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Governance of Delinquent Corporate Governance in the Banking and Finance Sector CHUNG Chun Pong, Thomas 1 Corporate Governance in the Banking and Finance Sector A Dissertation submitted to the School of Legal Studies University of Wolverhampton in fulfilment of the requirements for the degree of Doctor of Philosophy PhD in Laws By CHUNG Chun Pong, Thomas LL.B (University of Wolverhampton) Postgraduate Certificate in International Corporate and Financial Law (University of Wolverhampton) Postgraduate Diploma in International Corporate and Financial Law (University of Wolverhampton) LL.M (University of Wolverhampton) Faculty of Law Student Number 0624244 (University of Wolverhampton) August 2017 2 Blank page Table of Contents 3 Abstract………………………………………………………………………………..11 Dedication……………………………………………………………………………..12 Thesis’ structure……………………………………………………………………….13 Chapter 1 Introduction…………………………………………………………………………..15 Research Issues ………………………………………………………………………15 - Research Approach……………………………………………………………….16 - Meaning and implications………………………………………………………...16 Defining the Company ………………………………………………………………20 - What is a Company……………………………………………………………….20 - Contractual Theory………………………………………………………………..21 - Concession and Communitarian Theory………………………………………….22 Corporate Governance……………………………………………………………….23 - The Main Theories………………………………………………………………...23 - Internal and External Corporate Governance……………………………………..24 - The Cadbury Report …………………………………………..24 - International Reports………………………………………………………………25 - Internal and External Corporate Governance at Banks……………………………26 The Financial Crisis……………………………………………………………………27 Corporate Objectives……..……………………………………………………………28 - Enlightened shareholder value……………………………………………………..34 - Promoting company success……………………………………………………….37 - Care and skill………………………………………………………………………38 - Loyalty and conflicts of interest…………………………………………………...39 - Ring fencing……………………………………………………………………….39 - Transactions with the company……………………………………………………42 4 - Use of corporate property, opportunity, or information ………………………..42 Remedies for breach of duty………………………………………………………….42 Link with financial regulations……………………………………………………….45 Governance of Delinquent Directors following Insolvency…………………………47 - Disqualification for fraudulent/wrongful trading………………………………….49 Difference between legal systems……………………………………………………...49 - United States Corporate Governance………………………………………………49 - Commonly accepted principles of corporate governance………………………….50 - The historical development of corporate powers…………………………………..51 - The business judgment rule………………………………………………………...52 - Corporate Power……………………………………………………………………52 - Conspiring in or tolerating legal violations…………………………………………53 - The development of corporate governance codes…………………………………..53 - UK Corporate Governance Code……………………………………………………54 - Changing the culture of financial regulation………………………………………..57 - Conclusion…………………………………………………………………………..59 Chapter 2 Introduction…………………………………………………………………………….60 Corporate Governance crisis in the Banking and Finance Sector…………………..60 WorldCom………………………………………………………………………………61 - Leading and management…………………………………………………………..61 - Entrenched Culture…………………………………………………………………62 - Organizational Structure……………………………………………………………62 Financial Scandals………………………………………………………………………64 - Enron Scandals…………………………………………………………………….. 64 - The manipulation of special purpose entities and Enron’s ultimate demise………...64 - Apportioning blame for Enron’s demise……………………………………………65 - The auditors’ responsibilities………………………………………………………..65 5 - The responsibility of the directors…………………………………………………..65 - The Enron Board……………………………………………………………………66 - Insider trading……………………………………………………………………….66 Parmalat…………………………………………………………………………………78 Barings Bank……………………………………………………………………………86 Allfirst Bank…………………………………………………………………………….89 BCCI…………………………………………………………………………………….91 Lehman Brothers……………………………………………………………………… 93 Northern Rock………………………………………………………………………….97 Lloyds and HBoS…………………………………………………… 106 The Royal Bank of Scotland…………………………………………………………...107 - Mis-sold products…………………………………………………………………..111 - Money laundering…………………………………….. …………………………...112 Barclays Bank…………………………………………………………………………113 The Co-operative Bank……………………………………………………………….115 - Timeline……………………………………………………………………………..116 - Review………………………………………………………………………………117 - The Myers Report…………………………………………………………………..117 Elements of Corporate Governance…………………………………………………...119 - Ineffective Board…………………………………………………………………...119 - Ineffective risk management and controls………………………………………….120 - Culture, value and ethics……………………………………………………………120 - Regulatory failures………………………………………………………………….121 - Bernie Madoff……………………………………………………………………...121 - Allen Stanford……………………………………………………………………...121 - Inspector General office failures…………………………………………………...122 Conclusion………………………………………………………………………………123 6 Chapter 3 Introduction…………………………………………………………………………...124 UK and US Regulatory Response……………………………………………………124 - The UK’s response: the Higgs Report……………………………………………124 - The Companies (Audit, Investigations and Community Enterprise) Act and the Companies Act 2006……………………………………………………………...124 - Sarbanes-Oxley Act……………………………………………………………….125 - Corporate malfeasance and corporate misfeasance……………………………….126 - Reasons for Passage of the Act and Its Main Components……………………….127 - Executive pay & corporate integrity………………………………………………131 - The UK governance framework for bank executive remuneration………………..131 - The remuneration committee of a quoted bank……………………………………133 - Corporate governance reforms……………………………………………………..146 - Dodd–Frank Wall Street Reform and Consumer Protection Act (US and UK regulatory responses to the 2007 global financial crisis)………………………………………147 - Financial crisis of 2007–2008………………………………………………………150 The Banking (Special Provisions) Act 2008…………………………………………...156 The Banking Act 2009…………………………………………………………………..158 - Critical Analysis of the Banking Acts………………………………………………160 Conclusion………………………………………………………………………………..162 Chapter 4 Introduction……………………………………………………………………………...164 Crises and regulation……………………………………………………………………164 - The relative importance of internal and external governance controls………………164 - The role of financial regulation……………………………………………………...168 - Self-regulation……………………………………………………………………….170 - Corporate governance regulation……………………………………………………171 - The Responsibilities of the Board………………………………………………….. 172 7 - Reform monetary policy…………………………………………………………… .173 - Duties of Directors…………………………………………………………………...173 - Regulatory Regime……………………………………………………………….. 174 - Incentive structures………………………………………………………………..176 - Legislative response and passage………………………………………………….177 U.S. Securities and Exchange Commission…………………………………………..182 - Regulatory action in the credit crunch……………………………………………..183 - Responses from the Senior Supervisors Group…………………………………… 184 The Basel Committee…………………………………………………………………..185 Critique on the Basel Reports…………………………………………………………185 - Independent Commission on Banking……………………………………………..190 - Increasing Board Effectiveness……………………………………………………191 - Shareholders and the stewardship code……………………………………………194 - Governance of risk…………………………………………………………………194 - Risk management, internal controls and governance………………………………196 - Transparency……………………………………………………………………… 197 - The UK Stewardship Code………………………………………………………...198 Next step in UK Corporate Governance Reform…………………………………….203 - Shareholder voting rights…………………………………………………………..205 - Shareholder engagement……………………………………………………………205 - The role of the remuneration committee……………………………………………206 Conclusion………………………………………………………………………………210 Chapter 5 Introduction…………………………………………………………………212 Recommendations for Corporate Governance............................................................212 - Balance between Risk, Growth and Profit………………………………………....212 - Remuneration and Culture…………………………………………………………213 8 - Board Effectiveness and Senior Management Experience………………………...214 - Senior Management Regime……………………………………………………….215 - Recommendations for External Corporate Governance…………………………...215 - Recovery and resolution…………………………………………………………..216 - Fair treatment of clients and customers……………………………………………217 - Ownership………………………………………………………………………...218 - Core corporate governance………………………………………………………..219 - Market competitiveness…………………………………………………………...220 - The impact of regulation and litigation……………………………………………220 Future Developments ……………………………………………………………..221 - Addressing the Weaknesses………………………………………………………..221 - State-ownership…………………………………………………………………….221 - Future research……………………………………………………………………. 221 - The future of corporate governance ………………………………………………. 222 Conclusions………………………………………………………………………….. 224 Bibliography 227 Books …………………………………………………………………. 227 Websites …………………………………………………………………….231 Table of Cases ……………………………………………………………………. 235 Table of Statutes …………………………………………………………………….238 Reports …………………………………………………………………….240 Newspapers – Magazines……………………………………………………………… 242 Speeched ……………………………………………………………………. 245 Journal articles …………………………………………………………………….246 Financial data provider…………………………………………………………………278 Other sources …………………………………………………………………….279 9 Abstract The focus of this thesis is an examination of certain weaknesses in the corporate governance at UK and US banks which constituted an underlying cause of the crisis. It considers the regulatory responses to these identified weaknesses and assesses to what extent these have led to improvements in corporate governance at banks. This research is based
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