US Senate Banking, Housing and Urban Affairs

Senator Christopher Dodd,

What do Lehman Brothers, Bear Stearns, General Motors, BofA and AIG have in common with Enron, Worldcom and Tyco?

The board was blind-sided by excessive risk taking in combination with excessive compensation.

To the board, information is knowledge, and knowledge is power.  How can anyone expect the board to oversee management if the executive management team is allowed to filter the information they receive?

The housing bubble began to burst in 2006.  Yet it wasn’t until late 2007 when Pricewaterhouse told AIG executives that the company “could have a material weakness.” Uncertainty about the accuracy of the company’s financial statements weren’t disclosed to investors and the public under SEC rules until 2008.

Even with losses from AIG’s Financial Products mounting, the 2007 year-end filing stated, “management believes” it could raise the billions of dollars needed to meet “anticipated cash requirements.”

Yeah, the $180 billion in cash and loans it received from taxpayers just a few months later.

Corporate governance reform will remain illusive until public companies expand their board-level reporting to the audit and corporate governance committees to fully disclose the business practices of the company and its executive management team?  An independent third party should provide board-level reporting to prevent the executive management team from filtering the information.  The board-level audit and governance committees should use this information as a check and balance with disclosures made by independent outside auditors and consultants.

Until these reforms are adopted, its “business as usual.”  CEO’s will continue to receive excessive compensation for excessive risk taking. 

If you’re serious about preventing the next financial crisis, implement reforms that reign in excessive risk taking.  Pass the Investor Protection Act that expands employee awards and provides protections so that employees can anonymously disclose information about the business practices of their company and its executives to a third party without fear of reprisal or reprimand.  Make it mandatory for public companies and financial institutions to expand board-level reporting from a third party to ensure transparency and independence.

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About zethics
CEO and founder of zEthics, Inc. Thirty years of experience with finance and accounting background in public private sectors.

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