Lehman Brothers
and
Corporate Governance failure
By
Adnan Qatinah Mohammed Ghiath Agha

• Introduction.
• Brief history of Lehman Brothers.
• The Board Structure on Lehman Brother.
• Causes of Lehman Brothers failure.
o Corporate Governance Failure.
o Technical Causes of Lehman Brothers failure.
o Other Causes.
• Conclusion.

On September 15, 2008, Lehman Brothers Holdings Inc filed for bankruptcy. It filed for
protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy
Court for the Southern District of New York. It filed with $639 billion in assets and $619
billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far
surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the
fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees
worldwide.
In this presentation we will focus in the corporate governance failure.
http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp#ixzz1fMgLOtOn

Henry Lehman, an immigrant from Germany, opens a small dry goods store in
1844
Montgomery, Alabama, in 1844.
1850 Henry is joined by brothers Emanuel and Mayer and they name the business Lehman Brothers.
The Lehmans -- who take cotton from farmers to settle accounts and trade the cotton for money
1858
and merchandise -- open a New York office.`
1860s After the Civil War, they move to New York and establish the New York Cotton Exchange.
1887 Become members of the New York Stock Exchange
1889 Lehman underwrites its first public offering, for the International Steam Pump Company.
1929 The Lehman Corporation is created, a closed-end investment company.
Source: http://www.reuters.com/article/2008/09/13/us-

1930s Lehman underwrites the IPO of DuMont, the first television manufacturer.
1950s Underwrites the IPOs of Digital Equipment and Hertz Rent-a-Car
1960 Opens a Paris office.
With Salomon Brothers, Merrill Lynch and Blyth and Company, Lehman forms an association
1962
nicknamed the "fearsome foursome" that challenges the major firms for underwriting business.
Becomes one of the first investment banks to open an office in London to take advantage of the
1972
booming bond market in Europe.
1975 Lehman acquires Abraham & Co.
1984 American Express acquires Lehman Brothers and merges it with Shearson.
1986 Seat on the London Stock Exchange
Source: http://www.reuters.com/article/2008/09/13/us-

1988 Seat on the Tokyo Stock Exchange
American Express divests Shearson, and the independent firm once again becomes known as Lehman
1993
Brothers.
Lehman becomes independent through a public stock offering and Lehman Brothers Holding Inc
1994
common stock begins trading on the New York & Pacific stock exchanges.
1994 Richard Fuld Jr takes the top job at Lehman.
Fuld fights off rumors that the near collapse of Long Term Capital Management had caused a cash crunch
1998
at Lehman.
1999 Lehman establishes an alliance with Bank of Tokyo-Mitsubishi for Japanese mergers and acquisitions.
2001 Under pressure to cut costs, Fuld decides to pay staff less and in stock, rather than lay off employees.
Source: http://www.reuters.com/article/2008/09/13/us-
lehman-factbox-idUSHAR27520620080913

Lehman establishes its wealth and asset management division and acquires Lincoln
2002
Capital Management's fixed income business.
2003 Lehman acquires Neuberger Berman and The Crossroads Group.
Lehman posts record-high net revenues, net income and earnings per common share
2007 (diluted) for a fourth consecutive year and the highest volume of trade on the London
Stock Exchange for a third year in a row.
On September15, 2008 Lehman Brothers Filed for Chapter 11 bankruptcy with about $613
2008
billion in bank debt
Source: http://www.reuters.com/article/2008/09/13/us-

As glorious as this past may seem Lehman could not resist the subprime
markets. In August of 2007 Lehman closed its subprime lender BNC
Mortgage which left 1,200 positions gone. This clearly was only the
beginning for Lehman and their mortgage and credit problems. In 2008
Lehman was posting unprecedented losses. For the most part their
problems arose from holding onto lower grade tranches and holding
on too long to subprime mortgages. It is up in the air whether they
held onto to these assets because of a foolish investment move or
whether their simply wasn’t a market for these assets. For the
2nd quarter the frim had $2.8 billion in losses and was forced to
liquidate $6 billion in assets. It is simply stunning to see the stock
movement for the firm:

• Structural Attribute : Lehman Brothers
• Chairman : Richard S. Fuld, Jr
• CEO : Richard S. Fuld, Jr
• Number of board members : 10 members
• Number of current CEOs/Chairmen/President
:3
• Number of retired CEOs and years since their retirement
: 3 retired, average 12 years
• Independent board members (according to NYSE)
: 8 members
www.afcar.net
http://www.gsb.stanford.edu/cgrp/documents/CGRP03-

Professional background of independent board members
Name Experience
ICHAEL L. AINSLIE Former CEO Sotheby’s
JOHN F. AKERS Former Chairman of International Business Machines Corporation
ROGER S. BERLIND Theatrical Producer
JOHNSON EVANS CEO American Red Cross
SIR CHRISTOPHER GENT Chairman GlaxoSmithKline
Vice Chairman RKO Pictures / Actress
THOMAS H. CRUIKSHANK Former CEO Halliburton
JOHN D. MACOMBER Principal JDM Financial
www.afcar.net
http://www.gsb.stanford.edu/cgrp/documents/CGRP03-

Average age of board members : 68.4 years old
Committee meetings (2007-2008) • Audit Committee :7
• Compensation and Benefits Committee :8
• Nominating and Governance Committee :5
• Finance & Risk Committee :2
• Executive Committee : 11
http://www.gsb.stanford.edu/cgrp/documents/CGRP03-

Numbers of Committees:
• Audit Committee
• Compensation and Benefits Committee
• Nominating and Corporate Governance Committee
• Finance and Risk Committee
• Executive Committee.
www.afcar.net

• The structure follow the one tier board structure (US model).
• Richard FULD hold the two positions CEO and Chairman of the
company.
• The board consists of high portion of independent directors eight
out of ten(whom met the independence standards of the New York
Stock on the board). In addition to five committees.
www.afcar.net

• The board met the structural standers and there is
nothing unusual.
• Their average age was 68 versus 61 on the large
company (a little high).
• Directors had a diversity professional experience, but
a significant lack of experience on financial issues.
www.afcar.net

Definition of Independent Directors at Lehman Brothers:
• A director is not considered independent if the director or a family member has been
employed as an executive;
• officer at the company within the last three years;
• has earned a salary in excess of $100,000 from the company in the last three years;
• has been employed as an internal or external auditor of the company in the last three
years;
• is an executive officer at another company where the listed company’s present
executives have served on the compensation committee in the last three years;
• or is an executive officer at a company whose business with the listed company has
been the greater of 2 percent of gross revenues or $1 million within the last three years
Source: NYSE Corporate Governance Rules.
www.afcar.net

On 15 September 2008, Lehman Brothers Holdings filed for Chapter 11 bankruptcy
protection. Its bankruptcy filing listed debts of $613bn, and named banks from Tokyo,
Hong Kong, New York, Singapore, Taipei and elsewhere as unsecured creditors owed
hundreds of millions of dollars.
There are many causes of Lehman Brothers failure, we could divide them to tree
categories as follow:
Others
Technical
causes
Corporate
governance
failures

Lehman Brothers had weak corporate governance arrangements which failed to safeguard
against excessive risk taking are partly to blame for the economic crisis. Such failures
remained hidden in a prosperous market but the downturn has revealed a number of flaws.
The key areas of weakness that have been highlighted are:
• Corporate risk management;
• Board of directors;
• Remuneration scheme; and
• Nomination committees.
http://www.charlesrussell.co.uk/UserFiles/file/pdf/Mergers%20&%20Acquisit
ions/briefing%20note%20%20corp%20gov%20since%20the%20fall%20of%20lehman.

Lehman Brothers had sex committee, one of them was a
Finance and Risk Committee, which consists of the
Firm’s Executive Committee, the CRO and the
CFO, should meet weekly to discuss all risk
exposures, position concentrations and risk taking
activities, but it only met twice in both 2006 and 2007.
LEHMAN BROTHERS, “Quantitative Risk Management Policy Manual”,
September 2007, P. 3.

Timothy Geithner (Secretary Of The Treasury),said in his
report, “Lehman’s plunge into high-risk businesses in the
years before its bankruptcy has become a familiar
story. During this period of aggressive growth, Lehman
developed significant exposures to risky subprime lending,
commercial real estate, structured products, and high-risk
lending for leveraged buyouts. Importantly, the Valukas
Report indicates that Lehman repeatedly breached its own Treasury Secretary Tim Geithner
risk concentration limits in pursuit of higher earnings”.
http://newsroom-magazine.com/2010/government-agencies/finance-and-

NEW YORK (CNNMoney.com), Failings by Lehman
Brothers executives and its auditor led to the bank
collapse that unleashed the worst of the financial crisis.
According to a report by a court-appointed
investigator, “Lehman repeatedly exceeded its own
internal risk limits and controls," and a wide range of bad
calls by its management led to the bank's failure, says the
report, authored by examiner Anton Valukas.`

Anton Valukas, (Chicago Based Lawyer) said in his report, the bankruptcy examiner's
massive report on the collapse of Lehman Brothers has found "credible evidence" that top
executives, including the Chief Executive, approved misleading statements and used
accounting gimmicks as drugs to hide the truth from investors and the public. Worse, the
report raises serious questions about the behavior of auditors and regulators, who are
supposed to protect the public. Specifically, the report's revelations include:
Inside Lehman Brothers, some executives were very concerned about the firm's Enron-like
accounting practices as the company headed to the brink in September 2008. In May
2008, Matthew Lee, a former Lehman senior vice president wrote a letter to senior
management warning that the company may have been masking the true risks on its balance
sheet. His warnings, revealed in the bankruptcy report, show that Lehman's auditors knew
of potential accounting irregularities and allegedly failed to raise the issue with
Lehman's board.
http://www.linkedin.com/answers/financial-markets/equity-

Lehman Brothers adopted a new strategy to overcome
their problems but this led to business risks because its
investments in long term assets like the commercial
real estate, private equity and leveraged loans had
more vague prospects and were less liquid than its
usual investments.
“Corporate Governance Of Lehman Brothers”,
http://www.oppapers.com/essays/Corporate-Governance-Of-

The House of Representatives Committee offered the
following observations on the composition of the
board: “Nine are retired. Four of them are over 75
years old. One is a theater producer, another a
former Navy admiral. Only two have direct
experience in the financial services industry”.
Sores:- “Getting Bank Governance Right -The bank board member’s guide to
risk management oversight”, Deloitte, 2009, P. 4

• Board of directors at Lehman Brothers were paid well for their services in fees that
range from $325,000 to $397,000.
• Independent directors may lack the incentive and the time to take care of the
corporation, because, most of them were very busy and had many responsibilities.
For instance, Marsha Johnson Evans serves as a director of Weight Watchers
International, Huntsman Corporation and Office Depot, as well as chairman of
Lehman’s nominating and governance committee and a member of both the
compensation committee and the finance and risk committee.
http://finlayongovernance.com/?p=485

A study from researchers at Harvard University, “The Wages
of Failure: Executive Compensation at Bear Stearns and
Lehman 2000-2008,” shows that the top executive managers
of Lehman Brothers received about $1 billion respectively
from cash bonuses and equity sales between 2000 and 2008.
The Board at Lehman Brothers awarded total remuneration of
close to $500 million to Chairman Fuld, just four days before
its collapse and following an announcement that the firm lost
almost $4 billion in the third quarter, Fuld told the media that
"the Board's been wonderfully supportive."
http://journalistsresource.org/studies/economics/corporations/ex
ecutive-compensation-at-bear-stearns-and-lehman/

• Fuld (CEO) received nearly half a billion dollars in total compensation Between
1993 and 2007.
• In 2007, Fuld earned a total of $22 million, including:
- a base salary of $750,000;
- a cash bonus of $4.25 million; and
- stock grants of $16 million.
• The staff received a disproportionately high percentage of their pay in Lehman
stock and options. When the firm went public, employees owned 4 per cent of the
firm, worth $60m. By 2006, they owned around 30 per cent, equivalent to
$11billion, at least on paper.

Four of the ten member board at Lehman
Brothers were over 75 years of age and
only one had current financial sector
knowledge.
http://www.fide.org.my/publications/articles/0013_OECD.pdf

• One of the main failure cases in Lehman Brothers was the misbehavior of top
executives and the inaction of both the board and the auditing firm (Ernst & Young).
• There are many similarities between the collapses of Enron in 2001 and Lehman
Brothers in 2008, that they managed to reduce leverage on the right-hand side of the
balance sheet and, at the same time, reduce assets on the left-hand side. In Lehman
Brothers, Repo 105 transactions doubled between late 2006 and May 2008, were
known inside the corporation, exceeded the firm's self-imposed limits and typically
happened at the end of each quarter, when financial information had to be released.
Arturo Bris, “THE LEHMAN BROTHERS CASE, A corporate governance failure, not a

• Lehman in the last year was unable to retain the
confidence of its lenders and clients, because it did not
have sufficient liquidity to meet its current obligations,
and on two consecutive quarters with huge reported
losses, $2.8 billion in second quarter 2008 and $3.9
billion in third quarter 2008, without news of any
definitive survival plan.
http://lehmanreport.jenner.com/VOLUME%201.pdf

• The Wall Street equivalent of a coroner’s report, mention
that Richard S. Fuld Jr, Lehman’s former chief executive,
certified the misleading accounts, the report said.
• Mr. Valukas (one of the examiner) wrote in the report
“Unbeknownst to the investing public, rating agencies,
government regulators, and Lehman’s board of directors,
Lehman reverse engineered the firm’s net leverage ratio for
public consumption,”. The report states that Mr. Fuld was
“at least grossly negligent”.
• Henry M. Paulson Jr., who was then the Treasury secretary,
warned Mr. Fuld that Lehman might fail unless it stabilized
its finances or found a buyer.` Henry M. Paulson Je.
Shannon
Stapleton/Reuters
http://www.nytimes.com/2010/03/12/business/12lehman.html

Lehman Brothers filed for many reasons, corporate governance failures were the
most important, especially risk management.
Lehman Brothers failure and other failures that happened in the financial crisis
will, in turn, spawn a new wave of corporate governance reforms.
http://www.law.upenn.edu/cf/faculty/jfisch/wo