1 Introduction

The Australia corporate world has been shaken by the demise of another major company, the third such collapse in a matter of weeks. “One.Tel”, the country’s fourth largest telecommunications company (telco), ceased trading on the Australian stockmarket on May 28 and was put into the hands of an administrator after an investigation of the company’s financial situation showed it to be insolvent (Cook. T, 2001). The One.Tel collapse has lay off its 1,400 workers and also impacting on a host of small creditors owed thousands of dollars for goods and services. Many faced bankruptcy and, according to the reports, will receive nothing from the company windup. The fact that workers’ entitlements are under threat while the major creditors and company executives are protected is a further embarrassment to the government which is trying to overcome the hostility engendered by its big policies over the last five years (Cook. T, 2001). This assignment embarks on the issues leading to the collapse of “One.Tel” ; breaches of the corporate governance and persons involved; and how the breaches could have been avoided.


Company Background

One.Tel is the generic term used to describe a group of Australian based telecommunications companies, including principally the publicly listed One.Tel Limited (ACN 068 193 153) established in 1995 soon after deregulation of the Australian telecommunications industry (Media Coverage). The company was established by Jodee Rich and Brad Keeling who had secured large investments from Murdoch and Packer business empires (Media Coverage). One.Tel attempted to create a youth-oriented image to sell their mobile phones and One.Net internet services, with a slogan “You’ll tell your friends about One.Tel”, to draw the connection between the brand and personal communication. One.Tel also has a mascot known as “The

The ownership structure of the company was: Optus 28. One. and set about but did not complete constructing a mobile phone network of its own. One. Kalara Investment was owned by Jodee Rich and Brad Keeling (Media Coverage). reselling Telstra Local and Long Distance International Calls.000 in the United Kingdom. The company was very people focussed and focussed on the residential market. Its business expanded greatly and included operations in the United Kingdom and several other countries.Tel had three core product offerings: fixed wire long distance.4 million customers world-wide including 500.Tel was listed on the Australian Stock Exchange (ASX) not long after it was founded in 1995 to 2001. selling pre-paid phone cards for long distance calls. His main role was to inform the public in television and print advertisements that even a stupid and lazy person such as himself could get a mobile phone with One. FAI 18%. Large murals were printed upon the garishly-painted walls of company’s offices all around the world. It began business in May 1995 with a total initial seed capital of approximately $5 million. A huge expansion of activities 1 The Dude was a cartoon-like depiction of a rather stupid man in his early twenties. reselling Telstra Internet Services. It went into voluntary administration on 29 May 2001 and into liquidation. Internally.Dude.Tel came to do business reselling Optus Mobile Phone Services.Tel One. to have access to the entire suite of telephony products. James Packer 5%. the company had a fondness for applying the One.Tel credibility and cash base to fund it rapid expansion both domestically and overseas (Cook. PBL and New Corp’s support gave One.-prefix to everything relating to the business: One. They wanted the consumer or everyday person in the street.Tel (Media coverage) . upon a decision made by creditors in the administration on 24 July 2001. Internet service provision and mobile telephony (Wikipedia). Kalara Investment 50% (approximately). 2001). as opposed to corporate business. one that the average person would understand.Team. it came to have 2. which is why the company was marketed with the catch phrase “100% telephone Company”. One.T.5%. etc (Media Coverage). Chronological outline of One. The original thought process began with a simple initiative: they wanted to start a new telephone company.Dude1”.

Tel incurred net trading loss of at least $92 million. The Group associated with One. At its peak.2 “One. One.Tel worsened by very large amounts. Reports indicated the bonuses paid to Rich and Keeling were specifically tied to the rise of the company’s share rather than profit or any other indicator of the overall viability of the company (Cook.7 million on 29 May 2001. One. One.Tel.T.Tel’s business. One.Tel employed 3000 persons throughout the world and had many subsidiaries.Tel actually requires a cash injection at least$270 million to continue its existing operations and meet current and reasonably foreseeable liabilities. from a deficiency of $24. One. 2003). 2001). In 1999 News Ltd and Publishing and Broadcasting Ltd made investment around $1 billion in One.Tel from 1 January 2001 onwards. including contracts committing expenditure of more than $1. By 28 February 2001. and the requirement for cash injection was at least $287 million by 31 March 2001.1 billion with lucent Technologies. The deficiency in liquidity precipitated the failure of One. .Tel” Collapse The company was specifically geared to making money through stockmarket speculation.Tel continued to build quality. Facts were established on the deterioration which occurred in the financial position and performance of One.Tel experienced huge trading losses and reductions in net realisable value in 2001 up to 29 May 2001.and liabilities was involved in constructing the network. During this period One. intuitive platforms and resources based on R&D in the Australian Next Generation Network.Tel’s strengths were recognised in consumer marketing and information systems.5 million on February 2001 to a deficiency of $98. value for money telephony products and services while remaining a low cost provider (Wikipedia).Tel would also incur additional indebtedness to Lucent Technologies of approximately $365 million for capital works relating to the construction of the network (NSW Supreme Court. In these months the liquidity position of One. 1.

.0m 326.Tel Limited Period Year to June 1999 Year to June 2000 Half-year to Dec. & Hunt.000 1.0m 653.0m loss** The US. D.000 Source: Table 2-An IT Failure and a Company Failure: A Case Study in Telecomuncations (One. has seven mobile network providers. this remarkable growth was taking place without regard to profitability or returns to shareholders. Wilson.000 160.Tel Limited Year Ended 1996 1997 1998 1999 2000 Annual Report (2000) Sales Rev.One. One.000 290.T.0m Subscribers 80. Exhibit 1: Growth of One. However. $ 65. It could only survive as long as it could raise new capital investment more rapidly than it was burning money.Tel Exhibit 2: Profitability of One.000 642.0m 207. D.840.T. The UK and Germany have only three (Cook. 2000 2 Profit/Loss $ 9.9m profit* 295. S). with a population more than 10 times larger than Australia.T.Tel was caught up in the international collapse of dotcom ventures (Cook. 2001).9m loss** 132. It was also badly hit by the changes in the European network providers and more generally.0m 148. low yield strategy. Exhibit 1 provides an indication of the rate of worldwide growth that was achieved. The company’s high risk. The fatal flaw in the business model of the company was that the telecom services were offered to subscribers at lower than the price the company was paying for them itself. 2001). 2001). with generous incentives for new customers could not be sustained in the small Australian market which had six mobile phone providers – the second largest number of any country in the world2 (Cook.Tel’s rapid expansion was way beyond its financial capacity coupled with its misguided management decision. as Exhibit 2 demonstrates (Avison.

particularly. the offer was withdrawn (Cook.Source: Table 2-An IT Failure and a Company Failure: A Case Study in Telecomuncations *One. he wholly misunderstood the facts One. N. 2003). B. and they presented the accounts to Geoff Kleeman 3 The decision is reported as ASIC v Rich and Ors [2004] NSWSC 836. Jodee Rich and Brad Keeling – Founder & Joint Managing Director Keeling and Rich used their marketing skills and unwavering positive public statements to promote the company and made assurance that One.Tel.Tel’s financial position and performance.J. News Corporation and PBL initiated an investigation into company’s books and promised a $132 million cash injection aimed at reassuring the markets. and the company was on target to meet its subscriber numbers and gross profit projections.Tel would have A$103 million at June 30 (Hopkins. lack of adequate regulation.Tel? The thread leading to the collapse of One. Through the last quarter of 2001.Tel Annual Report (2000). Rich gave the board and directors James Parker and Lachlan Murdoch repeated upbeat assurances that the company’s cash position and profitability is improving (Exhibit 3) (Lampe A.. However.2001).Tel was declared insolvent in June 2001 and has since been liquidated3.T. 2001). 2 Who Killed One. and lack of independence in audit function (Leung. Rich and Keeling were very much running the show at One. Cooper. failure of directors and managers to exercise due diligence. P.**newssanviews14780(2001) The first public indication that the company was in trouble was the resignation of Rich and Keeling.Tel. Keeling did not fathom the true position of One. the investigation found that the company needed at least $400 million to remain viable.. Rich. One... . creative accounting. was misleading the market and shareholders by saying that the company is having big cash surpluses and heading to profits.Tel including: inappropriate management compensation.2004).

allegingly misled the board as to One. Firstly. Cadzow (2001). large sum of money were being moved around the group between the subsidiaries to disguise the true situation (ABC-Lateline. Avison.Tel would “readily achieve” $115 million in cash holdings by the end of October and that the British operation “will start throwing off large amounts of cash. communications analyst. suggested his attitude was “why bother with petty concern like faulty billing systems…when you can be thinking about global expansion”. Exhibit 3 According to former One. put forward two failure of management as the reasons for the collapse. Rich concentrated very much on the big picture. the decision to spend $1.Tel reported loss of $291 million. deferring payments of million dollars repatriating money from overseas subsidiaries.Tel Director James Parker. Rich told him One. One. the state of the billing and debt-collection system.Tel’s true financial position. argued was just ego and macho on Rich’s part. Paul Budde. Wilson. Despite the loss. The share price plummeted to below $1. & Hunt.2004) In financial year ended 30 June 2000 One. S contended that. D. Secondly. which Budde. caused the company to go to the wall (Cadzow. D.000 basic salary and a $6.Tel’s accounts was kept by juggling the creditors.as they wanted him to see. John Greaves – Chief Financial Officer . Rich and Keeling each received a $560. It will be a jewel and a cash cow” (Lampe A. in August 2000 he asks Rich about One.9 million bonus (Media Coverage). 2001). Mark Silberman – Finance Director He did not exercise powers with respect to the company with due care and diligence.2 billion building their own mobile network.Tel’s cash position.. 2001).

T. 2001).Tel spruiker in Peter Yates to take over. with extensive background in finance function of public company and as chief financial officer at One. James Packer and Lachlan Murdoch – Board Directors Stephen Mayne (2001) reported.He fails to exercise his judgement with duty of care of an expert being a Chartered Accountant. Rodney Adler – Company Director He dumps One.Tel shares raising $2.Tel as they attended to the major parts of their multi billion empires. he should be able to properly assess One. He is known to have sold off 6 million One. they did not exercise their rights looking after the One.2m after directors meeting on May 17 (Cook.Tel’s stock in the tumbling market. . James Packer sacked PBL chief executive Nick Fallon for questioning the One.Tel. As board director. As a Chartered Accountant. They should not have sat on the board when there is no way in the world they had the time to keep an eye on Rich and Keeling and hold them accountable. they are responsible for approving the bonus deals and pumping in hundreds of millions that triggered these very bonus payments which then helped destroy confidence in the company.Tel investment then hired a One.Tel’s financial performance and spot the discrepancies in the books thus alerted the board.

approving and monitoring the progress of major capital expenditure. Promote ethical and responsible decision-making. The ASX’s principles of Good Corporate Governance and Best Practice Recommendations summarises the responsibilities of the board: 1. capital management. input into and final approval of management’s development of corporate strategy and performance objectives. A. ensuring any activity concerning the company is carried out in the interest of the company (Kala. 5.4 Management encompasses not only the day-to-day running of the company’s operations but also the development an implementation of a long-term strategy. and the company secretary. and approving and monitoring financial and other reporting. 6. 7.3 Breach of Corporate Governance Issues 3. code of conduct and legal compliance. 4.1 Laws Relating to Duties of Directors Directors’ Duties The directors of a company are responsible for the management of the company’s business. acquisitions and divestitures. 3. Structure the board to add value by ratifying. reviewing and ratifying system of risk management and internal compliance and control. including the articles of association of the company and the provisions of the Company Act itself (Kala.2003) . 4 The actual division of powers is dictated by the internal rules of the company. individually and as a board. A. Directors. bear the primary duty to carry out the corporate governance policies of the company. Respect the rights of shareholders. appointing and removing the chief executive officer (or equivalent). Safeguard integrity in financial reporting. 2. Make timely and balanced disclosure. Recognise and manage risk. Lay solid foundations for management and oversight. ensuring proper balance between the interest of various stakeholders. 2003). including its control and accountability system.

without express authority from constitution. 2003). 2005 & Kala. delegate their discretion to others. Director’s duties can be found in common law and statute law.  to exercise powers for their proper purposes – directors are required to exercise their powers for the purpose for which they were conferred. monitoring senior management’s performance and implementation of strategy. personal profits and competing with the company.g. The duty of a trustee in respect of the skill and care required a much heavier one than that of a director. Remunerate fairly and responsibly 10.  to retain their discretionary powers – the board must not. not subjective as in the case of common law duty to act in good faith.  to avoid conflicts of interests . and 9. Here the test is objective. Fiduciary Duties Common law and equitable duties owed by directors are collectively referred to as general law duties:  to act in bona fide in the best interest of the company – means to act in good faith. and ensuring appropriate resources are available. It is the obligation which trust law places on someone who must act in the best interest of another. using a power granted by the legislation or the constitution of company for an ‘impermissible’ reason makes action void as abuse power. honestly without fraud or collusion.8. Thus. and  to act with care. Recognise the Legitimate interest of stake holders (Eric Mayne. Nor can the directors simply accept the direction of others as to how they will vote at board meetings. A director is expected to run a business aimed at making a profit and therefore must be in .fiduciaries are not permitted to place themselves in any position where there is an actual or potential conflict between their personal interest and their duty to the company e. or from statute. A. skill and diligence – this is not a fiduciary duty. This is so even though the director honestly believed the action to be in the best interest of the company. Encourage and enhanced performance. contracts with the company.

Tel make affordable expansion and loans and fails to ensure the company has a proper system of controls and audits in its business to avoid defalcations by other Officers and employees.a position to take risks to enhance the prospects of the enterprise. or to cause detriment to the corporation. company and employees of One. He fails to ensure One.Tel shares raising $2. from improperly using that information to gain an advantage for himself or for someone else. he is using his position as a director in One. he sold off 6 million One. Directors are chosen because of their ability to make good business judgements (CPA).Tel. • • Section 181 requires the Director or Officer to act in good faith in Section 182 prohibits a Director or Officer from acting improperly the best interests of the Corporation and for proper purposes.2 million.2 Analysis of the Breach Rodney Adler – Company Director Adler contravened his directorial duties as an officer pursuant to s. Immediately after the directors meeting on May 17 2001. He did not care for the benefits of shareholders. He is in for getting as much as he can before the company collapse.Tel to gain advantage for himself by using the information gained in the board’s meeting. 181. Or to cause detriment to the corporation. so as to use his position to gain an advantage for themselves or someone else. 180. He is using privileged information gained at the board for trading in his . with a “safe harbour” for those who satisfy the “Business Judgement” rule. 3. • Section 183 precludes a person who obtains information because he is a Director. By selling his shares.182 and 183 of Corporations Act 2001. None of the “Business Judgement” rule nor acting in good faith matters to him. The legislative position of the Corporations Act 2001 (Cwlth) is set up as follows: • Section 180 requires the Director or Officer to exercise a degree of care and diligence that a reasonable person would exercise in the Corporations circumstances.

own benefits and gains.Tel.). and • ensure that systems (billing and accounting system) (Exhibit 4) were maintained and monitored which resulted in accurate and financial information flowing from management to the board (Jaques. deferring payments and repatriating money from overseas subsidiaries. Exhibit 4: Excerpts from IT Failure and Professional Ethics:The One.S. He fails to take reasonable steps to: • promptly ensure that he and the board were aware of certain financial circumstances.M. • • monitor the management of One.Tel Case . particularly concerning the adequacy of cash reserves. February and March 2001.Tel’s finances adequately and failed to keep the board informed and he might have fiddle with the accounts by simply juggling the creditors. The financial information supplied to Greaves was limited and inaccurate in material respects.Tel to properly assess the financial position and performance and detect material adverse developments. including the executing directors. ensure that all material information was available to the board.Tels share. and the actual financial position of various segments of the business. And this had mislead the board of the actual cash flow of One. John Greaves – Chief Financial Officer Greaves relied on the financial information supplied to him by others. in January. Mark Silberman – Finance Director He fails to supervise One. It does not matter to him the implications or consequences to the company by his act of dumping One. including cash balances and the aging of debtors.

They further approved bonuses of $6. There are no structures. no accounting systems. He should take an active role in ensuring the accounts of the company has been correctly reported and the accounting system is in place and alert to Silberman’s act of keeping the accounts simply by juggling the creditors. the group financial controller. deferring payments and repatriating money from overseas subsidiaries.p. and taking reasonable steps in ensuring that the directors are fully informed of all material financial information about the adequacy of cash reserves and One.One Senior accountant suggested that `The place was a joke. Being a qualified Chartered Accountant and with his expertise he should not rely on the information provided by others. They did not know the true financial position of the company and make judgement according to information or promises made by Rich. James Packer and Lachlan Murdoch – Board Directors Both.Tel’s investment and investigation should be carried out to verify the fact and financial status of the company. finally resigned stating he was not prepared to do what his bosses were asking. As a director. Packer sacked PBL chief executive Nick Fallon for questioning the One. and that he considered it completely unethical (Barry.9 million to Rich and Keeling in financial year ended 30 June 2000 despite reporting a loss of $291 million. being otherwise engaged in their other more lucrative business empire.Tel investment (Mayne S. Keeling and Silberman.Tel’s actual financial position and performance. he should have been alert when Fallon question One. David Barnes. no processes and no control` (Barry. They did not monitor the business and left the running of the business to both Rich.p185).).255). Jodee Rich and Brad Keeling – Founder & Joint Managing Director As joint managing director. 2002. both failed to mange their responsibilities including responsibility to properly assess the financial position and performance of the group and detect and assess any material adverse development. 2002. .

Tel without having a thought for maintaining cash reserves at a level which ensured liquidity. They failed to employ their expertise to the management of the company and failed to carry out the fiduciary duties as company director: to act in bona fide in the best interest of the company. the two help themselves to a lucrative salary and bonuses. When being queried. Packer. They do not care for the financial performance of the . Greaves. Failures to ensure the establishment of proper system to produce accurate and reliable financial information. Adler. to avoid conflicts of interests and to act with care. They also made public statements about One. They are not interested to investigate on the actual financial performance and ensure the correct accounting reporting of One. On top of that. which they did not and thus did not comply with their duty. Murdoch. failure to maintain cash reserves at a level which ensured liquidity and failure to employ an appropriately qualified finance director.Tel’s accounts. 4 Conclusion All the directors mentioned above has breach the corporate governance rule as a director of a company one way or another. They also did not stop to apprise the accounting system used to control the payments and collections system. Rich and Keeling have all failed to carry out their fiduciary duties by acting in their own interest which do not include taking any active participation or interest in caring for the benefit of the company and shareholders’ interest. Silberman. It is obvious from the analysis above that Rich and Keeling pursued their self interest or obsession in building their own mobile network by expanding too fast and investing all the cash in One. to exercise powers for their proper purposes. They did not act in good faith and honestly without fraud or collusion.They did not take steps to either to apprise themselves of the financial situation and the deterioration from about the end of January until about the end of April 2001. skill and diligence.Tel’s financial position and performance which is entirely incorrect and no reasonable factual basis for them. It is also their duty to notify ASX the actual circumstances of the company’s financial position and performance. or to ensure that the board was aware of them. they presented a version of account which is incorrect to the public and ASX.

Adler sold off his shares at One. . Silberman. 181 and182. apart from s. As a director. Adler has also breach s. to act in good faith in the best interests of the Corporation and caused detriment to the corporation. Rich and Keeling each have breach the Corporations Act 2001 (Cwth) section 180. Adler.181 and 182 as they failed to exercise a degree of care and diligence.Tel’s financial capability.180.183 whereby it precludes a person who obtains information because he is a Director. Murdoch. Packer and Murdoch has also approved bonuses to Rich and Keeling when it is clear from the company accounts that it is facing losses. from improperly using that information to gain an advantage for himself or for someone else. they are expected to run a business aimed at making a profit with calculated risk instead they keep expanding beyond One.Tel after attending the directors meeting. Packer.company instead plays on the share prices by giving baseless statement and expanding the company to push up the share prices so that they can get their director’s bonuses. However. They also help themselves to hefty bonuses when the company is at the eve of collapsing. or to cause detriment to the corporation. apparently he is using the information he gets during the meeting and knows that something is very wrong with the company therefore sold off his shares. Apart from not carrying out their duties as directors. Greaves. Bonuses paid to directors should be tied to company performances not assurance and forecast for future earnings.

v. The ASX listing rules were consequently amended so that the listing rule 4. and Holloway D. Principle 4 is similar to the requirements of the Sarbannes-Oxley Act in that CEOs and CFOs are required to submit in writing to their boards that the corporation’s financial reports present a true and fair view of the operational results and financial conditions. ASX Corporate Governance Council (CGC) The ASX took a proactive stance and formed a plenary council (CGC) of a number of stakeholder groups (21 in all) including business. The governance structures and practices should be tailored to meet appropriate corporate and governance activities and needs. company directors and the Law council resulting in a ten principles and comprehensive guidelines about operationalising ‘best practice’ corporate governance. the accounting profession. Corporate governance is.p.A). The recent collapse of HIH insurance and One. or are on the board representing a major investor. The ASX has produce its own set of new listing requirements and this was followed by the Federal Government’s implementation of the Corporation Law CLERP9 reform proposals from 1 July 2004 (Rhyn D.10 now requires company to disclose their annual reports the extent which they have followed or elected not to follow these best practice recommendations (ASX.5).A). “Recent collapses suggest that the dangers of ‘cliqueness’ of directors and senior executives cannot be ignored (RMIT.5 Proposed Legislative Response Just because [Directors and senior executives] have personal money invested. . the stewardship responsibility of corporate directors to provide oversight for the goals and strategies of a company and to foster their implementation. creditors or employees. 2001). 2003. does not mean they do not have to worry about other shareholders. investor groups.v. and Holloway D. This has given effective regulatory weight in the same way as the UK “comply or explain” approach.tel suggested that “One size does not fit all” when it comes to corporate governance. company secretaries. Whereas Principle 7 covers statements about integrity of risk management and control compliance is both efficient and effective (Rhyn D. Their responsibilities extend beyond self-interest. in its broadest sense.

In future. accountability and enhancing shareholders rights. 2003. 2003). shareholders will be able to comment on. achieve better disclosure outcomes and improve enforcement arrangements for corporate misbehaviour (Treasury. CLERP 9 does. some senior management personnel are taken away in manacles in the back of police vehicles if this provision is breach (Rhyn D. This is to be sufficiently detailed to enable shareholders and others to make informed assessments of the company’s current position and future strategies. It would certainly would have a sobering and salutary effect on the company senior executives if. however. the legislative requirement for CEOs and CFOs to make a formal written declaration to the board of directors that the annual financial statements are ‘true and fair’ takes Australia down the USA path of the Sarbannes-Oxley Act. CLERP 9) Bill being released for comment on 8 October 2003. One of the more important provisions. They are also concerns on the issue of continuous disclosure and associated penalties for companies that do not comply with the requirement (Brown. relates to the need for the annual directors’ report to include a more detailed operating and financial review of the company performance. Anonymous. . In addition. propose to extend the reform processes beyond the narrow boundaries of the corporate governance recommendations and principles produced internationally and in Australia. and Holloway D. It subsequently passed through Parliament (late June 2004) and had a commencement date of 1 July 2004.CLERP 9 Requirements Intervention by the Australian federal government has resulted in the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure. According to the Department of Treasury (the administrators of corporate law) it will augment auditor independence. 2002). in future corporate failures. and take non-binding vote on the mandated remuneration disclosures for executives and directors (Dawes.A).v. The primary objectives of the Act involve promoting transparency. 2003).

He argues that it is not the rules and regulations of the governing process that count but the way people work together is vital. The role of the chair and that of the independent members (particularly staff members) needs to be expanded to help deliver this ‘healthy’ culture. This is the most critical of the additional elements needed to ensure that good governance practice is translated into ‘better’ organizational performance. however. Such culture is enabled by openness. This will allow organizations to reap the benefits from their existing knowledge/intellectual capital and unlock and realise the full potential of the organization (Rhyn D. Therefore.A). Organizations needs to ensure that the governing boards meetings does not become ‘rubber stamping’ exercise and implement both ‘form and substance’ changes emanating from the best practices governance recommendations (Rhyn D. Sonnenfied (2002) highlights a particularly positive response to the conundrum of managerial prerogative and the adoption of a ‘form over substance’ approach to governance of organizations.v. merely by implementing ‘best practice’ guidelines and recommendations. effective social systems (2002. p. and Holloway D. and Holloway D.v. In other words they exhibit a ‘healthy’ boardroom culture. . 108). trust and strong relationship building amongst the differing parties and members.Good governance is not guaranteed.A). what distinguishes exemplary (effective) boards is that they are robust.

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