June 2013 - Doing Well While Acting Good: Benefits of Good Governance, Insights from MENA

An increasing attention has been given to corporate governance in the past decade as scandals have exposed grave governance issues within companies. These concerns were exacerbated during the 2008 crisis which exposed weak controls at many firms. While there were multiple causes to the scandals, the lack of efficient corporate governance was pointed out as a key issue, Enron and WorldCom being perfect examples (ultimately leading to the adoption of the Sarbanes-Oxley Act of 2002 in the United States, a sweeping corporate governance regulation). Citi’s ineffective handling of their mortgage-related holdings during the 2008 crisis is yet another example of lack of efficient corporate governance. As described in a New York Times article1, Citi’s CEO discovered in 2007 that his bank owned about $43 billion in mortgage-related assets and when he asked the head of trading if everything was ok, he took his positive answer as a definitive one. However, "normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses. But many Citigroup insiders say the bank’s risk managers never investigated deeply enough." Citi lost more than $65 billion in the financial crisis, more than half of that stemming from mortgage-related securities. A report by the "Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup." Had Citi had efficient governance systems and processes, they would have probably seen the red flags and potentially cut their losses. 

 

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Doing Well While Acting Good - Benefits of Good Governance, Insights from MENA