What Happens When Governance Fails

The failure of governance can have disastrous consequences for a firm. In fact, corporate governance failure can lead to the total collapse of an organization. The range of causes of corporate governance failures includes the failure of the board, failure of internal audit and failure of external audit. Corporate governance failures have occurred in major organizations in Europe and the US. The list of European firms that have experienced corporate governance failures includes Sports Direct, Volkswagen, Guinness, Polly Peck, Maxwell and Barings, while the US list includes firms such as Enron, Allied Irish Bank (AIB), WorldCom, Xerox, Andersen and Royal Ahold NV.

The corporate governance failure at Sports Direct occurred because of a failure of the board. Sports Direct’s business model emphasized short-term performance, which led to some questionable practices at the firm. For instance, the company reduced its business costs by underpaying its employees and imposing on them harsh penalties for minor infractions. The poor treatment of employees at Sports Direct led to a public outcry, which had a negative impact on the firm’s corporate image. Consequently, the share value of Sports Direct plummeted (Willmott, 2015, p. 32). In this case, the board failed in its duty to oversee the actions of the management of the company. Thus, the company’s shareholders incurred significant losses because of the fall in the value of the company, which also discouraged potential investors from investing in the firm. Similarly, a failure of the board occurred at Volkswagen in 2014, when it was discovered that the company had been misleading its customers and regulators about the emissions levels of its cars for more than ten years (Gates, et al., 2016, p. 43). Volkswagen was found guilty of equipping its cars with a software that allowed them to cheat on emissions tests to gain regulatory approval. Knowledge about the software was found to have permeated the entire organization, which means that the board failed in its duty to ensure that the company adhered to ethical and legal requirements. The corporate governance failure at Volkswagen cost the company $14.7 billion in fines from the US government (Gates, et al., 2016, p. 24). Furthermore, the company lost the trust of its customers. To make matters worse, Volkswagen faces the prospect of lawsuits from its customers in other countries, which means that the total amount of the fines is likely to increase. Aside from the fines, Volkswagen’s profits declined as it struggled with the emissions scandal. The Volkswagen case highlights the heavy financial losses that an organization can incur when governance fails.

The case of Baring Futures Singapore (BFS) entailed a failure of internal and external audit. BFS’ appointment as head of its Singapore operations was an inexperienced individual with a history of fraud in the UK. On joining the firm, the new BFS leader opened an unauthorized trading account, which he used to hide his huge trading losses. Although the fraudulent employee reported to the senior managers in the firm, their internal controls failed to prevent the fraud. Similarly, the company’s external auditors were unable to discover the BFS head’s illegal activities. The consequence of the failure of governance at BFS was the collapse of the firm. Another failure of internal audit occurred in Allfirst Financial, which was a subsidiary of AIB. This case also involved a trader that made unauthorized transactions, which proved to be costly for the company. AIB’s poor internal control mechanisms allowed the trader’s actions to go on for five years. These examples reveal that the failure of governance weakens the internal control mechanisms of an organization.

A failure of the board occurred at Guinness in 1986. The company’s management and financial advisers were found guilty of false accounting and breaching the Companies Act. The guilty parties had tried to manipulate Guinness shares to win a takeover battle with Argyll for Distillers, which was another beverage company. Furthermore, the share rigging involved external parties, including the Heron Corporation, a stockbroker and a management consultancy firm. In this case, a failure of the board arose from its inability to prevent the management from engaging in corporate malfeasance. Moreover, the actions of the management showed their complete disregard for the law and their insensitivity to the interests of other stakeholders in Guinness and Argyll (Parr, et al., 2005, p. 232). These actions are consistent with poor and unethical leadership, which are conditions that are supported by the failure of governance in an organization.

Much like Guinness, a failure of the board occurred at Enron, which engaged in questionable accounting practices to hide its true financial position. However, Enron’s case was so profound that it led to the collapse of the company. Andersen, WorldCom and Xerox are other renowned firms that used manipulative accounting practices to portray a false picture of sound financial health. In fact, Andersen was involved in auditing the financial records of both Enron and WorldCom. The failure of the board of at Andersen explains the company’s failure to highlight the financial malpractice at Enron and WorldCom. Polly Peck International (PPI) was another case that involved the complete failure of the board. The company’s value fell by more than half in 1989 (Giles, 2012, p. 5), which prompted its suspension from the London Stock Exchange. Investigations that followed revealed that the company had been perpetuating fraud on a massive scale. PPI had been presenting a false picture of its financial position and evidence of insider trading was found. In addition, the owner of the company was jailed for theft and false accounting.

The events at PPI portray a scenario whereby the company existed for the sole benefit of the board. Another failure of the board, as well as a failure of external audit, occurred at the Maxwell publishing empire in 1991. The founder and CEO of the company were found guilty of disguising its losses by manipulating the accounting records to portray a false image of its financial position. The board failed because it did not prevent the founder from engaging in his financial deception. In addition, the company’s external auditors failed to ascertain the real financial situation of the company. The external auditors were castigated for being too trusting of the company’s founder. In this case, the failure of governance led to the fraudulent management by Maxwell’s founder, as well as the passivity of the company’s senior managers towards his actions (Parr, et al., 2005, p. 234). These cases illustrate that the failure of governance in an organization facilitates the manipulation of financial records.