Tag Archives: Goldman Sachs

Corporate Governance and Why it Matters

Everyone agrees that the economies around the world today are a lot stronger (pre-COVID-19 pandemic) when compared to the past several decades. The economies depend on multiple factors one one of them is greed. The question is how do keep this innate human behavior in check.

Many companies today has adopted Corporate Governance as the mechanism to ensure that greed is not being used to define a corporate culture. Corporate Governance has many definitions. If you ask two different companies, you will get two different answers. Essentially Corporate Governance refers to mechanisms that are in place to ensure that companies follow the rules of law and moral practices for the benefits of many. According to Wikipedia the mechanisms include several participants (internal and external) working together to ensure the success of the companies while continue to abide the laws and regulations.

The bigger question is why does Corporate Governance matter. Many entrepreneurs earlier in the past centuries became successful not because of luck only but some of them relied on tactics on the borderline of illegal. Some of them may include slavery, extortion or fraudulent activities. There were several major disruptions in the financial market the past several decades which raise the question of corporate responsibility of these companies. There were a lot of interests from the public and political interests in this area and began to hold these companies responsible. Hence, Corporate Governance was created.

The subject of Corporate Governance is considered new when compared to many advancements in the business world. A lot of companies continue to expand this area and they find that Corporate Governance involve changing the corporate cultures and changing the culture takes time. I do not intend to cover this subject in details as it includes many other fields. The question that I am trying to answer is why it matters in our modern society.

While many large companies continue to claim that they have strong Corporate Governance, sometimes greed will raise its heads and morality will take a back seat. The best example is how Goldman Sachs disregarded what is right or wrong and helped the Malaysian Government under then Prime Minister Najib Razak channeled $3.5 billion into his own account. Another example is how Apple Company continue to exploit cheap labor in China while reap big benefits from selling its smart devices.

A company exists to make money for its shareholders. Unfortunately, most shareholders want to be able to reap the benefits regardless of what market conditions. When the economy is bad, companies will need to find new ways to increase the income and it is not an easy task. Hence, some companies will cut corners or do things “under the desk” to ensure there are steady flow of cash. How does a company balance greed vs corporate responsibility?

The financial crisis of 2007-2008 was perhaps the biggest tipping point of balancing corporate greed vs corporate responsibility. Without going into details, the crisis was due to collapse of real estate market due to excessive lending by financial institutions to subprime borrowers. The end results were numerous debate by many interested parties (including regulators from around the world) to finally put a system in place to prevent this from happening again. The creation of Volcker Rules myriad of rules from OCC were some of the regulations in place to combat this. Dealing with all different rules and regulations require a big commitment and large resources from companies. Using banks as an example, there was a shift in managing these expectations with the creation of compliance departments and increased visibility of Internal Audit. Ultimately the board of directors are held responsible for the actions of the companies. Hence, the creation of Corporate Governance.

My career has always been in the control functions of multi-national banks. Since I started working professionally, I see significant changes in corporate culture of the banks I worked for. When I was at Citigroup, I observed a strong governance in all businesses. The creation of second line of defense to monitor the risks of each businesses and the increase responsibilities of Internal Audit helped Citigroup to become a stronger bank today. Currently I am working at HSBC and I have noticed the same. The corporate office place Corporate Governance on top of everything else and place a heightened emphasis in managing the risks of every line of business. HSBC was finally able to have the Anti-Money Laundering/Bank Secrecy Act Consent Orders terminated in July 2017 due to this efforts.

Corporate Governance provide long-term benefits for every company and it ensures viability of its business model. However, in order for this to work the tone from the top is extremely important. There should be constant communication from senior management to ensure every employees are aware of this. Working at HSBC I appreciate how the culture of the bank has changed since I joined. HSBC was put in the negative limelight for more than a decade due to the AML/BSA Consent Orders. The cost of reputation was higher than monetary fine by the US regulators.

Companies will continue to exist to make money for their shareholders. Companies are not run by machines but managed by actual persons. If there is a strong Corporate Governance and there is a sense of doing the right things for the society most companies will stand to reap the long term benefits.