Organisational Governance: Parmalat Case Study and Corporate Failures

This report analyzes the corporate governance failures of Parmalat, a major scandal in the business world. It identifies three key failings: the lack of independence of non-executive directors, the dual role of the CEO and Chairman, and mismanagement of internal controls. The report explores mechanisms that could have prevented the failure, such as stronger fraud management, technological innovations, and improved financial monitoring. It also discusses the roles of non-executive directors, auditors, the internal audit committee, and the board of directors in good corporate governance. The report emphasizes the importance of a strong audit system, transparency, and a fair recruitment process. Ultimately, the report concludes that Parmalat's downfall was a result of a combination of factors, including corruption at the top management level and a failure to adhere to basic principles of good corporate governance.

Running head: ORGANISATIONAL GOVERNANCE
Organisational Governance
Name of the student
Name of the University
Author’s Note

1ORGANISATIONAL GOVERNANCE
In response to question 1
Parlamat is one of the biggest example of corporate governance failure that has been investigated
and discussed in various researches as a case study. The dairy company was established in the
year of 1961 and was growing exponentially until it got associated with the biggest scandal of
the time. According to Solomon (2007), the company has made significant mistakes that has led
to a significant failure. The 3 major corporate failures that have been identified in this book are
mentioned below.
 The company’s non-executive director was not independent as he was working as a
senior manager in the company since a very long time.
 According to the Preda corporate governance code in Italy, the directors of the company
are supposed to be independent from the controlling shareholders when the latter have an
authority over the company. However, the company failed to abide by the law, which led
them to their fall (Dibra, 2016).
 The company also failed to comply another of the rules that stated the separation of
chairman and chief executive position. Calisto Tanzi, the founder of the Parmalat
Company held both these positions that led them to the noncompliance of governance
practice.
This biggest corporate failures was accompanied by many other several reasons including
mismanagement of internal control system. It also failed to maintain a transparency in the
recruitment process of the directors. All these instances of maladministration led to its fall.
Solomon also compared the fraudulent activity with that of Enron and termed the former one as
the case of European Enron. A more strong monitoring system of fraudulent activities makes it
similar to that of Enron in the US.

2ORGANISATIONAL GOVERNANCE
In response to question 2
One of the most vital aspects of company management is corporate governance. Fraud
management should have been stronger in case of companies like Parmalat and Enron where the
deceitful activities were done from the top level of management. Had it been detected in the
lower level of the hierarchy, the fraud could have been prevented. However, the company could
have sustained, according to many researches, with the correct technological practices and
procedures to monitor the various activities.
Moreover, a proper treasury management and even a web-based centralized cash could
have been come to of use that could have, in turn, averted the fraud. The company also had an
obsession to increase the shareholders returns that aided to the increase of corrupt remuneration
structure. It also should have avoided the practice of too many directors that led to the failure of
effective monitorship. This particular factor had also increased the company to financial risks. In
a nutshell what the company needed to avert the failure of corporate governance was –
 Following the monetary policy (Cuomo, Mallin & Zattoni, 2016)
 Cutting off the excessive remuneration policy
 Technological innovations
 Financial analysis and monitoring
 Robust internal and audit of the company
Apart from the above mentioned facts, Parmalat should have had the independence of the
non-executive directors who could have taken an unbiased decision for the company. On
investigation, the company was found to have given the position of directors to their family
members mostly that prompted the lack of good governance. The company also failed to adhere

3ORGANISATIONAL GOVERNANCE
to the governance law as stated in the Italy’s governance code (Tricker & Tricker, 2015). The
governance code comprises the basic rule of good ethics that includes accountability, good
citizenship status in the place it is being operated, etc. Following these rules, the company could
have a chance to save its back instead of having such a downfall.
Parmalat is the classic cases of fraud that has been inflicted on the top management. Some of
the reasons mentioned here are just a preliminary assumptions that could have possible avoided
the negative impact, however, the company was bound to fall considering the corruption in the
senior managerial level. Another faux pas that the company had committed was the inclusion of
family members in the top managerial positions. Had Tanzi allowed competent people to handle
the upper management, the company could still have a chance to avoid the failure (Ogutu, 2016).
In response to question 3
A corporate governance that is free from any errors should always be the primary focus of
any organizations. The roles of the non-executive directors, auditors, the internal audit
committee and the board of directors are equally important than the other good corporate
governance mechanisms. This is because they comprise the managerial decisions which affects
the overall management of the company. A strong audit system would also help the company
identify the mistakes at its earliest instance without further infestations. Apart from that, the
auditors of the company namely Deloitte and Touche and Grant Thorton’s ineffectiveness proved
to have added to the failure of corporate governance. Without the help of these auditors,
Parlamat would not have carried out their operations as they remained tight lips even on the
discovery of such activities (Jones, 2004). Furthermore, in the case of Tanzi, the company lost

4ORGANISATIONAL GOVERNANCE
the formal structure due to too much inclusion of family members. Since all these high positions
were allotted to their family members, good governance came at stake due to the individual
interests of the family members rather than a collective interests of the company. The principles
of corporate governance are described below.
 The responsibilities and managerial functions of the company should be distributed
between the executive and non-executive directors. There should be a shared balance of
the entire task that would lead to efficient management (Leipziger, 2017).
 A transparency which will enable the company to have a complete insight into the actions
of the company.
 A fair and transparent mode of recruitment that should be accountable to the
shareholders.
 A clear financial governance that can detect any deceitful activity at the earliest (Berger,
Imbierowicz & Rauch, 2016).
 The inclusiveness of the company by introducing economic policies that would be
addressed towards the investors, too.
These are the basic ethics and principles that should be followed by companies regardless of
their functions and sizes. However, all these corporate governance mechanism was not followed
and integrated in its managerial condition that gradually become the root causes of Parmalat’s
downfall. Moreover, it also did not take much heed to the analysts and stakeholders that is an
inability to follow the good corporate governance.

5ORGANISATIONAL GOVERNANCE
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