JMFS Journal of Management and Financial Sciences Volume V • Issue 9 (September 2012) SZKOŁA GŁÓWNA HANDLOWA W WARSZAWIE (WARSAW SCHOOL OF ECONOMICS) Collegium of Management and Finance THE SCIENTIFIC COUNCIL OF JOURNAL OF MANAGEMENT AND FINANCIAL SCIENCES Janusz Ostaszewski – Chairman (Warsaw School of Economics) Ryszard Bartkowiak – Vice-Chairman (Warsaw School of Economics) Luisa Anderloni (University of Milan) Edward Altman (New York University) Paul H. Dembinski (Observatoire de la Finance in Geneva) Ivo Drahotský (University of Pardubice) Mikhail A. Eskindarov (Financial University under the Government of the Russian Federation) Jan Głuchowski (Toruń School of Banking) Małgorzata Iwanicz-Drozdowska (Warsaw School of Economics) Jan Komorowski (Warsaw School of Economics) David Mayes (University of Auckland) Biswa Swarup Misra (Xavier Institute of Management in Bhubaneswar) Mileti Mladenov (University of National and World Economy in Sofi a) Maria Romanowska (Warsaw School of Economics) Piotr Wachowiak (Warsaw School of Economics) TRANSLATION (except articles submitted by the Authors in English) Mirosław Szymański LANGUAGE SUPERVISION Kevin Essex STATISTICAL EDITOR Tomasz Michalski THEMATIC EDITORS Małgorzata Iwanicz-Drozdowska (Finance) Wojciech Pacho (Economics) Piotr Płoszajski (Management) COVER Ewa Grabowska TECHNICAL ASSISTANT Marcin Jakubiak ISSN 1899-8968 Typesetting and printed by: Dom Wydawniczy ELIPSA, ul. Inflancka 15/198, 00-189 Warszawa tel./fax 22 635 03 01, 22 635 17 85, e-mail: [email protected], www.elipsa.pl CONTENTS From the Scientific Council . 5 Post Crisis Corporate Governance Lessons. The case of the US investment banks Maria Aluchna . 7 Methods of Increasing Bank Capital Effectiveness – part 3 Tomasz Cicirko . 33 Small Local Stores in Poland: Changes in the Retail Market and Consumer Preferences Anna Dąbrowska, Teresa Słaby . 60 The Economic Impact of Cultural Institutions on the Local Economy Rafał Kasprzak, Teresa Skalska . 78 Consumer Lease Development in Poland. Legal Determinants Piotr Russel . 105 The Taxation of Free Employee Benefits in the light of Personal Income Tax Joanna Szlęzak-Matusewicz . 115 Summary . 127 FROM THE SCIENTIFIC COUNCIL Ladies and Gentlemen, We present you with the ninth edition of the ‘Journal of Management and Financial Sciences’. We hope that these articles will present a contribution to the development of economic thought and contribute to a fuller understanding of the complex economic issues. We wish you pleasant reading. Janusz Ostaszewski, Chairman of the Scientific Council and Dean of the Faculty Ryszard Bartkowiak, Vice-Chairman of the Scientific Council and Vice-Dean of the Faculty Maria Aluchna* Collegium of Management and Finance Warsaw School of Economics Post Crisis Corporate Governance Lessons. The case of the US investment banks Introduction1 Corporate governance encompasses mechanisms and institutions which are aimed at providing for corporate efficiency. The corporate governance best practice delivers a set of commonly shared and globally recognised guidelines referring to the board work, the formation of specialised board committees (audit, remuneration, nomination, related party transaction), the structure of executive compensation, information policy and investor relations. Additionally, corporate governance recommendations deliver performance measures which are the fundament for the evaluation of a company’s efficiency in meeting shareholder and stakeholder expectations and providing a benchmark for their competitors. The universality of corporate governance best practice allows for their adoption for listed companies, financial institutions as well as non-profit organisations. The aim of this paper is to analyse the corporate governance shortcomings identified in the case of the US investment banks and show their divergence from the best practice norms. The paper is based on the case studies of three American investment banks, Bear Stearns, Lehman Brothers and Merrill Lynch which discuss their major corporate governance failures, resulting in the their collapses and contributing to the outbreak and course of the financial crisis and leading to a significant uncertainty on the stock market. The case study method offers a detailed description of the analysed field, area or issue taking into account different dimensions and features. It allows the study of individual cases and the relations between selected variables2. As shown in the paper the analysis of Bear Stearns, Lehman Brothers and Merrill Lynch depicts severe corporate governance inefficiencies although the scenarios of each of these investment banks proved to be different – Lehman Brothers collapsed filing for bankruptcy, Bear Stearns * Dr hab., prof. SGH, Katedra Teorii Zarządzania, Szkoła Główna Handlowa, Al. Niepodległości 162, 02-554, Warszawa, pok. 325M, tel./ fax: 0048 22 654 86 20, email: [email protected] 1 The author would like to thank two anonymous referees for their valuable comments. 2 Lisiecka K., Kostka-Bochenek A. (2009), Case study research jako metoda badań naukowych, “Przegląd Organizacji”, Nr 12, s. 25–29. 8 Maria Aluchna was rescued in a takeover transaction by JP Morgan Chase and Merrill Lynch was taken over by the Bank of America, while the parent companies of the two latter banks were covered by the US bailout scheme known as the Troubled Asset Relief Plan (TARP). Although investment banks reveal their own specificity and may not – as opposed to the listed companies – be the prime receivers of the corporate governance recommendation in the first line, their impact (and hence stability and governance standards) upon the financial system and other market participants appears to remain crucial, particularly with respect to the course of the financial crisis. Moreover, before 2008, US investment banks operated largely in the form of public listed companies and not as financial holdings, this form assuring larger flexibility and liberalisation of operation3. Thus they needed and still need to adopt corporate governance. Finally, their control and monitoring practice as well as shortcomings have contributed to the understanding of corporate governance and performance. This paper is organised as follows. The first section presents an outline of the investment banking sector taking into account its role in the outbreak and course of the financial crisis. The second section is devoted to the case studies of three investment banks, Bear Stearns, Lehman Brothers and Merrill Lynch, discussing their history and development up until the outbreak of the financial crisis in 2008. The main corporate governance shortcomings identified in these three investment banks referring to the board composition and work, structuring of the executive compensation as well as compliance with corporate governance best practice are presented in the third section. The final remarks and summary of the conducted analysis are delivered in the conclusion section. 1. The overview of the investment banking sector 1.1. The origin and development of investment banking Investment banks have always been perceived as the elite of financial institutions known for their unique knowhow, service, quality, reputation and aggressive corporate culture. The origin of investment banks is related to the emergence of specialised services tailored for trade enterprises in the US as of 1688–18154. The dynamic development of investment banking was also noted during the industrialisation period of the American economy 1850–1920 as well as after 3 Kansas D. (2009), Guide of the end of Wall Street as we know it, Collins Business, New York, pp. 90–91. 4 Morrison A., Wilhelm W. (2007), Investment banking: institutions, politics, and law, Oxford University Press, pp. 97–120. Post Crisis Corporate Governance Lessons. The case of the US investment banks 9 the introduction of the Glass-Steagall Act in 1932 which brought into effect the separation of commercial and investment banking. The investment banks in Europe originated from the universal banks which covered and still cover the wide range of banking services. There is no clear distinction between investment banks and investment banking as the term of investment bank refers to so called full service investment banks (Goldman Sachs, Morgan Stanley) as compared to the wider term of investment banking which comprises a set of services that may also be delivered, for instance, by universal banks or financial holding companies (HSBC, UBS, Deutsche Bank, BofA, JP Morgan Chase5. Additionally, investment banking services may be provided also by boutique investment banks (Grenhill, Sandler O’Neill). Interestingly, since 1999 when the Glass-Steagall Act was lifted and replaced by the Gramm-Leach Bliley Act, stating that investment banking services may be provided by various financial institutions and units formed within large corporations (e.g. British Petroleum). Investment banking known also in the literature as corporate investment banking neither grants loans nor accepts deposits. Their prime role lies in assuring intermediary services within the financial system supporting the efficiency of capital allocation, transfer and creation6. Thus investment banking is to serve both companies searching for sources of external financing (as it optimises the cost of capital) and investors who provide capital for investment (as they provide a wide range of investment opportunities and access to financial instruments of various yields and risk levels)7. The determinants of investment