Why Corporate Governance Fails and Lacks Sustainability (2)

TOWARDS Ethical Excellence Following up on our previous article, many governments and large companies everywhere are currently very keen to revamp, develop, and implement a corporate governance code to address the above mentioned shortcomings. Unfortunately, all these codes are cosmetic and do not provide adequate protection. For example, the collapse of Lehman Brothers seen by a lot of people, a corporate governance failure, not a failure of financial markets, in September 2008, was the biggest bankruptcy in the corporative history of the USA, and the event that conduced to the largest and financial crises of the last decades.

The most resonant similarity with Enron is appearance of the name of a large audit firm, Ernst & Young, “they didn’t approve the Accounting Policy”, it rather “became comfortable with the Policy for purpose of auditing financial statements” (Alexandru, 2012). Two of the Lehman’s financial directors were in the past engaged in a collaboration with Ernst & Young. And in the last year of complete financial reporting, Lehman Brothers was the 8th largest customer for E&Y, and the fee paid by LB was about $185 millions. Worrying is that we are not learning from history and not to repeat the same mistakes and those from Lehman Brothers walked the same steps of collapse as Enron did.

The situation at JPMorgan Chase, one of the world’s largest banks, early this year is an interesting case with regard to corporate governance. Government investigators have recently found that JPMorgan Chase devised “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and that one of its most senior executives gave “false and misleading statements” under oath. JPMorgan executives also ignored a series of alarms that went off as the bank’s Chief Investment Officer breached one risk limit after another. Rather than ratchet back the risk, JPMorgan personnel re-engineered the risk controls to silence the alarms. In a previously undisclosed case, prosecutors examined whether JPMorgan failed to fully alert authorities to suspicions about Bernard Madoff. And nearly a year after reporting a multibillion-dollar trading loss, JPMorgan did face a criminal inquiry over whether it lied to investors and regulators about the risky wagers. This case pinpoints that JPMorgan’s corporate governance code and exhaustive regulations do not provide adequate protection.

A recent study conducted by LabatonSucharow, a New York City law firm, suggested that Wall Street still has a shaky grip on its ethical compass. Despite the financial changes enacted after the 2008 financial crisis, improper and even illegal activity is perceived as common among traders, brokers, portfolio managers, and bankers. Behind all these scandals are a number of common factors, including:
Poor ethical leadership and lack of personal integrity
Mismanagement and management incompetence
Fraud, corruption, and violation of corporate governance code of ethics
Non-observance of the procedures stipulated in internal regulations
Insufficient attention paid to risk management
Inconsistent distribution of duties and responsibilities
Inefficiency of internal audit
Ignorance showed to the signals provided by external audit
Influencing the external auditors to express an audit opinion inconsistent with reality.

All the above mentioned organizations have comprehensive corporate governance codes in place, implemented by the left brain Big Four accountancy firms (PwC, KPMG, Ernst & Young and Deloitte), McKinsey, America’s Top Corporate Governance Law Firms,… which apparently are not working at all. They made things worse and created a stable basis for more corruption.

Unethical behavior of top-executives, poor ethical leadership, lack of personal integrity, mismanagement, fraud, corruption, and violating corporate governance codes are the main contributors towards most of these scandals. The human element represented by the directors and employees is the major cause of the mentioned failures. Especially unethical behavior of leaders is the main cause of bankruptcy and financial failures.

Remember what Alan Greenspan, Former Chairman of the Board of Governors of the US Federal Reserve System, said: “Our market system depends critically on trust—trust in the world of our colleagues and trust in the world of those with whom we do business…. I am saying that the state of corporate governance to a very large extent reflects the character of the CEO.” This article will be continued next week.

Prof. Hubert Rampersad is President of the Technological University of the Americas and Abiodun Kayode Fawumi is the Publisher of Ekocity Magazine.