The Bad and the Ugly
There are many case studies of organisations which either didn’t keep up with the rapidly changing world around them, had dubious leadership/management practices, or behaved unethically/unlawfully and paid the ultimate price. Here are some well-known local and international examples:
One-Tel was the fourth largest telecommunications company in Australia in 2001, with over two million customers and operations in eight countries. Key reasons for the collapse were seen to be strategic mistakes, incorrect pricing policy, and serious deficiencies in its corporate governance. These included poor internal control and financial reporting, the board’s oversight of management, and poor executive pay-to performance link. The collapse of One-Tel provided several key lessons on the role of corporate governance in preventing corporate collapse.
HIH Insurance was Australia’s second largest insurance company. It was placed into provisional liquidation in 2001, and was the largest corporate collapse in Australia’s history – losses were around $5.3 billion. Investigations into the cause of the collapse brought about conviction and imprisonment of some of HIH management on various charges relating to fraud. The director Rodney Adler, CEO Ray Williams and others were sentenced to prison for fraudulent activity.
Enron Corporation was a US company, and one of the world’s major electricity, natural gas, communications and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000. Fortune named it “America’s Most Innovative Company” for six consecutive years. In 2001, its reported financial condition was shown to have been sustained by systematic and creatively planned accounting fraud. The scandal brought into question the accounting practices and activities of many US corporations, and ended up causing the dissolution of Arthur Andersen.
Arthur Andersen was forced into bankruptcy in 2002, because of indictments during the Enron investigation. Many believed that its downfall was due to its relationship with Enron for largely legal reasons. However, analyst Charles Ellis disagreed. “Arthur Andersen, once the world’s most admired auditing and professional services firm, descended through level after level of self-destructive decline to its ultimate death.” Ellis linked the firm’s decline to the 1950s, when senior management shifted their focus from professional excellence and integrity to beating their competitors’ revenue. When Enron became a key client in the late 1990s and were clearly using dubious practices, Arthur Andersen’s culture had reached a point of no return.
The Global Financial Crisis (GFC) was brought about by a series of major collapses in short succession, as a result of dubious financial practices. Many large financial companies collapsed in 2008, as increasing numbers defaulted on housing loans. From 2003, Lehman Brothers had invested heavily in mortgage debt, in markets deregulated from consumer protection by the US government. Losses increasingly grew in 2008, and the company was forced to file for bankruptcy after the US government refused to extend a loan. The various major collapses triggered a global financial market meltdown.
Lessons to be learned?
The common threads weaving together these and other major collapses appear to be highly dubious values and unethical/corrupt behaviours of key players, and lack of effective controls. History does have a habit of repeating itself, unless we learn these critical lessons.
Narayan van de Graaff