Shareholders And Company's Interest example essay topic

INTRODUCTION 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. ANALYSIS 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: o 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' purchase prices as current period revenue. By doing so, Loewen overstated its revenue making the managers' performance look good but misled the shareholders, creditors or any other potential investors. Obviously, this practice was good not for shareholders' but for managers' own interests. o Abused the company's resources When the company faced the hostile takeover offer from SCI, the management adopted lucrative severance packages, or " golden parachutes", for more than 70 of its senior executives.

This is an example of how hard the management did to its own interests. Though the interests of the be taken care of by the company in this situation, however, to grant so generous severance packages to so many executives at a time would provoke the public to doubt if the management abused the company's resources to satisfy its own interests. o Adopted a risky aggressive acquisition strategy Loewen adopted a risky aggressive acquisition strategy to speed up its rapid development. The strategy seemed working pretty well before 1998: the consolidated revenues had grown by 30% a year on average, from $303 million to over $1.1 billion in the past several years; the share price increased from $3 per share in December 1987 to $55.5 in September 1995. However, this was a risky strategy that could not sustain the development because the acquisition was based on mountainous debt (see exhibit 6). When the revenue declines and then could not match the accrued debt, the chain of cash flow breaks leaving companies who adopt this strategy go broke if they cannot get balanced within short time. Unfortunately, Loewen could not get a way out of the crisis and had to file for bankruptcy protection in 1999.

Encouraged by the benefits that the rapid expansion brought them, Loewen's shareholders turned to be in a fever of acquisition and kept on pushing the management to continue raising it rate of acquisition. In 1996, after Loewen had turned down its takeover bid, SCI proposed its bid of $45 per share directly to the shareholders. Thought the price was much higher than the prevailing price, the shareholders still rejected the offer because they believed that the acquisition strategy Loewen was using would bring them much more benefits. Compared with the malfunction of Loewen's board, shareholders' voracity had less to be blamed because most of them lacked necessary quality and information to avoid being deceived by the management. Loewen's board should have prevented or corrected the mistakes. But what happened to Loewen as last showed that it did fulfill its responsibilities.

The reason for that may 1) it bend the principles under the stress of the shareholders. 2) yield to the influence of Ray Loewen, the chairman and CEO, who may have his own interests other than other shareholders. Good corporate governance practices would have helped to solve the issues: o Align the company's accounting principles to make sure they are in compliance with GAAP and the law. o The independent compensation committee would review the compensation packages granted to the management to make sure they were reasonable. o 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. o 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. CONCLUSION 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.

Word count: 990.