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Case Study Analysis

Robert Maxwell Corporation

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Contents
1. Introduction 3
2. Robert Maxwell Corporation 4-6
3. Literature Review about CG and Disclosures 7-8
4. Corporate Governance in the United Kingdom 9
5. Recommendation 10-11
6. Conclusions 12
7. References 13-16

Introduction
In order to examine the poor performance or negligence of corporate governance and lack of
corporate legislations for the companies I have used case study approach and have chosen
Maxwell Corporation and corporate scandals. It is really important to discuss real life situations
in relates to the Corporate Governance. The approach of this case study is discussing number of
corporate governance issues in this case study it was Maxwell Corporation. Also this report first

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part analyze the Maxwell communication corporations scandals for the last decade and reasons
to those scandals and what are the corporate governance solution in order to overcome fraud. In
the later of the report some discussion were point out such as literature about importance of the
corporate governance and history of the corporate governance final part produce some
recommendations to overcome fraud and reinstate investors confidence on their investments.
Also it discussed some theories relates to corporate governance and its issues including
limitations.

Robert Maxwell Corporation

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Robert Maxwell is communication proprietor who was well known in the communication
industry since 1960. In 1969 Maxwell have merge his Pergamon Company with Saul Steinburg
(Head of Leasco). So when Leasco purchase Pergamon press where Maxwell acts as a
subordinate role in the merge company. Leasco was profitable business with claiming $27m
profit and more than $1 bn total assets in the year of 1968. So Maxwell wanted to account of his
company substantial profit at that time so that support share price and assist Maxwell negotiation
with Leasco. That time Sunday time queried about the procedures used by Audit Company about
Pergamon’s accounts. It was alleged that stocks had been overvalued. Also Leasco financial
advisers have questioned about pergamon’s accounts information as it difficult to extract and
they questioned from Maxwell about Pergamon’s profitability.

According to the independent audit carried out by Martin Harris in 1968 have disclosed that
Pergamon’s profit was $140,000 instead of $2.1m. After this report Pergamon’s auditors resigned
and board of trade or DTI investigated Maxwell in 1969. Report mentioned that Maxwell is not
suitable or reliable person to exercise proper methods for public quoted company.

Price water house have carried out some investigation and it indicate the important of unify
accounting standards. This report was regarded as valuable addition to the accounting profession.
After this report accounting standard committee had been setup in order to unify the accounting
standards in financial reporting treatments and audits. But governments were invited by
accounting professional to include some minimum standard to the financial reporting and
auditing.

Once Maxwell communication were labeled as improper use funds in 1990 as MCC had to
repay its part of $3 billion borrowings and due to lack of funds company face crisis. In order to
save from financial crisis Maxwell made decision to float 49% of Mirror group shares but then
Maxwell pledging shares in MCC as Collateral for loans. In 1991 Maxwell ran sorts of cash and
he sold the Dutch group Elsevier for $440. MGN and MCC shares were pledged as collateral for
further loans to his private companies. Maxwell also used pension fund amount of $767 million
to make some large investments in his corporation shares. This transaction was covered from
pension trusties as it was window dressed from its accounts. Maxwell Empire was collapsed
soon after death of Maxwell. Also his two sons got arrested by London police due some serious
frauds which was disclosed they have debts of $400 million. Also Goldman Sachs was affected
from its relevant regularities as they were disciplined.

After the collapse of the organization many pensioners suffered anxiety and loss and employees
of Maxwell organization suffered uncertainty and redundancies due to pension fund assets are
worthless when company goes to liquidation. Maxwell should have sold all his assets for the

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requirement of the cash for the fund requirements. Instead of use of pension funds in improper
way putting pensioners in deep trouble. Also he used loans to support Maxwell private
companies was not good governance. Also Maxwell hidden the transparency of the loans he
took. It is fair to hide business decisions but shareholders have rights to know how loans were
used. Maximum time one accountancy or audit firm can audit the books of particular company or
group of companies should be limited or reduce. In this case Maxwell corporation auditor has
worked with them since the early seventies and due the long term relationship with company the
window dressing was allowed to hide information.

One of other corporate governance issue with the Maxwell Corporation was Independent non
executive directors. Maxwell had control power over MGN as he was an executive chairman and
the independent directors had not been effective while excising control over the chairman.
Maxwell had not reacted favorably when he was told to that non executive directors should
appointed and then he agreed to appoint Independent non executive director as it important but
non executive directors had no function in Maxwell corporation. Independent non executive
should be in the board with enough power should have their hands on the decision on the board.
Also Independent non executive directors should be able to bare independent judgment on issues
such as strategy performance, resources and standard of conduct. Also they should be freed from
business or other matters which could affect their independent judgment exercise.

Another issue with Maxwell Corporation was power of authority. Maxwell death had revealed
lot of controversial business dealings and activities. Also Maxwell had used hundreds of millions
of pounds from his company’s pension fund to finance for corporate debt and his takeovers and
lavish lifestyle without relevant approval. In 1992 Maxwell had filed for bankruptcy. Also his
two sons were declared bankrupt with debts of $400 million. Also both sons went trial for serious
fraud with two former directors in 1995. Basically company board should have clearly accepted
division of responsibilities for the head of the company. Clear defined responsibilities ensure the
balance of power and authority. But unlikely this company where Maxwell holds the chairman
and chief executive may allow for the corporate governance issues. Company like Maxwell
Corporation should have strong and independent party on the board with another senior member
on board which could avoid serious fraud such as window dressing in financial statements.

This whole fraud were caused due to irresponsible work of Maxwell as director and his sons
Kevin and Ian due to substantial support they were given to Maxwell. Also they signed
documents without considering the implications. Also these errors made help of the accountants

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and auditors due to report those pension funds issues in the financial statements. Also Goldman
Sachs who were responsible for manipulation of the Maxwell communication corporation.

Literature Review about Corporate Governance

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And Disclosures

According to the UK Corporate Governance it describe CG is combination of process which

directed and controlled. Company boards of directors are responsible party for the corporate
governance of their respective company. In the formation of the company directors shareholders
have important role as they appoint directors for the company and auditors in order to satisfy
themselves hoping that suitable and secure government structure is in place. According to the
Cadbury committee 1992 company board of directors have responsibility of setting the strategies
to the business and providing required leadership and guidance to the management and reporting
to company shareholders about their investment. Furthermore Cadbury report states corporate
governance is all about holding the balance between economic and social goals and between
individual and communal gains. Also it further states that corporate governance framework
enable efficient use of resources and equality to required accountability for the stewardship of
those resources.

International Chamber of commerce further states that corporate governance as a relationship

between corporate managers, directors, equity and the investors who invest their money
expecting a return. Also it ensures that board of directors in the company have accountable for
the pursuit of company corporate objectives and oblige with law and regulations. Also corporate
governance provides the relationship between company and its shareholders and society
(Millstein, 1998).

Corporate governance is varying country to country but Millstein report it has four core
objectives which are fairness, transparency, accountability and responsibility. Ensure the
protection of company shareholders and all equitable treatment of all shareholders defines as
fairness. Transparency is about providing clear comparable corporate information by the timely
and quality disclosure as adequate manner about company performance, governance and
ownership (OECD 2004). Corporate information disclose by published annual company reports.
Quality of the corporate governance displays the extent of information disclosure of the
company. Disclosures may commissioned by existing laws and voluntary and mostly it’s include
company financial information and performance. Accountability can be explained as company
board directors clarify management roles and responsibilities and shareholder interest to the
business to shareholders by board of directors. Responsibility is not just obliging with
regulations and laws also meeting its duties to company stakeholders adding employees and
socially responsible and environmentally sustainable corporate conduct (OECD 1999).

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According to Gregory and Simms (1999) states that quality of the corporate governance and
disclosures may impact on the ability to attract low cost capital. Corporate governance proves the
way of company performance and it may help to attract relatively cheaper capital both locally
and internationally. Also good corporate governance will boost company image and will increase
the investors’ confidence about company image. Investors would be happy to invest the
companies who have greater good governance practice as it ensure the companies have more
secure position and have greater protection to the investment.

Corporate Governance meets expectations of the society as it provide transparency of the

corporations and its function in fair manner by imposing relevant checks against management
performance. Also it help to combat against unlawful and fraud in the business. Corporate
governance transparency and accountability of the organization performance. Many organization
have stated that good corporate governance practice and overall profitability of the company link
with good association. It means CG practice may increase higher economic profit.

In current Modern Corporation ownership of capital is differ from its management. So

organization management and owners have contractual agreements between them. Basically
management work behalf of the shareholders. In some case management use information for
their own advantage or they misuse those information to overvalue the company performance.
Patel (2002) argued that corporate governance can find a solution for those situations where
company place vigilant board and timely accurate and sufficient financial information disclosure
and transparency of the ownership structure.

Corporate Governance in the United Kingdom

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In the United Kingdom regulation of the business activities governed by serious of legislative
texts and orders. United Kingdom legal framework applied in UK regarding corporate
governance as follows,

 Common Law rules

 Statute or companies act
 A company Constitutional documents or memorandum and articles of association
 Listing rules
 The combined code on corporate governance.
 Non Legal guideline issues by relevant represent institutional investors such as ABI,
NAPF, and PIRC.
 Takeover of Public companies such as city code on take over and mergers and rules of the
takeover panel.
 The Financial Services Authority’s code of market conduct.

Corporate governance of the UK regulated by series of legislative texts and the important of
which is the combined code on corporate governance as mentioned above. In the United
Kingdom specific codes include some provisions that relevant to all aspects of the Corporate
Governance and in some cases such as merger additional provision may be required.

Recommendations

Maxwell communications main issue was lack of internal control system. Also if auditors and
regulators insisted on changes the amount of fraud caused would have been more less damage.

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DTI have suggested that although there were many of the deficiencies in legislation and
regulation which was allowed the events at Mirror group to happen have been sorted, but still
remain some important questionnaires to being addressed or consider such as,

 Give some more assistance to and boost training for trustees who perform vital role in
company stewardship and investment of pension funds schemes.
 Implement statement of guidance on the role and duties of consultants and advisors on
flotation.
 Construct some radical changes by imposing some heavy fines and sanction against
companies and organization who do not report fraud activities.
 Input some regulation of the market in securities to give more effective control over firms
which operate on a transnational basis to make sure that company runs fair, open and
transparent conduct of market and with some projection for the investment.
 Give some detailed guidance to the auditors how to audit of business such as empires.
 Provide more assurance on regarding the independence of the auditors as the public
expect auditors to be fairer and independent and discourage or impose ban on the firms
which act auditor and accountant for the same company as discouraging auditors who is
not independent could reduce the level of fraud.
 Make non executive director more responsible in the organization and more accountable
also make separation for chairman and chief executives by giving some extra statutory
guidance on the duties of all directors.
 Averting an expectation gap by causing public aware that regulation cannot provide
100% security of eliminating fraud, malpractice or manipulation of the markets.

In this Maxwell scandals most important lesson is highly ethical and professional standards must
put before the corporation advantage as reputations of the financial market depends on it. Also
on the other hand most affected victims of the major frauds is most of the time its employees
which defraud. Due to financial fraud so many careers and finance in the all levels could lose
their career for life. Most of the time big frauds occur for benefits of company owners or senior
management and not the employees. The biggest defense against fraud may be educated
workforce, so they can watch how their company performance and can put so much impact on
the company or organizations.

Furthermore in the past there was no such a guideline to follow and after the cases like Maxwell
questions were urged regarding the corporate governance. In 1992 Cadbury report was
introduces as first guideline in the world which aim to investigate corporate governance of the
companies in order to provide system which govern the company’s corporate governance and in
order to restore the investors’ confidence about in the system. After this many countries have
applied corporate governance for their country in order to avoid more fraud cases such as
Maxwell. After the introduction of the corporate governance there was positive impact on the

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economic and social development due to corporate governance will stop further fraud cases due
to legislation.

Conclusions
The aim of this report to undertake an analysis issues of the corporate governance and corporate
governance scandals. As an example Maxwell communication corporation scandals were
analyzed. A through literature view has been taken into consideration in terms with corporate
governance and its importance, issues and limitations. In this case study many loop holes of the

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lack of the corporate governance were discussed. Corporate governance history goes back to
early 1920. Corporate governance initially began with Cadbury report (1992) and later it was
added some provisions in to the corporate governance such as greenbury report (1995), Turn ball
report (1999/2005) and combines code (1998/2003). After several years corporate governance
became hot topic following UK Company listing rules in 1998. These corporate governance
disclosures have impact on the investments as good governance organizations attract more
capital and bad governance companies share plunged. So introduction of corporate governance
have benefited to those who are running fairly and efficiently.

Last decade of twenty first century has produce big corporate scandals in the UK such as
Maxwell scandals which were mainly lack of corporate governance. After those scandals
investors and public faith on the companies have lost and its affected UK economy badly. As a
result of Maxwell scandals and other corporate scandals Cadbury report 1992 was introduced.
The relationship between corporate governance and corporate is very essential and strong.
Mainly scandals were aroused due to lack of control system. As a solution for that corporate
governance was formed and it provide important controls on the companies in order to avoid any
misbehaving and fraud and it provide assurance to the investors about their investments
confirming that their investment is safe and secure.

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