Final exam assignment
Over the last few decades there have been a number of cases of high profile corporate collapses and fraud scandals. In essence, the unethical behaviour of corporations affects us all, such as shareholders’ lost financial investments, employees who lost their jobs, other companies that provided goods and services to the company, as well as the economic impact on domestic and international communities. In this paper I will focus on the case study of Royal Ahold and the large accounting fraud that took place within the company. The issues I will address include Ahold’s transparency and disclosure weaknesses, its demanding culture focused on economic growth regardless of certain ethical principles, the weaknesses of corporate governance within Europe and the United States, as well as the influences a company’s global expansion has on corporate governance and its financial risks. As an analytical framework, I would like to use Robins’ (2006) Technical, Political and Cultural problem analysis framework, in order to elevate understanding of the problems at Ahold by analysing it from these perspectives. I wish to argue throughout my paper, that all of these aspects are in some way related to a company’s respective shareholder or stakeholder approach to business operations. The shareholder approach focuses mainly on creating shareholder value by maximising profits, with a lot of pressure on short term financial performance. Stakeholder theory on the other hand also takes into account the interests of parties other than the shareholder, e.g. employees and suppliers. All aspects of the company are dependent on which of these approaches it follows.
An analysis of the weaknesses of Ahold’s approach to transparency and disclosure.
In this first section I would like to examine Ahold’s approach to transparency and disclosure. This falls under Robbins’s technical framework, as it examines aspects of accounting rules and principles, the responsibility of auditors as well as the role of the board (Robins, 2006). Transparency is a key element to successful corporate governance. It is achieved by disclosing relevant and essential information to a company’s various stakeholders. In this section I will examine some of Ahold’s systems of internal control, such as the audit function and the role of the board, in order to better pinpoint the weaknesses in its disclosure and transparency. Internal control functions provide central monitoring roles in corporate governance and I will show that weaknesses within these mechanisms, contributed significantly to the fraud scandal at Ahold. By first of all introducing the agency theory, I will examine why such internal forms of control is necessary at all within a company. I would ultimately also like to link the fact that Ahold’s more shareholder value approach to business ultimately influenced the flaws that occurred in its transparency. The reason why companies need such extensive monitoring of management could be argued to be rooted in agency theory. Agency theory is rooted in the separation of ownership and control. The agent is believed to be purely self-interested and will act opportunistically. The actions of the agents (the managers) need to be monitored in order to protect the interest of the principals (the owners). Internal and external governance mechanisms are used in order to decrease managerial opportunism (Solomon, 2007 ). The agency theory thus examines potential conflicts that may arise between management and shareholders. The manipulation of the control mechanism, the auditing function, can be explored in order to get a better understanding of the disclosure and transparency weaknesses in Ahold. We shall see that the lack of transparency contributed to increasing and not decreasing the agency problem. Disclosure of information is a critical function in reducing agency problems. Disclosure refers to different forms of information...
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