HANOVER FINANCE COMPANY CASE STUDY

Name:

Institution:

Course:

Date:

Introduction

When Lehman Brothers came down in 2008, it led to a negative economic domino-effect throughout the world. The recovery of financial companies – major investment tools for the world’s millions – suffered the brunt of this major calamity as they had to explain to their shareholders why their investments were disappearing. The ability to recover from the economic hardship relied on the country’s contingency plans. New Zealand lacked in these facilities thus exposing its shareholders to serious losses. This paper shall show how one example of this shortcoming on the government’s part caused the investors of Hanover Finance to suffer great losses. It shall explore the management’s role in this company’s action and its effects on the shareholders.

Facts, research and findings concerning the Hanover Finance company

The utilitarian perspective is an ethical perspective seeking to create a balance of benefits in circumstances that involve multiple parties affected by a common occurrence. In the world of financial companies, the prevailing economic climate is sometimes not favorable to warrant a continued involvement in trading and financial activity since it exposes all stakeholders to high risks. While the technical aspects of forecasting the effects of such economic climates are well known by finance managers and professionals involved in the actual trading process, their shareholders might not appreciate the need for proactive action (Bryant, 2004). The Hanover Finance case presents such a scenario since the firm’s management froze investors funds to try and mitigate the effects a hard economic market in New Zealand, and indeed the world over, was facing. By so doing, the finance company protected the shareholders’ funds from a similar fate to that of firms that went down, such as Five Star Finance.

Before the current economic doldrums, New Zealand witnessed economic sector growth as more people found themselves in sustainable employment while exchange rates brought in cheap imports. Finance companies came up and rode on the success of the favorable economic climate by providing funds for small and medium-sized enterprises, consumers, and other players in financial sectors commercial banks shunned. This fueled their growth as well as shown by RBNZ (2009), where large finance companies – those worth above $ 100million – rose in terms of total assets from less than $ 2billion dollars to more than $ 9 billion dollars. Unfortunately, most of this growth went unchecked as finance companies concentrated more on the profit-making activities at the expense of risk mitigation strategies. Hanover Finance presents one such case as it failed to put in place measures to buffer the shareholders from the effects of a financial meltdown. One example of this lack of contingency plans was the company’s failure in sealing leaks to investors’ pools of funds in the form of overstated real estate deals. The second example of this problem is borrowers who seeked to challenge their loan repayment obligations in court.

Hanover Finance decision to investment in television advertising can be analyzed from various perspectives. From the optimist’s side, this is an investment made to provide the company with a safety net in case the prevailing economic conditions prove to be unsupportive for normal trading and financial activity. Bollard (2004) states that it is a general practice in finance companies to look for opportunities to invest some of their shareholder’s funds in investments that are resilient to economic hardships (p. 20), which probably explains Hanover’s choice of television advertising. However, from the less optimistic perspective, Hanover’s management could have been trying to create an illusion of financial security for their shareholders by investing in the media industry which is very resilient to harsh economic times.

If a finance company can continue trading, it has the ability to refund its stakeholders during economic hardships (Jensin & Meckling, 1976). Financial companies that can sustain and recover from damage during these times of economic uncertainty are very impressive. These companies should formulate agreements with their shareholders to enact repayments programs in the form of shares or funds. Hanover finance and its senior management seem to have been trying to avoid the obligation of repaying their shareholders. This materialized as a hasty freeze on debt-repayment funds to render them unable to repay shareholders. In addition, fully knowing their company’s cashbook reflected nothing illegal, the owners of the company felt confident in the continuation of court proceeding against them knowing they would blame a few errant real estate developers.

As the global economic condition worsened, Hanover Financial along with its partner company United Financial froze funds intended to repay more than 36500 investors. The disgruntled investors held meetings to discuss their predicament and try to look for the best course of action. More than three quarters of the investors voted to a plan suggested by Hanover Financials top management to repay all debts owed to them over a 5 year period. This plan of action by Hanover Financial showed a genuine feeling of compassion towards the angry shareholders, some of whom had lost substantial amounts of money. One such individual was an Olympic medalist called Hayden Roulson who lost more than $ 250 000 (Savage & Cleaver, 2008).

While the shareholders pursued legal redress over the freezing of their funds by Hanover Finance, its owners had started gifting the affected individuals to try and soften the blow caused by the firm’s actions. Mr. Watson and Hotchin made property, cash, and property pledges worth more than $ 90 million, portraying compassion for those affected by this firm’s recent actions. Although property market prices had lowered the value if these pledges, Uche (2001) states how this act proves these seemingly greedy individuals could find it in themselves to extend some form of assistance to affected shareholders (p 69). As the company started actual repayment of the debt, payments of six cents in the dollar went to investors once more demonstrating a commitment to assisting them recover from this situation.

After a year of negotiations, meetings, and other attempts at trying to unfreeze investor assets, Hanover Finance accepted advances from Allied Farmers in 2009 to transfer their debt obligation to them. After meeting with its shareholders, three-quarters of them voted to allow Allied Farmers to purchase the majority assets in Hanover Finance thus saving it from receivership. For the shareholders, this arrangement meant their bonds and debentures could be changed for shares in Allied Farmers. Compared to their former position as creditors of a struggling finance company, the new shareholders were happier as shareholders of a larger, more resilient company (Mulholland, 1985). Hanover Finance management might have transferred obligations and large debt to their new owner, but suggesting the move was clearly in their former shareholders’ best interest since it provided a better chance at recouping their investments.

In 2010, Allied Farmers found themselves in a position that could no longer sustain the firm’s operational capacity and placed their assets into receivership. A year later, the firm’s shares were noticeably overstated in the stock market necessitating the Financial Market Authority (FMA)’s intervention. The FMA started legal proceedings against Hanover Finance promoters and company directors for statements made in its brochures. The company had made misleading advertisements that caused gross overstatement of Allied Farmers stocks. After the FMA stated its intention to pursue legal action on Hanover Finance, the company’s directors cooperated with the investment teams in order to bring restitution to the affected (McManus, 2010). Willingness to cooperate with the FMA was obviously a self –preservation tactic, but it proved to bring the whole matter to rest much sooner after recovering $ 13.5 million dollars worth of assets.

Hanover Finance directors faced legal action after their company suspended repayments angering its shareholders. A moratorium raised by these individuals was delayed using gifts. Pledges, property and other forms of small incentives offered to the disgruntled shareholders provided a form of delays tactic for these directors to try and pass on their liability to another company (McManus, 2010). From a moral and ethical perspective, the directors acted in a slightly insensitive manner to the welfare of shareholders. Instead of offering a more transparent form of debt payment, the directors tried to buy time by offering incentives and later transferring this debt to Allied Farmers. A better option would have been to try and look for a way of directly repaying the investors instead of paying them off with small pledges.

Investors involved in the Hanover Finance case suffered many losses due to the firm’s carelessness. In 2008, at the same time this company started reporting performance problems, the bad financial climate had also led to the collapse of more than 45 other finance companies putting more than $ 6 billion of depositors’ funds in jeopardy. Many more were operating under a lot financial strain as the global financial crisis worsened after the collapse of Lehmann brothers in the same year (Edmundson, 2008). Hanover Financial suffered a similar fate since it had to suspend repayments to its investors thus placing its operations in the cross hairs of the country’s financial watchdog – the FMA.

The dynamics preceding the collapse of these companies has been the object of numerous scholarly studies, all at the expense of the real losers in the whole issue – the actual investors. In addition to the bad prevailing economic conditions, some conditions have come up as contributors to the financial problems investors faced. Lack of adequate government regulation and ignorance on the investors’ part is perhaps the greatest of these.

The greatest problem, which precipitated the widespread collapse of financial companies leading to investors losing money, was inadequate regulation of financial activity. As many countries seek to protect their investors, New Zealand had no regulation in place to protect their interest, as well as the financial operations of these companies (Mortlock, 2004) until 2008 when it was too late for many investors. Financial companies such as Hanover operated in very much a liberal manner as shown by the haphazard decision regarding handling of investor funds. After the performance had been affected by the prevailing economic crisis, Hanover Finance directors took advantage of the lack of a regulatory structure to orchestrate the transfer of fiscal obligation. This was further aggravated by the government’s lack of deposit insurance mechanisms to protect the shareholders’ investments.

The second issue that precipitated the collapse and subsequent loss of investors’ funds was a healthy portion of ignorance on the shareholders part. Most investors in the New Zealand market before 2008 were not in a position to protect their investment (Parker, 2008). Many relied on financial advisers to handle the investments and never even cared to follow up on their activities to audit their practices. This gap between the actual investors and their fiduciary agents provided deviant directors such as those of Hanover Finance with the leeway to manipulate company resources to their benefit. Such actions were not moral since many of these investors were pensioners and middle-class, investment-oriented civil servants. A good example was a civil servant who lost $ 150,000 to Bridgecorp (McCrone, 2007).

After the collapse of many finance companies in 2008 due to various reasons, the New Zealand government realized the need to involve itself more in regulating financial activity, in the country. In line with the same observation, the CEO of the defunct Hanover Finance company suggested that the government introduce more measures to enhance regulation of the sensitive industry. In line with this, the New Zealand government passed the Financial Advisors Act and the Financial Advisors Act into law. These actions would prove to be integral in the enhancing the recovery process after 2008.

The benefits of more government regulation of financial companies are obvious. This boosts investor confidence since fiduciary agents and financial advisors activities are more closely monitored. Canniford (2005) reiterates on the need for companies to procure the services of risk managers who assist to mitigate the level of risk investor funding is exposed to during normal operations (p 214). Finally, the government formed a Crown Asset Management – an organization tasked with holding assets the assets of failed financial companies.

Conclusion

Business ethics dictate that business leaders show compassion towards their investors and protect their interests. Hanover Finance management showed this feeling when they pledged cash and property to investors affected by the company’s collapse. In addition, negotiating for Allied Farmers purchase of its assets meant their debt to investors would be transformed to shares. Coordination with the FMA was done with smoothly so that an end to the whole matter could be resolved as soon as possible.

On the other hand, the owner of Hanover Finance exposed investors’ funds to risk without caring about emergencies such as the 2008 economic crash. In addition, after the actual collapse, they passed on their debt obligation to Allied Farmers thus extracting themselves from a position necessitating their paying investors more than $ 500 million. This mix of ruthlessness and apparent concern for investor welfare led to many losses on the investor’s side, but that is common in business.

References

Bennett, A. (2008), “Matter of trust – what went wrong?”, available at: http://www.nzherlad.co.nz/news/print.cfm?objectid=10514928 [Accessed 12/05/2010].

Bollard, A. (2004), “The Financial Stability Report”, Reserve Bank of New Zealand: Financial Stability Report, October, pp. 1-22.

Bryant, N. (2004), “A matter of trust”, The National Business Review, 12 November.

Canniford, R. (2005), “Moving shadows: suggestions for enthnography in globalised cultures”m Qualitative Market Research, 8, 2, 204-218.

Edmundson, J. (2008), “Why finance companies fall over”, available at: http://workersparty.org.nz/2008/10/14/why-finance-companies-fall-over[Accessed 9/06/2010].

Jensen, M. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, 3, 4, 305-360.

HANOVER FINANCE COMPANY CASE STUDY

Name:

Institution:

Course:

Date:

Introduction

When Lehman Brothers came down in 2008, it led to a negative economic domino-effect throughout the world. The recovery of financial companies – major investment tools for the world’s millions – suffered the brunt of this major calamity as they had to explain to their shareholders why their investments were disappearing. The ability to recover from the economic hardship relied on the country’s contingency plans. New Zealand lacked in these facilities thus exposing its shareholders to serious losses. This paper shall show how one example of this shortcoming on the government’s part caused the investors of Hanover Finance to suffer great losses. It shall explore the management’s role in this company’s action and its effects on the shareholders.

Facts, research and findings concerning the Hanover Finance company

The utilitarian perspective is an ethical perspective seeking to create a balance of benefits in circumstances that involve multiple parties affected by a common occurrence. In the world of financial companies, the prevailing economic climate is sometimes not favorable to warrant a continued involvement in trading and financial activity since it exposes all stakeholders to high risks. While the technical aspects of forecasting the effects of such economic climates are well known by finance managers and professionals involved in the actual trading process, their shareholders might not appreciate the need for proactive action (Bryant, 2004). The Hanover Finance case presents such a scenario since the firm’s management froze investors funds to try and mitigate the effects a hard economic market in New Zealand, and indeed the world over, was facing. By so doing, the finance company protected the shareholders’ funds from a similar fate to that of firms that went down, such as Five Star Finance.

Before the current economic doldrums, New Zealand witnessed economic sector growth as more people found themselves in sustainable employment while exchange rates brought in cheap imports. Finance companies came up and rode on the success of the favorable economic climate by providing funds for small and medium-sized enterprises, consumers, and other players in financial sectors commercial banks shunned. This fueled their growth as well as shown by RBNZ (2009), where large finance companies – those worth above $ 100million – rose in terms of total assets from less than $ 2billion dollars to more than $ 9 billion dollars. Unfortunately, most of this growth went unchecked as finance companies concentrated more on the profit-making activities at the expense of risk mitigation strategies. Hanover Finance presents one such case as it failed to put in place measures to buffer the shareholders from the effects of a financial meltdown. One example of this lack of contingency plans was the company’s failure in sealing leaks to investors’ pools of funds in the form of overstated real estate deals. The second example of this problem is borrowers who seeked to challenge their loan repayment obligations in court.

Hanover Finance decision to investment in television advertising can be analyzed from various perspectives. From the optimist’s side, this is an investment made to provide the company with a safety net in case the prevailing economic conditions prove to be unsupportive for normal trading and financial activity. Bollard (2004) states that it is a general practice in finance companies to look for opportunities to invest some of their shareholder’s funds in investments that are resilient to economic hardships (p. 20), which probably explains Hanover’s choice of television advertising. However, from the less optimistic perspective, Hanover’s management could have been trying to create an illusion of financial security for their shareholders by investing in the media industry which is very resilient to harsh economic times.

If a finance company can continue trading, it has the ability to refund its stakeholders during economic hardships (Jensin & Meckling, 1976). Financial companies that can sustain and recover from damage during these times of economic uncertainty are very impressive. These companies should formulate agreements with their shareholders to enact repayments programs in the form of shares or funds. Hanover finance and its senior management seem to have been trying to avoid the obligation of repaying their shareholders. This materialized as a hasty freeze on debt-repayment funds to render them unable to repay shareholders. In addition, fully knowing their company’s cashbook reflected nothing illegal, the owners of the company felt confident in the continuation of court proceeding against them knowing they would blame a few errant real estate developers.

As the global economic condition worsened, Hanover Financial along with its partner company United Financial froze funds intended to repay more than 36500 investors. The disgruntled investors held meetings to discuss their predicament and try to look for the best course of action. More than three quarters of the investors voted to a plan suggested by Hanover Financials top management to repay all debts owed to them over a 5 year period. This plan of action by Hanover Financial showed a genuine feeling of compassion towards the angry shareholders, some of whom had lost substantial amounts of money. One such individual was an Olympic medalist called Hayden Roulson who lost more than $ 250 000 (Savage & Cleaver, 2008).

While the shareholders pursued legal redress over the freezing of their funds by Hanover Finance, its owners had started gifting the affected individuals to try and soften the blow caused by the firm’s actions. Mr. Watson and Hotchin made property, cash, and property pledges worth more than $ 90 million, portraying compassion for those affected by this firm’s recent actions. Although property market prices had lowered the value if these pledges, Uche (2001) states how this act proves these seemingly greedy individuals could find it in themselves to extend some form of assistance to affected shareholders (p 69). As the company started actual repayment of the debt, payments of six cents in the dollar went to investors once more demonstrating a commitment to assisting them recover from this situation.

After a year of negotiations, meetings, and other attempts at trying to unfreeze investor assets, Hanover Finance accepted advances from Allied Farmers in 2009 to transfer their debt obligation to them. After meeting with its shareholders, three-quarters of them voted to allow Allied Farmers to purchase the majority assets in Hanover Finance thus saving it from receivership. For the shareholders, this arrangement meant their bonds and debentures could be changed for shares in Allied Farmers. Compared to their former position as creditors of a struggling finance company, the new shareholders were happier as shareholders of a larger, more resilient company (Mulholland, 1985). Hanover Finance management might have transferred obligations and large debt to their new owner, but suggesting the move was clearly in their former shareholders’ best interest since it provided a better chance at recouping their investments.

In 2010, Allied Farmers found themselves in a position that could no longer sustain the firm’s operational capacity and placed their assets into receivership. A year later, the firm’s shares were noticeably overstated in the stock market necessitating the Financial Market Authority (FMA)’s intervention. The FMA started legal proceedings against Hanover Finance promoters and company directors for statements made in its brochures. The company had made misleading advertisements that caused gross overstatement of Allied Farmers stocks. After the FMA stated its intention to pursue legal action on Hanover Finance, the company’s directors cooperated with the investment teams in order to bring restitution to the affected (McManus, 2010). Willingness to cooperate with the FMA was obviously a self –preservation tactic, but it proved to bring the whole matter to rest much sooner after recovering $ 13.5 million dollars worth of assets.

Hanover Finance directors faced legal action after their company suspended repayments angering its shareholders. A moratorium raised by these individuals was delayed using gifts. Pledges, property and other forms of small incentives offered to the disgruntled shareholders provided a form of delays tactic for these directors to try and pass on their liability to another company (McManus, 2010). From a moral and ethical perspective, the directors acted in a slightly insensitive manner to the welfare of shareholders. Instead of offering a more transparent form of debt payment, the directors tried to buy time by offering incentives and later transferring this debt to Allied Farmers. A better option would have been to try and look for a way of directly repaying the investors instead of paying them off with small pledges.

Investors involved in the Hanover Finance case suffered many losses due to the firm’s carelessness. In 2008, at the same time this company started reporting performance problems, the bad financial climate had also led to the collapse of more than 45 other finance companies putting more than $ 6 billion of depositors’ funds in jeopardy. Many more were operating under a lot financial strain as the global financial crisis worsened after the collapse of Lehmann brothers in the same year (Edmundson, 2008). Hanover Financial suffered a similar fate since it had to suspend repayments to its investors thus placing its operations in the cross hairs of the country’s financial watchdog – the FMA.

The dynamics preceding the collapse of these companies has been the object of numerous scholarly studies, all at the expense of the real losers in the whole issue – the actual investors. In addition to the bad prevailing economic conditions, some conditions have come up as contributors to the financial problems investors faced. Lack of adequate government regulation and ignorance on the investors’ part is perhaps the greatest of these.

The greatest problem, which precipitated the widespread collapse of financial companies leading to investors losing money, was inadequate regulation of financial activity. As many countries seek to protect their investors, New Zealand had no regulation in place to protect their interest, as well as the financial operations of these companies (Mortlock, 2004) until 2008 when it was too late for many investors. Financial companies such as Hanover operated in very much a liberal manner as shown by the haphazard decision regarding handling of investor funds. After the performance had been affected by the prevailing economic crisis, Hanover Finance directors took advantage of the lack of a regulatory structure to orchestrate the transfer of fiscal obligation. This was further aggravated by the government’s lack of deposit insurance mechanisms to protect the shareholders’ investments.

The second issue that precipitated the collapse and subsequent loss of investors’ funds was a healthy portion of ignorance on the shareholders part. Most investors in the New Zealand market before 2008 were not in a position to protect their investment (Parker, 2008). Many relied on financial advisers to handle the investments and never even cared to follow up on their activities to audit their practices. This gap between the actual investors and their fiduciary agents provided deviant directors such as those of Hanover Finance with the leeway to manipulate company resources to their benefit. Such actions were not moral since many of these investors were pensioners and middle-class, investment-oriented civil servants. A good example was a civil servant who lost $ 150,000 to Bridgecorp (McCrone, 2007).

After the collapse of many finance companies in 2008 due to various reasons, the New Zealand government realized the need to involve itself more in regulating financial activity, in the country. In line with the same observation, the CEO of the defunct Hanover Finance company suggested that the government introduce more measures to enhance regulation of the sensitive industry. In line with this, the New Zealand government passed the Financial Advisors Act and the Financial Advisors Act into law. These actions would prove to be integral in the enhancing the recovery process after 2008.

The benefits of more government regulation of financial companies are obvious. This boosts investor confidence since fiduciary agents and financial advisors activities are more closely monitored. Canniford (2005) reiterates on the need for companies to procure the services of risk managers who assist to mitigate the level of risk investor funding is exposed to during normal operations (p 214). Finally, the government formed a Crown Asset Management – an organization tasked with holding assets the assets of failed financial companies.

Conclusion

Business ethics dictate that business leaders show compassion towards their investors and protect their interests. Hanover Finance management showed this feeling when they pledged cash and property to investors affected by the company’s collapse. In addition, negotiating for Allied Farmers purchase of its assets meant their debt to investors would be transformed to shares. Coordination with the FMA was done with smoothly so that an end to the whole matter could be resolved as soon as possible.

On the other hand, the owner of Hanover Finance exposed investors’ funds to risk without caring about emergencies such as the 2008 economic crash. In addition, after the actual collapse, they passed on their debt obligation to Allied Farmers thus extracting themselves from a position necessitating their paying investors more than $ 500 million. This mix of ruthlessness and apparent concern for investor welfare led to many losses on the investor’s side, but that is common in business.

References

Bennett, A. (2008), “Matter of trust – what went wrong?”, available at: http://www.nzherlad.co.nz/news/print.cfm?objectid=10514928 [Accessed 12/05/2010].

Bollard, A. (2004), “The Financial Stability Report”, Reserve Bank of New Zealand: Financial Stability Report, October, pp. 1-22.

Bryant, N. (2004), “A matter of trust”, The National Business Review, 12 November.

Canniford, R. (2005), “Moving shadows: suggestions for enthnography in globalised cultures”m Qualitative Market Research, 8, 2, 204-218.

Edmundson, J. (2008), “Why finance companies fall over”, available at: http://workersparty.org.nz/2008/10/14/why-finance-companies-fall-over[Accessed 9/06/2010].

Jensen, M. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, 3, 4, 305-360.