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Corporate governance is a hot topic in the new century. The company needs the new mechanisms of responsibility, new methods of long-term decision-making involved in employees and shareholders, new ideas to create the wealth and new ways of solving complex problems to the fierce competition, so that the company can be in an invincible position in the global market. In other words, the clearly division of responsibility of Directors, Board, shareholders and various departments such as audit is a must for the success of a company. In order to understand the governance in a globalising world, this essay will analyze a case of Societe General Bank, and according to the case, this essay will firstly study what aspects of corporate governance did the directors of Societe General ignore, subsequently analyze whether the directors should have been aware of Kerveil's losses and through what accesses the directors can get this information.
One of the aspects of corporate governance the director ignored was the ethics of director and the Board. Professional ethics of directors require them to refine the management, focus on monitoring, clear special professional ethics of key positions in the organization and organize employees to comply with these ethics. The ethics require the realistic, objective and true reflection of the information on the activities of banking. During the institutions implementation of disciplinary, if the director finds the possibility to occur the violations that may lead to risk, then the director should immediately report this situation to their superiors. The directors should consciously resist the insider trading, shall not use inside information for personal gain (Drennan L. T., 2004). However, the director of Societe General ignored the ethics, and let the single futures trader, Kerveil, to do such a wrong thing.
Corporate social responsibility
The director of Societe General also ignored the corporate social responsibility (CSR).
The corporate social responsibility refers to the responsibility the enterprise in its business operations should meet to stakeholders (Cornelius N., 2008). The concept of corporate social responsibility is based on the idea of sustainable development that the business operation must be consistent with. Companies not only consider their own financial and business conditions, but also concern its impact on social and natural environment. Stakeholders refer to all individuals or groups which can affect the business, or will be the affected by the decisions and actions of a business, including: employees, customers, suppliers, community organizations, parent or subsidiary companies, partners, investors and shareholders. Davis, an American scholar proposed that a business should be a two-way open system, that is it should be open to accept the information of society, and it should also let the public understand its business openly. In order to ensure the stability and progress of society as a whole, business and society must maintain a continuous, honest and open communication.
Based on the analysis above, obviously, Societe General Bank did not consider its social impact when the bank keep an eye closed to the exceeded and inappropriate trading the futures trader make, so Societe General Bank neglected its social responsibility
The director of Societe General ignored the responsibility he should shoulder. This contains the following aspects (Petrovic P., 2008).
Fiduciary duty will be discussed firstly. An important function of the director is to play "judge" role, the director should evaluate objectively of the situation, make clear estimation of various programs, the performance of top management to conduct an independent evaluation and check independently of the operating performance of supervisory. The responsibility of the director is also reflected by organizations and mechanisms compromise of the non-executive directors in the various special committees (such as audit, nomination and remuneration committee). This oversight role should be independent, impartial, and standardized. The directors should maintain the legitimate rights and interests of shareholders and stakeholders. First, the director is the protecting people of owner and other special interest groups. They maintain interest of minority shareholders, consumers, employees, etc. Second, each director should be the fully trusted, business consulting and cordial conversation friend of other directors and senior executives. When the companies involved in major personnel changes, the adjustment period and process, this effect seems particularly important.
Duty of loyalty to companies will be talked about secondly. The behavior of directors should be loyal, honest and frank. This requires, first, the directors exercise power must be for the interests of bank and not for himself or someone outside the bank. This should be judged and evaluated comprehensively from the purpose, procedures and results. Second, directors must service not only for the part of, but all shareholders. The directors should take into account the relationship, objectives and interests between all stakeholders. In other words, the directors should equally treat all shareholders, especially minority shareholders, to provide them adequate and accurate information that might affect their interests. Third, the director can not harm the interest of the bank and should not create a secret profit between him and his business dealings. On the contrary, he is under an obligation to disclose any such interest and adhere to the policy about the best interests of the bank. Finally, the director can not participate in insider trading, that is, the behavior of using privileged access to sensitive price information, and trading shares in a listed bank.
Responsibilities to the position will be analyzed last. Directors should demonstrate reasonable care, diligence, and skill in their work in Board. Specifically, the directors are required to performance experience, skills and competence corresponding to their positions, qualifications, experience and identity when handling bank affairs. They should performance their professional duties in line with diligence, intelligence and expertise and they should take the joint and several liabilities when subordinate personnel make mistakes caused by improper and poor management.
According to the analysis above, the director of Societe General ignored the actions of the single futures trader exceeded its trading and took the wrong action more than one time without being monitored. The ignoring is actually irresponsible to the shareholders, the bank and his position. Hence, he ignored the responsibility of him as the director of the bank.
The director should bear the obligation of good faith and diligence of all the shareholders, particularly pay attention to the legitimate interests of minority shareholders to ensure their interest will not be harmed. In most cases, directors are elected by the shareholders, and the ownership is the power base of the nomination and election of directors (Enriques L & Volpin P. 2007). Despite the appointment of directors may come from the senior executives or board, but ultimately it needs the approval of shareholders. Therefore, as the trust's return to shareholders, director's basic responsibility is to consciously do their duty to shareholders. This contains two meanings: First, actively and steadily provide strategic guidance to the bank and determine the policy and monitor the activities of top management. Second, timely make correct notification to the shareholders and explain the important actions and the corresponding results, including the normal to provide reports and accounts required by law (in most cases have been audited).
However, the director of Societe General ignored the interest of shareholders, and did not take actions to stop the incorrect exceeding trade of the futures trader, which led to the suspended and 4% decrease of the share, which greatly damages the interest of the shareholders. Hence, the director's behavior is irresponsible to shareholders.
The director ignored the aspect of Auditing, whose main responsibilities contain whether the department is reasonable standard operating procedures; whether the bank exists of internal control and two-stage review procedures within the department and randomly selected cases of the daily operations in the department, audit related documents and notes the three aspects.
Specifically speaking, the responsibility of the Auditing should contain:
The target of audit should be specific, not only to find out the error of a particular department, but to identify internal controlled weaknesses and risks, and to propose measures for improvement and recommendations to avoid unnecessary losses in future. Meanwhile, the audit department is not passive, but it is very active in cooperation with operational departments to find problems and discuss solutions to problems; audit department not just t audits the accounts, but in many cases supervise the work of all other departments, especially when a new business applications are introduced, the audit departments will be timely in intervention. In addition to cooperation of the audit department and operational departments, the audit department maintains close cooperation with credit risk policy and legal department. Audit departments establish an audit scoring system, for each score there has a clear definition, which is examined and approved by the Board Audit Committee, and department managers can received this definition in advance.
Establish a risk-based audit control system. The core of banking audit is risk prevention, and all kinds of the audit technology operations is constructed to guard against the risk objectives. Bank's audit management techniques generally are four ways: First one is the Vertical Auditing, which is a traditional auditing method, namely, according to the purpose of the audit needs to confirm or verify the compliance with relevant regulations and procedures of accounts, finance, securities, management, operation and control during any activities, functions, products, services, and branches. It can be divided into Authenticity audit, financial audit, business operations audit, management audit and procedures of computer data audit; the second one is Horizontal Auditing, that is, according to the risk of different activities, all the activities of banks can be divided into credit audit, securities audit, banking products and services audit, operational audit, branch audits and project-specific audit; the third one is Situation Auditing, the audit is divided into the hot spot for business audits, priority audit, strategic development audit, loan audit and internal control evaluation; the fourth audit is the Reactive Auditing, it accords to certain information to respond, the audit approach includes preventive audit, early warning signals audit and exception reports audit. Various audit methods are sometimes used interchangeably, but the core goal is to guard against the risk (Archambeault S. D, 2008).
According to the analysis above, in this case, the single futures trader, Kerveil, exceeding this trade limit for not only once, but many times without get any warning. His behavior of falsifying documents and breaching computer security and some other changes have not been detected by the director and the auditing department, according, the risking of course not have been evaluated, which make the director and the auditing department irresponsible.
Of course, there are some other aspects the director also ignored, such as the responsibility of Board and transparency, and these aspects will be mentioned in the following part.
On the other hand, the directors of the bank should definitely have been aware of Kerveil's losses, because it is the responsibility for them to aware any risk and losses of the trade. And they can know and understand any situation through director, Board, audit and the transparency of the trading, and if the improvements of them are achieved, the like case in the bank can ultimately eliminated in the most part.
In the analysis of the first question, the responsibilities of director are analyzed, so here is a definite responsibility that the director should have been aware of Kerveil's losses.
They can know this situation through the Board. Because here are some functions of the Board as discussed below (Chen R. R., 2009):
Strategy development is a process, not just to approve the bank manager's annual plan. With it, each member of the board will finally understand the competitive environment of bank, and to reach a consensus on business prospects planned by the Board. The right strategy formulation should be established on the the actual analysis of the bank, and on the correct understanding of the state of existing and potential competitors, the advantage of the bank, usage and protection of these advantages and the correct development direction of banks. In this regard, the board will encounter a number of difficulties about how to give contributions for the bank's strategy and would not replace the chief minister and senior management to discharge responsibilities. Undoubtedly, the later should play a fundamental role, especially in the proactive analysis and interpretation of the proposal. However, each director in the process also has the opportunity to display their talent: to provide information, advice, questions and approve, as a part of the creative process, and thus making the entire board reach the final consensus on strategic content. These works should be best before the Board meeting approve a formal strategic plan, because established view often has been formed by management then.
Policy-making process is natural, short-term extension of strategic-making process. Under the strategic direction of framework of specific policies, plans and procedures also need to be determined. Specific proposals on capital investment projects, acquisition and divestment opportunities, financing options, key management and organizational development policies, normal annual budget programs should be presented to the Board. Under the environment full of intense competition and the volatile hostile takeover, a feature of policy-making is a crisis or disaster plan. This plan is an attempt before the incident and a preparation to determine the possible areas of crisis. Make this preparation in advance in a considerable calm period can greatly enhance the survival and development opportunities in the difficulty or crisis. Each bank can determine its own risk.
The performance to monitor each management is the basic element of the activity of Board. The purpose of supervision is to ensure that bank is developing under the policies established by the bank and along the direction of strategic plan. If there is bias, whether positive or negative, the Board should investigate the cause. The key to successful oversight of management is a reliable and timely performance measurement system, which is recognized by both the Board and management. The contents include (1) financial performance, such as income, cost and profit levels, cash flow, spending and borrowing, income and other assets and shareholders' funds; (2) market performance, such as market share, price changes, consumer satisfaction, etc.; (3) product and service performance, such as product development, distribution and services; (4) technical performance, which runs through the supply, production, and the whole marketing process, such as information technology; (5) management and organizational performance, such as effective management information and control systems. For this system, a form of charts and figures to provide timely, accurate, and to reflect the trend of the data is the most basic requirements of management information system.
To take responsibility to shareholders is one of the most important functions of the Board. It should be noted, however, the Board can not make these people understand the inside information, resulting in damage to other shareholders. On the other hand, there is also another attention, which is, disclosure or not fully reveal of information is not conducive to the shareholders to fully evaluate the performance of the bank when lacking resources.
Auditing committee (external auditors)
Another way the board can aware the losses is the auditing committee. This method can be achieved by external auditors.
The auditing committee's main function is to audit the bank's financial reports and provide ongoing monitoring process to ensure the objective and fair information provided to investors. Audit Committee, as an important institutional arrangement in corporate governance structure, was generated from the corporate fraud case of famous McKesson & Robbins Company in American history in 1940 (DeZoort F., 1997). The original intention of having an audit committee is to appoint an independent external auditor to monitor the implementation of external audit procedures, and further to create the environment that the company's management is monitored, which can effectively prevent the problems such as transfer of benefits, fraud. External auditors have played a certain positive role in promoting capital market development, optimizing the allocation of resources, but financial fraud cases continue to occur. The reason can be partly attributed to serious deficiencies in corporate governance structure, which also reveals the urgency to strengthen corporate governance and improve the regulatory audit system (Piota C. & Janinb R., 2007).
Therefore, the problems such as how to improve the quality of financial statements, how to monitor the external auditor's functions and responsibilities and how to improve the independence of external auditors, become the main concerns. As an integral part of corporate governance structure, the auditing committee can represent the board to bear the financial reporting process, internal controls and the supervisory duties of corporate governance, and can improve the independence of external auditors and avoid collusion between external auditors with the management. Audit Committee's responsibilities shall include: properly coordinate the communication between internal audit staff and the external auditors, review the factors when the management considers the independence of external auditors, and assist the management authorities to maintain its independence and objectivity of the external auditors. Determine responsibilities of the Audit Committee to enhance efficiency and reduce financial fraud and audit failures. Make clearly that the ultimate responsibility for the external auditor is responsible to the Board, and the Audit Committee, as representative of shareholders and the Board, has ultimate authority and responsibility in the selection, replacement and assessing the adequacy of the external auditor. The external auditors are out of the control of management.
The board also can aware of the losses through improving the transparency of the bank, which is an important aspect in bank governance.
Transparency is conducive to supervision to prevent moral hazard caused by black-box operation and job-related crimes. Inadequate disclosure of bank information, the lack of details of capital formation, and regulatory capital and accounting statements are not coordinated will result in difficult accession of market participants to the quality of bank capital and valid comparisons between banks (Campbell A., 2007).
There are some advantages of the improvement of transparency in the bank:
Transparency can provide inspection standards to promote the development of banks. Banks should disclosure important information such as asset classification, risk identification, internal ratings, capital measurement, and the internal capital adequacy assessment, which can promote the healthy business development of bank.
Transparency can enhance risk management capabilities. Disclosure of a series of open market, improve the bank information transparency, improve risk management capabilities, build more efficient capital adequacy assessment framework and system, improve the transparency of the banking sector, strengthen the bank's external governance to effectively build the fundamentals for market discipline.
Improving the public aware channels can help to restore market confidence. A large number of complex and opaque trading will adding to the asymmetry of financial market information, then further become breeding grounds for the financial crisis. Business model of financial institutions should be shifted from the selling of risk to active management of risk. Market can more effectively access to information and content about the standardized and full banking operations and risk management, thereby enhancing public confidence and trust, which will influent greatly economic stability and recovery.
In conclusion, the Director, Board and other departments such as audit of the bank are irresponsible for the shareholders when they overlooked the action of the single futures trader. The bank should strength the supervisor to the traders. That is, the path to success is clear: the Board needs to make a clear understand of their role and establish effective framework for responsibility of the Board and Directors to the shareholders. Leadership is the key responsibilities of the Board, and good corporate governance depends on the strength of the company leaders. For the Board and Directors, the leadership means that three tasks: setting strategic direction, supervising and implementing the strategy, select and guide senior management. Some other aspects such as audit, transparency to the shareholders are also important for the development of a company.