The LIBOR Crisis and Corporate Governance

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:
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.
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.
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.

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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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