Adelphia Problem
: Adelphia doesn’t apply the core concept of corporate governance.
Elaboration : What are the core concepts of corporate governance? i) -
Integrity integrity is measured by what an individual does and does not do when no one is looking
-
Corporate reports, filings, and stakeholder communications state one thing when in reality the corporation is doing something else
-
This inconsistency comes as a result of ignorance, market and management pressures, or an outright willingness to deceive.
-
Integrity is violated when corporate policies and procedures are thrown out the window in the quest for personal or corporate gain
-
In order for a corporation to have integrity, it must have an ethical environment with employees and business partners willing to follow and enforce corporate culture, policies, and procedures
-
Adelphia lack of integrity as the Rigas’ family uses Adelphia’s fund to :
the Rigas family borrowed $3.1 billion from Adelphia to buy Adelphia shares without disclosing the loan
-
building a $13 million golf course
invested $130 million in the Buffalo Sabres hockey team
Also in Adelphia Family received special treatment: John Rigas gave his wife Doris, a $371,000 contract to decorate Adelphia buildings with $12.4 million in furniture from a Rigas family business.
-
They did all of this without disclosing to the other directors, shareholders and stakeholders of the company.
ii)
Tranparency
-
Transparency is essential to risk assessment
-
They demonstrate the quality and reliability of information -- financial and non-financial-- provided by management to lenders, shareholders, and the public.
-
Reliable and timely information increases confidence among decisionmakers within the organization and enables them to make good business decisions directly affecting growth and profitability.
-
Information also affects decision makers outside the entity-shareholders, investors and lenders-- who must decide where and at what risk to place their money.
-
The information a company provides should show decision-makers and outside interests whether and to what extent corporations meet legal requirements.
-
Disclosure helps public understanding of a company's activities, policies and performance with regard to environmental and ethical standards, as well as its relationship with the communities where the company operates.
-
Disclosure and transparency, as well as proper auditing, serve as a deterrent to fraud and corruption, allowing firms to compete on the
basis of their best offerings and to differentiate themselves from firms who do not practice good governance. -
John Rigas and family is obviously is not transparent with the business of Adelphia as they participate in a scheme to defraud creditors and investors by making false and misleading statement concerning :
Adelphia’s off balance sheet
The company’s purported deleveraging through a variety of securities transactions
Adelphia’s operating performance as reflected in such metrics as EBITDA, basic cable subscriber’s growth and plant rebuild progress
The unauthorized and unreimbursed use of Adelphia’s funds and assets by the Rigas family
iii) -
Independence An independent director is one who is independent of management and free from any business or other relationship, which could interfere with the exercise of independent judgement or the ability to act in the best interest of a listed company. Without limiting the generality of the foregoing, an independent director is one who:i)
is not an executive director of the listed company or any related corporation of such listed company
ii)
is not engaged as a professional adviser bythe listed Corporation under such circumstances as prescribed by Bursa Malaysia Securities Berhad or is not presently a partner, director (except as an independent director) or major shareholder, as the case may be, of a firm or corporation which provides professional advisory services to the listed Corporation under such circumstances as prescribed byBursa Malaysia Securities Berhad
iii) -
is not a major shareholder the listed Corporation
One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing.
-
This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management.
-
The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor.
-
It is prohibited for accounting firms from providing both auditing and management consulting services.
-
Adelphia’s auditor was not acting independently as the auditors :
Did not give the audit of Adelphia as high risk
Knew about the Rigases regularly took fund from the Adelphia’s cash management system but fail to inform the directors.
Always give Adelphia a clean bill of health despite reasons to be wary.
-
All of this happens because Adelphia also lack of independent director’s to guide the company to the right path
Hypothesis
: Adelphia's story is a sad one because it is a tale of a man who brought economic growth and benefit to a small town in Pennsylvania while building an empire with a mere $300, but allowed greed, poor judgment, and a warped "family-first" mentality tear it all down.
Recommendation
: Adelphia never managed to successfully transition from a familyowned operation to a public company with shareholders and SEC regulations. The Rigas crew, however, did successfully manage to topple a huge multi-billion dollar company by treating the company as a free resource of funds and thinking of the family wants and desires first. Therefore, if the Rigas’ family stick to the core concept of transparency, integrity and independence, all of these might have not happened.
