The Failure of Demonstrating Fiduciary Duties - Essay Example

Question Directors are responsible for fulfilling fiduciary duties of care and loyalty as well as pursuing honestyand have good intentions for the company. Failing to carry out the principals then any losses or benefits incurred by the directors, which was to go into the company’s account, should be directed to them unless they have substantial explanation to oppose the move. Good directors should not conflict their personal greed and interest with the goals and objectives of the company since this attributes to failure in carrying out their duties. In addition, it is not wise for any director to take opportunities to serve their own interests on the account of the interests and gains of the company as this shows their incapability of fulfilling their duties of loyalty. Moreover, any director is liable to carrying out duties of care by obtaining information that enables him/her to make informed decisions. Directors should also make it their obligation to attend all committee and board meetings that are held during their tenure. This case discusses facts that relates to the failure of demonstrating fiduciary duties as director by Daniel by his move to persuade his colleagues to purchase a warehouse that was undervalued that worth more than $5000. Daniel also shows his incompetency by signing an insurance policy that was not capable of covering the risks of burglary and that which caused the company to loose $30000. It is clear that Daniel had a conflict of interest that benefitted Paul’s Ltd to pay lower prices and gain from the move by adding $3000 to his person al wealth. Daniel failed to carry out fiduciary duties of loyalty and care as an executive director, working as a chattered accountant of the Sofa & Bed Ltd. There is no doubt that he obtained all the necessary information before making his decision to buy the insurance policy, which caused the company to loose $30000. Daniel also fails to show his loyalty to the company when he allowed to be bribed by $3000 to offer lower price to Paul’s Ltd and accept the bribe as his person al gain. Question 2 Corporate governance acts as a mechanism that protects the management; insiders from the outsiders; stakeholders, creditors, regulators and customers. Corporate governance; however, has shown major failure in the recent financial crisis, which portrayed a clear picture of real failure attributed to gatekeepers represented in audit and credit rating agencies when the CG failed to heed the alarm. Apparently, the gatekeeper too advantage of the deregulations proposed by SEC to stimulate their own market for the benefit of higher gains. The gatekeepers risked their capital reputation to benefit more, and lose their integrity by sending wrong signals to the markets, which resulted in small investors to suffer great losses. It is expected that Cooperate governance prevent failure of businesses by setting up mechanisms and policies to control and super vise the activities of a company. These mechanisms include rules and code of conduct that regulates and govern the practices of a company. The purpose of Cooperate governance desists to exist if its main objectives are proven to fail. Practices seen in this financial crisis are linked to the board of directors and rise of bonuses that aims at maximizing the stock prices, which their personal gains depend on. Additionally, there was no introduction of any rules or policies to govern time of exercising stock options thus managers took the advantage to raise the stock prices and exercise their stock options for the fiscal year, a move which caused a collapse in the stock prices. There was no segregation of duties in auditing, where an audit firm performed both consultancy and audit services to the same customer/ client, which resulted to in stance of corruption. Credit rating agencies were major players in the crisis since no regulation measures were imposed on them. The credit rating agencies failed to talk about the emerging problems in the mortgage market that caused failure of low class individuals to pay their mortgages and overvaluing of the real estates serving as collaterals. Question 3 External rent in rentier state includes all the natural resources such as oil, coal and natural gas. The natural resources are not man made, thus can be said to be blesses or treasures. However, the natural resources are faced with diminishing and sooner the rentier states will no longer be beneficial to all. Economy is said to collapse when the external rent vanishes since it minimizes diversification of revenues in the rentier state. Vanishing of external rent will affect the style and policies of government, which may result into an authoritarian regime since external rent, are government owned and are not available for investment purposes by other members of the society. In addition, there is a possibility of the existence of bureaucracy. Lack of both diversification of workforce skills and revenues is one of the major reasons that the countries are not well developed. This is because, the workforce scramble for employment at the external rent sectors regardless of their skills and labor diversification since it is the only vital sector and the whole rentier state depend on it. The states happen to put their personal interest first when lobbying for more insensitive to increase their wages and or reduce the working hours, a mentality that is not present in developed countries such as China and Japan. There is no existence of creativity opportunities. Moreover, there are no efforts directed towards pressuring the government to push for the operation of development cycles. In addition, the economies of the countries suffer from lack of currency protection when trading with foreign currencies when selling their external rent. The governments are not doing enough to promote local industries to get into the game of competition. Question 4 The existence of legal systems is aimed at fighting unethical behaviors that are committed by people within the community. The entire style and economy is shaped by the legal system. However, in capitalist state, normally there are minimal government intervention that results to the natural forces of demand and supply to dominate the economy. This tends to provide more room for democracy, but in most cases, fail to protect the country in times of financial crisis. Other systems promote existence of market inefficiency and bloating of bureaucracy. Regulations and policies favor the workforce when laws such as those which promote the safety of employees are introduced or when consumer protection agencies come into place to protect the rights of consumers and employees from unlawful business practices. Lack of regulation measures can result into unlawful business practices as well as agency problems in that managers and businesses will place their personal ambitions and interests above other stakeholders and communities. In contrast, imposing of so many rules and regulations can also results to retarded growth and development, especially where decisions are forced to go through longer processes before put into practice. Reforms to laws and regulations should be emphasized to give more room for business to operate freely, keeping in mind that personal greed should be governed to minimize risks and prevent crisis that is uncalled for. Government should intervene in major crisis since the economy cannot be left to collapse and hoping for the market to restructure itself. Read More