The Collapse of Lehman Brothers

With assets of $639 billion, the insolvency of Lehman Brothers, filed on 15 September 2008, was the biggest in history. Lehman was later criticized for aggressive and excessive risk-taking and overexposure to sub-prime bonds. With the benefit of hindsight, the bank went down because of overexposure to bad mortgage loans. This raises an obvious question: where was the board in all this?

As of 2008, the board members were:

• Richard S Fuld, the chairman and CEO since 1994, joined Lehman Brothers in 1969.
• Michael L Ainslie, former president, Sotheby's Holdings
• John F Akers (age 74), retired Chairman, IBM
• Roger S Berlind (age 75), theatrical producer
• Thomas H Cruikshank (age 77), retired CEO of Halliburton Company
• Marsha Johnson Evans, Rear-Admiral, United States Navy (retired)
• Sir Christopher Gent, non-executive Chairman of GlaxoSmithKline plc
• Jerry A Grundhofer, retired CEO, US Bancorp, entered 2008
• Ronald A Hernandez, retired Chairman and CEO, Telemundo Group
• Henry Kaufman (age 81), retired, Salomon Brs, Chairman of the Finance and Risk Committee
• John D Macomber (age 80), former CEO, Celanese Corporation, a director of Lehman Brothers Holdings Inc. since 1994.

CEO Richard S Fund had a substantial equity investment (estimated at 1.4% of the firm or more than half a billion dollars' worth before the stock dropped during the crisis). Fuld is reported to have made hundreds of millions of dollars during his tenure as CEO of Lehman Brothers.

Sources: Dellaportas, S., Thomsen, S., and Conyon, M., Principles of Ethics and Corporate Governance in Financial Services, 1st edition, McGraw-Hill, Sydney, 2012.

Required:

1)Did Lehman's board have the capacity to stop the bank's excessive risk-taking?

2)Was the board sufficiently independent?

3)Was the size of the board appropriate?

4)What changes in board structure would you propose?