Report On Maxwell i5j1d

Company History Robert Maxwell was a British media proprietor and famous in the media industries from the 1960s till now. The following timeline illustrates how he had expanded his business empire since his young.

May

1951

Pergamon Press (Butterworths) is established

July

1964

Pergamon Press is floated on London Stock Exchange

1969

Maxwell is defeated in the battle for the News of the World

June

1969

A disputed takeover bid for Pergamon from Leasco

July

1971

Department of Trade and Industry (DTI) critical report

1974

Regains control of Pergamon

1981

Gains control of British Printing Corporation (BPC)

Feb.

Renamed British Printing and Communication Corporation (BPCC) 1984

Purchases Mirror Group Newspaper

1987

Bids unsuccessfully for the US publisher Harcourt Brace Jovanovich Renamed BPCC as Maxwell Communications Corporation (MCC)

March

1988

Purchases US publisher Macmillan for $2.6bn

1991

Purchases New York Daily News newspaper Pergamon is sold for £440m Been brought down in scope to an English-language weekly newspaper

May

Mirror Group Newspapers (MGN) is floated on London Stock Exchange

Nov.

Maxwell vanishes overboard from his yacht Suspends trading in MCC and MGN shares

Dec.

Maxwell’s business empire collapses

March 2001

DTI report into MGN

Background: Maxwell Communication Corporation plc (MCC) was formerly one of the world's ten largest media groups, with interests in information services and electronic publishing, school and college publishing, language instruction, and reference book and professional publishing. An aggressive, controversial player in the international business world throughout its history, the company's dissolution in the early 1990s was an astonishing one. The mysterious death of MCC's founder and chairman, Robert Maxwell, in 1991 triggered one of the most spectacular corporate collapses in modern-day business history.

Robert Maxwell will be ed as the architect of the greatest fraud in British history. It all happened right under the noses of the regulators and with the of the well-paid but seemingly unwitting bankers, lawyers and ants from the top firms in London. Maxwell built a vast publishing empire in the 1980s before it collapsed under a mountain of debt and fraud, which was only discovered following his mysterious death. Maxwell was born Jan Ludvik Hoch in the village of Slatina Solo in the Czechoslovakian province of Ruthenia in 1923. He grew up in abject poverty but rose to become an international media tycoon. His family was part of the prewar Hungarian Jewish community that had lived in this region since the 16th century. After the outbreak of World War II, Maxwell succeeded in escaping to the United Kingdom, where he enlisted in the British army. By the end of the war he had been promoted to the rank of captain and had been awarded the Military Cross for bravery. In 1946 Maxwell became a naturalized U.K. citizen. Most of Maxwell's family in Ruthenia were victims of the Holocaust. He had close personal s with prominent world leaders and statesmen. He became almost certainly a paper billionaire. The young Maxwell was a man of outstanding bravery. When fighting with the British Army in Europe he was awarded the Military Cross. After the war, he began the publishing business. His company Pergamon Press became a highly successful business. He served with distinction in the British Army and later became a British citizen, changing his name to Ivan du Maurier, then to Leslie Jones, and finally to Robert Ian Maxwell. However, the British tabloids had the last word when they dubbed him ‘The Bouncing Czech’.

In 5 November 1991 it was discovered that Maxwell was disappeared from his yacht. Following a search at the sea, Robert Maxwell’s dead body was found. His death is still a mystery. Some press reported that he was executed by the Israeli Army, but yet not sure how he died.

1.Do you believe that, following the DTI reports of the early 1970s, the City should have been more skeptical of Maxwell’s business activities? Solution: In January 1969 Maxwell reached an agreement with Saul Steinberg, chairman of Leasco Data Processing Equipment of the United States, whereby Leasco would launch a formal bid for Pergamon subject to Maxwell's permitting a team of ants appointed by Leasco to have full access to all of the Pergamon business records. Maxwell was to become president of Leasco's European division. However, Leasco’s financial advisers were finding it difficult to extract the necessary information from Pergamon. By August 1969 Steinberg and his advisers had doubts about the future profitability of Pergamon and wanted to withdraw from the bid. However, since Leasco had agreed to the takeover in principle, a valid reason to withdraw would be required.

Maxwell disputed Leasco's right to take this course of action and had the dispute referred to the Takeover . On August 27 the decided Leasco had the right to withdraw and recommended a full Board of Trade inquiry over the objections of Maxwell. A shareholders' meeting was called at Pergamon for October 10. The meeting voted to dismiss Maxwell as company chairman and remove him from the board. Leasco gained control of Pergamon with 61 percent of the vote. However, Leasco decided not to proceed with its takeover bid, but retained its 38 percent stake in the company.

Maxwell retained control of Pergamon's U.S. subsidiary, Pergamon Press Inc. (PPI), even though the U.K. parent company controlled 70 percent of its stock. In April 1971 he reached an agreement with Leasco over PPI, thus ending their dispute.

In July the Board of Trade issued its report on Pergamon. The board alleged that there had been irregularities in the ing practices of the company. The two inspectors Owen Stable QC and Ronald Leach were appointed by the Board of Trade. At the same time the ants Price Waterhouse carried out an independent audit and it was carried out by Martin Harris, and among its conclusions was the finding that the reported profits of Pergamon for 1968 had been overstated. Instead of a profit of £2.1m the corrected figure would have been £140,000. This represented a huge reduction and it caused some consternation among the public. The DTI report was published in July 1971 and among the conclusions of the inspectors, Stable and Leach, was the following critical statement: “We are also convinced that Mr. Maxwell regarded his stewardship duties fulfilled by showing the maximum profits which any transaction could be devised to show. Furthermore, in reporting to shareholders and investors he had a reckless and unjustified optimism which enabled him on some

occasions to disregard unpalatable facts and on others to state what he must have known to be untrue . . . We regret having to conclude that, notwithstanding Mr Maxwell’s acknowledged abilities and energy, he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company.” Chalmers Impey subsequently resigned as auditors and Cooper Brothers took over the audit. The Department of Trade and Industry reports of early 1970s regarding Maxwell’s business activities should have been more skeptical. But it was not possible due to-

1. Maxwell always attempted to settle disputes through the courts and he began many legal actions against journalists who attempted to report on his business activities.

2. It is quite possible that the fear of being sued in the courts made journalists (especially financial journalists) and financial analysts reluctant to write critically in public about Maxwell and his business affairs.

3. Maxwell was keen to succeed in political life and was adopted as the Labour Party candidate for North Buckinghamshire and in the 1964 general election was elected to Parliament.

4. Maxwell took great care to cultivate relationships with world leaders and was seen meeting with political leaders such as Mikhail Gorbachev of the Soviet Union, President Mitterrand of , President Reagan of the USA and Prime Minister Margaret Thatcher of the UK.

5. In 1971, a judge criticized the tone of the DTI inquiry as being accusatory rather than inquisitorial claiming inspectors had acted contrary to the rules of natural justice.

Technical director at the Chartered Association of Certified ants Roger Adams said, "Professional people dealing with someone like Maxwell should be on their guard certainly." "But Maxwell had a reputation of throwing writs and injunctions at anyone threatening to criticize him." Pat Park, a spokeswoman for the Department of Trade and Industry said, “In 1971 there was no legislation to allow directors to be disqualified. In 1971, finding him unfit was the best we could do”

But the successful investigation carried out by Price Waterhouse showed the important of unify ing standards. The report was honored as an instrument in the ing profession deciding to confront the issue of uniform ing standards. An ing Standards Committee had been set up since then in order to unify the ing standards in financial reporting treatments and audits. However, in order to keep the credibility of insisting ants, government was invited by profession to impose some minimum standards for consistent financial reporting treatments.

Question-2: Contrast Robert Maxwell’s view of the role of the board of directors and the role of the non-executive director with recent guidance on corporate governance. Solution:

Robert Maxwell’s viewpoints of the role of the board of directors and the role of the non-executive director which contrast with recent guidelines of corporate governance. These guidelines lead to good corporate governance in any organizations and establishments through board of directors through board of directors and non-executive directors. Five golden rules from recent guidelines are explained in below: i. Ethics: Ethics is defined as a moral philosophy or code of morals practiced by a person or group of people. An example of ethics is the code of conduct set by a business. Ethical dilemmas presented in Robert Maxwell’s view of role of directors. Ethical dilemmas occur in a state in which there is no agreement over what accepted principles are. This guideline of corporate governance contrast with Robert Maxwell’s view of the role of the directors. For example, Robert Maxwell created a £530 million hole in the pension funds of 16000 employees of Mirror Group Newspapers. Which contrast with ethics. ii. Congruence of Goals: The integration of multiple goals which are integrated by directors in an organization. Congruence is a result of the alignment of goals to achieve an overarching mission. We can easily say that from this case study there were no congruence of goals which integration is one of the roles of directors. Congruence of goals or appropriate goals which arrived at through the creation of a suitable stakeholder decision-making model. That role strikingly different from the guidance of corporate governance.

iii. Strategic Management: Strategic management is the formulation and implementation of the major goals and initiatives taken by a company's top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization competes. An Effective strategy process which incorporates stakeholder value. In this case, Strategic management of the board of the director contrast with the guidance on corporate-governance.

iv. Organization: An organization is structured to effect good corporate governance. There are different types of organization structure such as functional structure, divisional structure and matrix. This structure is developed to establish how an organization operates and assists an organization in obtaining its goals to allow for future growth. For example, in functional structure of organization there may be a finance department, marketing department, a sales department and a production department. In matrix type of organization there be sharing people one section to another section or segment. Where matrix structure is the hybrid of divisional and functional structure. These guidelines of corporate governance contrast with the Robert Maxwell’s view of the role of the board of directors.

iv. Reporting: Reporting systems structured to provide transparency and ability of the organization or establishments. Sound reporting system is the combination of accurate and enough information as well as ability and transparency. Information will be symmetric which represents equal information in sound reporting system. For example, Maxwell used the pension fund (£530 million) to made substantial investments in Maxwell Communication Corporation shares, this did not become known to the trustees of the funds. The s were "window dressed". Which also contrast with the guidelines of corporate governance.

Here we tried to find out the contrast Robert Maxwell’s view of the role of the board of directors and the role of the non-executive directors with the recent guidelines of corporate governance. As we know the head of the board ensures a balance of power and authority so that no one individual has unfettered powers of decision. The board includes non-executive directors for their view to carry significant weight in the board’s decision. They also bring independent judgment as they are free from any business or other relationships with the organization.

In this case we can see that Robert Maxwell didn’t act favorably first but later he changed his mind. He had a tendency of having ‘luminaries’ on board as non-executive directors. Robert Maxwell only used their name in his organization but they actually had no function in Robert Maxwell’s world.

The Cadbury Committee made a number of recommendations about non-executive directors

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There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board, with a recognized senior member. The board should include non-executive directors of sufficient caliber and number for their views to carry significant weight in the board’s decisions. Non-executive directors should bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct. The majority [of non-executive directors] should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement.

3: What do you believe are the main lessons that can be drawn from the failure of Maxwell’s business empire? Solution: The most important lesson from all the events is that high ethical and professional standards must always be put before commercial advantage.

Autocratic Leadership

The scandal of Robert Maxwell occurred as Maxwell was the chairman and the chief executive of the Maxwell Corporation, which gave all the right and large amount of power in the absence of proper Corporate Governance). As Maxwell was performing the duties of Chairman and Chief Executive so it gave him too much power and it is possible that it was this power which allowed him to defraud his companies. This should never be the case for any organization. Power should be well diversified so that no one man abuse his power. And ability is very important which was clearly absent in the case of Robert Maxwell.

Lack of Corporate Governance Legislation

There was a different lack of Corporate Governance legislation or even guidance with the first piece not being introduced until 3 years later in 1992 by the Cadbury Committee. The lack of guidance or legislation meant that Maxwell was in a position to defraud his employees by playing with their pension funds. Until then there were no specific guidelines to highlight how a company should be run and what are the duties of the directors or chairperson and because of this loophole he Maxwell fraud was not brought to light until it was too late. Robert Maxwell company was listed in the stock exchange until the Maxwell scandal effected the organization. However, with Maxwell's employee's trusting him with their pensions this could have been one of the assurances which were given, had it been in place.

Robert Maxwell and Non-Executive Directors:

The key failings of the Robert Maxwell scandal were internal control, as no other directors reported what Maxwell was up to. The internal control failures of Maxwell were vast. Maxwell employed his son's as non-executive directors, when non-executive directors are meant to be independent. He had a tendency of having ‘luminaries’ on board as non-executive directors.

Robert Maxwell only used their name in his organization but they actually had no function in Robert Maxwell’s world.

Abuse of Power

Professionals are often confronted by strong personalities. Maxwell was abusive with anyone that questioned his authority. To get his way, he would bring the matter to a senior partner or board member and threaten to take his business elsewhere. Media houses didn’t report anything against him. Everything comes to an end. The most powerful today may vanish soon. So, organizations and their owners need to understand the fact that nothing is permanent. If they are abusing their power, sooner or later the outcome of their wrong actions will become disastrous for them

Forced the employees to trust:

The fact that Maxwell had already been exposed as being unfit to run a company, employees still trusted him with their pension s. However, employees may have had little choice if this was the only pension scheme available to them. The employees play a vital role in an organization. The employees need to stand up unitedly if they face any kind of oppression from the governing body to ensure the effectiveness of corporate governance.

Reluctant behavior of the financial community

The financial community took too much comfort in the fact that Maxwell’s listed companies and pension funds were audited and regulated. The Department of Trade and Industry (DTI) stated in their official report about the Maxwell fraud: ‘We have noted views expressed about the comparative inexperience of the regulatory staff that conducted the inspections. Both the audit and the regulatory functions failed due to poorly trained staff.’ Trustees need to do their own due diligence beyond that of regulatory agencies or professional firms. They also need to meet and engage in a direct dialogue with the auditors to insure competency and thoroughness

Financial Statement Limitations: Pension plan s were deceived in part because financial statement balances at year end did not often reflect the true activity. Maxwell would withdraw funds and replenish them at the end of the year, only to borrow them back out again after year end. Massive funds were moved in and out of companies with offsetting receivables and payables that were netted to avoid detection.

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Trustees and audit committees need to conduct their own reviews from time to time. Financial audits are not intended or geared to detect fraud, especially when several people are part of a conspiracy. A good tactic is to review the cash and financial activity the month before the close of the fiscal year.

When fraud occurs on a massive scale, the legal processes take over. In the Maxwell investigations, the ownership of investments and companies was often in question because transactions were not properly documented. The lack of clear title resulted in years of litigation. Properly executed documents evidencing clear title must be retained in company or trust files. The simple step of ensuring that proper documentation exists can save substantial litigation in the event of a title dispute.

4: Who were the main losers when Maxwell’s empire crashed? Solution:

This paragraph from this case resembles who were the main losers. Maxwell had managed in a fairly crude way to get round the pension fund rules, which had been designed to ensure independence. When Maxwell purchased Mirror Group Newspapers (MGN), the pension fund had a substantial surplus. Maxwell took advantage of the regulations that allowed the employer effectively to take a holiday from making employer’s contributions. This was effectively the same as MGN receiving a cash windfall. Consequently the surplus diminished. Maxwell was also able to raid the assets of the pension fund by pledging their shares as collateral against loans he was raising with the banks. Although Maxwell had been successful with BPCC and Pergamon, he had been less successful in other areas. In 1991 the share price of MCC and MGN began to fall. MGN had been floated in May 1991, although the flotation had not been particularly successful. So, discussing about the loser, it can easily be said that the company’s employee were the substantial losers. The fundamental part of Maxwell’s empire was the selling of Pergamon. During this period Maxwell was also pledging shares in MCC as collateral for loans. Consequently, Maxwell’s cash requirements were leading to a steady increase in indebtedness. Maxwell also maintained the pledging shares in company pension fund as collateral. It seems surprising that the trustees did not object to this incidence. The reason is Maxwell removed all trade unionist by his two sons. The principal of pension fund is it must be separate entity from the company. Moreover, the employee should also be separated from this scheme. But Maxwell himself used millions of pounds to shore up the shares and these were used to protect his company from a certain bankruptcy. Subsequently there was massive loss of these funds. As a result those who were adjacent to pension fund such as pension fund holder, were heavily incurred loss. There have been few financial scandals in Britain in recent years as extensive, complex and apparently dirty as that precipitated by the death of Robert Maxwell, who fell off his yacht near Tenerife Nov. 5 under unexplained circumstances. After his death, Creditors, already suspicious of MCC's fiscal health, soon discovered that the company was in utter financial ruin. Authorities are engaged in sorting through the labyrinthine remains. MCC was placed under the t istration of United States and English bankruptcy courts acting with the help of Price Waterhouse. Of MCC's subsidiaries, Macmillan and Official Airline Guides are likely to be sold more or less intact by the bankruptcy s. MCC itself was hopelessly insolvent and would be liquidated to repay some of its $2.5 billion in debt. Four British banks are facing losses of about $1 billion on loans they made to him. Banks outside Britain are believed to have lent him possibly three times that amount. Last but not the least, his two sons were also losers because of large extent of debts of their father’s company. Although they tried to hold the company, they were unsuccessful.

5: Is it likely that problems of the type and scale of Maxwell’s financial dealings could be repeated in a quoted company in future? Although Maxwell was really a good businessman who build his empire coming from a poor family but he failed to proof success. After his death the empire he builds totally collapses and he becomes an example for everyone such as: businessman, authorities, banks, and ing system. After his In those last few days before he died Maxwell was still furiously borrowing money from banks acting, as always, as if he owned everything and he had the absolute right to do as he wished with any of the companies, public or private, of which he held the stewardship. He had never changed; he had never learned. To the last, Maxwell was as guilty as the DTI reports of the 1970s had reported. (Davies, 1993: 332) The DTI Report stated that it was clear to many people who dealt with Robert Maxwell that ‘he was a bully and a domineering personality, but could be charming on occasions’ (DTI, 2001: 319). The nature and style of doing business of Maxwell was not in an organized way to achieve his business targets. But now a days the business become more complex there are so many competitors and rules to follow. But the ethical issues of an organisation is still questionable. All want to make profit we can see there are also so many autocratic leaders who are making decisions solely. However, the Cadbury Committee also appeared to accept that regulation on its own would never be sufficient to ensure ‘good’ corporate governance: Had a Code such as ours been in existence in the past, we believe that a number of the recent examples of unexpected company failures and cases of fraud would have received attention earlier. It must, however, be recognised that no system of control can eliminate the risk of fraud without so shackling companies as to impede their ability to compete in the marketplace. (Cadbury Report, 1992: 12) As an autocratic leader Maxwell does not thinks the necessity of independent directors even he doesn't care about the other board of director’s view. He invested the fund of the employees to the share price of another company. He clearly does not have any specific goals and mission. The only thing he wants is to expand his empire. He does not think about his employees. All the five golden rules are not present in Maxwell strategy, thinking, and style. The possibility of happening this type and large scale of Maxwell’s financial dealing in future is low because after this scandal, a lot of changes took place. 1. The law enforcement authority has become more active to prevent this sort of happenings. 2. Number of regulations has been imposed to ensure “good” corporate governance. 3. Inclusion of non-executive directors in the board has become compulsory so that they can give independent opinion. 4. Division of responsibility has been brought so that on individual can enjoy unfettered power of decision.

Main Recommendations Lack of internal controls was a huge problem on Maxwell’s case. Had auditors and regulators insisted on changes, the magnitude of the fraud would have been less devastating. Department of Trade and Industry suggests that although many of the deficiencies in legislation and regulation which permitted the events at Mirror Group Newspapers to occur have been rectified, there remain some important matters which still require being addressed or considered including: 1. Providing more assistance to and encouraging training for trustees who perform the vital role of the stewardship and investment of Pension Schemes. 2. Building on the work carried out by the Occupational Pensions Regulatory Authority in providing more assistance to and encouraging training for trustees who perform the vital role of the stewardship and investment of Occupational Pension Schemes. 3. Providing a statement of Guidance on the role and duties of advisers on a flotation. 4. Building on the radical changes in particular by imposition of severe sanctions against companies who do not report fraud. 5. Addressing the regulation of markets in securities to provide more effective control over firms that operate on a transnational basis to ensure the fair, open and transparent conduct of such markets and more effective investor protection. 6. Providing more detailed guidance on the audit of business "empires". 7. Addressing the issues relating to auditor independence with a view to maintaining public confidence in the audit and discouraging a firm which provides audit services to a company from acting as reporting ants on that company. 8. Making non-executive directors more able, separating the offices of chairman and chief executive, and providing extra statutory Guidance on the duties of all directors to amplify the general principles that it is proposed be incorporated into the Companies Act. 9. Avoiding an "expectations gap" by making the public aware that regulation cannot entirely eliminate fraud, malpractice or manipulation of the markets.

Conclusions: How could one person commit such a vast fraud? It was mostly due to Maxwell’s bravado and absolute control. Another important ingredient was the failure of professionals to do their job. They put money ahead of ethics and the public trust. Where trustees are in positions of substantial responsibility, they need to: Retain a healthy skepticism towards professionals and their inherent conflicts of interest; Diversify, rather than consolidate, financial advisors on large s; Establish good governance and exercise discipline with following established procedures; and Take appropriate action whenever one’s instincts start sending signals. Enron and WorldCom proved that financial fraud on a grand scale can be accomplished with only a few well-placed individuals. Bigger scams will come along soon enough, but few with the same drama and intrigue.