LEGAL VIEWPOINT: Why Corporates Fail – By Dr. AbdelGadir Warsama Ghalib LEGAL COUNSEL

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Dr AbdelGadir Warsama-Ghalin, Legal Counsel

This important issue has been discussed many times with the aim of understanding, why corporates fail and the ways and means of stopping such failures, for the private & public interests.

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Why corporates fail, could be due to issues related to ownership of the corporation, management of the corporation, structure of the corporation, etc. Ownership of companies, as a matter of fact and law, takes different ways, such as, family ownership or partnership or equity shareholding ownership… Each of such categories has got, if we could say, its pros and cons, strengths and weaknesses…

Regarding family ownership, we have to mention that, many companies diminish or disappear after the first or second generation in the business. Failures could occur in family business due to lack of capital, business information, and lack of vision, conflict of interest or other various reasons.

With reference to partnerships, being simple or general, the failure could happen to differences between the partners regarding the business or future activities of the partnership. Lack of industry or good market or business.  The partners or one of them, also, may face some financial or logistical problems that affect his role in the company.

Equity shareholding companies are not free from such instances and they face certain difficulties regarding ownership of the company. This is obvious from the fact that we seldom notice the involvement of most shareholders in the activities of the company. Many shareholders are completely ignorant about what is happening in their company and this attitude, in certain cases, could lead to the total failure of the company.

In some instances, with reference to this type of companies, the board of directors or the senior management of the company could be the direct cause for the failure of the company. This happens when they are not exercising or performing their duties properly and there is no body or authority to question them due to lack of governance and real leadership..

Management of companies and corporations requires leadership with vision and mission. This vision and mission should be maintained in all cases, being family companies or equity shareholding companies. Proper management of corporations includes planning for present and future operations in a satisfactory way and in a good method that enables the business of the corporation to add real and material value to all stakeholders.

The law includes certain specific provisions that should be followed all through the life span of the corporation. These provisions, we believe, will safeguard the interests of the companies and could help in escaping or mitigating corporate failures.

The company laws include some provisions regarding the rights of shareholders in addressing the affairs of the company during the annual meetings. The required mandatory disclosure by the management of the company to the shareholders and the competent authorities is a legal requirement that needs to be implemented. Disclosure enables the shareholders or the required party to take the appropriate steps in the appropriate way & appropriate time.

There are many other legal duties, such as, the duties of the external auditors and their mandatory role in safeguarding the interests of the company, the shareholders and the community in general. The external auditors are required by the law to inform the competent authorities in certain cases where there are clear unattended serious violations by the management.

The law gives the competent government authorities the right to intervene to and take the required appropriate actions to safeguard the interests of the company or the shareholders. We believe that, the legislator gave such legal authority to the external auditors and or the competent authorities so as to enable them to take corrective actions to escape or avoid corporate failures.

In certain cases, we have noticed that, the governments took drastic measures and steps to avoid failures of certain corporations that represent the national image or the like. Governments, of course, take such measures based on legal mandatory authorization and this authorization can be used in all cases because the law applies on all corporations being small or big, famous or normal corporations.

We could say that the law includes many ways and means to help proper governance of corporations. Such measures could help to a great extent in avoiding corporate failures. However, we believe that, the shareholders should basically take more positive actions to improve the governance and all affairs of their companies… This could lead to positive progress and keep their companies booming, surviving and away from failures. This is not a miracle, and could happen by proper leadership and efficient management by all concerned parties..