After decades’ dramatically expansion, the Loewen Group Inc, the second largest death care company in North America, went downhill abruptly in 1998. Compared with those in 1997, its net income decreased from $42.7 million to $599 million in deficit, meanwhile, its long-term debt due in one year increased by more than 2000%, from $43.5 million to $874.1 million, and total liabilities exceeded the total assets by $326.8 million (in US dollar). Because Loewen could not get out of its financial crises, in June 1999 the company had to file for bankruptcy protect.
As to the causes of the company’s bankruptcy, some people blamed the accounting principle the company used; many others attributed the business failure to the risky expansion strategy the company adopted. I agree that the company’s management should take the lion’s share of blame, however, the board of directors and shareholders should take the other shares. That is, the company’s bad corporate governance made Loewen out of the business.
Corporate governance, as OECD defined in 1999, “ is the system by which corporations are directed and controlled.” Three participants involve in this system, the board, managers and shareholders. The system distributes rights and responsibilities among the participants in the corporation, regulates and monitors their conducts as per standard principles and procedures. Corporate governance arise whenever a company’s ownership separates from management, because managers, as Adam Smith mentioned in his “ The Wealth of Nations”, can not well expected to watch over shareholders interests as serious as over their own. As such, the board is introduced to make sure the management works on the best interests of the company in the long run by monitoring and regulating managers’ performance on behalf of shareholders. If the board does not response or only wants to be pacifist in case the management does wrong, the shareholders’ interests will be inevitably damaged as what happened in Loewen’s case.
There are some examples we can take from Loewen’s to demonstrate how the management fails to fulfill its commitment to the shareholders:
• Used improper accounting practice
Loewen used an improper accounting practice to book its pre-need sales. After the customers made a down payment, Loewen started to recognize the customers’ purch...
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...hairman and CEO, who may have his own interests other than other shareholders.
Good corporate governance practices would have helped to solve the issues:
• Align the company’s accounting principles to make sure they are in compliance with GAAP and the law.
• The independent compensation committee would review the compensation packages granted to the management to make sure they were reasonable.
• Review and guild the company’s strategy, major action plan and risk policy. In Loewen’s case, the risky acquisition strategy would have been rejected.
• By adding up the number of independent directors, enhancing transparency, hiring an outside CEO, to make the board separate from the influence of the management, and ensure the shareholders be informed about the company real situation.
Because the exist of principle-agent issues, companies need good corporate governance to make
each participant devote its own responsibilities. A conscientious independent board is essential in protecting shareholders and company’s interest.