Lehman Brother PDF

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Case 7 – Lehman Brothers 1. Based on Dess’ discussion of agency theory and board responsibility toward shareholders, do you believe that the Lehman Brothers Board of Directors fulfilled their fiduciary obligations and responsibilities? According to the textbook, the stockholders elect and are represented by a Board of Directors who has a fiduciary responsibility to ensure that management acts in the best interest of stockholders to ensure long-term financial returns for the firm. (Dess 293) Agency theory is theory of the relationship between the shareholders and Board of Director; an agency problem arises in a situation where a Board of Director of a company does not act in the best interests of a shareholder (Dess 294). I believe that the Lehman Brothers Board of Directors failed to fulfill their fiduciary obligations and responsibilities to ensure the best interest of shareholders. Based on the case, the directors failed in their oversight and advisory role to the company. Lehman's directors taking excessive debts and failing to diversify is an example of an agency problem. The company invested majority on the subprime and commercial real estate even though this market was turning down drastically in 2007, and directors was not able to either recognize the risk or notice any turn-down of the investment. The result came out to be the company need to overuse 2018 expense budget for 2007 loss. In this case, the directors should not have taken excessive debts and should have diversified the product portfolios. Also, there was a time when other investment banks failed and file for bankruptcy, Lehman Board of Director did not investigate their company performance and have not tried to eliminate their debts at that time. When there was a time for Lehman to look for buyer for the company to avoid bankruptcy, Board of Director did not plan to sell their company; as a result, Lehman had no choice but to file for bankruptcy because the company had no government ads,

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Case 7 – Lehman Brothers no company want to buy, and no cash to open the business. Lehman's directors should have gone ahead to diversify and minimize the debts. The failure to diversify and minimize the debt was not in the best interest of the company's stakeholders.

2. CEO Richard Fuld was both the Chairman of the Board and Chief Executive Offices. How did CEO/Chairman duality at Lehman Brothers help or hurt the company? Why? According to Dess, CEO duality is where CEO acts simultaneously as the Chairman of Board. Companies have two thoughts on CEO duality: unity of command and agency theory. Unity of command believes CEO duality allow the leader to act more efficiently and effectively, eliminates confusion and conflict between CEO and Board of Director, allow CEO to serve the shareholder better, and enhance a firm’s responsiveness. Agency theory believes CEO duality could negatively affect the interest of the shareholders; agency theory also believes in the separation of power. Finally, there is no one correct answer on duality, but that firms should consider its current position and performance trends when deciding whether to keep it together or separate. (Dess 300) Richard Fuld was both the CEO and the Chairman of Board which mean he had huge power in the company’s operation, and it is very important for him to protect the shareholder’s interest since he is the only person that make the decision for the company. However, he was able to create false reports and expand the income of the company with no one knowing it. Being the chairman and CEO at the same time means that no one would be able to investigate the report of the company keenly and hold him into account in how the businesses of the firm was being run. It hurt the company because he can plan with other workers and blow up the company's revenues to show that the company was making profits, while the company was making losses.

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Case 7 – Lehman Brothers 3. Consider the three options that faced the board of Lehman Brothers at their final meeting on September 14, 2008. What do you believe the Board of Directors should do? The three options that faced the board of Lehman Brothers at their final meeting on September 14, 2008, were; 1. The board could further delay a decision regarding bankruptcy, 2. The board could vote to not file for bankruptcy, and direct Lehman Brothers to open for business, and 3. The board could vote to file for bankruptcy. The Board of Directors should have prepared a clear balance sheet to ensure that they can get secure emergency loan from the Fed. However, Lehman failed to do so which they had a poor balance sheet which created an impression that the company will fail again anyway. In this case, the company should have reached out to the buyers and make an agreement to ensure that the company is not declared bankrupt, but Lehman fail too. Bank of America refused to buy the company because Lehman has too many bad assets. Barclays was only able to buy the “good” bank and Lehman will keep their “bad” bank, but Lehman refused to sell the company like this so that deal was failed too. In this case, I believe the best action for Board of Director will be file for bankruptcy. Lehman should not further delay its decision regarding bankruptcy because there were no government aid and no company want to buy Lehman. There will be also very difficult for Lehman to open for business because the company did not have any cash at this time, while the company need billions of dollars in order to be able to open for business. Based on above analysis, the Board of Director should vote to file for bankruptcy soon....