Coercive power
Reward power
Ligitimate power
Expert power
Referant power
3 " Page
The One-Tel Collapse: Lessons for Corporate Governance
By
Rubel Shaikh
Executive Summary
One-Tel was a major corporate collapse in Australia in 2001. At the time of its collapse, it was the fourth largest telecommunications company in Australia with more than two million customers and operations in eight countries. Analyses of quantitative and qualitative data from diverse sources suggest that One-Tel's collapse is a classic case of failed expectations, strategic mistakes, wrong pricing policy, and unbridled growth. The company's meteoric rise and fall was associated with serious deficiencies in its corporate governance including weaknesses in internal control, financial reporting, audit quality, board's scrutiny of management, management communication with the board, and poor executive pay-to performance link. Thus, the collapse of One-Tel has several important lessons on the role of corporate governance in preventing corporate collapse.
Table of Contents
Executive Summary ii
1.0 Introduction 4
1.1 Objective of the Report 4
1.2 Methodology 4
1.3 Background of the Study 4
1.5 Limitation of the Study 4
2.0 History of One.Tel 5
2.1 Company Background 5
2.2 Chronological outline of One.Tel 6
3.0 Major Issues in the failure of One.Tel 7
3.0 Financial Performance 8
4.0 Corporate Governance Issues 11
4.1Financial reporting quality 12
4.2 Corporate Governance issue of One-Tel 15
4.3 Breach of Corporate Governance Issues 17
5.4 Fiduciary Duty 18
4.5 Analysis of the Breach 19
4.6 Compensation Scenario of One-Tel 21
5.0 Summary and Conclusion 23
6.0 References 26
1.0 Introduction
Corporate governance essentially involves balancing the interests of the many stakeholders in a company- these include its shareholders, management, customers, suppliers, financiers, government and the community. Corporate governance includes the processes through which corporations' objectives are set and pursued in the context of the social, regulatory and market environment. This paper has focused on the case study One.Tel failure on corporate governance issue. Here the reasons behind the failure of the company will be identified along with identifying the responsible parties in the entire corporate governance failure. The report will also identify the aftermath of the corporate governance failure of the company.
1.1 Objective of the Report
The broad objective of the report is to identify the reasons behind the corporate governance failure of One.Tel. Other minor objective of the report is to identify the key players behind the corporate governance failure and identify the actions taken by the authority to solve the problem.
1.2 Methodology
This report will focus on the secondary sources of data to identify the corporate governance failure of One.Tel. Here the reports published by the government along with the published articles of newspapers will be considered. A secondary source of data has been selected to minimize the cost and time required to collect the required data.
1.3 Background of the Study
Corporate governance includes the processes through which corporations' objectives are set and pursued in the context of the social, regulatory and market environment. This study is going to focus on the reasons and the key players behind the corporate governance failure of One.Tel subsequently results in the failure of the company.
1.5 Limitation of the Study
The study is fully concentrated on the use of secondary sources of data to draw a conclusion on the corporate governance failure of the Anglo Irish Bank. This report lacks primary data. For this reason, there is a chance of drawing invalid conclusion if the objective of the secondary sources of data does not match of the current study objective.
2.0 History of One.Tel
The Australia corporate world has been shaken by the demise of another major company, the third such collapse in a matter of weeks. "One.Tel", the country's fourth largest telecommunications company (Cyert, et al., 2002), ceased trading on the Australian stock market on May 28 and was put into the hands of an administrator after an investigation of the company's financial situation showed it to be insolvent (Cook. T, 2001).The One.Tel collapse has lay off its 1,400 workers and also impacting on a host of small creditors owed thousands of dollars for goods and services. Many faced bankruptcy and, according to the reports, will receive nothing from the company windup. The fact that workers' entitlements are under threat while the major creditors and company executives are protected is a further embarrassment to the government which is trying to overcome the hostility engendered by its big policies over the last five years (Cook. T, 2001).This assignment embarks on the issues leading to the collapse of "One.Tel"; breaches of the corporate governance and persons involved; and how the breaches could have been avoided.
2.1 Company Background
One.Tel is the generic term used to describe a group of Australian based telecommunications companies, including principally the publicly listed One.Tel Limited established in 1995 soon after deregulation of the Australian telecommunications industry. The company was established by Jodee Rich and Brad Keeling who had secured large investments from Murdoch and Packer business empires (Media Coverage). One.Tel attempted to create a youth-oriented image to sell their mobile phones and One. Net internet services, with a slogan "You'll tell your friends about One.Tel", to draw the connection between the brand and personal communication (Drew, 2009).
Core Products: One.Tel had three core product offerings are:
Fixed wire long distance,
Internet service provision
Mobile telephony
One.Tel also has a mascot known as "The Dude". Large murals were printed upon the garishly-painted walls of company's offices all around the world. Internally, the company had a fondness for applying the One.-prefix to everything relating to the business: One.Dude, One.Team, etc. (Smh.com.au, 2016).
2.2 Chronological outline of One.Tel
One.Tel was listed on the Australian Stock Exchange (ASX) not long after it was founded in 1995 to 2001. It went into voluntary administration on 29 May 2001 and into liquidation, upon a decision made by creditors in the administration on 24 July 2001.
Year-1995: It began business in May 1995 with a total initial seed capital of approximately $5 million. The ownership structure of the company was: Optus 28.5%; FAI 18%; James Packer 5%; Kalara Investment 50% (approximately). Kalara Investment was owned by Jodee Richand Brad Keeling.
Year- 1996: Between May 1995 and September 1996 One.Tel increased its customer base from zero to over 100,000.
Year-1997: One.Tel floated on the Australian Stock Exchange at $2 per share in November 1997. Initial market capitalization was $208 million. On paper, FAI had turned a $950,000 investment into $51 million; Packer had turned $250,000 into $17 million and Rich and Keeling had a combined stake worth well over $100 million. In addition, the company had paid out $4 million in dividends and $2.85 million in consulting fees to Rich, Keeling, FAI and Packer.
Year-1998: The original shareholders also received $16.9 million for the sale of two businesses, One.Net and One.Card to One.Tel in July 1998. In the financial year ended 30 June 1998 One.Tel reported a before tax profit of $8.8 million. During the year the company had commenced a 'Global Strategy', opening offices in Los Angeles, London, Paris, Frankfurt, Hong Kong, Amsterdam and Zurich.
Year-1999: In 1999 One.Tel's Next Generation 3GSM 1800 network was launched by joint CEO's of the mobile business, Stephen Moore and David Wright in Sydney, Australia. In the financial year ended 30 June 1999 One.Tel reported a before tax profit of $9.8 million. The most remarkable day in the history of One.Tel was 23 November 1999. Lucent Technologies announced that it would build and finance a European GSM mobile network for One.Tel at a cost of up to US$10 billion. The company's market capitalization reaches a high of A$5.3 billion on 26 November 1999, making it one of Australia's largest 30 companies.
Year-2000: In March 2000 One.Tel spent $523 million on purchasing additional Australian spectrum licenses. The Packer and Murdoch families provided a further $280 million in funding. Australian investors provided $340 million in funding. In the financial year ended 30 June 2000 One.Tel reported a loss of $291 million. The share price plummeted to below $1. The annual report included details of the remuneration of Rich and Keeling; both received a $560,000 basic salary and a $6.9 million bonus.
The end-2001: In January 2001, Jodee met with Kerry Packer who told him, "You ran out of money with Imagineering, and you're going to do it again". A Macquarie Bank report states that the company was worth $3.5 billion, and the share price doubled within days. Merrill Lynch predicted that the company would run out of money by April. In February, director Rodney Adler sold 5 million shares for $2.5 million. During April and May the company's problems became increasingly apparent. In a final attempt to give the company a chance to survive, News Limited and PBL agreed to subscribe to a rights issue at 5 cents per share to supply another $132 million in much needed cash. News Limited and PBL reneged upon the agreement later in May when further evidence of One.Tel's financial problems emerged.
The directors appointed Ferrier Hodgson as administrator on 29 May 2001. The administrator's report states that the company was insolvent by March 2001.
3.0 Major Issues in the failure of One.Tel
Major issues face by One.Tel is that the company structure was not developed, in which lead to ineffective communication. In its operation, One.Tel run high centralization as the managers only do what Jody told them. He creates the leadership turnover since he liked promoting the yes man and humiliated managers who brought problems to his attention, therefore, there are high staff turnover. He also did not accept any opinions from others and used his authority to manage the company. Furthermore, he focused too much on advertisement in taking in the new customers. He was too autocratic which made the employees unable to exercise their ability in solving problem. In addition, One.Tel had low complexity that is determined by having unclear job tasks and responsibilities. As there is no organizational chart, the relationship between the employees could not be determined and the job descriptions were ambiguous. Understaffing, which often happens, and many called from customers were left unanswered, led to the long-term decline in sales, as there was frustration among the customers. No rules and procedures in handling account and customers complaint shown that One.Tel was lack of formalization in operation. One.Tel also did not run its divisions' function properly. There was no right procedure in training staff and it recruited young inexperienced staffs. It also had disorganized billing system and financial account. Lastly, there was no clear planning of staff training, advertising, and product availability, which made the technology wasted.
3.0 Financial Performance
The 1998 Annual Report of One-Tel presented that One-Tel had the customer numbers required to maintain profitability and fund sustainable subscriber growth.
However, an analysis of its financial performance vis-à-vis customer growth would suggest otherwise. Table 1 summarizes key performance indicators and financial variables of One-Telfor the period 1996-97 to 1999-2000.
Table 1: Key performance indicators and characteristics of One-Tel
Particulars
1996-97
1997-98
1998-99
1999-2000
Number of customers at year-end (in '000)
159
290
642
730
Sales Revenue ( in A$m)
148.3
207.3
326.0
653.400
Operating profit after tax (in A$m)
3.723
5.910
6.965
-291.100
Total operating cash flows (in A$m)
13.402
-8.000
-28.945
-168.900
Ratio of OPAT to Sales
0.03
0.03
0.02
-0.45
Cash balance at end of year (A$m)
2.783
8.403
172.641
335.700
The firm's sales revenue showed successive growth to reach A$653.4 million in 1999-2000, which was ten times of the sales revenue in 1995-96. In particular, it sales revenue had a year-on-year increase of 127% in 1996-97, 40% in 1997-98, 57% in 1998-99 and 100% in 1999-2000. However, the phenomenal revenue growths did not translate into higher profitability. One-Tel's profit margins (operating profit after tax divided by sales revenue) appeared to be 3% in 1996-97, 3% in 1997-98, 2% in 1998-99 and -45% in 1999-2000. Similarly, its returns on assets (operating profit after tax scaled by total assets at the beginning of the year) were 12% in 1997-98, 9% in 1998-99 and –55% in 1999-2000.
One-Tel's cash flows over the period 1996-97 to 1999-2000 are summarized in Table 02
Table 2: One-Tel's Cash Flows: 1996-97 to 1999-2000
(All figures are in A$)
Particulars
1996-97
1997-98
1998-99
1999-2000
Total operating cash flow
13,402,000
-8,000,000
-28,945,000
-168,900,000
Cash flows from investing activities
-4,940,000
-10,752,000
-32,183,000
-614,900,000
New equity issued during the year
0
25,764,000
430,348,000
818,500,000
New debt raised during the year
0
0
58,980,000
139,800,000
One-Tel's marketing and advertising campaigns created an impression that the company was targeting 'the back-packing community'. Further, the company relaxed its credit standards when signing up new customers, and credit checks were overridden sometimes. Thus, although its mobile-phone customers increased from 75 000 in 1995-96 to 290 000 in
1997-98 to 730 000 at the end of 1999-2000, the accelerated growth in customers came at the expense of profitability. First, as shown in Figure 1, its sales revenue per customer dropped from A$933 in 1996-97 to A$715 in 1997-98 to A$508 in 1998-99.
Figure 1: Sales revenue and Cash paid to employees and suppliers
Second, as shown in Figure 1, its sales revenue per customer per day went down from A$2.56 in 1996-97 to A$1.96 in 1997-98 to A$1.39 in 1998-99 but increased to A$2.45 only in 1999-2000. By comparison, cash paid to employees and suppliers per customer per day amounted to A$1.70 in 1996-97, A$1.83 in 1997-98, A$1.40 in 1998-99 and A$2.57 in 1999-2000.
Thus, clearly One-Tel was pricing its services even below its 'cash costs' for at least 1998-99 and 1999-2000.
Further, when change in sales revenue is divided by change in the number of customers, it appears that every new customer on average generated revenue of only A$0.9869 in 1996-97, A$0.4507 in 1997-98, A$0.3371 in 1998-99 and A$3.7206 in 1999-2000.
Thus, One-Tel was clearly attracting low quality, low-value customers who did not make phone calls.
Figure 2: One Tel's sales revenue, Operating Cash flows, Operating Profit after Tax
One-Tel's operating net cash flow per customer per day had been worsening over the years from Australian 23.09 cents in 1996-97 to -7.56 cents in 1997-98 to -12.35 cents to -63.39 cents in 1999-2000. Even if its accounts receivable had been fully collected within the same fiscal year, on a cash basis One-Tel would have reported a loss of A$2.1 million in 1998-99 and a further loss of A$31.4 million in 1999-2000. Thus, One-Tel was clearly pricing its services below costs even on a cash basis.
One-Tel's performance declined from an operating profit after tax of A$5.9 million in 1998 to an operating loss after tax of A$291.1 million in 2000. One-Tel's return on assets (operating profit after tax divided by total assets at year end) went down from 8% in 1998 to -20% in 2000.
One-Tel's profitability had been worsening over time in a telecommunications market that had been growing due to deregulation and increasing demands for mobile phone service.
4.0 Corporate Governance Issues
To examine the role of One-Tel's corporate governance in its collapse, one needs to define corporate governance and the standards of measuring the quality of governance. Effective corporate governance requires an environment in which 'authority is exercised with absolute probity'. It also requires directors, executive and non-executive, to ask awkward questions and for the board chair to ensure a proper flow of information to the board of directors.
In General, good governance has six universally accepted practices, implicitly or explicitly. These are:
A balance of executive and non-executive directors;
A clear division of responsibilities between the board chair and the chief executive officer;
Provision of timely and quality information to the board;
Formal and transparent procedures for the appointment of new directors;
Balanced and understandable financial reporting;
Maintenance of a sound internal control system.
Besides these, good corporate governance also requires:
Establishing clear roles of management and the board;
Balancing among skills, experiences and board independence;
Integrity and responsibility, decision-making by senior managers;
Integrity of company reporting;
Timely and balanced picture of all material events;
Recognition of shareholder rights;
Managing risk through oversight and internal control;
Formal mechanisms to encourage board and management effectiveness;
Remunerating management fairly and responsibly;
Recognizing the legitimate interests of stakeholders.
4.1Financial reporting quality
Financial reporting quality is high when financial reports faithfully represent the underlying economic phenomena. Faithful representation requires financial information to be completed, neutral and free from error .This broad definition encompasses earnings quality. Higher earnings quality faithfully represents the features of the firm's fundamental earnings process. This section documents that One-Tel's financial reporting did not faithfully represent its economic performance and thus was of lower quality. It is highly unlikely that One-Tel's financial statements were free from errors. In ASIC v. Rich, Jodee Rich gave evidence that he did not typically see, interlaid, One-Tel's trial balances, spreadsheets underlying monthly board reports, reports on ageing of debtors and creditors, to-be-billed reports, and unpresented cheque listing.
He relied on other responsible managers to bring matters to his attention Similar to Jodee Rich, Mark Silbermann, the finance director since July 1997, has rarely seen One-Tel's ledgers, journals, trial balances or other primary or secondary accounting records .
There were discrepancies in several records and documents including monthly trial balances, collection of accounts receivable, data description, the outstanding balance of accounts receivable and reporting of EBITDA. One-Tel did not have real-time or close to real-time information about total debtors, ageing, and risk profile of debtors. All these matters suggest weaknesses in One-Tel's internal control system. At One-Tel, the accuracy and integrity of financial records and data apparently did not receive the highest priority from senior management. There are several reasons to believe that One-Tel's earnings were of low quality.
First, One-Tel had higher accrual component in its earnings relative to that of its competitors with similar size. Because accruals are subject to management manipulation, high proportion of accruals in earnings would suggest low quality of earnings. For example, both in 1998 and 1999, One-Tel had positive earnings because of large positive accruals amounting to 18% and 7% of total assets, respectively. On the other hand, Optus and Hutchison always had negative income-decreasing accruals. AAPT had positive accruals for 1999 and 2000 but at least it had positive operating cash flows for both years. Thus, clearly, One-Tel's earnings were of lower quality relative to that of its competitors.
Second, One-Tel made two major accounting policy changes over a period of two years. The 1998 Annual Report stated, 'In contrast to most telecommunication companies, our conservative accounting does not create intangibles in our balance sheet. However, in 1999, the company changed its policy regarding deferred expenditures. Previously expensed costs of the establishment of business operations were now capitalized for amortization over a period not exceeding three years. If these costs had to be written off in full in the year incurred, the reported operating profit in 1998-99 would have been reduced by A$32.4 million and reported earnings per share of 0.52 cent would have turned into a loss per share of two cents. Next year One-Tel reported a record operating loss after tax of A$291.1 million. This after tax loss was 15.57 times of the cumulative after tax profits of A$18.7 million of the all the past years. This loss was also 41.59 times of the operating profit after tax reported in the previous year. One-Tel blamed this loss largely on the change in accounting policy in relation to 'the establishment of business operations and subscriber acquisitions'. In fact, the company had to write off these costs as per the UKGAAP because of One-Tel's proposed listing at the London Stock Exchange. Although One-Tel chose to capitalize such costs previously under the Australian GAAP, the writing off approach was always consistent with the Australian GAAP. Moreover, if this policy change had not been required, One-Tel's operating profit before tax would have been reduced byA$173.2 million in 1999-2000. Thus, One-Tel's operating profits reported in all the past years were largely due to non-conservative accounting policy choices.
Third, in the management discussion and analysis in all annual reports, One-Tel's management emphasized on earnings before interest, depreciation, taxes and amortization instead of the earnings reported under GAAP. This creates an illusion that interest expense, depreciation, amortization and taxes are only accounting expenses. For example, the 1998 Annual Report contains a graph comparing the growth in EBITDA from A$3.9 million in 1995-96 to A$10.6 million in 1997-98.EBIDTA is used mainly by companies that report lower than expected earnings and start-up companies that are operating at a loss. Its usefulness as a non-GAAP performance metric is questionable. It would appear that the audit quality for One-Tel was low. Following Carey and Simnett, audit quality in this paper is defined on two dimensions: (1) the auditor's propensity to issue a going-concern opinion, and (2) the level of abnormal accruals in earnings. Non-compliance with accounting and auditing standards while issuing unqualified audit opinion also suggests low-quality audit.
From 1997 to 2000, One-Tel was audited by the same audit firm, BDO Nelson Parkhill. The auditor issued unqualified audit opinions for all these years. The Institute of Chartered Accountants of Australia (ICAA) examined the One-Tel financial reports and identified 48 items of concern. The audit partner in charge of One-Tel and BDNP were both reprimanded by the ICAA. BDNP was fined A$48000 as well. The ICAA also concluded that the audit report was in breach of the Corporations Law, Australian accounting standards and Australian auditing standards. In January2001, One-Tel switched it auditor. The new auditor, Ernst & Young, complained to One-Tel's senior management that provisions for bad debts had been too low.
One-Tel had worsening operating cash deficits A$(8) million in 1997-98,A$(28.9) million in 1998-99, A$(168.9) million in 1999-2000), customer billing and cash collection problems, and employed large positive accruals and non-conservative accounting policies to minimize losses. However, BDNP never issued a going concern opinion. There is further evidence that One-Tel purchased a lot of non-audit services from its external auditor. The non-audit fees as a proportion of the total fees paid to the auditor were 41% in 1996-97, 54% in 1997-98, 52% in 1998-99 and 46% in 1999-2000. If being engaged in NAS with a client firm provides useful insight into the evaluation of a client's internal control, the planning of audit, and the prosecution of it, it is unclear whether the audit quality in One-Tel improved at all as a result of the NAS.
The evidence presented here suggests that One-Tel's reported earnings did not faithfully represent its fundamental earnings process. Its financial reporting quality including earning quality was low. It is no surprise that audit quality in One-Tel was low as well, given that financial reporting quality is endogenously related to audit quality. Low financial reporting quality and low audit quality concealed One-Tel's real financial performance and financial distress from its board and the shareholders. This in turn blocked any opportunity for remedial actions to avoid corporate collapse.
4.2 Corporate Governance issue of One-Tel
Board composition and activity: Directors are the Guardians of the company's assets for the shareholders. One-Tel had four members in the board in 1998, where Jodee Rich and Brad Keeling acting as joint managing directors (chief executive officers). Rodney Adler and John Greaves were the two non-executive directors with the latter acting as the board chair. All board members were subject to election each year except Jodee Rich. This ensured that he always remained as a chief executive officer (CEO). Both Jodee Rich and Brad Keeling held CEO positions until their resignation in May 2001. John Greaves remained as the board chair until his resignation in March 2001.
At the end of June 1999, One-Tel's board comprised eight members, which included five non-executive directors. The Audit Committee of 1997-98 and 1998-99, the Finance and Audit Committee of 1999-2000, the Remuneration Committee of 1999-2000, and the Corporate Governance Committee of 1999-2000 were all comprised of the same two nonexecutive directors, Rodney Adler and John Greaves, who had close links with the CEOs. This is despite the fact that One-Tel had three other non-executive directors for part of 1998-99 and the whole of 1999-2000. Further, since an audit committee should ensure compliance with the accounting standards (Clarke et al. 2003), One-Tel's breach of accounting standards in its 1998-99 financial statements could be viewed as ineffectiveness of its audit committee.
In One.Tel, the board chair did not always preside over board meetings. In 1997-98, one of the CEOs was appointed as chair for one of the eight meetings held in the year. In1998-99, the board chair attended seven of the 10 meetings held but presided over only four. Of the remaining six meetings, four were presided by Jodee Rich, one presided by Brad Keeling, and one presided by Mark Silbermann who was the finance director and company secretary. During 1999-2000, John Greaves attended all the 12 board meetings held but presided over 10 meetings. Of the remaining two, Jodee Rich chaired one meeting and the finance director chaired the other meeting. Thus, responsibilities between the board chair and the management were not clearly defined. This is inconsistent with the ASX good governance guidelines (ASX CGC 2003). Further, chairing of the board meetings frequently by a CEO suggests his excessive influence and dominating role in the board. In contrast, good corporate governance requires that there should be a balance of authority so that no single individual has unfettered powers (ASX CGC 2003).
Full disclosure of corporate affairs is vital for effective functioning of a board. Substantive evidence exists to suggest that One-Tel's case was far from the ideal. Lack of full disclosure may have indirectly contributed to the non-executive directors' ability to monitor the management. Conversely, however, it does not appear that they asked for such information. Further there were aspects of the financial position at the end of February 2001 that were not expressly disclosed to the directors as a whole. Justice Austin on several occasions was critical of the non-executive directors' lack of scrutinizing One-Tel management. For example, he commented, The interaction between the board and management in the decision-making process is not a one-way interaction: a director wishing to compare the half-yearly result with the unlamented budget but lacking current access to the figures could and should have asked the chairman to obtain such information, or have directly asked for it during the presentation at the board meeting.
Most of the non-executive directors that One.Tel had would not have qualified as 'independent directors' under the ASX CGC (2003) recommendations since the directors had substantial investments in the company. Further, evidence provided in ASIC v. Rich suggests that there was a lack of diversity of opinions in the board. Jodee Rich regularly briefed board members before board meetings and remained instrumental in shaping up board members' views about One-Tel's performance.
One-Tel's board composition and board activities suggest the following:
One of the joint-CEOs had excessive influence on the board.
Board members received selective and incomplete information on crucial aspects of the business.
There was a lack of diversity of opinions in the board to scrutinize management.
Responsibilities were not clearly defined between the board and the management.
The non-executive directors were virtually ineffective in providing a check and balance in the board.
Board members who are more accountable for collapsing One-Tel are shown in followings:
Founder & Joint MDJodee Rich and Brad Keeling
Founder & Joint MD
Jodee Rich and Brad Keeling
Mark SilbermanFinance Director
Mark Silberman
Finance Director
Chief Financial OfficerJohn Greaves
Chief Financial Officer
John Greaves
Company DirectorRodney Adler
Company Director
Rodney Adler
Board DirectorsJames Packer and Lachlan Murdoch
Board Directors
James Packer and Lachlan Murdoch
4.3 Breach of Corporate Governance Issues
Laws Relating to Duties of Directors: The directors of a company are responsible for the management of the company's business. Management encompasses not only the day-to-day running of the company's operations but also the development and implementation of a long-term strategy; ensuring proper balance between the interest of various stakeholders; ensuring any activity concerning the company is carried out in the interest of the company (Kala. A, 2003). Directors, individually and as a board, bear the primary duty to carry out the corporate governance policies of the company.
Some responsibilities of the board which are inevitable for maintaining good corporate governance:
Lay solid foundations for management and oversight, including its control and accountability system.
Structure the board to add value by ratifying, appointing and removing the chief executive officer (or equivalent), and the company secretary.
Promote ethical and responsible decision-making, input into and final approval of management's development of corporate strategy and performance objectives.
Safeguard integrity in financial reporting, reviewing and ratifying system of risk management and internal compliance and control, code of conduct and legal compliance.
Make timely and balanced disclosure.
Respect the rights of shareholders.
Recognize and manage risk, approving and monitoring the progress of major capital expenditure, capital management, acquisitions and divestitures, and approving and monitoring financial and other reporting.
Encourage and enhanced performance, monitoring senior management's performance and implementation of strategy, and ensuring appropriate resources are available.
Remunerate fairly and responsibly.
Recognize the Legitimate interest of stake holders.
5.4 Fiduciary Duty
Common law and equitable duties owed by directors are collectively to act in bona fide in the best referred to as general law duties: interest of the company – means to act in good faith, honestly without fraud or collusion. It is the obligation which trusts law places on someone who must act to exercise in the best interest of another; powers for their proper purposes – directors are required to exercise their powers for the purpose for which they were conferred. Thus, using a power granted by the legislation or the constitution of company for an 'impermissible' reason makes action void as abuse power. This is so even though the director honestly believed the action to be in the best interest of the company.
There are 5 sources of power, include coercive power, reward power, legitimate power, expert power, and referent power (Five base of power, 2004). Reward power is the power of promising and granting reward (Five base of power, 2004). Coercive power refers to the power to threat or give the punishment. Legitimate power is the power based on the position in the organization structure. Expert power is the power to share the knowledge and information. Referent power is the power from someone's personality.
Figure 3: Sources of power
The uses of power in One –Tel are in the form of poor leadership, ambiguity, task and fear.
4.5 Analysis of the Breach
Rodeny Adler - Company Director: Adler contravened his directorial duties as an officer pursuant to s. 180, 181,182 and 183 of Corporations Act 2001. He fails to ensure One-Tel make affordable expansion and loans and fails to ensure the company has a proper system of controls and audits in its business to avoid defalcations by other Officers and employees. Immediately after the directors meeting on May 17 2001, he sold off 6 million One-Tel shares raising $2.2 million. He did not care for the benefits of shareholders, company and employees of One-Tel. He is in for getting as much as he can before the company collapse. None of the "Business Judgment" rule or acting in good faith matters to him. By selling his shares, he is using his position as a director in One.Tel to gain advantage for himself by using the information gained in the board's meeting.
Mark Silberman - Finance Director: He fails to supervise One.Tel's finances adequately and failed to keep the board informed and he might have fiddle with the accounts by simply juggling the creditors, deferring payments and repatriating money from overseas subsidiaries. And this had misled the board of the actual cash flow of One.Tel.
John Greaves-Chief Financial Officer: Greaves relied on the financial information supplied to him by others, including the executing directors. The financial information supplied to Greaves was limited and inaccurate in material respects. He fails to take reasonable steps to:
Promptly ensure that he and the board were aware of certain financial circumstances, including cash balances and the aging of debtors, in January, February and March 2001.
Monitor the management of One.Tel to properly assess the financial position and performance and detect material adverse developments.
Ensure that all material information was available to the board, particularly concerning the adequacy of cash reserves, and the actual financial position of various segments of the business and
Ensure that systems (billing and accounting system) were maintained and monitored which resulted in accurate and financial information flowing from management to the board.
James Packer and Lachlan Murdoch-Board Directors: Both, being otherwise engaged in their other more lucrative business empire. They did not monitor the business and left the running of the business to both Rich Keeling and Silverman. They did not know the true financial position of the company and make judgment according to information or promises made by Rich. They further approved bonuses of $6.9 million to Rich and Keeling in financial year ended 30 June 2000 despite reporting a loss of $291 million. Packer sacked PBL chief executive Nick Fallon for questioning the One.Tel investment. As a director, he should have been alert when Fallon question One.Tel's investment and investigation should be carried out to verify the fact and financial status of the company.
Jodee Rich and Brad Keeling-Founder and Joint Managing Director: As joint managing director, both failed to manage their responsibilities including responsibility to properly assess the financial position and performance of the group and detect and assess any material adverse development; and taking reasonable steps in ensuring that the directors are fully informed of all material financial information about the adequacy of cash reserves and One.Tel's actual financial position and performance.
They did not take steps to either to apprise themselves of the financial situation and the deterioration from about the end of January until about the end of April 2001. Failures to ensure the establishment of proper system to produce accurate and reliable financial information, failure to maintain cash reserves at a level which ensured liquidity and failure to employ an appropriately qualified finance director. On top of that, the two help themselves to a lucrative salary and bonuses.
Finally, it is found that all the directors mentioned above has breach the corporate governance rule as a director of a company one way or another. Adler, Silberman, Greaves, Packer, Murdoch, Rich and Keeling have all failed to carry out their fiduciary duties by acting in their own interest which do not include taking any active participation or interest in caring for the benefit of the company and shareholders' interest. They are not interested to investigate on the actual financial performance and ensure the correct accounting reporting of One.Tel's accounts.
4.6 Compensation Scenario of One-Tel
Remunerating executives fairly and responsibly is part of good corporate governance practice.
In 1998-99, the three executive directors and the board chair had a combined remuneration of A$2.3 million. That year One-Tel reported an operating profit after tax of A$6.97 million. For the year 1999-2000, remunerations paid to One-Tel's five directors totaled A$ 15.5 million. This included a performance bonus of over A$6.9 million paid to each of the two CEOs. This is the year when One-Tel reported a record loss of A$291.1 million and when the share price was continually falling steeply since its peak of A$2.84 on 26 November 1999. Over the next several months, One-Tel's share price dropped to A$0.78 on 30 September 2000. Thus, CEO compensation and firm performance were disjointed at One.Tel. One study provide evidence that CEOs at firms with weaker governance structures receive greater compensation and firms with weaker governance structures perform worse than others.
One-Tel's directors had been granted options on very easy terms. In addition, they exercised options on a regular basis. In June 1998, Jodee Rich was holding four million share options in One-Tel (666, 667 in his name and 3,333,333 through one of his companies). In November 1997, 3,155,000 options were granted to a number of employees and consultants to the company. On 30 June 1998, John Greaves (the board chair) acquired 1,666,666 shares by exercising his share options at A$0.126 per share. On the same day, another 1,666,667 shares were issued to Inkwelo Pty Ltd (a company associated with John Greaves). One-Tel shares closed at A$2.72 on 30 June 1998. As on 30 June 1998, a total of 9,816,667 options were held by 26 employees and directors of the firm of which 3,333,333 options were held by Life Cell Pty Ltd (owned by Jodee Rich) and 2,333,333 options by Two Gables Pty Ltd (owned by Rodney Adler).
The 1999 Annual Report, released on 16 August 1999, stated that 30 million options had been granted to Brad Keeling over unissued ordinary shares with an exercise price of A$1. Of these, 25 million options valued at A$16 821 396, had the expiry date of 29 April 2001 and five million options valued at A$3 934 950 had the expiry date a year later. Similarly, Jodee Rich held 35 million options valued at A$23,549,944 with an exercise price of A$1 and the expiry date of 29 April 2001. He held another 25 million options valued at A$19,667,748 with an exercise price of A$1 and the expiry date 29 April 2002. Since 30 June 1998, One-Tel's lowest share price was A$0.98 on 15 July 1999 and on 16 August 1999, the share price was A$1.02.
The 2000 Annual Report stated that options had been exercised to acquire 379,586,570 shares in One-Tel Ltd at prices ranging from A$0.0126 to A$1.00. That is, the highest exercise price was more than 79 times of the lowest exercise price within a year or so. Similarly, 6,666,667 share options were exercised by One-Tel directors at a price of A$0.0126 between 1 July 1999 and 16 August 1999. During 1999-2000, One-Tel's top six executives were granted 8,172,688 share options valued at A$15,857,000 (exercise price of A$1.11754 and expiry date of 1 Dec. 2004 for 2, 126,936 options; the rest had the exercise price of A$1.53 and expiry date of 1 Dec 2004). Thus, it appears that One-Tel was heavily engaged in granting options to its directors on very easy terms and conditions. In summary, the link between senior management compensation and One-Tel's performance appeared to be very week.
Figure 4: One-Tel's Share Price from 1998-2000
From this graph it is found that, in year 1998 the share price of One-Tel was 0.98, but in year 1999 the price rise in 1.02.Finally in year 2000 the share price was too fall to collapse the company which was .0126.
5.0 Summary and Conclusion
The One-Tel collapse is a classic case of failed expectations, strategic mistakes, wrong pricing policy and unbridled growth. Corporate collapses are usually preceded by corporate deteriorations due to strategic errors of senior management. One-Tel management made strategic errors. One-Tel had wrong pricing policy. It got stuck in aggressive and costly customer acquisition campaigns. These customers did not contribute the revenues and the cash flows the company vitally needed to survive. It undertook a very aggressive strategy of expanding into new markets without consolidating its position in the existing markets. Time and again, One-Tel was involved in disputes with its suppliers (Optus and Telstra) and its network builder (Lucent Technologies). It paid dearly to acquire telecommunication license to position itself in the market.
Nevertheless, the dream of building the leading phone company in Australia and the backing of the two Australian media magnates created high hopes in One-Tel investors, which led to 'market madness', but those high hopes were never realized. One Tel had poor financial reporting quality including poor earnings quality. It was able to report small positive earnings in its early years due to non-conservative accounting policy choices and large positive accruals. It had weak internal controls and discrepancies in record keeping. Its audit quality was poor as well. It consistently received an unqualified audit opinion despite serious breaches of the Corporations Act, accounting standards and auditing standards in 1998. Despite One-Tel's worsening operating cash deficits, cash collection problems and losses concealed by non-conservative accounting policies, its auditor failed to issue any going concern opinion.
One-Tel management was able to paint a 'rosy' picture of the firm due to weak corporate governance. There was a lack of diversity of opinions in the board. The management did not make full disclosure to the board about the performance and solvency of the firm. On the other hand, the non-executive directors failed to scrutinize management effectively and ask 'awkward' questions to the management on how they operated the business. The link between executive pay and performance was weak in One Tel. The management received larger performance bonuses in times of worsening firm performance.
One-Tel had troubles with its cash balance, creditors, earnings, and debtors. However, management communications to the board always highlighted only EBITDA and gross margin, but not net profit.
There were no clearly defined responsibilities between the board and the management. One of the two joint-CEOs was very dominant in the board; this CEO never had to face an election subsequent to the first appointment and chaired several board meetings despite the presence of the board chair in those meetings. Although One-Tel had formed an audit committee, a remuneration committee, and even a corporate governance committee - all these committee roles were fulfilled by the same two non-executive directors. These committees appear to have had no impact on One-Tel's governance.
Firms with dominant CEOs perform worse in a turbulent environment. As late as, one-Tel board meeting was told that 'everything was fine'. Even later than that, One-Tel's cash crisis was simply termed as 'timing issue'. To say the least, there was significant information asymmetry between One-Tel management and the shareholders.
CEO dominance and poor monitoring of the management by the board stifled any chance for One-Tel's survival by blocking opportunities for board and leadership renewal. Further, CEO dominance, and major shareholders' excessive reliance on the CEOs for information allowed the CEOs to hide the true picture of the firm. All these factors together aggravated One-Tel's crisis and led to its collapse.
One-Tel's collapse leaves several lessons on corporate strategies.
First, it is not enough to acquire customers in large scale unless those customers contribute toward the profitability of the firm.
Second, highly competitive pricing only to gain market share can have disastrous consequences.
Third, it is not enough to generate sales revenues unless those revenues are collected in cash in a timely fashion.
One-Tel's demise leaves several important lessons on corporate governance as well.
First, strong internal controls, financial reporting quality, audit quality, effective management scrutiny, full disclosure of company affairs to the board, and a strong link between executive pay and firm performance are vital for effective corporate governance of a firm.
Second, a board is less likely to detect firm problems when there is a dominant CEO in the firm.
Third, non-executive board members should make their own enquiries into firm strategies and performance. Hence, non-executive members should be given access to middle and lower management to ensure transparency of information.
Fourth, large investors in any firm must take an active interest in managing the firm.
Fifth, as already documented in the literature, auditor's involvement in the non-audit service may compromise audit quality.
Sixth, the board chair should always preside over the board meetings to control the board's agenda and to effectively monitor management behavior.
This case study provides some new insights into the association between corporate collapse and corporate governance. In particular all else being equal, firms with weaker corporate governance than others are more likely to collapse, and the demand for good governance heightens in the wake of poor firm performance. Thus, good corporate governance has the role of a 'safety net' against corporate collapse.
6.0 References
Cooke, T. (2001), "Collapse of Australia's Fourth Largest Telco Adds to a Growing List of
Corporate Failures", available at World socialist Web Site: http://www.wsws.org/articles/2001/jun2001/onte-jo8.html, (Last accessed on 7 April 2016).
Cyert, R., Kang, S. and Kumar, P. (2002), "Corporate Governance, Takeovers and Top- Compensation: Theory and Evidence", Management Science, vol. 48 (4), pp. 453-69.
Drew Cratchley (2009), "One.Tel saga not over for James Packer and Lachlan Murdoch", The Daily Telegraph.
Smh.com.au. (2016), "One.Tel auditor was linked to Packer - Business - Business - smh.com.au", [online] Available at: http://www.smh.com.au/news/business/onetel-auditor-was-linked-to-packer/2005/10/25/1130239522655.html, [Accessed 8 Apr. 2016].
Sales revenue, Operating Cash flows, Operating Profit after Tax (Per customers in A$)
Sales revenueand Cash paid to employees and suppliers (Percustomers per day in A$)