Corporate Governance: Lessons from Corporate Collapses and Global Financial Crisis

This article discusses the reasons behind corporate collapses in Australia and the global financial crisis of 2008. It also highlights the modern corporate governance principles and practices that aim to prevent corporate negligence and malfeasance.

CORPORTE GOVERNANCE

Question 1
Owing to the reasons of the globalisation and complex business practices, there have
occurred a range of corporate collapses. The said corporate collapses highlight the needs of
the stringent provisions in the corporate governance codes and the rules for the better control
over the ones in the power and the protection of the interests of the various associated
stakeholders (Tricker and Tricker, 2015). The following segment would shed light on the
various popular corporate collapses in Australia, as described follows.
One of the earliest corporate collapses include that of the Bond Corporation Holdings
Limited which was an international conglomerate, the business operations of which ranged
from real estate, brewing, media, and natural resources. The owner Alan Bond would
consistently engage in acquisition of interests in various companies (Carnegie and O’Connell,
2014). However, the business collapsed in the event of the economic downturn when the
company was in attempt of buying an iron-ore extraction company in Western Australia. The
said acquisitions were financed by the risky borrowing such that the overall debt balances of
the company had reached $7 billion which made the company technically insolvent.
The second case of the corporate collapse included that of the Girvan Corporation, which is
stated to be prime example of the breach of the agency theory. From the finance point of
view, the continuous rise in debt combined with the high negative operational cash flows
were the main culprit of the corporate collapse. However, the management of the entity made
use of the creative accounting practices to hide the liabilities. The company was in limelight
by virtue of supplying the shareholders, creditors and the other stakeholders with misleading,
distorted information, leading to conflict of interest of different parties.
The third case of the corporate collapse was of the Rothwells Ltd, which was a merchant
bank and was formed by Mr Laurence Robert Connell. The bank was in lime light because of
the backing offered to a number of high profile business figures. However, the period of 1987
witnessed stock market collapse followed by the financial difficulties to the merchant bank.
In reality, the bank was always insolvent and the same was not depicted in the books on the
discretion of the management (Bongiorno, 2015). The striking fact was that a huge amount
was pumped into the bank in an attempt to save it with the efforts of the high profile
personalities of Australia.

Today the modern corporate governance principles that include the compliance requirements,
in law and in practice are aimed at prevention of the corporate negligence and the
malfeasance as purported by those in power in the entities. For instance, the Corporations
Act, 2001 has mandated it clearly that the directors of the companies would be accountable
towards the laws. In addition, the Australian Securities and Investments Commission (ASIC)
consistently scrutinizes the conducts of the directors that contravenes the statutes. For
instance one of the events where the directors would be subjected to the scrutiny is indulging
into trading practices when the company has insolvent which was the main cause of collapse
in case of the Bond Corporation. A wide range of massive fines has been imposed on the
directors including the lifting of the corporate veil to protect the interests of the stakeholders.
Hence, it can be concluded that the modern corporate governance practices are expanded the
traditional management responsibilities to mitigate corporate disasters and the financial risks.
Question 2
The Global Financial Crisis of the year 2008 is until date regarded one of the most serious
financial catastrophes. Not only it affected the economies of different regions, both
developing and developed but also led to the serious disruptions in the stock markets around
the globe and the various financial and other industries. One of the key reasons that led to the
disruptions in the financial industry was the inadequate policies of the banks and the financial
institutions with respect to the exposure to the risks (De Haas and Van Lelyveld, 2014). Some
of the yet another major reasons that led to the economic and financial disruptions were that
of the inefficient choices about strategy and risk, inefficient control of the allocation of
authority and responsibility and poor compensation structures. The consequences of the
global financial crisis for the financial institutions can be stated to be the tightening of the
lending policies, and others as explained follows.
Some of the notable institutions that faced the heat of the collapse during and post the crisis
were the Northern Rock Bank, Bear Sterns, Fannie Mae and Freddie Mac, American
International Group and others. The top management representing the institutions were
quoted as stating that the entities would not be further engaged in the buying of the risky
subprime mortgages, and would not be investing in the related securities. Seeing the high
rates of the financial institution collapses, there was a temporary prohibition in trading of the
securities of major financial players by the US market regulator Securities and Exchange
Commission in respect of the naked short selling (Ait-Sahalia et. al, 2012). However, the

policy could not help much as the damage was already done. The modern corporate
governance implications that have been developed and implemented to address the
shortcomings that led to the global financial crisis are explained as follows. In global
contexts, the corporate governance codes have been reformed involving amendments on the
lines of the apportionment of authority and responsibility by the management of the
enterprise, selection and overseeing of the personnel, protecting the interests of the
depositors, shareholders and stakeholders and establishment of the control functions. Further,
the reforms have been made in the corporate governance practices to strengthen the directors’
remuneration in the banking and the financial sectors that form the base for the conflict of the
interests among the directors and the shareholders. In addition to the above mentioned, a new
liability regime has been introduced for the senior management of the entities.

References
Ait-Sahalia, Y., Andritzky, J., Jobst, A., Nowak, S. and Tamirisa, N. (2012) Market response
to policy initiatives during the global financial crisis. Journal of International Economics,
87(1), pp. 162-177.
Bongiorno, F. (2015) The eighties: The decade that transformed Australia. Australia: Black
Inc..
Carnegie, G. D. and O’Connell, B. T. (2014) A longitudinal study of the interplay of
corporate collapse, accounting failure and governance change in Australia: Early 1890s to
early 2000s. Critical Perspectives on Accounting, 25(6), pp. 446-468.
De Haas, R. and Van Lelyveld, I. (2014) Multinational banks and the global financial crisis:
Weathering the perfect storm?. Journal of Money, Credit and Banking, 46(s1), pp. 333-364.
Tricker, R. B., and Tricker, R. I. (2015) Corporate governance: Principles, policies, and
practices, USA: Oxford University Press.