blog




  • Essay / Loewen?s Corporate - 961

    INTRODUCTIONAfter decades of spectacular expansion, the Loewen Group Inc., the second largest funeral care company in North America, experienced a precipitous decline in 1998. Compared to those of 1997, its net profit decreased by $42.7. deficit from $43.5 million to $599 million, while its long-term debt due in a year increased by more than 2,000%, from $43.5 million to $874.1 million , and total liabilities exceeded total assets by $326.8 million (in US dollars). Because Loewen could not emerge from its financial crisis, the company had to file for bankruptcy in June 1999. ANALYSIS Regarding the causes of the company's bankruptcy, some have blamed the accounting principle used by the company ; many others attributed the company's failure to the risky expansion strategy adopted by the company. I agree that company management should take the lion's share, but the board and shareholders should take the other actions. In other words, the company's poor corporate governance caused Loewen to disappear from the company. Corporate governance, as defined by the OECD in 1999, “is the system by which companies are directed and controlled”. Three actors participate in this system, the board of directors, managers and shareholders. The system distributes rights and responsibilities between society participants, regulates and monitors their conduct in accordance with standard principles and procedures. Corporate governance arises whenever ownership of a business separates from management, because managers, as Adam Smith mentioned in his "The Wealth of Nations", cannot expect that They look after the interests of shareholders as seriously as their own. As such, the board of directors is created to ensure that management works in the best interests of the company in the long term by monitoring and regulating the performance of managers on behalf of shareholders. If the board of directors does not react or only wants to be pacifist in case management makes a mistake, the interests of shareholders will inevitably be harmed, as happened in the case of Loewen. There are a few examples we can take from Loewen to demonstrate how management is failing to fulfill its commitment to shareholders: • Use of inappropriate accounting practices Loewen used an inappropriate accounting practice to account for its prior sales. After customers paid a deposit, Loewen began to recognize customers' purchase...... middle of paper ...... chairman and CEO, who may have their own interests other than those of other shareholders . Good corporate governance practices would have resolved the issues: • Aligning the company's accounting principles to ensure they comply with GAAP and the law. • The independent compensation committee would review the compensation awarded to management to ensure that they were reasonable. • Review and articulate the company's strategy, major action plans and risk policy. In the case of Loewen, the risky acquisition strategy would have been rejected. the real situation of the company. CONCLUSION Due to the existence of principle-agent problems, companies need good corporate governance so that each participant fulfills their own responsibilities. A conscientious and independent board of directors is essential to protect shareholders and the interests of the company.: 990