Poor Corporate Governance Highlights Risk of Bank Failures
Poor corporate governance ratings are highly correlated with high risk among financial institutions, according to Audit Integrity, which provides such ratings.
For Corporate Governance metrics, “high Executive Compensation is prevalent for the riskiest financial institutions,” Audit Integrity says. “A substantial number of financial institutions have been flagged for high Incentive Compensation (both CEOs/CFOs and Other Officers), as well high ratio of CEO to CFO Total Compensation. Of the data set, 57.6% of the financial institutions have been flagged for CEO and CFO Incentive over Annual Compensation.”
Lehman Brothers, for example, was flagged for all 3 compensation metrics: CEO and CFO Incentive Compensation and Officers Incentive Compensation (99% percentile for both) and CEO to CFO Total Compensation (90% percentile). Merrill Lynch (NYSE: MER) is flagged for Officers Incentive Compensation (99% percentile) and for CEO to CFO Total Compensation (84% percentile).
Performance-based compensation may indicate that company executives have incentives toward short-term profits and stock gains over longer-term health of the company, and can motivate executives to manipulate company books in order to boost earnings and thus increase the value of executive options. Also, excessively steep compensation increases as one goes up the corporate hierarchy indicate the possibility of senior management exercising undue influence over the compensation committee.
Corporate Restructurings and Share Repurchases also are High Risk Events that are frequently flagged, as are Loan Loss Allowance, Interest Income, and Accounts Receivables.
Of the data set, 57.6% of financial institutions are flagged for Corporate Restructuring and almost 40% are flagged for Loan Loss Allowance.
Morgan Stanley (NYSE: MS), for example, is flagged for Corporate Restructurings (96th percentile) and for Accounts Receivable (91st percentile). Washington Mutual NYSE: (WM) is flagged for Corporate Restructurings (96th percentile), Loan Loss Allowance (98th percentile), and Interest Income (82nd percentile).
The full, free report is available here.
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