BM7913 Organizational Governance and Performance Management

1. Over the years, the media has pinpointed Parmalat to a particular Italian scandal in the Italian system of corporate governance. Parmalat was initially owned by a group of companies but managed through a pyramidal structure (Ogutu, 2016). Such a pattern of ownership is considered typical in Italian companies. In addition, the company was mainly controlled by a sturdy block holder. The Tanzi shareholders portrayed the failure of corporative governance through channeling corporate resources to themselves majorly at the expense of the minor shareholders.

In spite of most Italian corporate governance being distinguished by monitors such as external auditing and statutory auditors, the monitors did not protect the company from self-destruction (Solomon, 2007). Parmalat has still survived from its fraudulent ordeals while other companies under the same conditions have ceased to exist. Parmalat turned to its auditors so that it could recover its funds. In addition, auditing firms associated with Parmalat were able to extricate themselves from the present Parmalat crisis hence they were not destroyed in the aftermath (Solomon, 2007).

The corporate governance failures that led to the crisis of Parmalat can be divided into three. To begin with, we have lack of independence of the non-executive directors. For example, one member of the nonexecutives’ directors working in Parmalat was not independent since from 1963 he had been working for the company (Ogutu, 2016). This means the director was more gullible to biased decisions. Secondly, two high positions including the chairman and the chief executive position were not divided as directed by the codes of practice on corporate governance. The Tanzi held both positions. Thirdly, disregard of compliance to corporate governance code. In Italy, the Preda corporate governance dictated that in situations where an organization is controlled by a group of shareholders, a part of the directors needed to be independent such that controlling the shareholders would be limited (Melis, 2005). However, Parmalat did not uphold the corporate governance code, and no adequate explanation was given concerning this lack of compliance.

In conclusion, Parmalat’s failure in establishing careful monitoring structures on the governance framework of the company laid it bare to both fraudulent activities and abuse of power (Solomon, 2007). Therefore, the need for devices used for detecting fraud would assist in preventing crisis situations from arising.

2. In avoiding the crisis, Parmalat would have considered different mechanisms hence remaining afloat. One, Parmalat should have implemented a code of ethics. This code highlights the corporate responsibilities that should be carried out and directs the executives of a company to comply to rules when exercising their (Storelli, 2005). This is because it is critical in strengthening the corporate governance process. Through the code of ethics, Parmalat’s Tanzi shareholders would have been prevented from taking advantage of the other shareholders. Therefore, the fraudulent activities would have been avoided. In addition, the code of ethics shows commitment to acceptable and sustainable behavior towards stakeholders hence being able to meet the stakeholders need for information (Ogutu, 2016).

Secondly, Parmalat needed to ensure sustainable enforcement through proper legislation and regulation. Parmalat should have established a mechanism where deployment of enforcement would be done in situations when there is diminished corporate governance (Ferrarini, & Giudici, 2006). By adhering to regulations, the pyramidal structure controlled by the Tanzi shareholders would have been prevented hence abuse of power would have been withheld. Parmalat failure to adhere to the regulations is because at that time there was no presence of administration by the government. The company should have embedded the compliance in its operations. The rules help public companies to be managed ethically and effectively, and corporate governance practices are sustainable.

Thirdly, strengthening of independent boards. Board independence is considered a crucial element in enhancing the efficiency of corporate governance in a company (Ogutu, 2016). It ensures there is a balance amidst the directors in an organization. One of the reasons for corporate governance failures in Parmalat was absence of independence by the non-executive directors. In addition, lack absence of the division between the chairman and chief executive positions portrayed lack of ethics (McCahery, & Vermeulen, 2005). Therefore, if the company had established a strong independent board, transparency and ethics would have been highly promoted.

Lastly, enhancing monitoring and compliance. In Parmalat, the auditors failed to carry out due professional care hence fictitious financial statements were approved (Melis, 2005). Auditors are primarily crucial in ensuring a corporations financial and internal control reporting processes are adequate. Application of excellent monitoring and compliance systems would have guaranteed Parmalat does not enter into crisis.

3. Better running of activities forms the basis for a good corporate governance. Each position in corporate governance such as the board of directors, internal and external auditors, and non-executive directors is essential since the roles define the objectives of a corporate firm (Council, 2003). The interest of all stakeholders is made primary hence prompting all bodies to work together.

Inclusion of effective internal control systems procedures and policies promotes effective corporate governance hence the needs of all stakeholders are met. Excellent corporate governance gives attention to the well-being of the management as well as the shareholders in an organization (Sutedi, 2011). Besides, the internal controls in an organization are essential in the corporate governance toolbox. This is because it controls a company’s attitude on fraud and ethical culture. Nonetheless, a company’s Audit committee and board of directors are crucial in promoting the transparent and ethical environment in an organization (Melis, 2005).

Accountability is also important in corporate governance. However, it can only be established by the individuals working in a company who take actions on issues (Solomon, 2007). This means that, for corporate governance to be excellent, the different parties in an organization need to be accountable for their decisions and actions. Great mechanisms for accountability provide the shareholders with the right information and opportunity to assess the board and committees.

In addition, responsibility is another critical aspect that promotes good corporate governance when carried out well. Having the different roles in an organization will ensure that corrective action can be carried out in case of mismanagement (Sutedi, 2011). Responsible management puts in place the proper steps required for setting a company on the right path. Each role in an organization has a specific responsibility, therefore, considering the output of each party ensures excellent corporate governance is ensured.

References

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Ferrarini, G., & Giudici, P. (2006). Financial scandals and the role of private enforcement: the

Parmalat case. After Enron: Improving Corporate Law and Modernizing Securities

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McCahery, J. A., & Vermeulen, E. P. (2005). Corporate governance crises and related party

transactions: A post-Parmalat agenda. Amsterdam Centre for Corporate Finance Working

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Melis, A. (2005). Corporate governance failures: To what extent is Parmalat a particularly Italian

case?. Corporate Governance: An International Review, 13(4), 478-488.

Solomon, J. (2007). Corporate governance and accountability. John Wiley & Sons.

Storelli, C. (2005). Corporate Governance Failures-Is Parmalat Europe's Enron. Colum. Bus. L.

Rev., 765.

Sutedi, A. (2011). Good corporate governance. Sinar Grafika.

Ogutu, E. O. (2016). Corporate Failure and the Role of Governance: The Parmalat

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