Lehman Brothers Holding Inc. was one of the most significant financial institutions in the United States which involved financial crisis and bailout. Lehman institute provides massive financial services to many worldwide institutions like government, corporations, and wealthy individuals. The New York based financial institution has many offices across the world. Lehman Brothers come fourth among the world’s oldest and largest global financial services firms (Johnson & Mamun, 2012). However, this financial institute was declared bankrupt on September 15, 2008, with 613 billion dollars of debt. Lehman Brothers scandal was noted as the largest bankruptcy in the history of US. The collapse of Lehman Brothers Holdings Inc brought another era of financial challenges. The distressed followed with a period of volatility and a perfect economic storm that shook the worldwide stock exchanges with rapid downfall (Adu-Gyamfi, 2016).
Lehman brothers started with a humble origin from a small general store. The Henry Lehman was a German immigrant who founded the store in Alabama in 1944. His brothers Mayer and Emanuel founded the company. It grew from cotton trade and selling dry goods. The company expanded after Henry’s death and this scope encompassed brokerage service and commodity trading. The American economy’s boom also accelerated the progress of the company, though there were plenty of challenges that Lehman brothers had to face in upcoming decades. The company survived all the challenges including the great depression and railroad bankruptcies.
Lehman Brothers were indulged in many financial issues and worked with mortgage-backed securities in 2003-04. The company enabled capital markets and real estate involvement gave rise to the growth rate. In 2006, the firm securitized $146 billion in mortgage and received a 10% profit over last year. The firm earned record profits from 2005-07. In 2007, net revenue was $19.3 billion but later US housing market confronted cracks, and the company’s stocks faced a record decline. The main issue was raising home delinquencies that had an impact on the earning of the firm. Lehman acted as a major mortgage player in the market, even after the US market gained its momentum.
Causes of Lehman Brother’s failure
The analysts indicate that there are multiple factors involved behind the downfall of history’s biggest failure of US financial institutions. The Lehman Brothers suffered through numerous failures ultimately leading to the company’s failure. The greedy agencies, Fed actions, Wall Street traders as well as American Housing boom combined with deregulation are few factors that plunged the firm into fallout (Greenfield, 2010). Some analysts say that the crisis of credit and failure of Lehman Brothers are not solely responsible, the company also suffered through numerous credits taken from the market as well. However, corporate failure is another aspect that is also associated with the Lehman Brothers fall in the economy (Gardner, 2008).
Lehman Brothers faces a financial crisis due to the poor insight of the board members. Lehman Brothers is considered the most significant corporate failure, due to governance failure. Corporate or board failure is noted and criticized by many analysts. Many economic analysts indicated that Lehman Brothers collapsed due to taking excessive debts and lack of risk management by board members on their diversified products (Thomas H., 2009). The holistic approach determined that the board failed the company by not taking proper responsibilities and maintaining transparency in profits. Furthermore, the corporate also showed a lack of accountability and business ethics that further plugged the Lehman Brothers into crisis (Adu-Gyamfi, 2016).
One of the critical matters that developed in the Lehman crisis was the frail structure and activity of corporate administration associations within the organization. The organizational administration structures fizzled to protect the company from inordinate hazard taking, which in the long run lead to Lehman’s insolvency. These internal disappointments stayed all around covered up and were disregarded until the downturn (Chu, 2018). The key regions, where corporate administration fizzled, were the governing body, compensation plans, and corporate hazard “the executives”. Furthermore, outer control also failed to guide budgetary markets and foundations, CRAs, industry culture, and conceivable rivalry by rival organizations just as inspectors played a poor role.
The firm compounded with specific problems, which made them lose their confidence and investors on hedge funds and other banks. The financial analysts also narrate that the bankruptcy of Lehman Brothers without a proper rescue from the government put the economy in crisis and allowed the economic collapse of the market (Wiggins, Piontek, & Metrick, 2019). Although the stock market fell dramatically within the week due to this fallout, emergency intervention by the government allowed specific stability in the situation. The government tried to handle the gigantic dangerous scale of corporate failure but Lehman Brothers were already incorporate failure including lack of policies and responsibilities towards the company. The board needed to connect with the Risk Committee. CRO and CFO effectively discuss the potential strategies and activities to save the company. However, such steps are not pursued in Lehman Brothers, and the company failed tremendously (Sraders, 2018).
Lehman Board Structure
The Board of directors is the major structural feature and is noted as essential for the overall working of the company. In a typical board, there are independent directors, chairman, a number of different committees, outside the board, and diverse directors. The independent board holds specific responsibilities towards the company to keep board accountability transparent. The various board members significantly align their interests as per the best interest of the company (Thomas L. , 2008). The casual relationships between board members and the company are based on governance quality and control. Considering this aspect of Board members in Lehman Brothers, it is identified that the company board is diverse, but their oversight and ineffectively leads to financial downfall. The structure of Lehman Brothers consists of 10 directors, eight independence standards, different section directors, and executives from profit and non-profit affiliations (O’Mahony, 2018). Within Lehman Brothers company, all the board members and executives are paid healthily with specific equity portions and compensation. However, despite this, the Lehman Brothers board did not perform their responsibilities. The structural attributes and their professional backgrounds were notably absent in the financial service and business practice. It is reflected that the problem in board failure arises due to agency problems (Johnson &Mamun, 2012).
The agency problem mainly arises because agents do not act in the best interest of the shareholder. Agency problems state that when the principal, i.e., shareholders, work through others, the agency becomes subjective. The problem thus came into view that Lehman’s brother’s motivating agents to do not comply with the principal’s best interest, and the agent works on their investment. Scholars indicate that agents in any company are hired because they have the capacity to perform their tasks in any state, and the principal requires their assistance. However, when principals and agents are not on one page, commitment, and specific knowledge, as well as commitment, are not performed accordingly (Stevens, 2009). Furthermore, it is also identified that since agent possesses greater information within the company, they can be left the company in the dark for their interest and not perform their duties as promised in the contractual relationship.
Based on the conceptual analysis described above, it is reflected that Lehman Brothers faced these problems very increasingly. Lehman Brother board has a small piece of company ownership that guarantees the best interest of the company. The company effectively risked its own privacy and information at the disposal of board members. The company took great risks under the agency problems because executives acted on their interest and took performance-based compensation. The analysis of Lehman Brothers and board members indicated that the company itself established agency problems by making shareholders impossible to directly run the company (Thomas H., 2009). Shareholders hire the other party to reduce their problem, but that committee was not formally structured and monitored. Director’s role and management were oversight under the external audit setting, the compensation scheme for high members, and leading to lack of governance. When the corporate board was analyzed, it was also identified that ultimate board responsibilities and their business affairs led down the company. The board did not perform their responsibilities, loyalty and care were highly compromised. (Sraders, 2018).
Monitoring values in Lehman Brothers
According to the principle, it is noted that corporate governance needs to carry out certain strategic guidance in the company. The effective monitoring and accountability of management by the board members are also included in this perspective. Based on this principle, it is reflected that the Lehman Board lacked the ethical value of keeping responsibilities and accountabilities towards the company. Board members are required to implement the best interest of the company to keep ethical standards high. However, board members’ practice did not show any objective or corporate affairs that fulfilled their functions and kept the company effective on their risk policy strategy or business plan (O’Mahony, 2018). The company and Board Members effectively reduced their ethical values and principles to manage internal conflicts or oversee the company disclosure. It should be noted that once hired on the company board, each member has individual responsibility and ethical value to safeguard the rising agency problem in the company and held the lack of transparency in the company. CRA has an important role in tackling the financial crisis and securities within the company. The CRAs in Lehman Brothers failed to tackle any risk, balance out the power or misguidance inside the company. The major problems related to the financial inaccuracy and conflict of interests were not completely understood, and the overall corporate governance framework failed. The board and its independent members were noted as a classic examples of risks and crises. As one of the largest firms dealing with finance, the company did not have any risk management policies or evaluation strategies that could allow the board to perform its duties (Shell, 2018). The company faces trickery in terms of transparency and accountability. No member was observed to have proper dedication and accountability towards their duties. The greatly compromised internal information aggressive growth and pace of members were not properly monitored (Chu, 2018).
The analysis and critic review on Lehman Brother also indicate that performance-based compensation in the company was tight as per demands of long term shareholders and their value. The substantial opportunities in the company led to having a great impact on unethical performance and misleading the company greatly. Board individuals are expected to apply to the well-being of the organization by keeping the high moral benchmarks (Fitzpatrick & Thomas, 2016). Nonetheless, their training did not indicate any target practice or corporate undertakings that satisfied their capacities and stayed with the compelling on their hazard approach technique or marketable strategy (Shell, 2018). The organization and Board members have successfully diminished their moral qualities and standards to deal with interior clashes or administer the organization’s divulgence. The case study of Lehman Brothers is an active example where the corporate board took advantage of company resources and indulged in unethical practices (Authers& Fox, 2018).
The Lehman Brothers were engaged with various causes and expertly characterized their way towards the destruction. Lehman Brothers are considered as the greatest corporate disappointment principally because of the administration failure. The corporate and board disappointment is noted and censured by numerous investigators. These various monetary investigators showed that Lehman Brothers crumbled because of unreasonable obligations and the absence of hazard policy. The board members bombed the organization by not taking appropriate obligations and keeping up their benefits. Moreover, the corporate analysis additionally demonstrated a lack of responsibility and business morals that further connected the Lehman Brothers financial emergency. The basic qualities and their expert foundation were prominently missing in money-related assistance and business practice. The organization successfully took a chance with their own protection and data at the transfer of board individuals. The organization went out on a limb under the corporate issue since administrators followed up on their own interests and took advantage of their own corporate salary. As one of the biggest firms, the organization didn’t have any policy or strategy to keep the executive’s approaches or assessment systems while enable them to play out their obligations. The organization faced a lack of responsibility. The inside data was incredibly undermined, forceful development and pace of individuals were not appropriately held under the screen.
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