Corporate Governance Of Ethical Activities Essay

Question:

Discuss About The Corporate Governance Of Ethical Activities?

Answer:

Introduction

Liquidity is regarded as the stage where it becomes difficult for the organization to conduct its business operations and in turn company has to sell its assets when the company becomes solvent. The ultimate reason behind liquidation can be considered as high debt burden where the company has taken the higher amount of loan and is not able to repay the accounting back. The present study is based on three organizations named HIH insurance, OneTel company and ABC learning that have gone into the process of liquidation due to the presence of different reasons. Apart from this corporate governance and ethical activities of the companies have been analyzed in the present study.

Events That Led To Liquidation

A large number of valid reasons are present due to which companies operating in the market reaches the liquidation stage and in turn, it becomes difficult to conduct overall operations. The liquidation of HIH insurance was the biggest example of liquidation in the Australian marketing where the overall analysis has shown that some issues in the internal system of the enterprise were present such as ineffective monitoring, poor planning, ineffective utilization of financial resources, etc (Jiangbo 2008). HIH group operates on the wider basis and is comprised of HIH Casualty, FAI general insurance company, General insurance limited, etc. Further, the directors of the organization breached their duty, and due to this reason, they were not involved in the key affairs of the enterprise.

Overall the corporate culture of the business was conservative in nature along with the poor governance practices that directly led to the downfall of the organization in the market. Considering the acquisition strategy of HIH company which was also aggressive and this acted as the main issue while maximizing profits. In March 2001, the estimated value of the firm was between $3.6 billion and $5.3 billion as analyzed by liquidators. Further, the liquidation of the business badly affected the construction sector where different builders undertaken by the company had to seek replacement coverage (governance 2011). The key reason behind liquidation was the inability of the organization to pay claims of insurance policy holders and another form of debts that were due. The report published by the HIH royal commission indicated that company witnessed loss of $73 million against a net earned the premium of $1550 million on 30th June 1999. So, this reflects the key reasons behind the failure of the company in the market.

In case of OneTel company, the ultimate reason behind failure was inappropriate corporate governance. CEO’s of the organization has the high amount of control over the major affairs and on other executives. Further, this directly led to the conflict of interest and this was mainly compromised due to the provision of non-audited services of the organization. The top executives of the company were not at all able to manage key activities, and this raised situation of liquidation. The company was not able to manage its main expenses as the adequate amount of profits were not earned (Monem 2011). This situation was adverse for OneTel company operating in the market. Some valid reasons due to which organization reached into liquidation position were wrong strategic decisions, ineffective pricing policy, unbridled growth, etc. Further, it is a well-known fact that every organization has to take some corrective action for managing overall cost and this is only possible when proper planning is done by top executives which were not present in case of OneTel company (governance 2011). On the other hand, some issues have been identified in the corporate governance structure of the enterprise that involves ineffective audit control, poor pay to performance link execution, inappropriate communication between management and board. Due to all these valid reasons, it became quite difficult for OneTel company to operate in the market and company has to shut down its operations.

Considering the case of ABC learning center where the key operations of the company were to deliver childhood education services in the market of Australia. Further, due to the presence of a large number of reasons organization was not able to survive in the market (Sammut 2008). The key reason was the rise in the overall level of the expenses that involves advertising cost, staff salary and another type of costs due to which profitability level of the company declined at the faster pace. Further, corporate governance practice of the organization was also inappropriate where top executives of the firm were not able to manage overall operations. In the year 2008, the organization suffered the loss of 1.78 billion. Apart from this, the debtor director voted to enter into the practice of voluntary administration in Australia. Apart from this, cash problem was witnessed by the firm in the year 2008 and due to this reason situation of liquidation occurred (Crikey 2008). The firm was not able to manage its major expenses, and overall profitability level decreased at the faster pace. So, these were some of the valid reasons due to which ABC learning has to shut down its operations.

The Reason Behind Company’s Financial Stress

At the time of carrying out business activities and operations, it is required by corporations to take care of areas such as corporate governance and ethics. In simpler terms, corporate governance can be defined as the set of rules and procedures which promotes long term relationship between management and all stakeholders. The practices of corporate governance have a direct impact on the overall operations and business activities of an organization. Companies such as HIH insurance company, ABC learning center, and One Tel have set the example of how inappropriate corporate governance practices can increase the overall financial stress on businesses (Bank 2006). The practices carried out HIH insurance company cannot be termed as ethical as the company’s Board of directors were indulge in breach of The Corporate Act which is completely against business ethics.

However, the insurance company has taken strict actions against those directors by restricting them to be the part of decision-making process. Conservative corporate culture is also considered as another major factor which has resulted in financial failure or liquidation of HIH insurance company. Another reason why HIH insurance company practices are considered as unethical is that the organization has misguided the investors by presenting wrong financial figures and data in front of them (Steele, Wee & Ramsay 2016). Such type of practices directly results in creating several obstacles in the long term growth and success of companies.

The financial failure of ABC learning center is another example which indicates the significance of corporate governance practices and ethics in business operations (Walsh 2010). The company was not able to obtain an adequate amount of cash flow, and overall operations were affected by the same. In the short run, the learning center was somehow able to manage its operational cost whereas, in the long term, it became quite difficult for the company to deal with the same. The failure in corporate governance practices can also be witnessed by the fact that ABC learning center was not able to carry out effective management of the funds which it has obtained through the renowned banks operating in the country (Sammut 2008).

The concept of ethics and corporate governance reflect the fact that it is required by companies to measure the impact of decision the on all stakeholders before taking any decision. However, the case of One Tel was completely against this concept and this, resulted in liquidation of the company in the long run (Morrison & Anderson 2015). Here, the two CEO’s of One Tel were taking major decisions linked with financial management, operations and the views of other people on the board were not taken into consideration (Lane 2016). The result of this is that the organization started to witness such as shortage of finances and losses every year. Another reason, which has led to the liquidation of One Tel, can be termed as its auditor’s conflict of interest.

Major Factor – Liability

Liability alone cannot be considered as the reasons behind liquidation of HIH insurance company, ABC learning centre and One Tel. The main reason here is that these companies were not able to carry out ethical practices and operations with guidelines of corporate governance. In the modern era, the competition among businesses in Australian market has become so intense that it is no longer easy for companies to sustain in long run (Saville 2003). Furthermore, ethics and practices according to the guidelines of corporate governance can assists in carrying out smooth flow of all functions and activities. HIH insurance company, ABC learning centre and One Tel financial failure can be termed as perfect example of the situation which can be occurred due to inadequate and ineffective financial planning (Kruger 2011).

These companies would have managed their cash flow and finances by carrying out following business ethics and corporate governance practices.

Conclusion

In the modern era, companies cannot sustain in the marketplace without carrying out adequate financial planning. Furthermore, businesses should avoid implementing corporate cultures which are highly conservative. It can be inferred that HIH insurance company, ABC learning centre and One Tel financial failure due to lack of corporate governance practices is a big learning for other businesses operating in the Australian market. The failure in obtaining required cash flow has resulted in creating several obstacles in the growth of the company.

References

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governance, CC 2011, HOW THE COLLAPSE OF ONETEL AND HIH INSURANCE CHANGED, viewed 13 September 2017, <

Jiangbo, XU 2008, ' HIH Insurance Limited: Corporate Governance and Corporate Excesses.', Corporate Governance and Corporate Excesses., 31 August 2008.

Kruger, C 2011, Numbers finally start to add up as operators go back to basics., viewed 13 September 2017, <

Lane, RJ 2016, Unexpected corporate failures in Australia through the decades: commonality of causes, Doctoral dissertation, James Cook University, Australia.

Monem, R 2011, ' The One. Tel collapse: lessons for corporate governance.', Australian Management

Morrison, D & Anderson, C 2015, 'Is corporate rescue a realistic ideal? Business as usual in Australia and the United Kingdom.', Nottingham Insolvency and Business Law e-Journal, vol 2015, no. 3, pp. 417-435.

Sammut, J 2008, The ABC of policy failure, viewed 13 September 2017, <

Saville, M 2003, HIH : The Inside Story Of Australia's Biggest Corporate Collapse, viewed 13 September 2017, <

Steele, S, Wee, MS & Ramsay, I 2016, Remunerating Corporate Insolvency Practitioners in the United Kingdom, Australia and Singapore: The Roles of Courts.

Walsh, L 2010, Unravelling the truth of ABC's collapse, viewed 13 September 2017, <

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