To What Extent is the management Responsible for the Failures at Satyam, Damas, and Lehman Brothers ?

To What Extent is the management Responsible for the Failures at Satyam, Damas, and Lehman Brothers?

Faaiz Rehman 000895-018

Extended Essay Final Draft

Business and Management

Supervisor: Faraz Mirza

3390 Words

Abstract

The purpose of this extended essay is to look at three different Public Limited Companies in three different regions of the world-India, United Arab Emirates, and The United States of America, and determine which part of the management was responsible for the failures of abiding by the Corporate Governance Code. As such, the main aspect that will be looked at will be the corporate governance code, which is the code that all businesses must adhere to, and the operations that breach this code will be focused on.

Three companies are chosen because the corporate governance code is different in each of these countries, and so three different Codes will be focused on. Within each of these companies, the actual breach of the Code is mentioned and talked about, and the different stakeholders that comprise of the management and related external stakeholders are criticized based on their roles with the company that breached the Code.

By the end, when the situations of all three companies have been looked at and analyzed as to which stakeholders were responsible for the non compliance with the Corporate Governance Code, the conclusion should come to that it is not only higher management that is not only held liable, but is actually the management body that is responsible for the failures, but also the external stakeholders of the businesses.

Table of Contents

Page 4: Damas

History

Failure

Page 5: Whose fault was it?

Page 8: Satyam

History

Failure

Page 9: Whose Fault was it?

Page 12: Lehman Brothers

History

Failure

Page 13: Whose Fault was It?

Damas

In the late 1970s, Mr. Taher Abdullah and his three sons, Tawfique, Tamjid and Tawhid, first developed the Damas brand. By the end of 1985, the Group had expanded into several retail stores, and in 1988 the Group launched its first branded jeweler line under the Harmony brand.

In the 1990s, the Group adopted an early version of its current marketing and merchandising strategy to develop its brands and products based on customer segmentation according to demographic profile. (Damas)

By 2005, Damas had established stores in Qatar, Bahrain, Oman and Jordan, Egypt, Libya, Sudan, Italy and India. In the same year, Damas had raised AED 521 million through investments in close companies that would allow them to be large shareholders in these other firms. It can be seen that Damas implemented organic growth in order to let Damas grow and expand.

Failure:

On March 22 2010, DIFC announced that it would fine the Abdullah brothers a total of $3 million. The three brothers who are named Tawhid, Tawfique and Tamjid Abdullah, owed 365 million to the company Damas, which they had taken unaccounted for. The actual firm was also fined $700,000. This illegal withdrawal of company funds is considered to be unethical, and it would reflect the miscommunication and non transparency that exists with Damas. These unethical doings of the brothers would lead to the reputation of Damas to be tainted, and this would lead to decreased customer loyalty as well as their marketed people do not feel a bond to the brand name Damas. The withdrawals were made for many purposes, for example: payment of family ventures and leisure, and also large investments in real estate for the three brother's families.

Tawhid Abdullah who held the position of the Chief Executive Officer and Managing Director was expelled form Damas after the auditors had foundthe unauthorized transactions. Ever since the expulsion of Mr. Tawhid, Damas has made it an aim to remove any association with the unauthorized and unethical embezzling of Damas funds and has been focusing on regaining investor confidence. Without the continued investment, Damas would not be able to grow and enjoy the benefits of growth, such as economies of scale, and increases revenue due to increased scale of operations. The lack of disclosure and transparency of the operations of Damas affected the view of investors about the safety of their investment and this damaged the trust of the shareholders and associated financial institutions that were involved with Damas. Damas, being a Public Limited Company, its shares would be on the stock exchange and due to this negative image of Damas imprinted on it due to the lack of disclosure, the value of shares fell. This would lead to a decrease in the external monetary funds available for Damas to expand or in the basic aim of a company- to survive. However, Damas also said it had adequate funds to meet its current financial obligations and was continuing to conduct business as usual and this means that they were still meeting their primary aim-survival.

Whose fault was it?

One of the major responsibilities of the board of directors is to ensure that shareholders and other stakeholders are provided with disclosures on the financial and operating results of the entity that the board of directors has been entrusted with governing. The board of Directors are elected from out of the shareholders, not employed by anyone. Therefore, the according to the corporate governance code of the UAE, the board shall be monitored by an external audit. Within Damas, theres an issue of "balance of power" meaning that the board and the senior management have too much power. Due to this imbalance of power within Damas, both the external audit and/or the rest of the board were aware of the unauthorized transactions. This brings the question: WHO was responsible for this lack of disclosure? Was it the external audit, or the internal audit, along with the brothers themselves. The external audit was in charge of investigating

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