The Enron Corporation was once the most dominant energy trader in the world. Enron was formed in 1985 through the merger of two Texan gas pipeline companies (http://www.socialismtoday.org/63/enron.html). Its figures of sales, stocks and profits were sky rocketing at a very high rate in the year 2001. The Enron Scandal was a very well known scandal which was revealed to the world in the year 2001. The company had gone bankrupt and it had to finally file for bankruptcy on the 2nd of December, 2001. After the revelation of the bankruptcy of the company, its shares started dropping tremendously. Their prices went to some less than 50 cents from $90. This event was disastrous in the history of the United States of America. Some of the debts and loses that the Enron Corporation had gone through had not been included in its financial statements.
As a result of this, the accounting firm of the Enron Corporation suffered great loss in its reputation. The company finally dissolved which at that time was one of the top five accounting firms in the United Stated of America. On October 17, 2001, Enron released its third quarter results which showed a negative result of $1 billion. Enron claimed that the negative results were due to investment loses. There were some very opaque transactions that Enron had not reveled. Due to this, later around October 22, 2001, the share price of Enron fell to $20.65 and even down to $5.40 one day. On November 2, 2001 Enron succeeded in securing an additional $1 billion in financing, but the news was not universally admired in that the debt was secured with the company’s valuable Northern Natural Gas and Transwestern Pipeline(http://en.wikipedia.org/wiki/Enron_scandal). “Enron is now shorthand for the perfect financial storm,” wrote one editorial observer. It was estimated that Enron had about $23 billion as liabilities.
There were several lessons that the banks learned from the Enron scandal. It was one of the most significant collapses in the history of the United States of America. The members of the company were not true to each other about how the company was fairing in its transactions and investments. This was one of the many reasons for the downfall of the Enron. Skilling and Lay tried to change the culture of the company and did their best to show it as the company’s progress. There were differences between the old and the new economy companies. The collapse of the Enron gave a lesson to scrutinize the analysts. Some believe that the audition and the consulting services should not be provided by the same company. They should be different. In an interview with a Japanese reporter, the executive director of the Markkula Center for Applied ethics, Mr. Kirk Hanson said that Analysts who were bullish were less likely to be believed. He also said that those who unnecessarily create rumors should be avoided and dealt severely with. According to Mr. Hanson, the directors should be alert and attentive and at the same time the other members of the board should be truthful among themselves to prevent any other disaster such as Enron. They should avoid concealing their loses. He also has penned down some lessons to the public of United States and the executives. Some of them are listed below:
- Financial cleverness should not be substituted for a good corporate strategy.
- Procedure to make money in the old as well as new economy is the same.
- Corporate executives who boast a lot about themselves should always be doubted. The directors and the public should be aware and alert of such people.
- Executives who are paid more than anybody think that they can bend the rules as much as they like. Such an act should be checked by the directors.
- The government rules for the new economy should not be renewed or changed whatsoever.
When banks efficiently mobilize and allocate funds, this lowers the cost of capital to firms, boosts capital formation, and stimulates productivity growth (http://ideas.repec.org/p/wbk/wbrwps/3404.html). A small gang of bosses who made ‘bad decisions’ – who organized a gigantic fraud and lied and cheated to cover it up – have walked away $1bn richer (on top of their colossal annual salaries and bonuses). Thousands of workers who had no part in the conspiracy have lost their jobs and their life savings (Socialism Today, Socialist Party Magazine, March 2002, Issue 63). The aim of governments should be to create an environment which will be helpful in promoting good corporate governance practices. The governance of the banks should be both at the micro and the macro level. The bank must have independence from politics, customers and other banks.
This is the key for a better governance of banks to avoid any scandal involving billions of money and rendering the employees homeless and penniless. There should be no need for a political approval for its working and carrying out of tasks. Secondly, underdeveloped markets have a great role to play in creating a crisis for all to bear. The domestic banks should try to attract as much foreign investment as possible. All companies must be listed in the stock exchange market so that the banks know what the status of each company is. CalPERS and TIA-CREFF have helped in enhancing the performance of banks and influenced the quality of governance. The rating agencies also play a very important role in rating the banks according to their services. A governance culture is therefore essential for the proper governing of the banks. The banks should also learn the techniques of other foreign governing banks and inherit their way of doing things which can further enhance the effective working of the banks. Also, a very important point is that the members of the board must essentially go under formal training which would help them in understanding their duties in a better way.
The bank of Turkey, i.e, the Isbank, has a relations unit called the IRU or the Investors Relations Unit. This unit is responsible for the following tasks:
- Answering the existing and potential investor’s queries.
- It holds conferences and conducts presentations to let its shareholders what is going on in the company.
- It informs the shareholders of the various events and the latest news through newspapers regarding capital increases.
- The information is provided in both Turkish and English for the benefit of the public.
- The annual and the financial reports are released timely.
- Credit ratings, organization chart, etc are also released to the shareholders.
There is also an Audit Committee which elects an Auditor. This is done by the shareholders. A meeting is held at certain times between the shareholders who express their opinions on the various agenda of the company.
The bank discloses all kinds of information including financial and other. Road shows are held to let the public know of its policies and other information. The Isbank keeps its website updated and is written in both Turkish and English.
The corporate governance of the Akbank of Turkey includes practices like- Integrity, credibility, confidentiality, transparency, social responsibility, and the like. These are some of the fundamental management principles which are followed by the Akbank. Also, the services provided by the Deloitte, also includes Audit, Consulting Services, Corporate Finance, Corporate Services, Enterprise Risk Services and Outsourcing Services including Tax and Legal Services.
The BRSA, which stands for the Banking Regulatory and Supervision Agency (Turkey), is an organization that safeguards the rights of the depositors and promises the growth and development of the economy. Its mission is as follows: To safeguard the rights and benefits of depositors and to create the proper environment, in which, banks and financial institutions can operate with market discipline, in a healthy, efficient and globally competitive manner, thus, contributing to the achievement of long-run economic growth and stability of the country.
The main goals of the organization include enhancing the banking sector efficiency, reducing as much as possible the risks to the economy, promising a sound banking sector and safeguarding the rights of the depositors. It also emphasizes on controlling risk and management systems. It also prevents all such transactions which could prove hazardous for any economy.
In 2000-20001, Turkey had undergone a financial crisis. The prime reason for the fragility of the banking system was the way the finances were lent to the high public sector. The average interest rates were four times higher than what they were in the beginning of November. In the second half of November 2000, some banks closed or stopped their credit lines to the so called ‘bad’ banks.
On the other hand, we have Basel II, which ensures the safety of the banks. It is an international standard which tells the bank the amount of capital it needs to set aside for safeguarding itself from various types of risks banks usually face. It surely doesn’t define as to how the bank must define the capital which is required to guard it from the risks. Basel I only took care of the credit risk and not the financial risk. Basel II, on the other hand, took care of both the risk factors including the market risk. Systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk are the objects of consideration of the second pillar of the Basel II.
Citations
“An implosion on Wall Street. (The collapse of Enron Corp.).(Editorial).” The New York Times (2001 pA30 (N) pA34 (L) col 1 (11 col): A34 (L). Web.
Norris, Floyd. “Does Enron trust its new numbers? It doesn’t act like it. (Statistical Data Included).” The New York Times (2001 pC1 (N) pC1 (L) col 2 (10 col): C1 (L). Web.
Oppel, Richard A., Jr. “Enron’s shares fall and debt rating is cut.” The New York Times (Nov 2, 2001 pC11 (N) pC11 (L) col 1 (16 col): C11 (L), Web.
Socialism Today, Socialist party Magazine, March 2002 issue, Web.
The Corporate Governance of Banks – a concise discussion of concepts and evidence, Web.