Until directors actually do their jobs when it comes to risk, instead of merely boasting about them, disaster will be the inevitable intruder in the slumbering boardroom.
AIG, the giant insurance company which specializes in the assessment of risk, has accounting problems –again. This time, auditors discovered “material weaknesses in its internal controls.” The cost of that weakness comes in the form of a $4.88 billion write-down. It is nearly four times the earlier estimate given by the company. Just last year, AIG paid $1.6 billion to settle state and federal charges that it engaged in deceptive accounting practices to mislead investors and regulators. The payout set a record at the time.
You might wonder how a company that went through such a wrenching and costly experience over poor accounting practices finds itself in another accounting pickle so soon. The answer is that directors have a short-term memory problem. Merrill Lynch also went afoul of regulators in the early 21st century and had to pay out a huge amount to settle. Citigroup had to set aside millions in connection with Enron and WorldCom lawsuits. CIBC, the giant Toronto-based bank, also paid millions to settle regulatory charges that it acted improperly in its Enron dealings. All of these institutions are posting record losses and write-downs related to defective credit instruments. And once again, questions are being raised about whether management and directors are really on top of the affairs of the company.
One might have expected a prudent boardroom to be scrupulous, and more successful, in avoiding mishaps so soon after a previous embarrassment. In AIG’s case, it was required to issue an apology last February, which stated in part:
Providing incorrect information to the investing public and regulators was wrong and is against the values of our current leadership and employees.
But in the modern boardroom, where historically the preferred posture has been lateral for most of the time, there is a tendency to overstate the rejuvenating effects of reform while quickly slumping back into somnolence. The scandals of the Enron era revealed major weaknesses in the accounting and internal controls of many companies. Sarbanes-Oxley was passed in 2002 to address some of the most glaring defects, and companies responded by trumpeting how much more engaged their boards were. But in a few short years, the world has once more been forced to witness the spectacle of boards that did not properly oversee the risks their companies were incurring and ensure that adequate controls were being followed. Shortcomings in internal controls and the managment of risk were also at the heart of the $7 billion trader fraud at Société Générale. They are now featuring prominently in connection with the subprime-prompted credit crisis in many financial institutions.
Until directors actually do their jobs, instead of merely boasting about them, and remember the lessons of the past when risk became a corporate orphan for which no one would take responsibility, disaster will be the inevitable intruder in the slumbering boardroom.
The board of Yahoo has opted to reject Microsoft’s bid to acquire the company. The decision came after a series of meetings earlier this week. It was a wise decision.
Nothing illustrates the reality of Microsoft more than the Vista operating system that is its showcase: late on arrival, bloated in its functioning and incompatible with much of the world it depends upon. Microsoft operates a command and control culture that is in a state of constant paranoia, always fearful that customers are trying to get the better of it. So inward looking has it become that in the period it was trying to produce its newest operating system -the one that has become so much the bane of users that many demand the old XP system in their new computers -Facebook, MySpace and YouTube were conceived, developed and became a consumer phenomenon. Microsoft could have developed these applications, just as it could have done and become what Google has. It was too busy being big and becoming overly confident, still clinging to its anti-trust mentality and obsessed with the idea that customers are always trying to circumvent its software activation process. Some companies aspire to become customer-centric. Microsoft has turned customer-antithetic into a brand.
Microsoft has made a number of ground-breaking strides in its time, but it is doubtful that, as it is currently conceived, a match with any organization that prides itself on innovation and agility would make for a positive union. As the world learned from the costly AOL-Time Warner merger debacle, it takes more than money and high priced stock to make a happy corporate marriage.
Microsoft’s days as a transformative force in the world of personal computers and the Internet, barring a sea change in culture and attitude, are on the wane. The ability of the company to transfer its core values and management skills, honed in an era of market dominance symbolized by one-license-per-paying customer, to a more open 21st century cyberspace environment where success more and more is defined by the extent to which value can be added to the customer relationship without adding cost to it, is highly problematic. This is reality that long ago should have prompted a series of meetings by its own board to determine what has gone wrong with the Titanic of modern software companies, and what can be done to prevent it from meeting a similar fate. With its boardroom still on the Microsoft version of a Morse code operating system, the company’s directors will be painfully slow to decipher the message.
Something has gone fantastically awry in the risk management and oversight of some of the world’s most renowned investment bankers and financial institutions. The shortcomings in their controls and governance systems that permitted multi-billion dollar losses at Citigroup, Merrill Lynch, Bear Stearns, UBS and Swiss Re, and the overall failure of top management and boards to comprehend the risks of the subprime related investment vehicles they were packaging and selling, has been a recurring theme at Finlay ON Governance in recent months. We were taken aback, as we noted last week, when new Merrill Lynch CEO John Thain told the Wall Street Journal “Merrill had a risk committee. It just didn’t function.”
But nothing has been as breathtaking as the loss of more than $7 billion by Société Générale, apparently the result of a rogue trader acting on his own. (more…)
The fact that Merrill’s risk committee did not function shows that this company was governed by a board that failed utterly in its duty to investors.
The magnitude of the losses was staggering on its own: nearly $10 billion for the final quarter of 2007. That was on top of the $2.3 billion loss for the previous quarter. Write-downs have exceeded more than $20 billion. Never in the storied history of Merrill Lynch have such figures been recorded. But the admission today of John Thain, the new CEO of the world’s biggest broker, takes all the oxygen out of the room:
“Merrill had a risk committee. It just didn’t function,” he told the Wall Street Journal.
His candid statement begs the question: Where was the board? (more…)
Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.
Do you have your ticket for the Great American Boardroom Bailout Sweepstakes? Probably not. You need a special pass to get to the front of the line. Angelo Mozilo, CEO of Countrywide Financial, once the largest mortgage lender in the United States and now the poster child for financial ruin for itself and millions of homeowners, has one. And it’s a beaut. While steering his company into a Titanic-like credit collision and foisting loans on the most vulnerable and least able to handle them, the king of subprime mortgages has pulled in hundreds of millions in salary, bonuses and stock options since 2000 alone. (more…)
The board of SLM Corp., known in many circles as Sallie Mae, announced the appointment today of a new chairman and company CFO. They must have forgotten the other change they need to make: CEO Albert L. Lord. (more…)
