Northern Rock Plc

blue Rock Plc Contents Page 1 discover2 1. 1Audit citizens committal and Auditors2 1. 2 cognize4 2Comparison5 2. 1 forefront Executive and Chairman5 2. 2Audit direction5 2. 3Risk Management Committee6 2. 4Remuneration & Nominations Committee6 3Chance of an early(a) failure6 4Conclusion8 5References8 Report In this report I am going to gamylight the weaknesses in the corporeal governance code of blue Rock that lead to its downfall(a). Audit Committee and AuditorsAccording to the UK corporeal governance code the board should set up formal and obvious arrangements bearing in mind how to apply the corporate reporting national control, and risk management rules for keeping the right relationship with the gilds auditors. The board should make up an audit committee of at least cardinal non executive directors in the case of smaller companies at least two NEDs. The chairman can be a constituent in smaller companies merely can non chair the committee unless he or she was consider ed independent on appointment as chairman.The board should make sure that at least one the fraction should have recent and relevant perplex in the audit committee. The boards responsibilities are to lay out all the terms in compose and monitor the financial statement of the company, to review the financial performance and reporting. It should as well review internal financial control, risk management system if non in place separately to check the effectiveness and internal function of internal audit.The board should also be review and monitor the external auditors work their appointments and re appointments, their remunerations, and more importantly the non audit services should be checked very closely. In the case of Northern didder the board and the audit committee failed to enforce the above mentioned guidelines. In July 2007 the foreman executive published on the website that operationally Northern rocks first half of 2007 was a good one. He mentioned that mortgage lend ing in particular was strong.If that was the case because how did Northern Rock end up being nationalised in just over 7 months? Was someone checking and verifying the statements of the chief executive. The external auditors complacency was another issue. In their report of 2006 they gave a clean bill of health. This was later investigated by the House of Lords economic affairs committee which found that the auditors had performed their job caveatlessly. An effective audit committee could have spotted these problems well in advance.The reason for PWCs complacency might either be because of the presence of Rosemary Radcliffe on the audit committee who was previously a partner of PWC or maybe they were providing other non audit services to the company and did not want to upset the board. As per the corporate governance code the number of audit committees members was gibe to the code exactly none of the NEDs had any financial experience. Nichola Pease had experience of fund managem ent but not in the banking industry even that experience was not a recent one as required by the code.It seems that at Northern Rock the audit and risk committees were not taken very seriously as Rosemary Radcliffe only attended two out of quartet audit committee and one out of three risk committee meetings. Experience Northern Rock appointed a Senior Independent Director with over half the board being non-executive directors- following the combined code 2 and Basel 2 recommendations. However none of the directors were experienced enough in the field of banking not even building society.This in fact does not support the image of having good corporate governance as it does not ensure failure or success. The above factors raised questions as to why the companys shareowners did not question the risky business model or was it because of outstanding profits seen as the reward for taking such risk. The remuneration committee can also be held responsible for the failure as both the chie f executive and the company took on the gamble for the high risks which in turn questions the values of the shareholder and executive. As mentioned above there were so many factors involved . i. e. he lack of experience, the chairman of the board and nominations committee Dr Ridley had no prior financial experience and even the subject that he has studied is far different to the role he was responsible for. The other four non executive directors Fenwick, Gibson, Pease and Queen also did not have recent relevant experience. Sir Derek Wanless with a good education background but unfortunately with some negative history while working in NatWest where he got compensable ? 3M having lead a disastrous acquisition strategy. If the company was aware of the history then why was he appointed as a chairman of the Audit and risk committee?All of the above points indicate that it was really poor corporate governance in place which neither of the committee paid attention or lack their experienc e in the case of chief executives appointment cannot be said that much as he was internally promoted it is sometimes good so he knew round the company from scratch to the top but in some case it is demote to have an experience person from a different companies so that they can bring new ideas and innovation. The audit committee had to review what they have been there for the observe of the internal financial control, the services, remuneration, re appointments of the external auditors.If the corporate governance were strong in the company there would not be any mis representation of the financial reporting neither by the chief executive nor by the external auditors and also they would have known the consequence of the failure before it had happened. Comparison In this question I am going to compare the governance arrangements noted in the case study with the current version of the UK corporate Governance code. Northern rock had applied most of the governance code but there were s ome weaknesses in some of the areas. Chief Executive and ChairmanAs per the UK governance code the chief executive and the chairman should be separate, their re-appointment and remuneration will have to be approved by the board. In Northern Rock the above codes were applied properly. Chief executive and chairman were two different individuals and their appointment and re appointment were also approved by the board. Audit Committee As mentioned above Northern Rocks audit committee failed to comply with the UK Corporate Governance code on more than one count which led to the auditors not perform their job properly. Audit committee should act as a watch dog in an organisation.Risk Management Committee UK corporate governance says that the board should bring a review of the risk management committees effectiveness at least on a yearly basis. The review should cover closely everything including financial, operational and compliance controls and should be presented to the shareholders. Looking at the timeline of collapse of Northern Rock it seems that the risk committee was not very effective in identifying risks face by the organisation and hence failed to perform its duty properly which led to the collapse of UKs 5th largest lender in within one year.Remuneration & Nominations Committee According to the UK corporate governance code the company should have a remuneration and a nomination committee which should determine the salaries of the board members and should nominate adequate individuals for appointment. The nomination committee should be made up of non executive directors who should be independent members of the committee. The chair or non executive director should chair the committee but he or she should not chair the committee when appointing the successor to the chairmanship.The committee should also evaluate the skills, experience and knowledge of the candidate when making recommendations. It seems that northern rocks nomination committee failed in doing their job properly according to the UK corporate governance code. If they had fulfilled the above requirements in accordance to the UK code then the inexperience of the NEDs would have not been an issue. Chance of another failure Generally, organisations with relatively poor governance dont succeed as uch as those with high standard corporate governance aided by investors. Northern Rock proved this statement when worries about corporate governance resulted in poor performance. This came about 4 years before it was nationalised when shareholders were concerned in the kind of bonuses which were being paid to executives. This develops another understanding about the theory that governance drives performance instead than performance driving governance. Non-executives improve performance and the balance between executives and non-executives is very vital.Considering both the internal and external factors affecting the failure of northern rock it was in the first place caused due to its internal disability of managing crisis. It was the very flawed legal regulation and the poor corporate governance of Northern Rock that let itself down during the operose mortgage crisis in the US. The business model of the company worked for a number of years but despite the risk involved the non-executive directors cared less of the actual risks to the companys model.Lesson can be learnt from the Northern Rock fiasco by other businesses regardless of their size or profitability. If any business does not consume the corporate governance codes properly they are guaranteed to have problems sooner or later. Similar failure happened to the fourth largest American bank Lehman brothers due to poor corporate governance as their systems were very weak. The key areas of the failure were Corporate risk management, Board of directors, remuneration committee and nomination committee.The board of directors included nine retired four of them 75 years old one a theatre producer and anoth er navy admiral with no banking industry experience. In the board of directors the directors were paid well for their work each in the range $325,000 to $397,000 even after getting high return from the company they were not seriously taking care of the company due to having other responsibilities. Their risk management were also a failure because their executive committee the CRO and the CFO meeting were every workweek but instead they meet only twice in both 2006 and 2007 which was very outrageous.The failure of the remuneration committee was that only $1 billion were paid in cash bonuses in just matter of 8years which is a big failure. Other than that $500 million was paid to the chairman. Out of the ten board member four of them were 75 years old and only one had the recent knowledge of financial sector. If in the future any other bank or business will not make their corporate governance strong I am afraid there will be more cases homogeneous in the future. Conclusion After all I have mentioned above it was a poor corporate governance that led the bank to failure.Northern rock had all sort of weaknesses in their corporate governance code it will be a good lesson for the other banks to learn if they have any sort of weaknesses in their corporate governance they should amend those before it will be too late. References 1. Treanor, J. (2008). Poor governance reduces profits, says ABI. Available http//www. guardian. co. uk/business/2008/feb/27/executivesalaries. insurance. Last accessed 09 Feb 2013. 2. Roman A. Tomasic . (2009). Corporate Rescue, Governance and Risk Taking Northern Rock and Its International Context.Available http//papers. ssrn. com/sol3/papers. cfm? abstract_id=1417953. Last accessed 09 Feb 2013. 3. The Financial Reporting council. (2012). The UK Corporate Governance Code. Available http//www. frc. org. uk/Our-Work/Publications/Corporate-Governance/UK- Corporate-Governance-Code-September-2012. aspx. Last accessed 09 Feb 2013. 4. Agha, M G a nd Qatinah, A. (). Lehman Brothers and Corporate Governance Failure. Available http//www. slideshare. net/adnanqatinah1/lehman-brothers-case-study2. Last accessed 09 Feb 2013.