Deficiencies in Organizational Management That Resulted in the Economic Meltdown
Since the onset of the global financial crisis, everyone wanted to know what happened and what caused the entire situation. Analysts, economists and experts have all come up with many different reasons and explanations for what triggered the meltdown. To some extent many of these are intertwined and connected to another. Organizations such as Bear Sterns, Lehman Brothers, Freddie Mac and Fannie Mae were flawed at similar regions. In other words, there was a common denominator that ultimately led to the crisis for all these corporations. A fundamental error which is present in nearly all of the organizations which were directly to blame for and were directly affected is the problem of governance and management within organizations. As the companies and firms were not managed in a sustainable and healthy manner, their minor everyday errors built up and lead to the demise of those organizations as well as introducing a global economic problem (Kirkpatrick, 2009)
In fact, the findings from the conference held by the United Nations on Trade and Development in 2010 also suggest that it is subpar corporate governance methods that are creating a very frail risk management system within companies (Yeoh, 2010) This report also mentions that not only is the system to deal with risks weak, but the fact that the company is working towards taking quantities of risk which are beyond its control only make it worse. In the long run it is this inability to manage risk appropriately that is bringing down financial institutions (UNCTAD report, 2010). As the companies have not prepared themselves to handle risks and manage their own internal systems more efficiently, the problems presented in the financial crisis cannot be eradicated unless the organizations improve their own internal functioning. This is also related to the problem of management not being able to create a suitable solution or strategy. More so, the systems that firms and financial institutions have in place have been proven to be invaluable and ineffective as they have failed to protect against taking an unbearable amount of risk.
Researchers and analysts have studied corporate governance in the many layers in organizations and at every level there are problems. There are problems within the level itself and problems between levels as well.
To elaborate on this particular matter, Berrone (2008) studied the incentive system which was allotted to top executives of financial institutions. He found that not only are these employees allowed to attain a higher level of risk through the kind of stock options they had, but they are even being rewarded for any mistakes or blunders they make through the exit package that they can avail. It is as if the options which have been given to employees are wrong. Below executives, directors and even managers are given bonuses and rewards on lending out mortgages. This resembles the sale bonus that is given to salesmen who does well. The only thing that these employees saw through all those loans and mortgages and stocks was their own benefit. Due to this reason, they went all in without considering what would happen if things went wrong.
According to experts, there were many problems that were part of the system that these institutions had adopted. For example, the incentive for employees and the way risk was managed and processed through the company was flawed. Not to mention the method in which directors or board members in companies considered risk in the business before going ahead with any plans. Both of these areas therefore need to be reconsidered.
Along these lines Buiter (2009) makes an important observation. He stated that the more complicated financial products and other commodities which are not preset on the balance sheet are not very transparently visible. The same applies for the level of risk which is carried by the shareholders of companies which were engaging in such dangerous maneuvers. There is no clear cut evaluation of what level of risk shareholders were in. In many of the firms, the incentives and triggers that they had in place motivated workers to work in a direction which would later prove more costly for the firm as a whole. It has also been seen that for the higher tier of management, bonuses were awarded on the direct earnings from a transaction and the results or effects later generated from the deal were not their concern.
Clarke (2010) also mentions that the policies and reward structures that were in place motivated employees to invest as much as possible in order to gain the bonuses on all the loans they handed out. Another concern that was highlighted by Clark is that of universal accounting standards and making all of the operations of the firm completely transparent and open to audits. If the book keeping of a company is a grey area, not much about it can be trusted or relied upon. Considering that these companies deal in millions of dollars all over the world, clean and accurate records are very important. Not only could people be making incredible personal profits from this, but this is also the duty of the company for its owners in the form of shareholders. With records being inaccurate, the shareholders are not getting the complete image of the organization, and this certainly compromises their level of control.
It can be seen that the overall internal controls and mechanisms within companies have failed to work and caused problems in all departments. The problem with the accounts and the money in the business is one problem. The broader picture is that of handling information and data in the organization. Due to lack of control, information about risk is not accurately recorded. Even if it was recorded, it wasn't passed on to the appropriate authority to look into. When the organization as a whole is not even aware of a problem, it is next to impossible to develop a solution for it to defend any part of the firm. Directors and boards of companies were unable to create systems or internal methods of detecting as well as handling risks. The system in which employees from all levels of the hierarchy of the business participated incorrectly motivated everyone to make the business as profitable as possible in order to make them more profitable as well. In doing so, everyone over looked where the business as a whole is now situated in terms of how much of a risk it is under.
There are also some problems which are particular to banks or particular a certain kind of business. For example, the very lax requirements for people looking for loans meant that there was a lot of money being given to people who were already identified as No Income No Assets (NINA) individuals. For such cases, other rules like accounting practices also had to be bent and in the end there was a whole lot of inaccurate information created in order to gain a bonus and make some money in the short-term by issuing a loan.
Another problem that was introduced by property assessors was that of over valuing a property. The assessor's job is to value the land or building and attest that the value of the property is sufficient for the loan it has been granted. The problem is that if the assessor values the property less than what would be needed by the loan officer; things would be troublesome for the assessor. So seeing all of his or her colleagues overvaluing properties, just to keep their own income alive, the assessor would also overvalue the property, so the bank can loan out what it deems the appropriate rate.
We can see as a whole, there are many problematic areas within the companies that need to be worked…