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1. Case study
1.1 Connection between a well-functioning board and the likelihood of wrongdoing at a firm
The connection between a well-functioning board and the likelihood of wrongdoing is that a well-functioning board would be helpful in preventing the wrongdoing of the company in a strategic level of the business. From the case of the failure of Lehman Brother we can see that the board of the company as large as like Lehman Brother could also be ineffective and not functioning well and acting against to the expectations of their duties.
First of all, as mentioned in the case study, in 2003 and 2004, Lehman acquired five mortgage lenders including two which are specialized in the Alt-A loadns, these mortgage business had contributed to the rapid growth of the Lehman’s profits. And in 2007, the firm had reported net income of a record $4.2 billion out of the $19.3 billion revenue, but when in the first quarter of 2007, when the risks in the US real estate industry were becoming obvious as the defaults on the subprime mortgages increased to a 7 years high, it was thus irresponsible that the chief financial officer (CFO) said that the risks posed by the rising home delinquencies would have little impact over the company’s revue generation providing that the mortgage busies had been contributing largely to the profit making of the company. In this point we could conclude that the CFO as an important member of the board of directors had not acted in a prudent manner his job, in particular as a CFO, he should have the necessary knowledge to witness the seriousness of such risks.
Secondly, the board did not take advantage of the temporary rebound of the housing market to reduce the large mortgage portfolio to reduce the already obvious risks in the mortgage business and in the year of 2007 the company still underwrote the largest volume of mortgage-backed securities. This shows that the board of directors did not act well in their duty of care to ensure financial health of the company. And from the decisions made by the board, we can see that they were not prudent and with sufficient industry knowledge to avoid possible massive business failure.
1.2 Ownership, best compliance and best practices
If I were a corporate compliance leader, best compliance irrespective of whoever owns the company, would not always be the best practice that I should do as a company leader. According to Michael G. Silverman (2008, p. 97), an effective organization’s senior management should demonstrate a clear and unequivocal commitment to compliance, ethics, and integrity in its actions and worlds. Such definition of compliance requires that people should neither be native or fools. The author continues to state that in order to create an organizational culture that is ethical and compliance oriented, the first thing the senior leaders should achieve is to be clear about their expectations in term of ethics, integrity and compliance. In this point we can see that best compliance does not represent that leaders should follow the decisions made by the owners who may not have sufficient information and knowledge about the detailed business operations and correct evaluation with the ongoing market risks, and sometimes compliance with the owners’ decisions could generate conflicts with the compliance with the ethical requirements and the general rules and even the corporate cultures. Therefore, the task of keeping compliance will request the leaders in the senior levels to be compliance with all rules and requirements to do the best for the whole company in a long term basis. Let’s go back to the case of Lehman’s collapse, one thing that the company did not do well was to cover up the compliance failure of the management. For instance, the CFO of the company may already know the seriousness of the risks in the mortgage business to the company’s business, and even after some business failure, the company still not recognized the compliance failure of the management with the ethical standards and also with their duties to control the financial and business risks. But let’s put it in another perspective, the management of the company were actually under pressure to make decisions according to the decisions already made by the board which represented the will of the owners, if the board could be more prudent in making decisions regarding the strategic business directions, such massive failure could be avoided. But still we will conclude that the best practice of the compliance leaders will not be following the owners’ decisions under all situations.
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