Corporate Governance in YCP Company - Assignment Example

1. Why do you think the YCP Company had been able to grow in just over five years? One of the factors which contributed to the YCP Company rapid growth was its leaders who were strong visionaries and success oriented. From the case it is clear that when Joe and Jeff were chosen to be co-administrators the investors were very pleased. This was based on their ability to raise capital from financial markets and to attract profound investors and to secure synergies. They were also able to secure credit lines from major local and international banks for future financing of YCP expansion and growth. Due to confidence the leaders had from shareholders they sort for acquisitions to maintain their growth. The firm was also to expand rapidly because it was able to adapt to change faster. The company was thus involved in excessive diversification of its products. The company growth was also based on its consumer marketing strategies, its genuine information systems and platforms offering undisputable value for money for all its products and services while remaining a low cost provider, as well as in its innovative R&D which continued to build quality in next generation networks. The company also had competitive reward system for its top management in addition to offering its customers competitive pricing for its products. The visionary leaders on the board also wielded too much powder which enabled them to implement all their views. 2) What impression have you formed of corporate governance in YCP Company? Just like what happens in many countries the corporate governance in YCP company seems to expropriate minority shareholders and creditors by the controlling shareholders in this case, Joe and Jeff. The outside investors financing YCP Company have exposed themselves to risk of loosing their investment and the returns on their investment never materialized since they have been expropriated by major shareholders and who also doubles up as managers of YCP. Even though it has been argued that legal approach is the best way to protect outside investors, that is, both investors and creditors, there seems to be no prevailing legal systems in Neighbour country to protect outside investors. This seems to have aggravated expropriation of outside investors by Joe and Jeff who are the major shareholders who doubles up as executive managers of YCP Company. The connection of the firm to media company helped to build a strong image for YCP and its reputation that had many financial have confidence in it and pour more funds towards the company. The reputation of the firm made many investors finance the firm because they felt that their rights were protected. The assurance from Joe that the firm revenue was on the increase helped to win over more investors who thought they were making the right investment not knowing they were being misled. This made these investors to be more vulnerable to expropriation and since there were no prevailing laws in Neighbour country to protect their investment they were more at risk of loosing their investment. Although employees or the suppliers are said to be at a lesser risk of being mistreated, when YCP collapsed many employees lost their jobs when the firm collapsed. The executive management believed that expansion was key to sustainability and growth and this concealed the fact that a faulty system of billing was being used to attract new customers at the expense of profitability of the firm. It has also been argued that good corporate governance is one where investors have surmountable power in comparison to insiders. It is also argued that distinguishing between contractual and residual control rights that investors have, promotes good corporate governance. However, in the case of YCP, the investors had no surmountable power and there was no distinction between contractual and residual control rights that investors have. The investors had no power to change directors, to force dividend payments, to stop a project or scheme that benefited the insiders at the expense of outside investors, to sue directors and get compensation or to liquidate the firm and receive proceeds. This situation seems to have been consolidated by the fact that top executive managers at the firm were also the main shareholders of the firm. 3) What is your opinion of the ownership structure in YCP, in light of the fact co- administrators Kong and Watson retain 60% of the voting equity. Can group of small shareholders make a significant contribution to the governance of the company? What about large shareholders? It has been argued that since the board of directors is influenced by the CEO, the board is not able to structure the CEO’s compensation package to maximize value for outside shareholders. In the case of YCP, the fact that co-administrators Kong and Watson have retained 60% of the voting equity implies that the two could impose any compensation package on the board of directors. In addition, this gave them a leeway to impose any decision that they thought to be right to the company as exemplified by Kong’s decision to expand the business even though a faulty system of billing was being used to attract new customers. The small shareholders could not make any significant contribution to the corporate governance of the company since their composition in the board was way below a third and hence they could not influence the decisions of the board. Even though other large shareholders such as Media Company had substantial contribution to corporate governance by supporting marketing via increased media coverage, they had trust in Watson and Kong and hence they could not overrule any of their decisions in the board meeting which led to significant misleading of the firm. 4) What is your opinion of the structure of the board in YCP right after the company went public? It has been argued that boards of directors are often ineffective because the culture of the board discourages conflict, the CEO determines the agenda and that there is little equity ownership by managers and non-managers on the typical boards. It is also argued that the ineffectiveness arise due boards being too large and the CEO and the board chair is frequently the same person. It is further argued that boards of directors are ineffective in setting appropriate levels of compensation because outside directors are hired by the CEO and can be removed by the CEO. Thus the outside board members may be unwilling to take adversarial position to the CEO. The YCP board structure after the firm went public had Kong take the position of the president of the board and the CEO at the same time. As argued above this structure is often ineffective. In addition Watson was given the position of the vice president in the board and at the same time the position of deputy CEO. In addition, Mr. Mark Michael who was the Company’s Financial Controller was hired by the deputy CEO of the firm and thus could be manipulated through present financial records as per CEO’s and Deputy CEO’s request. Add to this that the CEO and his deputy had surmountable power to influence the board to award them huge amounts in compensation due to large shareholding in the firm. Even though large shareholders influenced the selection of the board CFO and had other two representatives, they were so pleased by the CEO and his deputy that they never questioned their decision and the CFO also failed to carry out his duties. Thus the structure of the board was ineffective. 5) What information should the board have had before approving the construction of the private telephone network for YCP? The directors of a company (including independent members) are responsible for the management of the company’s business. Management encompasses not only the day-to-day running of the company’s operations but also the development and implementation of a long-term strategy; ensuring proper balance between the interest of various stakeholders; ensuring any activity concerning the company is carried out in the interest of the company and the society. Directors, individually and as a board, bear the primary duty to carry out the corporate governance policies of the company. Thus, the board needed to be aware of the financial performance of the firm prior to approval of the construction of the private network for YCP. The board should also have noted discrepancies in the books by being alerted by the CFO. In addition, if the board was actively involved in daily operation of the company it would have noted the viability of the project or its failure prior to approving it. 6) What role did the board members played in the case of YCP collapse? Refer to each member’s role separately. Kong contributed to the failure of the firm by his public statements which were largely misleading as exemplified by his assurance that YCP would have A$103 million at midyear 2003 to cover its short term obligations and that current shortage was not permanent. It is said that he apparently misunderstood the confidential information he received about the performance of the firm. He also misled the market and shareholders by saying that the firm had sufficient cash reserves and that all signs were indicating that YCP was going to make profits in 2003. He also misled them by saying that YCP was on target to meet its subscriber numbers and profit projections. The arrogance of Kong also contributed to YCP collapse because he continued to expand even though the system which was being used for billing was faulty and other board members and activists decried this move. The move to construct the new network is argued to have been aimed at satisfying Kong’s self ego. Watson on the other had contributed to the failure by collaborating with Kong to run the show at YCP and as such they presented the accounts to board members the way they wanted them to see. It is said that the two moved large sum of money around the group between the subsidiaries to disguise the true situation. Even though the YCP reported losses in 2002, Kong and Watson managed to convince the board to get half a million dollars for the basic salary and 5 million USD performance bonus. The company financial controller, Mr. Mark Michael also contributed to the failure of the firm when he failed to follow the Generally Accepted Accounting Principles and standards to keep financial records of the firm but instead was involved in manipulating the accounts with the CEO and the deputy CEO. Mr. Cat Chris, company’s CFO, also contribute to the failure of the firm since he failed to exercise his judgment with duty of care of an expert having a strong background in finance function in publicly traded companies with an excellent career path accompanied by remarkable achievements. It is expected that as the CFO he should have been able to properly asses YCP’s financial performance and spot the discrepancies in the books thus alerting the board. He was self interested that it is rumoured he disposed off his equities immediately the top management resigned and made millions of money. Other board members are also accused of contributing toward the failure of the firm because they failed in their function. Board of Directors was responsible for approving the bonus deals thus eating up the company’s own fleshes in hundreds of millions. These bonus payments decisions have played a decisive role in ‘helping’ destroy confidence in the company. As board members they have been heavily criticized, for not exercising their fiduciary obligations towards the shareholders. They have been accused that they failed to look after the YCP’s interests, to keep an eye on Kong’s and Watson’s doings and hold them accountable. They were busy to attend the major parts of their multibillion empires and consequently there was no way in the world they had the time for YCP. They should not have sat on the board as silent partners with the sole purpose to vote yes, applaud after each CEO’s speech and hold the board’s seals for verifying decisions taken outside the board room. 7) Do you believe that the role of the Financial controller had a decisive impact on the outcomes and how do you suggest he could have had avoided them? Yes I believe that the financial controller had a decisive impact on the outcomes. As the company financial controller, Mr. Mark Michael could have alleviated the situation by following the Generally Accepted Accounting Principles and standards to keep financial records of the firm. This could have allowed the firm’s directors to note the true financial position of the firm in advance to put in place corrective measures early enough. By colluding with the CEO and his deputy to move money around, the financial controller deceived the board and other shareholders that the firm’s financial position was health and this contributed to approval for construction of the new network that had devastating effect on the firm and its final failure. If he had correctly reported the financial transactions of the firm, maybe the board could not have approved the construction of the new network and even Kong and Watson could not have received their full compensation. 8) What is your opinion of the statement made in the case that: “The accounting function is a joke. There are no rules, no directives no job descriptions and you can see segregation of duties everywhere. The concept of control seems to be forgotten as there is no accounting system” This statement is a true reflection of what was happening at YCP. As mentioned above the financial controller was not following the Generally Accepted Accounting Principles and standards to keep financial records of the firm. He was not getting directives from the CFO but rather the directives he was receiving was from the CEO and his deputy to manipulate the accounts to reflect what the two wanted the board to perceive of the firm’s financial position. The duties of the financial controller were segregated since he was under the influence of the CEO and his deputy. The person in position to oversee financial position of the firm, CFO, never carried out his duties and as such the accounting system was forgotten and there was no control. There also seems to be no independent auditors who were hired by the board of directors to cross check the firm’s financial accounts. 8) What is your opinion of the external auditors? Do you think the outcome in YCP Company suggest that they performed their duties according to the auditing standards? Do you think that auditing firms in their struggle to secure contracts or lose a client are entitled to act more as consultants and less as auditors? Please justify your views. External auditors help in validating the financial reports of publicly owned firms. This prevents the firm management from concealing the mismanagement being perpetrated by the management. The outcome from the YCP indicates that the external auditors hired performed their duties in accordance to auditing standards. This is because they were able to elucidate the evils that were being concealed by the CEO and his deputy by help of financial controller of the firm. The external auditors are charged with the role of ensuring the firm’s reports are accurate, true and a fair reflection of the firm’s status. The auditors were able to elucidate the discrepancies that existed between what was reported and what was the true status of the firm. This further show that the auditors performed their duties in accordance to laid down standards of auditing. I think that auditing firm’s need to act more as auditors rather than consultants to be able to provide true reports on the management of the firm. If they choose to be more of consultants they may be blamed if anything goes astray after giving their advice. In addition they may find themselves embroiled in legal issues if they do not stick to their role as auditors and divert their attention toward being consultants. 10) Do you believe there are issues (breaches) in the case leading to inappropriate management compensation; creative accounting; failure of directors and managers to exercise due diligence; lack of adequate regulation; and lack of independence in audit function? If yes how all these could have been avoided? Please justify your answers. I believe there are breaches in all this cases. For the case of inappropriate management compensation, the inability of the board to know the true status of the firm allowed the management to convince them to award them full compensation. In addition, since the two top managers of the firm wielded much power, they used this to convince the board to award them full compensation. This scenario could have been avoided if the financial controller provided true accounts of the firm. The CEO and his deputy based their argument on manipulated accounts under the assistance of financial controller to convince the board to award them full compensation. Creative accounting by financial controller enabled the management to conceal the true status of the firm. The financial controller breached the Generally Accepted Accounting Principles and standards. This could have been avoided if the controller could have followed the Generally Accepted Accounting Principles and standards. The failure of managers and board to exercise due diligent could have been avoided if the CFO of the company could have provided the need advice on the status of the finance of the firm. This is because the lack of this advice resulted in the board inappropriately approving the construction of the new network that made the firm to collapse. Lack of regulation could have reduced the firm’s board from neglecting their duties and could have implicated the CEO to take full responsibility of the firm’s collapse. Internal auditors’ lack of independence could have been avoided if the deputy CEO was not involved in the hiring of the financial controller. This is because the controller could not take adversarial position against the person who hired him and hence he was at the dispensation of being manipulated and hence not able to carry out his duties independently. 11) How a successful entrepreneurial character like Kong and Watson be controlled to protect shareholders? Successful entrepreneurs such as Kong and Watson can be controlled by adopting a management structure that either grants them the position of CEO or chair of the board only but not both. This allows them to have the interest of the firm at hand. The board of directors’ composition also ought to have at least a third of members being representative of minority stakeholders and non insider members. This allows the board to make independent decision with little influence of either the CEO or the chair of the board. In addition, the shareholding of the entrepreneurs need not be too high as in the case of YCP. This helps to reduce the power of influence of such individuals on then decisions made at the firm. 12) In your views, should the neighbour country’s governmental authorities have had? Arranged a bail-out program for YCP and why? I think the neighbour country’s government authorities could have arranged a bail out program for YCP. This is because this move would have helped to stabilize the country’s economy given that many livelihoods depended on the firm. In addition, many small and medium sized suppliers lost thousands of dollars for goods and services they had supplied the firm. Several of these small and medium firms were rendered bankruptcy following g the collapse of the YCP. Thus the economic effect of the collapse of the YCP had enormous effect on the general economy of neighbour country and hence a bail out program could have alleviated such outcome. In addition, telecommunication services are essential services and a move by the neighbour country to bail the firm could have protect such vital service provision since YCP accounted for large percentage of telecommunication service provision in the country. In addition the program could have alleviated the problem of job losses. As reported when the firm collapsed over 10,000 people lost a source of livelihood by being rendered unemployed. This could have been avoided by government bailout program. Read More