Saturday, January 26, 2008
While corporate failures, such as Enron, WorldCom, Tyco International Ltd, Peregrine Systems, iVillage, Adelphia Communications Corp, Hollinger International , Barings Bank and the recent Societe Generale bank have focused attention on issues of accounting and financial indiscretion, there is nothing inherently new in the reasons behind these corporate collapses. Neither is there anything original in the media's hurry to name a scapegoat. For example, at “Barings Futures Singapore (BFS)'s [the] management’s structure through 1995 enabled Leeson to operate without supervision from London headquarters. Leeson was not only the floor manager for Barings' trading division on the Singapore International Monetary Exchange, he was also the head of settlement operations. Leeson was responsible for ensuring that accurate accounting information was reported to the unit.
Normally the head of settlement operations and floor manager would have been held by two different employees. In other words Leeson reported to himself. This absence of checks and balances short-circuited normal accounting and auditing safeguards. After the collapse, several observers, including Leeson himself, placed much of the blame on the bank's own deficient internal auditing and risk management practices. People at the London end of Barings were all [know- it- all’s] that nobody dared ask a stupid question in case they looked silly in front of everyone else” (http://en.wikipedia.org/wiki/Barings_Bank).
SO WHO GAVE LEESON ALL THIS AUTONOMY? WAS IT NOT TOP EXECUTIVES??If …… “Most important, the corrective actions taken to date [cannot] be sufficient to reduce the frequency and magnitude of corporate bankruptcies. …Without changes in the policy-related conditions that contribute to corporate failure, improved accounting and auditing procedures [will] accelerate bankruptcies with little effect on their frequency or magnitude. Almost all of the public and press attention, however, has focused on reducing the accounting violations, not on those policies that contribute to business failure. The major lesson from the collapse of Enron and other large corporations is that the rules of corporate governance do not adequately protect the interests of the general shareholders against the increasingly divergent interests of corporate managers" (www.cato.org/pubs/handbook/hb108/hb108-22.pdf).
It is argued that a combination of legislation, regulation, effective risk management and appropriate sanctions are needed, if such unethical behaviour, and resulting corporate failure, is to be prevented in future.
However, what is required is an astute, independent, assessment of these financial collapse debacles. This may establish that failures within these companies' corporate cultures and management systems allow, if not encourage, unethical behaviour by key individuals.
COULD IT BE THAT THE CONTINUATION OF THE OLD BOYS CLUB may be the fundamental reason for the blatant disregard and perception of invincibility/groupthink mentality of same.
COULD IT BE THAT ONCE AN EMPLOYEE IS INCREASING THE PROFITS AND BOTTOM LINE OF AN ORGANIZATION HE/SHE IS SHELTERED BY TOP EXECUTIVES, WHO MAY TURN A BLIND EYE TO UNETHICAL PRACTICES?
Dr. Rookmin Maharaj’s research on:Corporate Governance and the Board of Directors:Study of the Importance of the Role of the Formal & Informal Systems Investigated corporate governance issues from a behavioural viewpoint and makes a clear distinction between strict adherence to formal rules and regulations that is, CEO/Chair separation, independence of board members and board size and informal characteristics of board members: knowledge, values, and groupthink.There are three main conclusions from her research and corporate experience:
1. Clearly proves that formal rules and regulations are inadequate; they have little effect upon decision making by board members. Informal characteristics must be considered in unison with the formal system when nominating board members, management and employees in order to restore shareholder confidence and to rebuild trust in corporate governance.
2. Similar values and groupthink can contribute positively to corporate decision making. However, there is a high possibility for groupthink and values to become redundant, masking board members’ and managements’ knowledge thus affecting their decision making process.
3. Skills matrices that include questions related to values, knowledge and groupthink should be considered by corporations to ensure the nomination of well-rounded members, management and employees.Changes to board process, and board decision making, are seminal in preventing future Enron and WorldCom fiascoes. It is only by changing the behaviours of the board of directors, through adopting skills matrices, that sweeping changes can occur.
In the past boards have asked: who are our board members? However, the most important question a board can ask today is: how can the skills and knowledge of our board members be used in service of the strategic direction of the corporation?
This can be achieved by recruiting new board members, management and employees who fill the needs of an organization, in contrast to nominating ‘friends’ and continuing the tradition of the old boys club.
Dr. Maharaj argues that, and has tangible evidence, that what should be done is a forensic audit on 'the people that we hire' and 'employees, managers, board members' should also conduct an audit on their potential employers. What is your opinion?Does your opinion change with this update?According to alleged rogue trader Jerome Kerviel, " his bosses turned a blind eye to his massive, questionable trades as long as he made money for the bank"(EMMA VANDORE, http://ap.google.com/article/ALeqM5h4ncvzDOrXAnqyB9avT4zvg1iJTQD8UG7MBG0Societe Generale Board Meets).
Posted by Dr. Rookmin Maharaj at 2:05 PM
10 comments:
Anonymous said...
Dr.Maharaj,Do you really believe that the old boys network still work today?
January 29, 2008 11:39 AM
Dr. Rookmin Maharaj said...
The old boys/girls network is alive in many different manifestations. For example, there are many studies/research that indicate that people hire those that are similar to themselves. Is this a manifestation of the old boys/girls network? Of course it is!!!
January 29, 2008 2:24 PM
Anonymous said...
How then do you ensure board independence?
January 29, 2008 2:30 PM
Dr. Rookmin Maharaj said...
You can and will ensure board independence by using Dr. MAHARAJ'S corporate governance model. This model was developed after two years of research conducted on 1200 CEOs, Chairs, board members and upper management in Canada and the United States.
The premise of my corporate governance model is that nominees to the board are pre screened, not only regarding their technical knowledge, or who they may know on the board, but on their values. Are their values congruent with those of the organization? Does the potential board member fit with the other board members, will he or she have the will to ask tough questions of other board members and of management? This can be accomplished with an in-depth skill matrix in the pre-assessment stage. Then the post stage follows with an annual peer review and evaluations on each board member including the chair and CEO. These evaluations should be conducted by a (independent) third party.
February 4, 2008 7:03 AM
Anonymous said...
Why are there so few women on boards?
February 4, 2008 12:28 PM
Anonymous said...
Taking into context recent events in the stock market, should boards have forseen the enormous losses? What could they have done differently?
February 4, 2008 12:31 PM
Anonymous said...
With all the regulations in existence, there are still too many corporate scandals. How can this be avoided,if at all?
February 4, 2008 12:33 PM
Dr. Rookmin Maharaj said...
In recent interviews I conducted with several Chairs, board members, and CEOs, I asked questions about “boards’ foresight regarding situations that are just inappropriate, whether the actions or inaction by management and the board manifest as losses to shareholders or blatant fraud perpetrated by the board and management.” The general consensus is that boards’ are in a position to govern, not manage the day to day operations of an organization.
However, if the board realizes that the CEO/management are taking advantage of stakeholders, there is lag time that it takes to actually oust a CEO and this affects the amount of losses that may occur. In order to reduce the probability of management/CEO taking advantage of stakeholders, boards members must be vigilant and astute by questioning management if they have concerns about risky projects or are aware of improper risks being undertaken by management and quick and precise action should be taken by the board to rectify the indiscretion.However, there is not only the principal-agent problem for shareholders/stakeholders to consider. In today’s global economy stakeholders cannot depend solely on the invisible hand. Stakeholders must investigate and look at who are the board members. Is there collusion between board and management, there is the ‘old boys’ network’ to consider.
In a recent high profile fraud case one board member (a well RESPECTED U.S. attorney) stated that he ‘skimmed’ documents that were given to him by management since he believed that if there was anything amiss management would have advised him. In other words this example suggests that board members are yes men/women to management. A reasonable person may be under the impression that the board of directors will enforce and ensure that the agents (CEO/management) will not take unfair advantage of the principals (investors, shareholders and all stakeholders).
According to modern governance theory the board of directors is considered the intercessor to the principal-agent problem. But in most of our corporations in Canada and the United States the principals are the agents they are one and the same or alternatively this is called the ‘small pool problem.’ As investors, community members, and stakeholders we as individuals must make a concerted effort to exercise our right as shareholders/stakeholders to ensure we police the police (board members), remember we can attend annual meetings and chose to vote out the board.
February 6, 2008 8:08 AM
Anonymous said...
This post has been removed by a blog administrator.
February 7, 2008 6:50 AM
Dr. Rookmin Maharaj said...
Q: With all the regulations in existence, there are still too many corporate scandals. How can this be avoided,if at all?A: This question of more rules and regulations!!!, rules and regulations can only act as a guide. An important issue is who are these people who are chosen as board members?
We NEED TO wake up to reality. If board members are handpicked by management there must be a reason, for example, in a recent high profile fraud case, an experienced, well respected audit chair ‘under oath’ stated that ‘the documents he SKIMMED were prepared by management and counsel, and if anything was INCORRECT he RELIED ON MANAGEMENT TO DRAW HIS ATTENTION TO THE non-compete agreements’. THIS, MAY I REMIND YOU was A WELL RESPECTED AUDIT CHAIR!
The fact is that he left due diligence to management, in other words he left his job to management, and rubber stamped their decision. The questions remain, was this audit chair unaware that his job involved investigating whether non-compete payments are legal in the pertinent jurisdiction or he was aware of this and instead of ‘causing waves’ or being a ‘trouble maker’ he succumbed to a groupthink mentality?
“Groupthink occurs when a person’s thought process and decision-making capabilities become marred by peer pressure. This may cause the group to overestimate their power and morality, causing the members to ignore the ethical or moral consequences of their decisions. This behaviour can encourage an illusion of invulnerability, creating excessive optimism and encourage the group to take extreme risks” (Maharaj, 2007).
The probability of nominating board members with a groupthink mentality can be reduced by using Dr. Maharaj’s Corporate Governance decision making model. Dr. Maharaj’s research is based on both qualitative and quantitative research conducted over a period of two years on over 1,200 executives in both Canada and the united States.Dr. Maharaj’s Corporate Governance decision making model suggests that there is a temporal linkage between board characteristics which are Values, Groupthink and Knowledge and the three tools Evaluations, Skills Matrices, Interconnections on Decision-making (Maharaj, thesis, 2007).
Therefore, corporations, Universities, health care organizations, and political institutions, (to name a few) should use Dr. Maharaj’s model to nominate board members who are not afraid to question the status quo or encourage creative tension in the board room instead of being merely parsley on fish. References:Maharaj, R., (2008). International Journal of Disclosure and Governance, 5, 68–92 "Corporate governance, groupthink and bullies in the boardroom. "Maharaj, 2007, Thesis Dissertation.
February 7, 2008 6:52 AM
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