Corporate Governance, Flex Industries Management Case (Case Study Sample)

FINANCE
Student’s Name
Institution
The Controversy Surrounding Flex Industries
Ashok Chaturvedi, who is the owner and founder of Flex Group of Companies is faced with bribery charges in a bid to evade exercise duty. The top ranking manager has been involved in giving numerous gifts to the tax commissioners as well as the policy makers so that he can get away with the offense. There is an allegation that Flex Group of companies had been involved the campaign of the then finance minister. It is not clear whether the related transactions had some strings attached on not. The third controversy is about the confession made by Mr. Chaturvedi, where he allegedly funded political parties associated with Mr. Kumar, a governor in India.
The chain of events
The Indian Central Chief Exercise Commissioner, Mr. Mishra is arrested after huge sums of money is found in his in his office and his car. The Indian entrepreneur Ashok Chaturvedi is also arrested to face bribery charges. The allegations state that and employee of Mr. Chaturvedi delivered cash to the commissioner as a bribe to evade exercise duty, a tax liability of the company. It is brought to the parliament’s attention that Mr. Ashok was involved in the campaigns of the then Indian Finance Minister. Controversies have also sprouted from the confession earlier made by Mr. Ashok of financing political parties, one associated with Mr. Kumar, a governor in India.
The Roles and Responsibilities of Different Stakeholders
The government, which is one of the key stakeholders of every public corporation has an oversight role to ensure that there is full compliance with regulations. The board of directors has the duty and the responsibility to act in an honest manner that will not bring damages to the stakeholders of the company. They should comply with all the requirements in the management of the company (Fernando, 2009). The employees of the company, having an agency relationship with the corporations should execute their duty diligently and with honesty and integrity. The shareholders of the company have a responsibility, through their voting rights to elect a board which is responsible and accountable. They should not cover up any hint of mal-practice.
Behavior with Respect to Flex Incident
The top management of Flex Group Of Companies led by its founder Mr. Chaturvedi has failed on the grounds of integrity and honesty. They are using dubious means to evade tax obligation. The end result to this is that corporations get a backlash when its investors start to sell their investment in the company. Government through its agencies are also compromised. This is a behavior that has led to the lack of confidence in its disciplinary role in corporate governance. The two suspected individuals, Mr. Ashok and Mr. Mishra are later acquitted for lack of evidence which further shows the laxity by the authorities to bring offenders to book.
The Role of the Market during and After the Controversy
During the controversial bribery case against Mr. Chaturvedi and the Flex Group of companies, the market reacted by taking a short position in their investment in company’s shares. The reputation of the company was greatly affected by the charges in the public light. There was panic in the market on a number of damages that the case could have on the valuation of the company. Flex Engineering Limited, its subsidiary, also suffered greatly from the controversy. As per the Efficiency Market Hypothesis (EMH), the market will tend to shift their resources where there is efficiency by applying the available information (Moix, 2012).
Theory behind the Market Reaction
Efficiency Market Hypothesis (EMH) is the theory behind the reaction by the investors from the damaged reputation of Flex Group. In this behavioral finance theory, it is stated that the market value of the company reflects all its available information (Burton & Shah, 2013). After the bribery cases by the senior management of Flex Group the value of the company fell drastically. Investors started to withdraw their investment from the company. This panic was caused by the perception of bad corporate governance. These flaws were shown by the bribery allegations brought forward against the Mr. Ashok, its founder and top executive.
The One with More Disciplining Power in Corporate Governance- The Market
Emerging markets are characterized by weak institutions in relation to corporate governance. They are easily manipulated by high net worth individuals. In such a case, it is the market which ...