Question

A CRITICAL REVIEW ON KODAK; CORPORATE GOVERNANCE SCANDAL

“With a few Kenyan companies over the recent past experiencing considerable losses or completely folding, the well-known narrative of Kodak’s downfall provides more than just a snapshot of why effective corporate governance is not simply about avoiding slip-ups, but about taking a proactive, innovative approach even when the picture seems full of colour.

In 1997, Kodak was among the most successful firms in the world. It was worth an astounding $31 billion due to its profitable camera and film-processing business, and a strong brand. However, just 15 years later, on January 19, 2012, Kodak was forced to file for bankruptcy. Its shares ended that day at $0.36 when they’d been worth over $90 in 1997.

Yet even nowadays, Kodak isn’t seen as a corporate governance failure. Bad corporate governance, several believe, arises when executives split the pie in favour of themselves or investors, at the expense of stakeholders. For instance, high chief executive pay or a share buy-back is frequently met by outrage, owing to claims that this money could have been otherwise invested. Those actions are known as “errors of commission” — taking bad actions. Kodak didn’t make any such errors. No one lined their pockets at the expense of anyone else. Even when it went bankrupt, Kodak’s executives didn’t suffer the media backlash regularly reserved for well-paid executives.

Indeed, whereas many alleged “fat cats” are notorious, few people know the names of the executives liable for Kodak’s collapse and the loss of 145,000 jobs. Instead, Kodak is often viewed as the innocent victim of changes in technology. But Kodak provides a great case study of poor corporate governance.

Poor corporate governance isn’t just about CEOs taking slices of the pie from other stakeholders, but shrinking the pie through complacency and ruinous decisions. Shareholders and executives suffered alongside the 145,000 workers who lost their jobs. Kodak wasn’t an innocent victim of technology. It may well have taken action — considering the fact that it filed the first ever patent for a digital camera back in 1975..”

Required:

Based on the article attached, critically review the topic with any issues related to corporate governance. In addition, a good argument, discussion, and recommendation must be added.

Answer 1

Critical Analysis

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Just like an elected government rule a country, and is held responsible for every fault and problem that the country faces, similarly the appointed Board members of a company are responsible for running the business successfully and are responsible for every problem that the company faces, whether it be of any kind.

A company like Kodak that used to be an undisputed market leader for decades, and had led the innovation path in it’s industry of operation, it’s Board members and top executives should have been aware of the changes in technology and the fact that the company should adapt with those changes. The Board members and the top executives were negligent and ignorant for years, They might have also felt invincible and hoped that their leadership would continue.

In 1981, a research study done by Kodak’s Head of Market Intelligence Vincent Barabba revealed or forecasted that digital would completely take over film within 10 years. But, the company’s Board members and executives didn’t pay much heed to it due to their complacency and negligence. They didn’t make any plans to change business strategy or invest in newer technology. Instead, they kept sitting, enjoying the revenues coming in at that point of time.

Issues:

Some specific issues related to Corporate Governance here could be:

1.) Ignorance to changing market conditions

2.) Reluctance to change product/business strategy

3.) Lack of Risk-taking ability

4.) Not realizing the importance of innovation and the need to invest in R&D

Such incompetent behaviour of the company’s management can be rightfully referred to as an “Error of Omission”, or the failure to make smart decisions.

Recommendations:

1.) The Management could have set up an Innovation/R&D team to work on newer technology

2.) The Management should have dedicated more financial & human resources towards technology development

3.) The Management should have realized the actual market scenario

4.) The Management should have had a long-sighted behaviour rather than a short-term one

5.) The Management should have had encouraged it’s employees to take risk, so that the company can innovate and sustain