Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

Synopsis

The financial crisis revealed fundamental shortcomings in both public and private American institutions. While the firms that were successful each found their own way to weather the crisis, unsuccessful firms were remarkably alike in their inability to cope and in the mistakes they made.

Combing through the wreckage, Thomas H. Stanton examines which financial firms survived the crisis and which ones failed. He analyzes how differences in governance, organization, and management between these firms led to their success or failure, and how government supervision and regulation failed to prevent the crisis. Based on interviews that the Financial Crisis Inquiry Commission conducted with CEOs, risk officers, traders, and others at major financial firms, Stanton systematically outlines how successful firms, like JP Morgan Chase, Goldman Sachs, Wells Fargo, and others used a multitude of approaches to distinguish themselves in operational competence and intelligent discipline, while unsuccessful firms, like Fannie Mae, Freddie Mac, and Countrywide, and others uniformly failed to prepare for possible low-probability, high-impact events. Stanton concludes by issuing a call for strengthening organizational design, governance, and risk management, by identifying clear attributes that distinguish successful firms from the others.

Why Some Firms Thrive While Others Failis an invaluable resource for company officials and policymakers on the development of a risk-sensitive, more-successful culture. It also provides an essential foundation on culture and governance for students of business and public policy, practitioners within the public and private financial institutions at the center of the recent financial crisis, and those at risk of playing roles in possible future crises.

Excerpt

On Monday, October 31, 2011, after this manuscript had gone to the publisher, a financial firm called mf Global went into bankruptcy. As the dust settled, investigators found over $1 billion of customer funds unaccounted for. mf Global’s ceo Jon Corzine, a former United States senator and former governor of New Jersey, told Congress that he had had no idea the money was missing. At this writing the mystery of the missing funds remains unsolved.

Mf Global illustrates many of the themes of this book. According to news accounts, Corzine was a powerful ceo. He led mf Global in making bets on European sovereign debt. When the company risk officer objected, the risk officer was removed; the risk officer’s successor was expressly instructed not to analyze risk of the company’s European debt exposure. Senior executives also expressed misgivings about the firm’s growing bet on European sovereign debt, but to no avail.

When board members suggested that Corzine might limit mf Global’s investments in European bonds, Corzine reportedly said that “if you want a smaller or different position [regarding European debt], maybe you don’t have the right guy here,” and offered to step down. Corzine later told a congressional committee that this was not a threat. and the board, despite knowledge of the company’s high leverage and growing concentration of risk, did not prevent the bet from continuing.

Where were the regulators? At this writing, multiple regulators are still sorting out their responsibilities. Corzine personally lobbied one regulator, the Commodity Futures Trading Commission, not to strengthen customer protections by requiring segregated accounts for customer money. the New York Times reported:

Just three months [before its insolvency], Mr. Corzine’s firm assured
regulators that the proposed rule could cripple the futures brokerage
industry by hurting their profitability. in a letter, mf Global told
regulators that they were trying to “fix something that is not broken,”
adding that the firm was not aware of any brokerage firm like itself that
was unable to “provide to their customers upon request any segregated
funds.”

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