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Ceylinco Consolidated is led by Deshamanya Dr Lalith Kotelawala, son of the late Senator Justin Kotelawala, the original founder of the first Ceylinco Company, in 1939. Ceylinco, an abbreviation of Ceylon Insurance Company, became the first registered company in Sri Lanka in 1939, and the only indigenous business dealing in insurance, a sector that was the domain of British colonial firms up until then.
Mr. Lalith Kothalawala is a top businessman in Sri Lankan who has more than 250 businesses where most of them are financial institutions such as banks, finance companies and real estate companies.
Golden Key Company pioneered the Credit Card industry in Sri Lanka in the early nineteen eighties and was responsible for setting up the initial Merchant Network that was expanded and was currently utilized by all credit card operators in the country. In addition to issuing a variety of domestic credit cards the company also issued Privilege / Discount Cards to a varied clientele which included children. The Card Management Division of the Company was responsible for setting up and managing a number of Credit Card operations for client institutions in Sri Lanka and overseas. The Promotions Department of the company was involved in organizing exclusive entertainment for card members both in Sri Lanka as well as in overseas destinations.
3.0 Problem Definition
The controversial Golden Key credit card company which was owned by Dr Lalith Kotelawala crashed off recently due to the financial mismanagement. It is believed that the billions of customer deposits have been swallowed by the company. The investors that deposited money in this company were severely distressed. There had been a fraud of Rs.26 billion and the Judiciary recently ordered that its assets worth Rs.14.5 billion should be sold and depositors paid back their money.
Relevant to this incident Sri Lanka Central bank stated Golden Key Credit Card Company was not a registered financial institute. However, depositors claimed that the company advertised freely through media and this urged them to invest in the company. There was criticism that Central Bank did not take sufficient measures to inform the public regarding illegal financial institutions. Â
Information has been received that the government too has been involved in promoting Golden Key Credit Card Company as a creditable institution where the public could deposit their money. It is evident that the government too is responsible for the fraud carried out by the relevant company. Government institutions have encouraged the public to have dealings with the company. This is a good example of the deterioration of the monetary sector of the country and how sloppy the functioning of the Central Bank is. Â
A Paradigm is a general perspective or way of thinking that reflects fundamental beliefs and basic assumptions about the nature of organisational life
According to this case the paradigms that will be used are the Functionalist & Radical Humanist paradigms. A Functionalist paradigm only examines the world through objects and observable facts that are measurable and that can be seen, touched and counted. The crisis in the Golden Key Credit Card Company and its resultant collapse was partly due to its apparent deficiencies in the organizational structure and due to lack of an effective transparent strategy, inefficiency and improper management control. A Radical Humanist paradigm takes an ethical, critical and human view of organisations This section of the will be based on the critical analysis of the company's behavior and practices on the lines of Radical Humanist assumptions.
4.1 Functionalist paradigm
The functionalist paradigm rests upon the premises that society has a real, concrete, existence and a systematic character and is directed toward the production of order and regulation. The social science enterprise is believed to be objective and value free. The paradigm advocates a research process in which the scientist is distanced from the subject matter by the rigor of the scientific method. It possesses a pragmatic orientation, being concern with analyzing society in a way which produces useful knowledge
This is the dominant paradigm for organizational study. It seeks to provide rational explanations of human affairs. It's pragmatic and deeply rotten in sociological positivism. Relationships are concrete and can be identified studied and measured via science. This paradigm has been mildly influenced by idealist and collective thought too.
Functionalist Paradigm was recognized that this would also offer political advantages. In particular if functionalist study was undertaken first with the results that senior management was given some free consultancy, this would assist a researcher in establishing his credibility prior to undertaken investigations which might seem less relevant in the host organization's team.
Theory of Functionalist Paradigm
The organization is a concrete entity rarely undergoing radical change, and it exerts influence on individuals to maintain the status quo.
The organization has a concrete existence -regularities exist:
â€¢ High degree of planning
â€¢ Day to day organizational production
â€¢ Visible organizational hierarchy
â€¢ fixed job titles
â€¢ Perception of physical structures and boundaries
â€¢ Standardization and rational decision-making
Stability and the status quo are important. There is a focus on the organization as an orderly, stable entity that only rarely undergoes radical change, and, exerting influence on individuals' behavior to maintain the status quo.
Approaches of Functionalist paradigm
In the Burrell and Morgan model the main approaches listed as representative of Functionalist Paradigm are social system theory and objectivism, theories of bureaucratic dysfunctions, the action frame of reference and pluralism. Of these social system is the approach they place at the heart of the paradigm.
Functionalist paradigm has provided the foundation for most modern theory and research on the subject of Organization. For those committed to its underlying assumptions, which in effect treats organization as an aspect of a wider societal system that serves the interest of its members, the paradigm has been spectacularly successful. It is seen as proving basis for an Organization and management theory that contributes to the process and development of formal organization, and to the process and development of the wider society. Organization theorists and researchers are seemed from this point of view as making substantive and helpful contribution to the development of Organizational society.
While it is recognized that this mode of Organizational research may in practice serve to enhance one set of individual or societal values as opposed to another or one set of interest as opposed to another, this is seen as involving a problem of its use rather than its fundamental nature. Functionalist theory is seen in principle as being able to serve management, workers, government, inter organizational networks or any client's perspective, according to the orientation to the user. The perspective generate theories, techniques and detailed research finding that claim to contribute our knowledge about the empirical nature of the organization, and encourage us to see the role of values as a separate variable in the research process.
Functionalist Organizational Theory creates and elaborates the 'language' for the management and control of organizations.
Functionalist theory has typically viewed organization as a problematic phenomenon, and has seen the problem of organization as synonymous with the problem of efficiency and more recently of effectiveness. Theory and research has sought to generate useful perspectives, models, and concepts and detailed research findings which help to structure and control organized activity in pursuits of system state deemed efficient and effective. Modern Organization and management theory constitute a language of control which has evolved in nature and sophistication to cope with changing requirements of organizational control. Functionalist Organizational theory can lay claim to great practical success, for it provides a direct means of structuring organization as a practical activity.
Functionalist Organizational theory provides its clientele with a 'mirror' through which it can see and assess itself
In addition to creating new languages for organization, functionalist theory has borrowed heavily from existing organizational language as a means of structuring and understanding organizational reality. To this extend organizational theorists engage in an act of unwitting collusion with the ideas and actions of those they attempt to study, articulating and refining theories in use. Much of classical Management theory of this kind, codifying practices in terms of general principles. Such codification performs a 'mirroring' function against which clients, for example managers, can reflect on and assess their current practice.
Functionalist Organizational theory generates problem solving ideas and practices designed to enhance the adaptive capacity of organization as a continuing process
The problem which a functionalist theorist sees in an organizational context usually hinge upon the perception of some form of breakdown in the control of ordered activity. An inefficiency in management procedure, a conflict between superior and subordinate, or some form of withdrawal from work as in the case of an employee strike may be define and recognized as problems. In each case the functionalist theorist seeks to find ways in which these problems can be overcome, and ordered operation restored.
4.2 Radical Humanist Paradigm
In an organization, workers and managers alike often experience the concepts through which they structure their world as the real forces; they believe their reality to be real, rather than merely an extension of themselves i.e. an objectification of their experience of the world. The perspective provides a means of regaining power over our social constructions, so that individuals can consciously attempt to make their organizational and every day life, rather than experiencing that they are merely being made by it.
People's processes of enactment are more important than others, for by virtue of position or charismatic qualities, they may assume great influence over the sense making process of others.
Radical Humanist approach argues the understanding and confronting the moral codes which underwrite modes of organizational life, posing organizational choice as much a problem of moral principles as it is of technique.
One of the most important but often neglected aspects of radical humanist thought focuses on the role of the unconscious mind in shaping the world of everyday activities. An appreciation of deep psychological significance of various aspects of the organizational practices generates important insights on the organizational realities that make effective action difficult, if not impossible.
Organization is seen as being ultimately for people rather that the other aspects. Whereas most theories of organizations view human beings as either tools or resources to be used for the purpose of organization radical humanism argues the organization should express our humanness and its potentialities.
5.0 Critical analysis
5.1 Functionalist analysis
A Functionalist analysis would have to focus on the organizational effectiveness of the company. Effectiveness is judged on many factors including organizational structure, strategy, control, efficiency etc. The crisis in the Golden Key Credit Card Company and its resultant collapse was partly due to its apparent deficiencies in the organizational structure and due to lack of an effective transparent strategy, inefficiency and improper management control.
The company has started as a credit card company, but has deviated into other types of businesses like deposit taking, lending, real estate etc. It is not registered with the Central Bank as a Finance Company. Therefore, it has no legal authority to engage in these financial activities. Although unregistered, it had ballooned into a company with around 9,200 depositors with a Rs. 26 billion deposit portfolio.) Obviously, an organisation structure meant for a modest credit card company cannot effectively function for a large organisation with varied activities such as these. Burns and Stalker in their Contingency Theory focusing on structure stated that organisations that operated in different environments needed different styles of organizing structures.
An organisation to be successful, a proper structure should be in place with appropriate people in appropriate jobs with defined roles and relationships. Golden Key Company does not seem to have had such a organizational structure with defined responsibilities and authority. This has resulted in attempts to 'pass the buck' when mismanagement and fraudulent actions were revealed.
The lack of appropriate strategy is another factor that has led to the Golden Key crisis. The poor strategies they adopted without a proper policy has led to a severe liquidity crisis in the company, which in turn had spread to other sister companies.
Golden key credit card company being an unregistered company has rates paid very high interests in order to attract more and more deposits. These interest rates ranged from 30-32% which were unrealistically high. It had been subsequently revealed that in order to pay the interest, the company had to raise funds from overdrafts and carried out Ponzie scheme - the practice of paying the existing interestsThey have also made very high risk investments and would have had to generate much money to cover the high interest payments and overhead expenses through those high risk investments
It was also revealed that Golden Key Credit Card Company has been engaged in the practice of shifting money from the company to other Ceylinco companies, which is apparently a strategy adopted by Ceylinco Group companies, feeding on each other by cross dealings. This practice has led to much confusion as to where the depositors' money has gone.
The Classical theorist, Weber has pointed out that problems may emerge if the organisations are not properly managed, although he favoured the beauracratic type of management. The Classical theorists Taylor and Weber and the Systems theorists Kast et al believed that managers have the ability to control organisations and the people, and the organizational control leads to efficiency. When the Golden Key Credit Card Company issue is analysed in the light of these theories and assumptions, the senior management of the company obviously had sufficient controlling powers given to them to handle any environmental situation, but has failed in controlling the environment. There are many reasons that can be attributed to this. They may have difficulty in adapting to the changing circumstances due to their lack of management capabilities and commitment. Their individual interests seem to have taken precedence over organizational success or the depositors who were the very source of resource base of the company.
These circumstances have led to blatant mismanagement of the company affairs. The company has invested in several ventures that are not viable in the current economic climate. It has not even done the basic things that a company is required to do. It had not maintained proper audited accounts. It was revealed that no audit was done since 2005; that board meetings were not held for the last our years; financial statements and audit reports had been prepared to show profits, but the company was actually running at a loss. Large amounts of money had been channeled to other companies in the Ceylinco Group. It paid overly high interest rates on deposits and had to raise funds from overdrafts to pay them. The mismanagement was so acute that by the end of 2008, the company has incurred a loss of Rs.13 billion and even had stopped paying interest to its depositors.
There were no risk management and other corporate best practices. The CEO and other senior managers lacked experience in these corporate management practices. There seems to be total lack of accountability on the part of the management of the Golden Key Credit Card Company. The Resource Dependency Theory recognizes that organisations are dependent on the environment for their resources for their survival. Considering the nature of the company which depends on the monies collected from depositors for its survival and growth, Golden Key Company should have acted with a high degree of responsibility and accountability. But they have acted with total disregard to these corporate principles and to their depositors.
The mismanagement and undesirable strategies and practices had led to inefficiency in the management of the company.
Thus, the Functionalist analysis of the Golden Key Credit Card Company shows the inherent weaknesses in the organisation which has significantly contributed to its collapse.
5.2 Radical Humanist analysis
The Radical Humanist paradigm is an ethical, critical and human view of organisations and it critically examines the impact of organisations on people and society and focuses on equality, fairness and ethics. This section of the analysis on the Golden Key Credit Card Company issue would critically examine the company's behaviour and practices on the lines of Radical Humanist assumptions.
The ethical dimension relates to the moral goals and behaviours of organisations. Golden Key Credit Card Company issue is new widely believed to be one of the biggest fraudulent crimes committed in Sri Lanka. The company has followed fraudulent practices to siphon off the monies of unsuspecting depositors; misappropriate large sums and transferred to other ventures here and abroad with out the permission of depositors. The senior management has misappropriated hundreds of millions of rupees from the company and some of it had been deposited in their personal accounts. The senior managers have been paid unbelievably high salaries amounting to several millions a month. The investigators have revealed that the total financial misappropriation at Golden Key Company is over Rs.20 billion; that the financial statements and audit reports were prepared to show profits, although the company was running at a loss; and even the auditor's signature has been forged.
The Attorney General informed the court that Rs.14 billion of the deposit money of Rs.26 billion had been misappropriated, Rs.5 billion has gone missing, Rs.1 billion had been used for illegal payments and Rs.6 billion invested in related companies.This shows the gravity of the unethical conduct of the company management.
Another dimension in the Critical Theory is the power of some over the others in an organisation. In the Golden Key Credit Card Company, there seems to have been concentration of power in the hands of a few individuals. This has enabled them to abuse the power, and misappropriate and misuse the depositors' monies.
Another dimension of the Radical Humanist paradigm is the 'people first' dimension which places people before the interests of the organisation. The Golden Key crisis has revealed that the company management has acted without any concern for the depositors or even their employees. Nearly 10,000 depositors have been made helpless and over 500 employees are without employment. If the company had put the people's interest first, this situation may not have arisen.
Another dimension is the alienation or leading human beings to feel powerless. This is exactly what has happened to Golden Key depositors. They have been made powerless by the ruthless behaviour of the company management. Regulatory authorities being somewhat reluctant to take speedy action over the matter, the depositors now look up to law courts for justice to be done.