Whenever a corporate crisis erupts (a phenomenon all so common these
days), questions quickly emerge regarding the role of governance (or failure
thereof) at the companies involved. On a similar note, questions are being
raised regarding the failure of board oversight, risk management systems and
internal controls at banks such as Barclays that failed to curb manipulation in
“fixing” the LIBOR rates. As this report
by Reuters notes:
days), questions quickly emerge regarding the role of governance (or failure
thereof) at the companies involved. On a similar note, questions are being
raised regarding the failure of board oversight, risk management systems and
internal controls at banks such as Barclays that failed to curb manipulation in
“fixing” the LIBOR rates. As this report
by Reuters notes:
The lack of specific internal controls, particularly in reviewing
email communications, was one of the failures cited by a Commodity Futures
Trading Commission regulatory order implementing its share of the Barclays
settlement. The CFTC said Barclays lacked daily supervision and periodic
reviews that could have detected the interest rate manipulation. The order also
accused the bank’s senior management of encouraging executives to submit lower
rates than the bank was actually paying.
email communications, was one of the failures cited by a Commodity Futures
Trading Commission regulatory order implementing its share of the Barclays
settlement. The CFTC said Barclays lacked daily supervision and periodic
reviews that could have detected the interest rate manipulation. The order also
accused the bank’s senior management of encouraging executives to submit lower
rates than the bank was actually paying.
From a corporate governance perspective, this is a manifestation of the
classic agency problem between managers and shareholders. While managers are
incentivized through executive compensation (a large part of which is variable
in nature), it is the shareholders who suffer in such episodes. Even in the Barclays
settlement where the company agreed to pay hundreds of millions of dollars in
fine, not only does that cause a dent in books of the company, but the
resultant fall in stock price also further erodes shareholder value.
classic agency problem between managers and shareholders. While managers are
incentivized through executive compensation (a large part of which is variable
in nature), it is the shareholders who suffer in such episodes. Even in the Barclays
settlement where the company agreed to pay hundreds of millions of dollars in
fine, not only does that cause a dent in books of the company, but the
resultant fall in stock price also further erodes shareholder value.
While some of the key managers were forced to vacate their positions
with the company, negotiations were underway on the severance packages to be
paid to them even though there were strong objections to payment of such
significant sums of money. However, it has been reported
that the former CEO of Barclays has forfeited his bonus but retained a year’s
salary.
with the company, negotiations were underway on the severance packages to be
paid to them even though there were strong objections to payment of such
significant sums of money. However, it has been reported
that the former CEO of Barclays has forfeited his bonus but retained a year’s
salary.
The repercussions of
the LIBOR saga could be several, for both Barclays as well as the other banks
involved. The immediate fallout could be lawsuits
against the banks and their directors. The long-term implications could be
reforms in governance norms that could become tighter, particularly with
reference to executive pay. The UK has already initiated steps to insist on a
binding shareholder vote for executive pay, as we have previously discussed,
and such moves could receive further impetus in the light of the new developments.
These are again classic instances of lawmaking in the wake of a crisis, which
some commentators warn
may be counterproductive and therefore ought to be avoided.
most of the international contracts which provide for interest rate link it to LIBOR. Now that LIBOR has been discredited (to an extent) it is interesting to see if a new index would become the next LIBOR.
@Badrinath. Thanks. In addition to the loss of credibility, the banks involved seem to be facing dire financial consequences as well (http://www.business-standard.com/india/news/scramble-for-damages-starts-over-libor-fixing-scandal-/480178/). As for a possible alternative index, it would depend on the manner in which the rate is determined by that system, and whether some of the deficiencies found in the LIBOR system can be purged.
With any new rate the problems will still exist unless the rate can be set independently of the banks.
The Economist has a discussion about the use of auction theory as an alternative to set the LIBOR. http://www.economist.com/node/21558573
The finding says, "The lack of specific internal controls, particularly in reviewing email communications, was one of the failures…………..", shows importance of reading emails carefully.