Introduction:
Corporate governance is a practice that defines all the mechanisms, procedures, processes and relations by which firms are controlled and directed. Governance structures and principles highlight the allocation of responsibilities and rights among the different parties in the firm such as: boards of directors, managers, shareholders, auditors, creditors, regulators, and other stakeholders. The governance mechanisms encompass the monitoring of actions, policies, and corporate decisions, their subsidiaries, and the stakeholders.
The Citigroup mortgage crisis sets an example in substantiating the outcomes of poor corporate governance, where the top management fails in implementing oversight procedures that would have averted corruption and the fraudulent mortgages. Unethical practices and a poor sense of personal responsibility in accomplishing financial oversight and due diligence on the mortgage reports nearly cripples the Citigroup’s financial capacity (Waytz, 2014).
On the other hand, Adelphia Communications Corp suffers a heavy financial blow after its core management misappropriate about $ 3 billion through lavish living and overspending. Besides the company being a public investment, the John Riga’s family was exerting a powerful influence over all the decisions (Gross, 2002). With considerable abuse of office and loan securing procedures, the family defrauds the firm, with a devastating outcome that drives the firm to bankruptcy.
This report provides a concise analysis of the various drawbacks that contributes to the mortgage crisis in Citigroup, which translated to an underperforming stock and bankruptcy. Moreover, the author will highlight the unethical practices depicted in Adelphia Communications Corp, that eventually led to bankruptcy. The report will dwell on two key principles of corporate governance, and how each one of them was abused, the consequences, and how a remedial action would have averted the crisis.
Accountability:
It is apparent that either the highest oversight body or the board of directors in the two companied did not envisage accountability, which is a critical tool in corporate administration. At one point, Citigroup subscribes to the collateralized debt obligation (CDO), a structured asset-backed model across the corporate debt market (Waytz, 2014).
The system allows banks to utilize illiquid assets from investors at an interest by giving loans and mortgages. If the loans default and the earnings from the CDO are insufficient to pay all its investors, the lowest ‘junior’ investor ranking suffer significant losses first, while the last investor to lose is the senior most level, ‘the safest’ would have their assets settled. The Citigroup failed to account the prevalence of an economic downturn, which significantly contributed to the widespread mortgage defaults.
Comparatively, after Adelphia Communications Corp runs into insolvency, the firm takes no responsibility to compensate the public shareholders from their losses. In fact, the company changes its name, replaces its managers and relocates from Riga’s home to Colorado (Gross, 2002).
No litigations were opened against the auditors’ team, even with credible evidence that the team constantly presented falsified financial information to the Wall Street. This reveals a weak system that is devoid of effective financial accounting and auditing, which is a result of poor internal control by the top management. An independent oversight body ought to have been established in monitoring the financial consistencies between the internal auditors and the independent oversight faculty.
Transparency:
Transparency defines the timely disclosure of credible and pertinent information relating the firm’s activities, including financial information and decisions, social and environmental measures, ownership, and management structures. The poor sense of transparency across the Adelphia executive management yielded a bulky financial embezzlement by the top-ranking directors (Gross, 2002).
Despite holding about 11 percent of the investment share at stakes, it is unclear how the John Riga’s family secures an unreported loan of up to USD 3 billion, a substantial proportion of the Adelphia Communication Corp capital assets. Such a he loan required due authorization and consent from the entire board of directors, which never happened (Gross, 2002).
Further to this, the company was reported to have presented falsified earnings and information to the Wall Street Journal financial reporting. It is unmistakable that the company was seeking to exclude fraudulently liabilities from its financial statements to meet the Wall Street expectations, that the company still qualified for more credit and reinstate a healthy financial position.
As the financial situation aggravates, the board of directors swore to sue the auditors, against the problematic transactions that approved credit to the Riga’s without their consent and the due procedures. Again, the aspect of transparency was eliminated. In a corporate setting, the flow of facts and information, reports, findings, decisions or updates must be effective and open to discussion among the relevant parties. Reaching a critical financial decision required invitation to all the shareholders, seeking their consent and negotiation. I perceive that this setback betrayed mutual trust between the firm and the public shareholders and the government.
Comparatively, Citigroup had knowingly violated the Federal Housing Administration (FHA), through increased purchases of unqualified loans and certifications of unqualified mortgages. It is evident that the firm was amplifying its credit risk by entering into the above credit arrangement. More unqualified loans and uncertified mortgages would only translate into high credit defaults, with little or no recovery prospects (Waytz, 2014).
Despite the high number of defective mortgages rated at 80 percent, the Chief Risk Officer refutes any financial losses; however, an impending financial recession brings the firm into bankruptcy. This inconsistency points to a serious misinterpretation of critical facts appertaining to interest rates during a recession. The interest rates remain low and the credit-rating agencies like the CDO perform poorly, eventually sinking into insolvency (Waytz, 2014).
On another level, lack of accountability is manifested when Richard Bowen, the then Senior Vice President, is discharged from duties after he exposes the risks and potential losses the firm was confronting. Sacking him for doing his obligations, however, at a much later stage reveals a deep sense of conflicts between the board of directors. Low level of accountability, poor internal control, and certifying fraudulent and defective mortgages gave way to the massive losses.
Conclusion:
The above case-studies demonstrates how the management of an organization calls for judicial actions under a thorough coordinated business environment. It is evident that monitoring of the firm’s activities ought to be implemented at a deeper scope, with a sense of responsibility and committed to the success of the firm and continuity. The firm must also strive towards protecting the rights of the shareholders, and esteem all the shareholders on an equal basis. The board of directors must therefore seek cooperation with all the parties, and espouse legislation that safeguards financial stability across the company. Consequently, reasonable corporate governance practices, especially accountability and transparency are core prerequisites to the thriving of robust firms. Moreover, a strong work ethics ensures mutual harmony between the stakeholders, while sustaining the growth of the organization.
Works cited:
Gross, Daniel. Stockholder Rights and Corporate Governance: Out of control at Adelphia. New Haven: Yale University Press, 2002. print.
Waytz, Adam. How Citibank’s Culture Allowed Corruption to Thrive: Leaders can learn from a whistleblower’s case against CitiMortgage. Kellog School of Management: Northwestern University. 2014, Print.
