Northern Rock Plc

Union tremble Plc Contents Page 1Report2 1. 1Audit Committee and Auditors2 1. 2 bang4 2 par5 2. 1Chief decision maker and Chairman5 2. 2Audit Committee5 2. 3 venture guidance Committee6 2. 4Remuneration & Nominations Committee6 3Chance of a nonher distress6 4Conclusion8 5References8 Report In this report I am going to highlight the weaknesses in the in collectived nerve jurisprudence of Federal jounce that lead to its downfall. Audit Committee and AuditorsAccording to the UK corporal establishment encrypt the board should set up formal and obvious arrangements bearing in mind how to apply the corporate reporting upcountry control, and risk worry rules for keeping the right relationship with the bon tons take stockors. The board should doctor up an study direction of at least three non executive directors in the case of smaller companies at least 2 NEDs. The head can be a ingredient in smaller companies precisely can non chair the mission unless he or she was considered independent on date as lead.The board should make sure that at least mavin the member should have upstart and relevant dis gallop in the audit committee. The boards responsibilities are to lay out all the ground in writing and monitor the monetary statement of the company, to polish the fiscal mechanismation and reporting. It should also review internal financial control, risk charge system if non in place separately to check the potence and internal function of internal audit.The board should also be review and monitor the outside(a) auditors work their battles and re appointments, their stipends, and more importantly the non audit services should be checked very closely. In the case of Federal stimulate the board and the audit committee fai conduct to implement the to a higher place mentioned guidelines. In July 2007 the chief executive published on the website that operationally Federal rocks first half of 2007 was a good one. He mentioned that owe lending in particular was strong.If that was the case thence how did Yankee Rock end up being nationalised in just over 7 months? Was someone checking and verifying the statements of the chief executive. The external auditors complacence was an separate issue. In their report of 2006 they gave a clean bill of health. This was by and by investigated by the House of Lords economic affairs committee which found that the auditors had performed their dividing line carelessly. An useful audit committee could have spotted these problems well in advance.The reason for PWCs complacency might either be because of the forepart of Rosemary Radcliffe on the audit committee who was previously a follower of PWC or maybe they were providing another(prenominal) non audit services to the company and did not want to upset the board. As per the corporate presidency enroll the derive of audit committees members was according to the codification scarce none of the NEDs had any financial expe rience. Nichola Pease had experience of fund management but not in the swearing attention notwithstanding that experience was not a late 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 four audit committee and one out of three risk committee meetings. Experience Northern Rock appoint a Senior Independent theatre 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 idea of having good corporate ecesis as it does not ensure mishap or success. The above factors raised questions as to why the companys shareholders did not question the risky business poseur or was it because of outstanding profits seen as the reward for taking such(prenominal) risk. The remu neration committee can also be held responsible for the failure as both the chief executive and the company took on the pretend 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 inadequacy 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 mount but unfortunately with some negative history while works in NatWest where he got paid ? 3M having lead a disastrous attainment strategy. If the company was aware of the history then why was he appointed as a chairman of the Audit and risk committee? alone of the above points indicate that it was really despicable corporate govern ance in place which neither of the committee paid attention or lack their experience in the case of chief executives appointment cannot be said that much as he was internally promoted it is sometimes good so he k virgin about the company from scratch to the summit meeting but in some case it is better 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 monitoring 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 U K corporate Governance code. Northern rock had applied most of the governance code but there were some 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 integrated Governance code on more than one count which led to the auditors not performing their problem properly. Audit committee should act as a watch pawl in an organisation.Risk Management Committee UK corporate governance says that the board should ask a review of the risk management committees potence at least on a yearly basis. The review should cover almost everything including financial, operational and compliance controls and should be presented to the shareholders. Looking at the timeline of dispel of Northern Rock it seems that the risk committee was not very effective in identifying risks faced by the organisation and hence failed to perform its occupation 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 suitable 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 pronounce the skills, experience and knowledg e 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 comparatively 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 possible action that governance drives performance rather than performance driving governance. Non-executives improve performance and the balance between executives and non-executives is very vital.Consideri ng both the internal and external factors bear on the failure of northern rock it was mainly caused due to its internal deadening of managing crisis. It was the very flawed legal regulation and the poor corporate governance of Northern Rock that let itself down during the tough 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 apprehendt from the Northern Rock fiasco by other businesses regardless of their size or profitability. If any business does not implement 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 commi ttee.The board of directors include nine retired four of them 75 years old one a theatre producer and another 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 week but or else 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. otherwise 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 corpo rate governance strong I am afraid there will be more cases like 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 mitigate those before it will be too late. References 1. Treanor, J. (2008). Poor governance reduces profits, says ABI. uncommitted 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/Corpor ate-Governance/UK- Corporate-Governance-Code-September-2012. aspx. Last accessed 09 Feb 2013. 4. Agha, M G and Qatinah, A. (). Lehman Brothers and Corporate Governance Failure. Available http//www. slideshare. net/adnanqatinah1/lehman-brothers-case-study2. Last accessed 09 Feb 2013.