6.1 Lehman Brothers Lehman Brothers was one of the main casualties of the US end of the global financial crisis that began in 2007. The US Government, fearing the loss of confidence in the financial markets bailed out Fannie May and Freddie Mac, AIG, and some other financial institutions. But when it came to Lehman Brothers, then the fourth largest investment bank in the US, the Government refused to support and the bank filed for bankruptcy. Whether this was a sound decision is, probably, not the subject for this case – though that decision did precipitate a lot of subsequent problems.
Rather the case has been written to generate discussion about the domination of a major institution by one man – Richard S. Fuld Jr. The case claims that Lehman Brothers was dominated by Richard S. Fuld Jr. Was this desirable? What steps could have been taken to avoid it? Who could have initiated these steps? The discussion should raise questions: where was the board, particularly the independent outside directors? Did they understand the risks involved in the business model being pursued by the CEO? Were they acquiescent, pliable, too-trusting, or dominated by the man who was chairman of the board, chairman of the executive committee, and CEO? Where was the audit committee, indeed, where were the auditors? Where was the nomination committee, which should have been considering board structure and membership? Indeed, where was anyone capable of standing up to Fuld?
The second issue concerns the directors’ ages. Certainly many of them had relevant past experience, but many were old. True, some old people can contribute significantly to board discussions from the experience, knowledge and wisdom. But others deteriorate with age. The Lehman’s board lacked a balance.
The third question – is it possible for the research analysts of a financial institution to give independent investment advice to clients about a company when the financial institution has an interest in that company? – can generate an important discussion that corporate regulators still struggle to control
6.2 The Siemens AG case 1. What might Kleinfeld have done to avoid resigning? Given the apparent cultural clash between Kleinfeld’s apparent Anglo-Saxon approach to tough-minded management and the more socially-concerned German supervisory board perspective, there might have been little he could do, other than, perhaps, communicating more closely with the labour and financial members of the supervisory board.
In fact, subsequent rumours about the situation surfaced, which suggested there was more to the problem than a clash of expectations. Students might be able to unearth more information from press reports.
6.3 Tokyo Electric Power and the disaster at Fukushima Daiichi This case exemplifies how a company can report confidently that it has satisfied all the required corporate governance criteria and yet have serious governance flaws that led to a serious problem becoming a catastrophe. 1. Did the structure of the board contribute to the failures? The board was large, executive and lacking any sense of independent outside directors. This is typical in many well-established Japanese companies, as we will see in this chapter. Attempts by the Japanese Government and some international institutional investors, such as US CalPers, have largely failed to change attitudes in the boardroom, to where power should reside and who should be ‘promoted’ to the board.
2. How do you account for the discrepancies between the company’s alleged concern for corporate governance on its website and the catastrophic failure? This was a company that apparently did not accept the significance of professional corporate governance thinking, but went through the motions to satisfy the regulators and stock market investors.
3. What advice would you give to the chairman of TEPCO? Encourage the students to appreciate the personal and cultural aspects of the situation. “Replace the board with a majority of independent directors” is not a satisfactory answer. This is not the US or the UK. There is no tradition of independent directors, it runs contrary to many top executive beliefs. Moreover, where are these INEDs to come from? Pressure from institutional investors to resign might work: but there has to be a replacement. Alternatively, consulting advice, mentoring, attitude changing activities, experience on other boards could all be among the ideas suggested.
6.4 The TYCO case What should a board do to ensure that a CEO does not treat the company as a private fiefdom? Recognize that the CEO probably played a major part in the appointment of the other directors. Furthermore, resignation from the board may have little effect on the CEO’s behaviour. This is another corporate governance classic. The challenge to students is to go beyond normative generalisations about how boards should be constituted and how directors should behave. They need to realize that personalities really matter. As in many corporate governance sagas mentioned in the textbook, powerful people can exercise considerable charisma, influence and authority over others – particularly if they have chosen them themselves. What was required was a group of INEDs who would insist on knowing what was going on, and if dissatisfied stand up to the CEO/chairman. If appropriate, this case can be explored further from a legal aspect to see what offences Kozlowski committed.