Editing my answer papres - Essay Example

Answer the following questions: Q1) Ethan, Joshua and Daniel are all directors of quality sofa & bed Ltd. The company desperately needed to purchase a warehouse. At a board meeting, Daniel successfully persuaded Ethan and Joshua that on particular warehouse was perfect for the company and that it was worth $140,000. Ethan and Joshua later discovered that Daniel was the owner of the warehouse and it was worth $145,000. Daniel who is a chartered accountant, is in charge of insuring the company’s warehouse against burglary and fire. He signed an insurance form without checking the content of its policy. The warehouse was burgled and the company suffered a loss of $30,000. The insurance company claimed that the insurance policy did not cover burglary and therefore refused to pay. Ethan and Joshua recently found out that Daniel offered a cheaper price to a company’s client, Paul Ltd, from which he obtained a personal benefit of $3,000. Advise Ethan and Joshua as to whether Daniel breached any of his duties as a director of Quality Sofa & Bed Answer: Daniel, the director is held liable for breaching his fiduciary duty, both his duty or care and his duty of liability. Duty of care was breached when Daniel failed to check the content of the insurance policy. When Quality Sofa expected to collect insurance it was faced the losses of 30,000 $ which affected its financial state, because he did not carefully check the statement and should be held liable for it. If Daniel is unaware of nature of insurance policies, because he is an accountant, it is no excuse to just sign the policy. He should have spent time and even requested legal advice if necessary not to be held liable in this particular case. As for his liability in duty of loyalty, he is liable for getting personal benefit by offering a client of Quality Sofa Bed a discount that not the company’s interest, but rather his own interest. If the client had approached Daniel as an individual, then he would not be held liable. Although Daniel should have disclosed that the warehouse that Quality Sofa and Bed purchased was his, he saved for Sofa and Bed 5,000 $ because the fair value was valued +5,000 $. In the specific incident he kept his self-interest aside and put the company’s benefit on the first place. Although Daniel did not technically breech his duty of loyalty in the warehouse incident, he definitely breeched his duty of care with the insurance contract and his duty of loyalty with the personal gain he benefited from. There were two violations of duties. I think that although he sold his warehouse for less than fair value and since he insisted on the directors to purchase his warehouse, he should have at least disclosed that he owned the warehouse or even restrained from voting. Since he already breached one duty of care and one duty of loyalty he can’t be considered a reliable director. Q2) The current financial crisis has shown that corporate governance failed to adhere to its objectives. Discuss the failures that were exposed in the prevailing corporate governance practices. Answer q2: Corporate governance has failed miserably to alert of send signals to everyone that something wrong is going on. I will discuss some internal corporate governance mechanisms that acted in a certain behavior that influenced this failure. Internal auditors the watchdogs are supposed to “bark” when danger is close lost its voice prior to the crisis. The internal auditors are double standarding. They are offering clients advice for substantial pay, they want to keep the client and the same time they have a reputation to maintain window dressing to many customers mislead investors prior to financial crisis. Consultancy that was added changed the business model of the gatekeepers. Their reputation was their asset but that leap of faith as I like to call it has impacted the failure of the CG. Client was given more power with consultancy gatekeepers did not want to lose clients. Security analysts in theory they are “expected” to be non-biased. Again the leap of faith post financial crisis showed us that they failed miserably. This is also due to the fact that they some were part of investment banking. Having a conflict of interest with that created problems usually security analysis offer underwriting when the market was in a boom influenced them. During pre-financial crisis, when the life was beautiful and everyone made money, people thought that they do not need regulations and a movement of deregulation was evident. This influenced the way the regulators such as the SEC operate not maximizing their potential with minimal intervention, shorter statue of limitation from 5 to 6 years to 1 year was introduced. Class action suits were limited. Proportionate liabilities between auditors and companies existed. All of these examples to,ok place because post 2008 markets were in a state of euphoria that allowed deregulation, which influenced gatekeepers. Rating agencies, gatekeepers are omnipotent so powerful that they can influence economies. They have no liability whatsoever. When they state is a matter of an “opinion”. After financial crisis when many tried to sue them they had no liability. BOD’s self interest and not aligning their interest with shareholders also is an added failure of corporate governance of 2008 financial crisis. BODs might have other motives in decision-making. Q3) Discuss how external rent influence the business behavior in a rentier state. Answer q 3: The rentier state mentality behavior is different from a regular state. The rentier state tends to behave in a certain way Kuwait is an example of a rentier state that I will base my answer on. Kuwait’s “external rent” comes from selling oil basing its economy on one source of rent. The government provides its citizens with free health care, controls Kuwait’s economy, provides free education. The country’s economy is based on the government’s exports of oil. In a rentier state such as Kuwait almost everyone works in the governmental sector where the individuals expect the government to provide them with “employment” by creating unnecessary jobs to provide citizens with a salary instead of trying to work hard. Citizens attend work with no incentive to work, disconnected between the relationship of work and reward. In other countries the focus on production, where a rentier state they have the money from the “rent” of oil and therefore simply allocate it. Kuwait is a not a manufacturing country it only creates “employment” I do not call lit a job, because a job means you are expected to work and if not you will not receive your salary, rather employment is your employed by the government. The Kuwaiti government is a master of creating employment in the government sector for citizens keeping citizens happy. The mentality of both Kuwaiti government and citizens will in the long run kill development of the country, citizens want what they think is rightfully theirs, part of the oil income and in their state of mind assume the government should spread the wealth. The government wants to enjoy its wealth it noes not want unhappy citizens that create riots and protests so it shares it wealth. Politicians act in public’s choice, assuring their reelections. This mentality in the rentier state will result in the Dutch disease. Everyone knows oil will deplete one day but they are in a drunken state, the government enjoying the status quo and the citizens want the maximum gain. Even parliament members who are supposed to be proactive act in the public’s choice. The Dutch disease will result in decline in manufacturing when oil is out. Kuwait economy suffers from the “Wasta”. This allows uncertified employees to be employed. Bureaucracy in Kuwait is annoying as it does not allow to attract foreign investors as in any normal state. This might not be the case, but to no one cares about the rentier’s mentality because the economy is oil dependent. Self-interest among parliament members is evident. They want to get maximum benefit they can from the government, because in a rentier state pressure in getting a foreign currency does not exist. This absence of pressure and incentives for government slows down the country ‘s development as we can witness happening in Kuwait. The government in a Rentier state does not support its weak manufacturing. If individuals decide to manufacture local cars in Kuwait and the government decides to support them by introducing tariffs on international cars citizens will not be happy. They do not see the need in local manufacturing when they can simply spend money and buy international cars. The rentier state helps practice in a sense agency laws, in the mentality they are in it is for them, as Kuwait here, is justifiable. However this will negatively influence the development, did not attract any investments and create an uneducated ineffective employees. In a rentier state citizenship becomes an asset, therefore introducing the “kafeel”. When foreigners are not treated nicely because they want to share citizenship with citizens, so in order to keep high government care in relations to own citizens, laws should limit foreigners’ owning, investing in Kuwait are issued. Everyone in Kuwait believes that it is normal, because of the mentality they have. This limits foreign investments in Kuwait, because they are considered unwelcome nd should be shared with Kuwaiti citizens. Governments are working for people’s will in order to keep their power. As for parliament members they are working to be reelected. therefore do not want to change anything. Society does not want to change its way of life. When oil is depleted economy will fail miserably with everyone compliant in the destruction of the economy. Q4) Legal systems and regulations can have a negative or positive influence on business. Discuss Answer q 4: Legal systems and laws can have both positive and negative influence on behavior, legal systems and laws affecting the way businesses operate differently. For example, in the United States in the Congress lobbying occurs to pass bills and influence laws. This affected the 2008 crisis. When investment banks and commercial banks could join these two, when markets collapsed it affected them badly. Incentives after the 2008 crisis that were created by governments such as the whistle blower were positive this was after the legal system and regulation jumped to correct and maintain markets. Some laws and regulations such as the class action can be both and negative. It can be negative for companies, because they have to be sued with claimless suits that would damage their reputation. On the other hand it can be positive for individuals suing the company to get some money no matter whether their suit was claimless or not. Adding more regulations to themarket could be harmful because it could limit supply and demand forces preventing market from developing. However having no regulations is a leap of faith. Placing high importance on reputation whether on gatekeepers or CEOs or others was evident in Enron case where with the good reputation of Andersons, the company ended bankrupt. The market failure is usually associated with less regulations and laws which affect how businesses operate allocation resources, competitive environment. Therefore having more regulation is positive at this case Read More