Corporate governance experts round on futures brokerage as it falls into bankruptcy
The collapse of MF Global Holdings, the futures brokerage, has highlighted the lack of transparency and rigid governance standards at the firm.
The SEC has now launched a probe into whether the Wall Street firm made false statements about the $6.3 bn bets that caused the company to file for Chapter 11 on Monday, says Reuters.
On Tuesday, the Associated Press reported that the Federal Bureau of Investigation (FBI) is expected to look into whether customer money is missing and if there were signs of criminal activity.
The Commodity Futures Trading Commission (CFTC) and the federal watchdog also revealed that MF Global ‘reported possible deficiencies in customer futures segregated accounts held at the firm.’
As the firm teetered on the brink of failure because of its exposure to $6 bn worth of European sovereign debt, it became clear that poor monitoring of executive pay practices and lax governance and compliance policies had all aggravated the situation.
Governance gone missing
‘This is in part the role that corporate governance should play in an organization,’ says Steve Shapiro, a partner at Pircher Nichols & Meeks and former corporate secretary and general counsel at Cole Taylor Bank.
‘More than just taking minutes at board meetings, governance should help establish internal controls in an organization to provide an early warning system that can alert senior decision-makers.’
Indeed, governance was at its lowest ebb at MF Global.
Earlier this week, Jon Corzine, chief executive of the New York-based derivatives broker and former New Jersey governor, was scrambling to strike deals to save his firm from failure.
But when news emerged that hundreds of millions of dollars in customer funds were unaccounted for, everything came to a halt. Within hours the board decided to file for bankruptcy.
‘Even though it appears that Corzine had fully consulted with the board and with his colleagues about the European debt exposure, who knows who was involved in potentially ‘borrowing’ money from other accounts?’ asks Paul Hodgson, a senior research associate at Governance Metrics International (GMI).
Major issues
‘For us, the major issues – apart from the dual class voting stock – were the compensation practices. In particular, for Corzine and other executives there was a slew of guaranteed bonuses, discretionary bonuses, retention bonuses and sign-on bonuses – virtually every kind of bonus you can have as long as it is not related to performance.’
Corzine is entitled to a $12 mn compensation package if he leaves the firm but in current circumstances a golden parachute seems unlikely.
Corzine received $4.3 mn in total compensation through March of 2011, the latest period for which figures are available, according to Equilar. The next four highest-ranking executives received between $550,000 and $2.1 mn over the same time frame.
A GMI report issued last month analyzed the governance profile of MF and pointed out that the firm’s compensation committee comprises four directors, three of whom are independent.
The company states that remuneration is tied to performance, but fails to disclose specific numeric performance targets for upcoming fiscal year
‘Boards are approving these kind of packages and it's not clear what rationale there is for that. In fact there is no clear economic or financial reasoning behind their decisions,’ says Douglas Park, a Silicon Valley corporate governance attorney and principal of DYP Advisors.
‘If you examine the way directors and chief executives are connected through the board network you won’t be surprised to see the social relationships and expectations that come into play with these type of compensation packages and because every other board is doing it, this trend seems okay to board members.’
This article originally appeared in Corporate Secretary magazine.
