Corporate Governance and Globalization

This report explores the relationship between corporate governance and globalization, focusing on the impact of snake oil salesmen in corporate collapse. It discusses the regulatory framework and theories related to corporate governance. Case studies of Lehman Brothers and Washington Mutual are included.

CORPORATE
GOVERNANCE AND
GLOBALIZATION

Table Of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................4
Introduction of research companies.............................................................................................4
List of the research companies.....................................................................................................5
Financial crisis.............................................................................................................................5
UK as well as US response..........................................................................................................6
Impact of financial crisis..............................................................................................................6
Regulatory framework.................................................................................................................7
CONCLUSION................................................................................................................................9
Discuss how the integrity affecting the corporation....................................................................9
Identify main issues of the current debate on corporate governance and the necessity of the
development of new, more effective, corporate governance solutions........................................9
Recommendations, lesson learnt from the case study...............................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Snake oil salesmen is basically the individual who intentionally sells the fraudulent goods
to people or who himself is fraud or quack. When the directors of the organizations are not
directly involved in the financial matters then snakes oil salesmen gets the chance to cheat other
and organization and their main duty is to fool the people by selling defective goods. Snake
charmers are predominately the people who sell the fraudulent and defective goods and thus
misleads organization as well as market. Corporate governance is predominately the series as
well as system of practices, rules as well as processes through which organization are mainly
directed and controlled. The major responsibility as well as duty of corporate governance is to set
the effective code of practices for promoting ethical working in organization and to clarify the
rights as well as responsibility of management within an organization. In short, corporate
governance has been established to put a stop on all the fraudulent activities and to provide a
framework to all the organization for corporate disclosure. The main importance of corporate
governance is that it ensures the transparency as well as reliability for balancing economic
development. Corporate governance increases accountability of the company as well as helps to
avoid massive disasters prior of their occurring. Besides this, it helps the organizations to
perform their functions ethically and hence work towards the interest of stakeholders through
maintaining the full transparency. Corporate governance plays an important role within
organization and thus sustain the competitive advantage. The effective corporate governance
mainly ensures the corporate success as well as lower down capital cost. Corporate governance is
required for making organizations aware about the various standards as well as and to increase
their compliance to various code of practices in order to avoid any fraud or misleading. The code
of corporate governance generally sets out the various standards of good practices in terms of
development, remuneration, relationship with shareholders, accountability etc. Major principles
of this code are leadership, effectiveness, accountability and remuneration. These four principles
generally forms the pillar of each and every organization and makes the organizations
responsible towards their stakeholders. The main aim of this report is to study the financial crisis
as well as need of corporate governance within organization to maintain the economic balance as
well as to prevent collapse of the firms.
This report gives an overview of actors as well as players influencing corporate decisions,
duty of the directors, impact of snake oil salesmen in collapse of banking industry, weakness of

corporation structure, financial crisis in Lehman brothers, Washington, Mutual, Northern Rock,
Bear Sterns & Royal bank of Scotland, theory of the corporate scandals, theories to the political
theories, transaction cost theory, unjust enrichment theory, self-enrichment theory and agency
theory.
MAIN BODY
Introduction of research companies
Identify the actors name and the actions which influence the corporate decision that collapse
the corporations. Brief history of how the actors come into the picture.
A snake oil salesman is someone who knowingly sells fraudulent goods or who is himself
or herself a fraud, quack, charlatan, and the like. There are various people who are engaged in
doing fraudulent activities which has led to the downfall in corporations. Most of these
individuals are engaged in doing frauds in their financial statements. These frauds have increased
the responsibility of auditors which can keep a check on all the ill effects which is going in and
on company. Like for example the Collapse of Lehman Brothers, the key actors who were
engaged in this type of fall includes government. Everyone blamed US government decisions
which lets Lehman failed (Yermack, 2017). Its collapse also served as the catalyst for the
purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on
Sept. 15. In this Collapse company went bankrupt and solemnly blamed the inefficiency of
auditors in managing frauds which were going in and on. It has also been linked to great
recession financial crisis which happened in the year 2007-2008. Another scam which was being
noticed in the year 2008 was of Washington Mutual, it was largest saving bank holding company
in the United States, it went bankrupt in year 2008. In this collapse one of the most significant
actor was Kerry Killinger, after the crisis he stepped down as chief executive officer of company.
Key actors who were insufficient and weak was mainly board of directors.
Duty of directors – related with snake charmers
There are various duties and responsibilities of directors to stop snake charmers from
doing fraudulent activities. Like in the case of Lehman, it was director’s duty to make sure that
they are engaged in governing firm to their best interest and to shareholders. There personal
motive must not come in between governing organization. Directors needs to be loyal and take
care of all activities which are going in company. They can also hire auditor which can keep a
check upon snake charmers of firm and can help them in saving organization from collapsing.

The influence of snake oil salesmen and snake charmers & the relationship that
relates to the collapse corporation in banking industry
Problem which was faced in case of Lehman was that there was unsymmetrical flow of
information between principle and agents. In this case, agent was engaged in carrying out all the
task and principle was not involved in making any type of decision because of lack of time. So
special emphasis needs to be laid by director on this.
The weakness of the corporation structure – model of corporate governance
It has been analysed that Lehman Brother had weak corporate governance structure. They were
inefficient in laying proper code of conduct in corporate governance (Aguilera, Judge and
Terjesen, 2018). Like for example board of directors in company was highly ineffective. They
also do not have proper corporate risk management system, remuneration scheme and
nomination committee.
List of the research companies
Lehman Brothers: This Collapse was because of weak board of directors, also they do
not have structured corporate governance. Company was also facing high amount of technical
issues. Directors were not directly involved in matters of firm.
Washington Mutual (2008, US): Main cause of failure was WaMu’s ineffective
corporate governance strategy, he was deliberately engaged in making use of high-risk lending
strategy coupled with liberal underwriting standards and inadequate risk controls.
Bear Sterns (2008, US): This company do not have adequate corporate governance
strategy, they do not effective fraudulent financial reporting and also they were engaged in
taking high amount of risk related to financial matters. It led to financial crisis in United states in
year 2008.
Financial crisis
The financial crisis began in the year 2007 in Europe along with the collapse of Iceland's
banking system. This crisis mainly peaked between the period of 2010 as well as 2012. Debt
crisis majorly began in year 2008 and resulted in the great recession of the Europe. This
recession distorted the fiscal policy of Europe and thus affected the economy to a great extent
(Aguilera, Judge and Terjesen, 2018).
This financial crisis took place in US in the year 2007 and was the starting main point of
the financial landslides. In this year, the economy of US experienced the mild as well as short-

lived recession and thus gave rise to high terrorist attacks. This global financial crisis was led to
the depreciation within subprime mortgage within United States and thus resulted in collapse of
wide range of investment banks mainly Lehman Brother in the year 2008. This crisis was
followed by the economic downturn and thus volatilized the US market. The excessive and
heavily risk taking by the investment banks like Lehman Brothers resulted in the huge depression
(Schmidt and Fahlenbrach, 2017).
UK as well as US response
The response for the collapse of banking and financial sector was highly imperative and
given a great importance in both US and UK. In the year of 2010, US government enacted the
consumer protection act in order to promote financial stability and continuity. Basel III capital as
well as the laws of corporate governance were established in US for reducing the crisis and for
increasing the overall economy of US. Within the framework of the corporate governance, US
government mainly reduced the interest rates to around zero and started bailing out few of the
struggling banking and financial institutions (Cuomo, Mallin and Zattoni, 2016).
In order to prevent the financial crisis, European commission adopted the large number of
regulations for enhancing shareholder rights through imposing the strict corporate governance in
EU. Besides this corporate governance reform, the UK government responded to this financial
crisis by implementing the regulatory reform where the main aim was to to strengthen the
various regulatory authorities for securities, banking as well as insurance sectors. In the year
2010, UK government along with European commission established the plan for imposing tax
upon banks. This tax would be utilized for establishing the resolution fund to provide help to
insolvent banking and other financial institutions (Yermack, 2017).
Impact of financial crisis
This financial crisis have eventually exerted the great and a profound effect upon
corporate government debate and thus impacted them to a great extent in both US and UK. Stock
market of US drastically peaked in the year 2007 but entered a great and pronounced decline in
the year 2008. In the year 2009, Dow Jones reached trough nearly 6600. In UK, this financial
crisis impacted financial institutions to great level. Most of the European banks generally lost
around $1 trillion upon toxic assets as well as from the bad loans in the period 2007 to 2009. The
major victim of this financial crisis was the Northern Rock which was the medium-sized bank
(Jacoby, 2018).

Regulatory framework
Loophole refers a mistake made in an agreement and law that gives a chance to a party to
do something wrong and illegal by which other party has to suffer. In the context of snake
charmers and snake oil salesmen, it can be said that they are the one who knowingly sells
fraudulent products and services and become the reason of bankruptcy of organizations (Anh and
Thao, 2019). There are some examples of organization who collapsed only because of snake oil
salesmen and snake charmers. One of the main example of it is Northern Rock, UK.
Northern Rock was a British bank which was situated at Regent centre in Newcastle upon
Tyne. It had 75 branches and sold to Virgin money. It was taken into public ownership in 2008.
Due to financial crisis in 2007-2008, this bank got restricted in the supply of credit. It is stated
that in 2008, this bank was in ruins. The fuel which it had used to grow turned into a toxic. The
main fuel or customers deposits, it borrowed in the international money market. Approximate
2500 jobs lost due to nationalization of the bank and snake oil salesman (Brown, Trautmann and
Vlahu, 2017). Due to this reason, many people lost their life savings but the actual reason behind
this collapse is still not revealed.
Other example is Royal Bank of Scotland Group plc which is a partly state-owned
British banking and insurance holding company. It has not made any profit since government
rescue in the year of 2007. In the year of 2007, it becomes the part of a consortium which takes
over the Dutch bank.
Related theories: There are several theories related to snake oil salesmen and snake charmers
which are still around.
Agency cost theory
According to the agency cost theory, internal company expenses of any type of
organization comes from the actions of an agent which act on a behalf of a principal. This cost
mainly arises in an organization sue to snake oil salesmen and those people who sell fraudulent
products of an organization knowingly. This act become the reason of dissatisfaction among
customers, conflicts of interest between management and shareholders. In these regards to, it can
be said that shareholders of an organization want management to perform activities in a way
which can increase value of their shareholders. But on the flip side, administration and
management look the company to grow in other ways which may conceivably run counter to the

shareholders' bets interest. Some illegal and fraudulent action decrease relation between
stakeholders by creating dissatisfaction.
Political theories:
There are several political theories related to this snake oil salesmen act. It refers a study
of the main concept which people describe and evaluate political events. It is a social thought by
a group of a geopolitical mass. As per the lobbying theory, people attempt or perform act to
influence actions and official decision. This influence has negative impact on the performance of
an organization in a negative manner as like snake oil salesmen. Ethics and dignity involved in
this theory is also critic or complex. It can also be said that people as per this theory inordinate
socio-economic power corrupt laws with the main aim to serve their own interest. So, it can be
said that theory of political is a form of advocacy whose intention is to influence decisions made
by the government by lobby groups and create problems for companies (Admati, 2017).
Crony capitalism is other political theory in which businesses expand not as a outcome of
risk but as a return on money. By making a use of state power rather using competition and own
capacity, they manage permits and tax breaks. In this type, economic and political elite work
together with the main aim of making money. But they commit some mistakes and perform
illegal acts and acts as like a snake oil salesmen which create several problems for their company
and become the reason of collapse and bankruptcy. It can also be said that corrupt government in
this type of theory favour one set of business owners who support government in their illegal
actions and tie to the government over others.
Transaction cost theories
It is one of the other theory which shows consequences of action done by snake oil
salesmen. It refers an alternative mode of organizing transactions which reduces transaction cost.
It mainly refers cost which are being provided for some types of goods and services via the
market rather having it provided from within an organization. Any organization want to reduce
their operational and transaction cost and for this purpose they perform illegal acts which can
create some problems for them. For earning money and reducing transactional cost, companies
act as like a snake oil salesmen and sell fraudulent products to other parties and in return they
seek higher amount. This act help them in earning money but gradually they become bankrupt
and face several problems (Anginer and et.al., 2018). A problem of social cost is subsidiary to

transaction cost approach. Due to absence of transaction cost, company feel effective results
hold.
Theories of self enrichment
It refers a process of developing an individual's intellectual power. Self enrichment
means performing an act of enriching own self financially. This theory of self enrichment mainly
focuses on job transfer of employees. In this context, it is stated that many companies transfer
their employees with increased pay but there are several employees who are being transferred at
lower pay or without increment. When employers do not provide higher salary to employees at
the time of job shift then there is no preference shown for the more enriched job. Every person
want to be motivated and seek effective salary but when they do not receive and feel motivated
then they perform illegal acts knowingly with the main aim of earning money and make
themselves beneficial. This act creates several problems for them (Dignam and Galanis, 2016).
CONCLUSION
Discuss how the integrity affecting the corporation
Integrity has affected the working of Lehman Brothers, they have an ineffective code of
conduct and proper control over the activities which were going in organization. As Board of
directors were not involved in subject matter, it gave snake charmers the opportunity to take
advantage which has made company go bankrupt and collapsed. It also led to financial crisis in
United States. Lehman Brothers failed to analyse the severe recession and eventually went
bankrupt. Collapse of company has also led severe impact on global economy, it led to negative
GDP growth and can also lead to another recession.
Identify main issues of the current debate on corporate governance and the necessity of the
development of new, more effective, corporate governance solutions
It was analysed from various case study like of Lehman Brothers that they have
ineffective corporate governance and weak board of directors. So in order to avoid these type of
problem company must be engaged in implementing and developing new structure related to
corporate governance. Like Lehman Brothers were not directly involved in matters of firm, so
snake charmers took advantage of it. They must make sure that all activities and business are
conducted in their look out. Also company needs to be engaged in doing market analysis and
conditions, so they have an idea about recession condition. Lehman Brothers case has led to
financial crisis in United States, in year 2008. In order to avoid this, they must design proper

corporate risk management strategies. Also risk free financial lending’s needs to be avoided by
company, in order to grow.
Recommendations, lesson learnt from the case study
It has been recommended by learning from various case studies like in case of Lehman
Brothers, that company needs to have proper code of conduct related to corporate governance.
They must not fully rely on other agents as it will give opportunity to them to took advantages.
Also firm needs to make sure that they have a proper corporate risk management strategy. This
will help them from threats like collapse, going bankrupt and company going insolvent.

REFERENCES
Books and Journals
Admati, A.R., 2017. A skeptical view of financialized corporate governance. Journal of
Economic Perspectives. 31(3). pp.131-50.
Aguilera, R.V., Judge, W.Q. and Terjesen, S.A., 2018. Corporate governance deviance.
Academy of Management Review.43(1). pp.87-109.
Anginer, D. and et.al., 2018. Corporate governance of banks and financial stability. Journal of
Financial Economics. 130(2). pp.327-346.
Anh, N.T. and Thao, T.T.P., 2019. The Impact of Capital Structure on Firm Performance of
Vietnamese Non-financial Listed Companies Based on Agency Cost Theory. VNU
Journal of Science: Economics and Business. 35(2).
Brown, M., Trautmann, S.T. and Vlahu, R., 2017. Understanding bank-run contagion.
Management Science. 63(7). pp.2272-2282.
Cuomo, F., Mallin, C. and Zattoni, A., 2016. Corporate governance codes: A review and
research agenda. Corporate governance: an international review.24(3). pp.222-241.
Dignam, A. and Galanis, M., 2016. The globalization of corporate governance. Routledge.
Hong, B., Li, Z. and Minor, D., 2016. Corporate governance and executive compensation for
corporate social responsibility. Journal of Business Ethics. 136(1), pp.199-213.
Hussain, N., Rigoni, U. and Orij, R.P., 2018. Corporate governance and sustainability
performance: Analysis of triple bottom line performance. Journal of Business
Ethics.149(2).pp.411-432.
Jacoby, S.M., 2018. The embedded corporation: Corporate governance and employment
relations in Japan and the United States. Princeton University Press.
Schmidt, C. and Fahlenbrach, R., 2017. Do exogenous changes in passive institutional ownership
affect corporate governance and firm value?. Journal of Financial Economics. 124(2).
pp.285-
Watt, D. and Schwartz, B., 2018. Governance in view: Done right, corporate governance audits
can generate great value for organizations. Internal Auditor.75(1). pp.48-53.
Yermack, D., 2017. Corporate governance and blockchains. Review of Finance. 21(1). pp.7-31.

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