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
Feb. 1981 Gains control of British Printing Corporation (BPC)
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)
1988 Purchases US publisher Macmillan for $2.6bn
March 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. Maxwells 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 remembered as the architect of the greatest fraud in British history. It all
happened right under the noses of the regulators and with the support of the well-paid but
seemingly unwitting bankers, lawyers and accountants 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 members of Maxwell's family in Ruthenia were
victims of the Holocaust. He had close personal contacts 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 Maxwells 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 Maxwells 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 accountants 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, Leascos 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 panel. On August 27 the panel 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 accounting 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 accountants 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 Maxwells 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 Maxwells 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 France, 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 Accountants 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
accounting standards. The report was honored as an instrument in the accounting profession
deciding to confront the issue of uniform accounting standards. An Accounting Standards
Committee had been set up since then in order to unify the accounting standards in financial
reporting treatments and audits. However, in order to keep the credibility of insisting accountants,
government was invited by account profession to impose some minimum standards for consistent
financial reporting treatments.
Question-2: Contrast Robert Maxwells 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 Maxwells 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 Maxwells 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 Maxwells 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 Maxwells view of the role of
the board of directors.

iv. Reporting:
Reporting systems structured to provide transparency and accountability of the organization or
establishments. Sound reporting system is the combination of accurate and enough information as
well as accountability 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 accounts were "window dressed".
Which also contrast with the guidelines of corporate governance.

Here we tried to find out the contrast Robert Maxwells 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 boards 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 didnt 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
Maxwells world.

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

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 boards 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 Maxwells
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 accountability 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 Maxwells 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 didnt 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 premiums. 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 Maxwells 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 administrators 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.
 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 Maxwells 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 employers 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 companys employee were the
substantial losers. The fundamental part of Maxwells empire was the selling of Pergamon. During
this period Maxwell was also pledging shares in MCC as collateral for loans. Consequently,
Maxwells 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 joint administration 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 administrators. 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 fathers
company. Although they tried to hold the company, they were unsuccessful.
5: Is it likely that problems of the type and scale of Maxwells 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 accounting
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 directors view. He invested the fund of the employees to
support 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 Maxwells 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 Maxwells 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 accountants on that company.

8. Making non-executive directors more accountable, 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 Maxwells 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 accounts;
Establish good governance and exercise discipline with following established procedures; and
Take appropriate action whenever ones 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.