CORPORATE GOVERNANCE CASE STUDIES FINANCIAL SERVICES EDITION Mak Yuen Teen and Richard Tan CPAAOM3499_297x210_Corporate Governance Report Covers_FA.indd 2 22/5/20 8:41 am CORPORATE GOVERNANCE CASE STUDIES Financial Services Edition Mak Yuen Teen and Richard Tan Editors First published July 2020 Copyright ©2020 Mak Yuen Teen and CPA Australia All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, except for inclusion of brief quotations in a review. The views expressed in this publication are those of the authors and do not necessarily represent the views of, and should not be attributed to, CPA Australia Ltd. CORPORATE GOVERNANCE CASE STUDIES: FINANCIAL SERVICES EDITION Authors : Mak Yuen Teen, PhD, FCPA (Aust.) Email: [email protected] Richard Tan MBA, FCA (S’pore) Email: [email protected] Published by : CPA Australia Ltd 1 Raffles Place #31-01 One Raffles Place Singapore 048616 Website : cpaaustralia.com.au Email : [email protected] ISBN : 978-981-14-6595-6 CONTENTS PREFACE ABOUT THE EDITORS BOARD RESPONSIBILITIES AND PRACTICES GOLDMAN SACHS: HELLO LLOYD, MEET BLANKFEIN 1 HSBC: WHO’S THE BOSS? 6 THE CO-OPERATIVE BANK: THE WITHERING FLOWERS 10 FINDING THE WHISTLE AT BARCLAYS 14 MISCONDUCT COMMONWEALTH BANK OF AUSTRALIA: ROGUE ONE 20 WELLS FARGO: FORGONE REPUTATION? 26 COMMINSURE: NO ONE’S COVERED 33 UNAUTHORISED TRADING ANOTHER DAY, ANOTHER TRADING SCANDAL: THE CASE OF NATIONAL AUSTRALIA BANK 46 JP MORGAN AND THE LONDON WHALE 50 UBS: ALL BETS ARE ON 56 TAX EVASION AND KYC MIZUHO FINANCIAL GROUP: DOING BUSINESS WITH THE YAKUZA 62 THE TAX-FILES: HSBC GROUP 67 MONEY LAUNDERING HSBC: THE WORLD’S LOCAL (LAUNDRY) BANK 75 MEGA BANK, MEGA FAILURE? 79 DEUTSCHE BANK: A RUSSIAN AFFAIR 85 COMMONWEALTH BANK OF AUSTRALIA: THE UNWITTING MULE 91 DANSKE BANK: HUNG OUT TO DRY 99 A SWEDBANK AFFAIR 107 BRIBERY JP MORGAN: PRINCE UN-CHARMING 120 GOLDMAN SACHS: HUNGRY LIKE A WOLF 125 CYBERSECURITY BREACH CENTRAL BANK OF BANGLADESH: THE BIGGEST CYBER HEIST IN ASIA 140 CAPITAL ONE: A BREACH IN THE CLOUD 145 PREFACE Over the past eight years, CPA Australia has published eight volumes of corporate governance case studies edited by Associate Professor Mak Yuen Teen. A number of these cases involve financial institutions. In conjunction with the launch of our report “Banking on Governance, Insuring Sustainability” covering how the largest banks and insurance companies in Asia-Pacific are addressing corporate governance, remuneration, risk management and emerging issues, we decided to release this special collection of case studies relating to companies in the financial services industry. These case studies show what can go wrong when financial institutions fail to pay sufficient attention to good practices in board governance, remuneration policies and risk management practices. This special collection is co-edited by Adjunct Associate Professor Richard Tan, who like Prof Mak, is from the NUS Business School. Prof Tan has extensive working experience in financial institutions and as a partner in one of the Big 4 accounting firms, where he specialised in risk consulting. This special edition includes 22 cases from Asia-Pacific, Europe and United States. Eighteen of these cases have been published earlier, with some updated for recent developments. There are four new cases on Capital One, CommInsure (the only case involving an insurance company), Goldman Sachs and Swedbank. We have organised the cases into those dealing with Board Responsibilities and Practices; Misconduct; Unauthorised Trading; Tax Evasion/KYC; Money Laundering; Bribery; and Cybersecurity Breaches. Clearly, some cases span across a number of issues. Based on these cases and those relating to other organisations, we can observe ethical failures, failures in board governance, and failures in the three lines of defence as common themes. Undoubtedly, poor corporate culture is often the overriding reason for these failures. Complexity in organisations, cross-border challenges, and compensation are also important contributors. We trust you will find this special collection interesting and useful. Associate Professor Mak Yuen Teen and Adjunct Associate Professor Richard Tan NUS Business School July 2020 ABOUT THE EDITORS MAK YUEN TEEN RICHARD TAN Professor Mak Yuen Teen is Associate Professor of Professor Richard Tan is an Adjunct Associate Professor Accounting at the NUS Business School, National with the NUS Business School, National University of University of Singapore and a former Vice Dean of the Singapore. He has about 40 years of governance, risk School, where he founded Singapore’s first corporate and control experience in both the financial services and governance centre in 2003. He holds first class honours non-financial services industries, and in risk consulting. and master degrees in accounting and finance and a He retired from KPMG as a Risk Consulting Partner doctorate degree in accounting, and is a fellow of CPA where he led in the provision of governance, internal Australia. audit, and enterprise risk management services. He has advised boards and senior management on corporate Professor Mak served on committees and councils governance, risk and control assurance, and enterprise that developed and revised the Code of Corporate risk management matters. Richard has worked Governance for listed companies in Singapore in extensively across the Asia Pacific region and has a good 2001, 2005 and 2018. He is a member of the Corporate knowledge of risks in these markets and in key industry Governance Advisory Committee set up by the Monetary sectors such as banking, real estate, REITS & business Authority of Singapore in 2019. He has developed several trusts, construction, consumer, charitable organisations/ corporate governance rankings and served on various IPCs, and education. corporate governance awards committees. Prior to KPMG, Richard worked in the banking industry Professor Mak is a regular commentator and speaker for 20 years where he held senior management positions on governance issues and conducts professional either in internal audit or in technology and operational development programmes for new and experienced risk management, and was a member of several directors, including those in financial institutions, and group-wide operational risk and new products review also for regulators and other professionals. committees. His latter role also included managing the group-wide business continuity management, and the Professor Mak received the Corporate Governance group-wide technology and operational risk control self Excellence Award from The Securities Investors assessment. Association (Singapore) in 2014, in recognition of his contributions to corporate governance in Singapore. In Richard currently sits on the board of several SGX-listed 2015, he received the Regional Recognition Award for and foreign-listed entities as an independent director Corporate Governance Contribution from the Minority in the capacity of either the chairman or a member of Shareholders Watchdog Group of Malaysia and was their Audit and Risk Committee. In voluntary services, recognised by the Singapore Institute of Directors as a he serves on the board of several charities/IPCs and on CG Pioneer. the management committee of two government-aided schools. For more information about Professor Mak’s work, please visit his website at www.governanceforstakeholders.com. Richard is a fellow member of the Institute of Singapore Chartered Accountants, and a Certified Internal Auditor (CIA). He holds the Certification in Risk Management Assurance (CRMA) and the Certification in Control Self Assessment (CCSA) from The Institute of Internal Auditors Inc (USA), and a Master of Business Administration (MBA) degree from Henley Management College/ University of Reading. BOARD RESPONSIBILITIES AND PRACTICES GOLDMAN SACHS: HELLO LLOYD, MEET BLANKFEIN 1 GOLDMAN SACHS: HELLO LLOYD, MEET BLANKFEIN CASE OVERVIEW1 A series of changes in leadership, mergers and The duality of the Chairman and CEO roles is a acquisitions, and changes in the financial environment longstanding controversy in corporate governance. have shaped its structure, with its main divisions of Having been at the helm as Goldman Sachs’ Chairman investment banking, securities, investing and lending and CEO since 2006, Lloyd Blankfein has drawn and investment management, and offices in more than much flak from shareholders concerned with the 40 locations across the globe. In 2012, Goldman ranked th independence of the board. The rise of shareholder 80 on Forbes Fortune 100 list, with revenue of US$36.79 3 activism in recent years has put pressure on Goldman billion and profits of US$4.44 billion. Sachs to review its leadership structure and generous executive compensation. The objective of this case is to enable a discussion of issues such as Chairman-CEO 2013: WITHDRAWAL OF SHAREHOLDER duality; shareholder activism as a corporate governance PROPOSAL TO SEPARATE THE CHAIRMAN mechanism; executive remuneration; and the possible AND CEO ROLES measures that can be taken to ensure good corporate It was 11 April 2013. CtW Investment Group had just governance. confirmed the withdrawal of its shareholder proposal after Goldman had agreed to widen the authority and responsibilities of James Schiro, its board’s lead THE GOLDMAN WAY independent director. Schiro