Lehman Brothers Collapse: A Corporate Governance Analysis & Lessons

This report examines the corporate governance failures that led to the Lehman Brothers collapse, emphasizing the urgent need for improved supervision of solvency and liquidity. Key lessons include the importance of accurate stock valuation, diversification, risk management, and ethical conduct. The report highlights the role of flawed risk management, poor ethics, and inadequate implementation of strategies in Lehman's downfall. Recommendations include strengthening board qualifications, enhancing risk management practices, and implementing robust stress testing. The analysis underscores the significance of ethical decision-making, transparent financial reporting, and effective communication channels within financial institutions to prevent similar crises. Desklib provides access to this and other solved assignments for students.

Corporate Governance

Table of Contents
Corporate governance lessons...............................................................................................................3
Recommendations.................................................................................................................................3
Conclusion.............................................................................................................................................4
References.............................................................................................................................................5

Corporate governance lessons
Lehman’s downfall shows that there is an urgent need for supervision regarding solvency,
liquidity situation and success. The lessons that can be learned from Lehman brothers
failure are the price paid for stocks really matters, Never to bank from one group of stocks,
There is no stable stock, Not to take risks with small savings, To trust the team members with
their expertise and to focus on the bigger questions, to respect and built good relationship
with team members. The collapse of Lehman Brothers led to a systematic crisis. Twenty four
countries fell victim to this crisis. The international ripple of Lehman brother crisis
devastated economies like Latvia, Hungary and Lithuania. Even Pakistan sought a bailout
from International Monetary Fund after the crisis. Public debts have increased and the
government has also felt the pinch1. Lehman failed to disclose various transactions due to the
negligence of accountants in financial statements. That led to the demand of re-examining the
generally accepted accounting standards. The whistle blower is one who has knowledge
about the illegal things happening inside the company. The vice president of Lehman
brothers, Matthew lee has disclosed to the auditor Ernst and young that efforts were being
made to mask company’s risk. The new generation of traders at Lehman brothers were
frustrated and expressed a desire to become an independent firm again. This was an example
of nepotism.
Recommendations
The financial crisis is one of the main attributes for the failure of corporate governance
arrangement. The corporate governance procedures had led to the failure of the risk
management system. Lehman’s failure is associated with ethics and decision making process.
Basic corporate information were not available that would reflect the tentacles the
organisation had. The international federation of accounts has laid five essential doctrines
relating to professional ethics they are integrity, due care, objectivity, professional behaviour
and confidentiality. Lehman brothers misrepresented the audit and proved bad ethics. The
Lehman brothers collapsed due to flawed risk management and bad ethics. The board has
devised strategies but there are no adequate means to implement them. Remuneration system
in a number of cases is not related to strategy or risk management of the company2. Qualified
board and robust risk management are very important. There should not be any potential
1 Kjaer, Governance, 85.
2 Krivogorsky, Law, Corporate Governance, and Accounting, 67.

weakness in board composition. The governance aspects in large nonfinancial companies
should not be neglected. The OECD principles need to be reviewed. The shortcomings in risk
management practice should be removed. Primarily Lehman focused on acquiring five
leading firms that deal in subprime lending. That was a risky project and even after earning
huge profit the firm crashed down due to high subprime loan default. The company should
pay attention to the growth and liquidity of balance sheets. The company should have active
control over the consolidated balance sheets, capitals, and liquidity. The company must
respect the clear warning signs of liquidity risk. Stress testing and scenario analysis is an
important risk management tool that can be applied by companies for reviewing strategies3.
Stress testing should be an important part of the management culture between senior
management. A clear corporate governance issue states that risk information should be
transmitted through effective channels. Remuneration system plays a very important role in
influencing financial institutions. For example, the organizations implements financial risk
management strategies during the financial crisis by managing their financial health in an
appropriate manner.
Conclusion
The business management and administration of Lehman brothers were one of the most
complex business management in the entire history. Handling of the crisis was very important
for the integrity of the financial institution. The situation was technically very complex. In
order to manage this crisis a sound knowledge of the law, accounting and financial markets
are very important. There should be sound decision-making procedures. The decision making
needs technical expertise and deep knowledge of the facts. During the time of crisis, the
mutual trust and faith amongst the members and team leaders should be reposed. On
maintaining all the above-mentioned conditions only a crisis on a big financial institution can
be overcome.
3 Mallin, Corporate Governance, 74.

References
Kjaer, Anne Mette. Governance. 3rd ed. Cambridge: Polity Press, 2010.
Krivogorsky, Victoria. Law, Corporate Governance, And Accounting. 4th ed. New York:
Routledge, 2011.
Mallin, Chris A. Corporate Governance. 3rd ed. Oxford: Oxford University Press, 2013.