The recent global financial crisis of 2009 had far reaching implications for numerous sectors of the economy of the United States. The crisis also affected other institutions in other countries. In the United States, one of the industries that took a severe beating from the 2009 financial crisis was the banking industry. The crisis resulted in banks finding themselves in hitherto uncharted waters. It was a terrain which many banks found difficult to navigate. Indeed, some of the banks were even on the brink of being wound up. While the financial crisis played a role in the challenges that faced these banks, poor corporate governance practices in some these banks also greatly contributed to their predicament. Using the Bank of America as a case study, this submission will highlight the extent to which corporate governance weakness contributed to the difficulties that faced Bank of America during the crisis.
Corporate governance refers to the way in which a corporation’s power is exercised in steering the resources and assets of the corporation so as to realize maximum value for the shareholders of the corporation as well as satisfying other stakeholders of the corporation. All these activities must be undertaken in the context of the corporate mission of the corporation. During the financial crisis, the Bank of America failed to properly exercise its power in the stewardship of its resources. Subsequently, it was not in a position to realize maximum value for its shareholders. Furthermore, some of its actions at the time did not satisfy other significant stakeholders of the bank. One such dissatisfied stakeholder was the government of the United States.
During the crisis, Bank of America, through its countrywide unit, fraudulently sold defective mortgages. In other words, the bank engaged in unethical practices so as to realize a profit. Indeed, in a recently determined case, the Bank of America together with another corporation were each found guilty of defrauding two mortgage companies during the crisis. Subsequently, the Bank will be subjected to penalties as provided for in the Financial Institutions Reform, Recovery and Enforcement Act.
The fact that the bank was engaged in fraudulent activities is a clear indication that there was weak corporate governance in the bank at the time. Among other things, good corporate governance seeks to promote corporations that are accountable and responsive, corporations that are managed with integrity and transparency and corporations that recognize and protect shareholder rights. In the case of Bank of America, the fact that the bank was found guilty of engaging in fraudulent activities is a pointer to the fact at the time it was not managed with integrity and transparency. Furthermore, by engaging in fraud, the corporation deviated from good corporate governance practice which requires full disclosure to the owners of the corporation, the shareholders. It can also be argued that a corporation which engages in fraud is hardly one which can be termed as accountable and responsive. All these are clear indications that there was weak corporate governance in the bank at the time.
One of the essential principles of good corporate governance is that there ought to be effective internal control procedures in a corporation. Where this principle is adhered to, the board provides direction in constantly reviewing these procedures so as to ensure they are not abused. Arguably, corporate governance weakness as suggested by the absence of strong internal procedures contributed to certain officials of the Bank of America engaging in the fraudulent activities which have now came back to haunt it.
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