Governance Risk and Compliance: The value driver for good Corporate Governance
Bala V Balachandran & K. Shyam Sundar
The Barings fiasco of the 1990s is one of the shining examples of failure of control s and processes at the operational level and inadequate corporate governance from a strategic perspective, although “governance” was not a buzzword back then. Mr. Nick Leeson had a history of adopting fraudulent practices, but Barings transferred him to Singapore and later promoted him, too. A temporary solution to cool down the heat brought the share value of the venerable Barings crashing to almost zero later on. The more than 50-year-old Glass–Steagal l Act was starting to get diluted in 1986 by allowing a small (5 percent) revenue from investment banking business, and it was repealed in 1999. Pink Floyd in 1979 would not have imagined that the financial wizards would borrow their cries of “Break down the wall!” for investment and commercial banking. The Street was being milked. The teachers (regulators) left them (the Whiz Kids) alone by gradually lowering the regulator y rigor. Enron and WorldCom were organizations in which the culture of corrupt ion was institutionalized. Auditors and accountants shredded evidence, since they were protected anyway under the LLP Constitution. In June 2002, there was a conference on credible financial disclosures organized by Kellogg School of Management; Mr. Paul Volcker delivered the opening address. One of the attendees remarked, “Why worry about off balance-sheet items?” when balance sheet items themselves were unreliable. Across the pond, Basel and other guidelines were being framed but implemented more in form than in spirit. Banks that on paper had more than the prescribed capital adequacy ratios went bust. The underlying assets were ignored, and derivatives that were originally designed to reduce risk became the instruments for generating wealth and value for the top players who “made the market.” Of f -balance- sheet financing was considered acceptable and of ten times smart and savvy. Creativity and innovation in statistical modeling, combined with exotic products, generated a heady mix and took the already fragile economic environment to unfathomable heights. Excessive greed, impunity, and arrogance born out of unethical revenue accumulation and compensation models blinded reason and rationale. Fund based business was out of fashion and less attractive than fee-based revenue and profit models. The 2008 crisis, which was considered a major speed breaker, was followed by several events involving whales too. We, the people, seem to have accepted that the LIBOR (mother rate) can be messed with. Global banks have agreed to pay heavy penalties to American, British, and other regulators. Were these isolated events, or can we try to make a pattern out of them? © Journal of Cost Management
BALA V. BALACHANDRAN is the J.L. Kellogg Distinguished Professor Emeritus in Accounting and Information Management and Decision Sciences of Northwestern University and also the founder, chairman, and dean of Great Lakes Institute of Management, Chennai, India.
K. SHYAM SUNDAR is a qualified chartered and cost accountant with a GRC certificate from PRMIA. He is a senior member of the risk practice, Tata Consultancy Services Ltd.
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