ABCP(Asset Based Commercial Paper) FIASCO

The news media are rampant with news and unwanted/sarcastic advice about the ABCP fiasco, for example, Ms. Deirdre Mcmurdy IN HER ARTICLE:

http://finance.sympatico.msn.ca/investing/deirdremcmurdy/article.aspx?cp-documentid=6671588A $34 billion made-in-Canada mess

Stated:

“There are plenty of lessons for investors and for the investment industry from a made-in-Canada credit crisis. No one ever wants to take responsibility when things go wrong. Blaming someone else for your bad decision is Human Nature 101. But in this case, that reality pretty much guarantees that the individual ABCP investors learn yet another painful lesson from this experience: Main Street and Bay Street almost never intersect.

Ms. Mcmurdy goes on to state that allowing these people

“so much clout - this is, after all, a $34-billion mess - in the hands of people who are angry, inexperienced and, in the grander scheme of things, relatively small players….They feel their losses entitle them to special treatment. …… For investors, the lessons are basic ones: risk is as closely tied to reward as fear is to greed; you should always question your financial advisor closely and ask for explanations until you really do understand the product and its provenance; you should make sure your advisor understands your risk threshold and investment horizon instead of assuming anything; regularly review your portfolio statements and follow-up on items you don't understand; if your gut tells you an advisor or an investment is wrong for you - listen to it; if you think you want a piece of the "real action" and can handle products that have traditionally been reserved for the pros - like ABCP - be prepared to get bruised".....

To actually compare a 34 billion dollar fiasco to the sale of a washing machine says it all about the Ms Mcmurdy’s disrespect for these small investors as she continues in her article to state,

“But then, that happens to consumers all the time. Is a mutual fund really that different from a washing machine? We all buy things we need, even if we're not sure how they actually work. We then trust that warranty or the vendor, will help us out if it ceases to work in short order.”

Ms Mcmurdy goes on to reprimand the small investors by insulting their intelligence stating that it was

“Somewhat surprisingly, the 1,800 small investors who own the paper have been given equal voice and vote with the bigger fish like pensions funds and corporations. And that gives them some rare leverage in terms of upsetting the whole wobbling apple cart”.

Has Ms Mcmurdy ever heard about 1 share, 1 vote?

Is this the advice and the opinion of a “columnist for the National Post, Canadian Business magazine MSN Money and co-anchor of MoneyWise”??

So what are some solutions to the ABCP Credit Squeeze?

We need to investigate who are these financial advisors Ms. Mcmurdy is referring?
What are their qualifications?
These advisors in many instances are only concerned with their bonuses, salaries and commissions. For example, In HSBC's statement of defence HSBC stated that Aastra would not have cared even if it knew that the ABCP it bought was backed by complicated derivatives such as credit default swaps and collateralized debt obligations. Aastra was interested only in the credit rating on the notes and the yield (http://www.financialpost.com/creditcrunch/Story.html?id=275411).
What a statement from a Canadian Bank?
This is a prime example of governance at its worse and it starts at the top.
Who are the directors?
What are the directors doing to help these investors?
How many boards do they sit on?
Do they have the time to know what is actually going on with investors’ paltry $ 34 billion, and do they care????
Do they have the knowledge of what an ABCP is?
Do they care?
How many actually reside in Canada?
What decision – making process did they go through to formulate these ABCPs?
Or do they know that ABCP’S exist at the companies on which they sit as board members. Please note some of these directors have JOB SECURITY FOR THE NEXT TWENTY YEARS(below)!!!!!!!!!!!!!!!
What is management doing?

If an asset-backed commercial paper (ABCP) program is composed of a bankruptcy-remote special purpose vehicle (SPV), or conduit, that issues commercial paper (CP) and uses the proceeds of such issuance primarily to obtain interests in various types of assets, either through asset purchase or secured lending transactions. And if an ABCP program includes key parties that perform various services for the conduit, credit enhancement that provides loss protection, and liquidity facilities that assist in the timely repayment of CP.

Then it is prudent that an ABCP seem to be fully protected or bonded, contrary to Ms Mcmurdy’s scornful remarks to investors.
(http://pages.stern.nyu.edu/~igiddy/ABS/fitchabcp.pdf).

In this instance some of the “key parties” include, HSBC Securities Canada; Canaccord Capital Corp.; Scotia Capital Inc., and Scotia Capitaux Inc., National Bank of Canada . who were supposed “to provide the liquidity needed in the first place to roll over the paper”.

Read my article for solutions:
Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors

Findings – “Value” for shareholder and stakeholder may not be mutually exclusive in some instances. MST may hold the key to giving the board a more useful, comprehensive framework of the firm's utility and purpose to society.
Practical implications – Organizations may be selected on their ethical performance by investors. Depending on whether ethical criteria are included in the definition of “firm's value”, decisions about which stakeholder theory to use become an issue of strategic importance to all organizations.
Originality/value – The paper illustrates how the board of directors as the governing body of the organisation may find that continuous assessment of the company's stakeholders is valuable in reducing risks.
http://www.emeraldinsight.com/Insight/viewContainer.do;jsessionid=AFFFA9B264B7619EFFD296FC452108FB?containerType=Issue&containerId=6012734 Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors
Dr. Rookmin Maharaj (pp. 115-127) Keywords: Boards of directors, Decision making, Market value, Stakeholder analysis

Please take a look at the board members for some of these companies (HSBC Securities Canada; Canaccord Capital Corp.; Scotia Capital Inc., and Scotia Capitaux Inc., National Bank of Canada).

The role of the board of directors is a complex and challenging task that is weighed down with conceptual, methodological and practical difficulties. Corporate governance has become progressively more important in the business world and has become inextricably linked to the process of decision-making within corporations.

The BOD being the top level of any corporation is therefore, the body whose responsibility it is to rigorously examine and advise management about high risk and the adverse affects of packaging and reselling debt such as these asset-backed commercial papers.
The institutions that packed and re-sold the debt as a savings product - principally Scotiabank and Canaccord Capital - should UPHOLD their responsibilities, HONOUR THE TRUST; ACT IN A FIDUCIARYCAPACITY TO INVESTORS, and HONOUR the reputation of THEIR RESPECTIVE firms.

Dr Maharaj’s Corporate Governance Decision-Making model indicates that tools (Skills Matrices, Evaluations and Interconnections) and variables (Knowledge, Groupthink, and Values) have positive relationships with Decision-making. These findings have important implications for board formulation and corporate governance in the future AND MAY REDUCE THE PROBABILITY OF fiascos like ABCP happening in the future.
Read my article:
http://www.palgrave-journals.com/ jdg/ journal/v5/n1 /abs /2050074a.html

US IN DEEP RECESSION!!!!

With the US IN DEEP RECESSION!!!! (http://www.financialpost.com/ story. html?id=326071)
Dr. Rookmin Maharaj’s Corporate Governance Model may be one of the solutions to bringing the US economy back on tract. Dr. Maharaj’s research work examines the characteristics (knowledge, groupthink, and values) and tools (interconnections, evaluations and skill matrices) can be used to select candidates to be nominated to the board to improve corporate governance Qualitative interviews with chairs, board members, CEOs in the leading energy, coal, pipeline, and chemical industries in Canada were conducted. The Quantitative phase included a survey questionnaire, which was sent to 1200 US and Canadian executives, data were collected and statistically analyzed. The findings indicated a temporal linkage between board characteristics, and tools, on decision-making, the Formal rules (SOX related rules) had no significant relationship with decision-making. Dr. Maharaj’s research is unique, as this is the first time that board characteristics have been operationalized and a model developed to test the effectiveness of directors serving on boards. “Boards and Management can no longer expected to be decorative, but are expected to exercise more influence and power and become more engaged with management, other board members and all stakeholders of the organization”(Maharaj, R., 2008).
Dr. Maharaj’s articles and blogs are a must read.
1) International Journal of Disclosure and Governance - Corporate Correspondence: ... I thank Dr James Gillies, Professor Emeritus of Policy, and founding ...www.palgrave-journals.com/jdg/journal/v5/n1/full/2050074a.html
2) http://corporategovernancesoxboards.blogspot.com/
3) Corporate Governance - Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors Rookmin Maharaj (pp. 115-127)
http://www.emeraldinsight.com/10.1108/14720700810863751
Purpose – This paper aims to critique moral stakeholder theory (MST) and to contrast it to earlier strategic stakeholder approach (SSA). Design/methodology/approach – Interview data were gathered from top executives at 12 companies in the energy sector in Canada and an in-depth literature review was conducted on MST and SSA. Findings – “Value” for shareholder and stakeholder may not be mutually exclusive in some instances. MST may hold the key to giving the board a more useful, comprehensive framework of the firm's utility and purpose to society. Practical implications – Organizations may be selected on their ethical performance by investors. Depending on whether ethical criteria are included in the definition of “firm's value”, decisions about which stakeholder theory to use become an issue of strategic importance to all organizations. Originality/value – The paper illustrates how the board of directors as the governing body of the organisation may find that continuous assessment of the company's stakeholders is valuable in reducing risks.
http://www.emeraldinsight.com/Insight/viewContainer.do;jsessionid=AFFFA9B264B7619EFFD296FC452108FB?containerType=Issue&containerId=6012734
Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors Rookmin Maharaj (pp. 115-127) Keywords: Boards of directors, Decision making, Market value, Stakeholder analysis
There are several references to the management/boards refusal to be fair to their stakeholders, for example,
1) “Senator Obama has made frequent reference to the spread between CEO compensation and average worker pay…..We have a [moral] deficit when CEOs are making more in ten minutes than some workers make in ten months."
2) According to David Rosenberg, “The U.S. economy has landed in recession, according to an economist at brokerage firm Merrill Lynch. David Rosenberg, Merrill Lynch's chief North American economist, said Friday’s employment report — which showed the U.S. jobless rate jumped to a two-year high of five per cent in December on weaker-than-expected job creation — "strongly suggests that an official recession has arrived." 'To say that the backdrop is "recession-like" is akin to an obstetrician telling a woman that she is "sort of pregnant."
References:
Dr. Rookmin Maharaj, 2008: http://www.emeraldinsight.com/10.1108/14720700810863751
http://www.cbc.ca/money/story/2008/01/08/merrilllynchrecession.html
http://www.americanthinker.com/2008/04/obama_ceo_pay_and_the_politics.html

PERSPECTIVES ON TEACHING AND TEACHER ISSUES Rookmin Maharaj

Sunday, January 13, 2008 - Dr. Rookmin Maharaj
PERSPECTIVES ON TEACHING AND TEACHER ISSUES

Teaching is a profession which is so enormous and so packed with significance that the issues related to it have a consistently high ranking with members of society in virtually every public opinion poll. These issues include multicultural education, teacher training and accreditation, burn-out, teaching under conditions particular to a worldwide certain country, student behavior and preparation, computers in the classroom, parental influence on the teaching process, the changing curriculum and its meaning for teaching, budgetary problems, and a multitude of similar issues. This new book presents issues current to the field from educators and researchers from around the globe.

Table of Contents: Chapter 4.-

Developing Critical Thinking Skills through the use of Computer-Mediated Conferencing; pp. 79-99

VILLAGE SWARAJ AND SUSTAINABLE DEVELOPMENT

Mahatma Gandhi.s Ideas as Seen through the Eyes of Pandit Jawaharlal Nehru Today

Please visit Dr. Rookmin Maharaj's article at:

http://www.advaitaashrama.org/pb_archive/2006/PB_2006_September.pdf

SUSTAINABILITY REPORTING IN THE UPSTREAM PETROLEUM INDUSTRY IN CANADA

OBJECTIVES :

There are four different reporting guidelines that could be used by Canadian upstream petroleum companies in the preparation of sustainability reports.
These four guidelines are:
• Enhanced Business Reporting Framework (EBR);

• Global Reporting Initiative Guidelines (GRI);

• Sustainability Reporting Guidelines by International Petroleum Industry Environmental
Conservation Association (IPIECA) and American Petroleum Institute (API); and

• Stewardship Benchmarking Guide produced by the Canadian Association of Petroleum Producers (CAPP).

The current research compares these guidelines and attempts to determine what obstacles they present, if any, for both preparers and users of sustainability reports. We present recommendations for streamlining the reporting process and making it easier to access sustainability information for use in decision making.Please visit the published report at:http://www.iseee.ca/iseee/files/iseee/ABEnergyFutures-09.pdf

CORPORATE GOVERNANCE, GROUPTHINK AND BULLIES IN THE BOARDROOM

EXECUTIVE SUMMARY:

This research study discusses corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations: 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:

1) This research 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 in order to restore shareholder confidence and to rebuild trust in board governance.

2) Similar values and groupthink can contribute positively to board members' decision making. There is, however, a high possibility for groupthink and values to become redundant, masking board members' knowledge.

3) Skills matrices that include questions related to values, knowledge and groupthink and three behavioural characteristics should be considered by boards to ensure the nomination of well-rounded members.Changes to board process, and board decision making, are seminal in preventing future Enron and WorldCom fiascos.

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?

The most important question a board can ask today, however, 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 who fill the needs of an organisation, in contrast to nominating 'friends' and continuing the tradition of the old boys club.

It should be noted that out of the 100 of the largest economies in the world, 57 of these are corporations and 49 are countries. Corporations are powerful entities in our society, operating in a manner similar to representative governments.

Like heads of government, at the top echelon of each corporation is the board of directors; their decisions have enormous ramifications for everyone. Although most citizens have a limited or a passive interest in corporate governance, we each depend on these corporations for jobs, salaries and as investors.

Governance of these gargantuan corporations, which wield considerable economic power in the world, concerns each and every citizen.

This study draws novel conclusions about the state of governance today, and presents practical solutions for corporations to consider when selecting board members. The detailed discussion about what happens in the boardroom demystifies board process and provides the bases for three critical objectives when selecting new board members or evaluating current board members performance:

1) ascertain and embellish the knowledge base of directors;

2) motivate directors to share and gather information to ensure personal values are congruent with organisational values; and

3) ensure clear and fluent transmission channels exist to reduce the potential of having groupthink on board.view

Dr.Rookmin Maharaj's full journal article at:http://www.palgrave-journals.com/jdg/journal/vaop/ncurrent/abs/2050074a.html

PRE- EMPTIVE FORENSIC CORPORATE GOVERNANCE - Dr. Rookmin Maharaj

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 SystemsInvestigates corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations: 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/ ALeqM5h4ncvzDOrX AnqyB9avT4zvg 1iJTQD8UG7MBG0Societe 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 couse 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. The model essentially pre screens nominees to the board, 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

February 7, 2008 6:50 AM

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 SystemsInvestigates corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations: 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 couse 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. The model essentially pre screens nominees to the board, 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...
February 7, 2008 6:50 AM

Dr. Rookmin Maharaj said...
Anonymous said.... With all the regulations in existence, there are still too many corporate scandals. How can this be avoided,if at all?

Dr. Maharaj said..... 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.