The American regulatory model of corporate governance rests on the theory of self regulation as the most efficient means to achieve corporate self-control in the marketplace. However, that model fails to achieve regular compliance with baseline ethical and legal behaviours as evidenced by a century of repeated corporate debacles, the most recent being Lehman’s Brothers. Lehman’s Brothers Holdings Inc was a global financial services firm who provided services like investment banking, equity and fixed income sales, research and trading, investment management, private equity and private banking.
It was the fourth largest investment bank in the United States. In the year 2008, failure and deteriorating financial position led to destructive and supposedly deceptive financial reporting practices. This in turn led to the company filing for bankruptcy protection, becoming the largest U. S company to fail. The reasons that led to bankruptcy of Lehman Brother’s were as follows: * In 2006, Lehman made a deliberate business decision to pursue a higher growth business strategy. To do so, it switched from a low-risk brokerage model to a high risk capital intensive banking model. This led to a mismatch between short-term and long-term debts.
Therefore, Lehman had to borrow hundreds of billions of dollars in order to get rid of business risk. But this act put Lehman in unavoidable circumstances to maintain good credit ratings. * Lehman adopted a new strategy to overcome their problems but this led to business risks because its investments in long term assets like the commercial real estate, private equity and leveraged loans had more vague prospects and were less liquid than its usual investments. Similar to the collapse of Lehman Brothers was the collapse of Bear Sterns, which was the fifth largest US investment ban.
It faced severe liquidity problems which ultimately led to the need for it to be rescued through the takeover by JP Morgan with financial support from the Federal Reserve Bank of New York (Arner, 2009). Fannie Mae and Freddie Mac, two Government-Sponsored Enterprises that were the largest participants in the US markets faced similar problems but in their case, these two institutions enjoyed an implicit guarantee against failure or financial collapse by the US Government, that was not sufficient to restore confidence in them and they subsequently had to be nationalised (Arner, 2009).
Furthermore, studies have investigated that even though companies like Enron and HIH acknowledged good corporate governance as a prevailing framework, the failure was in its implementation, explaining that the corporations used governance principles as tools for investor relations to keep stock prices high for the benefit of the boards (Mardjono, 2005, p. 282). The collapse of HIH Insurance Ltd in March 2001 is considered to be one of the largest in Australian history.
This has had wide reaching effects in the community due to the company’s significant place in the insurance market. Just like Lehman Brothers, the failure of corporate governance could be seen as a part of the corporate culture which was central to the poor decision making. A long-term strategy or plan was never formally submitted to the board for critical analysis which in turn resulted in opportunistic investment decisions which also lacked in direction.
Another problem of the company was that the board did not grasp the concept of conflicts of interest and its critical importance in corporate governance. However, the ASX Corporate Governance Council has put forward recommendations and has also provided a comprehensive template for boards to improve their performance and not fall ineptly into the poor corporate governance practices unearthed by the HIH Royal Commission.
The development and refinement of corporate governance standards has often followed the occurrence of corporate governance failures that have highlighted areas of particular concern. * Companies now demand most out of corporate governance so therefore boards have to be clear about the strategy and risk appetite of the company and need to respond in a timely manner, requiring efficient reporting systems. * Corporate survival largely depends on discipline placed on managers. Discipline needs to be incorporated inside the firm through corporate governance structures.
