Executive Summary
This paper highlights the importance of effective risk management in corporate governance. The focus of the investigation is on the collapse of the Lehman Brothers Investment Bank during the 2007/2008 global financial crisis. Four key objectives underpin the probe and they focus on identifying reasons why managers ignored fundamental risk management policies, citing roles that employees and shareholders play in risk management, reviewing the nature of risk management in the financial sector, and proposing recommendations for improving corporate governance in the industry.
Key tenets of this paper show that top managers of Lehman Brothers disregarded fundamental risk management during the 2007/2008 global crisis principles due to a lax corporate culture that encouraged irresponsible risk taking. Key sections of this paper show that due to this risk management culture, the bank had accumulated excessive financial risk with minimal cash reserves that would have prevented its collapse. Therefore, it could not withstand the financial repercussions of the housing bubble burst in 2008.
As part of the recommendations to protect investment firms from such kinds of risk, two recommendations are proposed in this report. First, it is important for organizations to define their risk appetite, as a basis for defining the context of risk management. This plan involves communicating to all employees the level of acceptable risk for a firm. Secondly, employees should be trained to be familiar with new risk management policies to improve their compliance records. Similarly, to secure their commitment after the training program, their overall appraisal systems may be pegged on their risk management performance.
Introduction, Context, and Objectives
Introduction
Risk management is an important aspect of business performance because it measures the capabilities of companies to sustain their operations during adverse periods. In this regard, risk management refers to a company’s ability to identify, assess, and control threats that may affect business performance (Bottema et al., 2021; Suprin et al., 2019). The process is often followed by the prioritization of risk and the effective use of a company’s resources to minimize their effects (Elamer et al., 2020; Marisa & Oigo, 2018). Given its centrality to business performance, the main goal of risk management is to increase the financial performance of a company because no meaningful organization can grow if it does not control its risks (Malach & Malach, 2019; World Bank Group, 2019). Thus, organizations consider risk management a critical tenet of their corporate management strategies.
Companies could be exposed to different forms of risks based on their origins. These risks are known as perils and they could stem from multiple sources, including a company’s legal environment, technology use, natural calamities, and strategic relationships, among other factors (Eriksson, 2017; Hartono et al., 2019; United Nations Disaster Risk Reduction, 2019). The process of risk management is often cumbersome and difficult for people who are unfamiliar with a firm’s activities to understand (Biersteker et al., 2022). This is because risk management systems are customized to suit an organization’s internal working and environmental dynamics (Akbar et al., 2021; Winston, 2018). Thus, there is a need for a robust understanding of the reasons why managers pursue specific strategies.
The goal of developing an effective risk management plan is to help organizations to develop a robust understanding of risks affecting organizations and their effects. Risk management also helps managers to understand the cascading nature of these risks on other business processes and overall strategic goals of the organization (Basanna & Vittala, 2019; Groves, 2019). Therefore, the failure to account for the effects of risks on businesses could lead to poor corporate performance. The practice of risk management has undergone significant reforms to help people understand the main motivations for firms to pursue certain risk management strategies. Recently, there has been a trend to increase disclosures about risk in corporate governance practices, but this development has only exposed part of the story of risk management (Ahmadi-Javid et al., 2020; Suša Vugec et al., 2018). Thus, a wealth of information is yet to be known about why managers make the decisions they do, oblivious of fundamental principles of risk management.
This report contains a comprehensive review of this research topic with a focus on the global financial sector. A case study approach is adopted to support the analysis using the collapse of the Lehman Brothers Investment Bank during the 2007/2008 global financial crisis as an example. The Lehman case is selected for this case study because it is one of the largest incidents of financial bankruptcy filed in US history with its roots in poor risk management. The subsection below describes the context of this analysis.
Context
Financial institutions play an important role in supporting the overall functioning of an economy. Their centrality to this sector is informed by their facilitative role in the movement of capital and resources (Aliber & Zoega, 2019; Schenk, 2021). The 2007/2008 global financial crisis provides the context for this review because it is one of the latest risk events to have occurred in the global market (Chen et al., 2020; DesJardine et al., 2019). Its name suggests that the crisis happened in the years 2007 and 2008 but it was years in the making (Johnstone et al., 2019). It is only until the summer of the year 2007 that it became clear to many observers that the global financial system would collapse on the back of cheap credit given to lenders in the US housing market (Aliber & Zoega, 2019; Schenk, 2021). Two financial institutions affiliated with an investment company, Bear Sterns, had already indicated to investors that they would not be able to withdraw their funds due to unforeseen factors (Ball, 2018; Wigmore, 2021). At the same time that the British Bank, Northern Nock, was seeking financial help from the government (Hernando, 2019). These events preceded the crisis and they contributed to the collapse of other industries and sectors of the economy.
The 2007/2008 global financial crisis marked a period when risk management was ignored in pursuit of profit-making objectives. At the end of the crisis, investors were left with trillions of dollars of worthless investment options in the US real estate sector (Engelen, 2017; Nützenadel, 2021). From this background, millions of investors in the US paid premium mortgages for properties that were not worth the investments (Pulapa, 2020). This crisis caused many of them to lose their savings, homes, and even their lives due to financial distress and cases of suicide (Lee et al., 2021). In 2009, the crisis subsided when the government bailed out wall street banks from the crisis (Abolafia, 2021). Overall, this event highlights the circumstances preceding the collapse of the Lehman Brothers Investment Bank. The objectives underlying the current probe on the risk elements associated with the crisis are discussed below.
Objectives
- To identify the main causes for the neglect of risk management principles at Lehman Brothers Investment Bank
- Identify key roles that employees and shareholders play in risk management in the financial industry
- To critically review the nature of risk strategy in the global financial sector
- To formulate strategies for helping risk management officers to perform their duties
Literature Review
In this literature review, the theoretical foundations underpinning the research topic will be analyzed with an emphasis on how banks and financial institutions managed their risks during the 2007/2008 global financial crisis. Stemming from this background, the evidences provided by other scholars on this research topic will be evaluated with a keen focus on leadership and corporate culture as tools of engagement.
Theoretical Foundation
Several theories have been developed to explain the risk management plans of several multinational organizations. For purposes of this review, the focus is on theories that apply to risks associated with the financial sector. Subject to this position, researchers claim that financial institutions hedge their risks to mitigate the effects of credit risk rationing (Giambona et al., 2018; Murthy & Al-Muharrami, 2020; Shen & Wang, 2019). This action helps to reduce cash flow volatility and enhance investments in cash-starved priority areas (Cantero-Saiz et al., 2021). The common idea behind the pursuit of this alternative risk management strategy is the possibility that firms will hedge their risks if they anticipate credit risk rationing.
The importance of risk management in the financial sector is to hedge against a company’s investments. Therefore, most banks control for investment prospects as a core part of their corporate plans (Michie, 2021). Given that access to liquidity could act as an alternative investment strategy, it is advisable to control this option (Popkova, 2018). Banks are also known to control management risk based on the lack of potential to assess management quality (Meah & Chaudhory, 2019). In this context, some banks choose to hedge certain risks by mitigating the effects of external factors on their overall corporate performance (Deloitte, 2020). Lower level managers do not often follow this strategy because it is expensive (Kaur et al., 2021). Conversely, the decision to setup a parallel risk management plan is more convenient and practical. Therefore, it can be deduced that setting up a risk management plan is an effective strategy for countering information asymmetry in organizations.
The above insights show that hedging is a commonly adopted risk management strategy in the financial sector. It stems from the credit-rationing model underpinning the actions of many investment managers today (Maxwell, 2020; McKinsey, 2019; Wang et al., 2020). However, agency models have also been developed to understand the risk management actions of the same managers (Dhingra et al., 2017; Donthu & Gustafsson, 2020; Mogos et al., 2019; Sun et al., 2019). This statement draws attention to the agency relationship developed between managers and their shareholders in situations where both parties have conflicting interests. For example, the actions of risk-averse managers could clash with the interests of well-hedged shareholders.
Leadership and Risk Management
As highlighted in this study, leadership is a broad concept that involves the management of different factors affecting corporate performance. Its pervasive nature means that the concept is an object of control for the management of risk activities (Tafvelin et al., 2019; Waldman et al., 2020). From this background, leadership theories have been developed to explain corporate risk management strategies (Schinzel, 2020; Schweiger et al., 2020; Latta, 2021; Crawford et al., 2020). Furthermore, recent scholarly discussions have explored the best type of leadership style to use in uncertain economic conditions, such as those witnessed during the 2007/2008 global financial crisis (Tafvelin et al., 2019; Waldman et al., 2020). In this debate, researchers have explored the appropriateness of democratic and servant leadership styles in modern organizations (Latta, 2021; Crawford et al., 2020. Both formats are applicable in the financial sector and its appendages.
The servant leadership style has emerged as an effective model for implementing risk management principles because of its alignment with fairness and shareholder interests. People’s preference for this leadership style is based on its goal-oriented nature, which makes it a fit for organizations that want to implement robust risk management plans (Schinzel, 2020; Schweiger et al., 2020; Latta, 2021; Crawford et al., 2020). Proponents argue that this leadership style minimizes human limitations by inviting various groups of stakeholders to take part in the decision-making process of an organization (Bustamante, 2019; Chan & Ho, 2018). Therefore, a participatory model of decision-making is envisioned and it encompasses the principles of robust risk management practices because it strives to raise awareness about different sources of risk.
Discussions on leadership theories and their effects on risk management have also included debates on ethical leadership. These deliberations have been integrated with others that highlight the need for proper agency relationships between leaders and shareholders as a risk mitigation strategy (Chiniara & Bentein, 2018; Dust et al., 2018; Hoch et al., 2018; Hu & Judge, 2017). They suggest that unethical leadership practices often encourages uncouth managers to promote their interests at the expense of an organization, or its shareholders, during risk management (Chiniara & Bentein, 2018; Dust et al., 2018; Hoch et al., 2018; Hu & Judge, 2017). This practice exposes them to undue risk exposures because they are not working to promote the interests of shareholders (Chiniara & Bentein, 2018; Dust et al., 2018). Therefore, the attitudes and organizational environment of an organization precedes the type of risk management activities they are likely to engage in.
Risk Management Culture
Risk management operates within a contextualized organizational culture where common norms, beliefs, and values influence people’s behaviors. Stemming from the relationship between risk management and culture, some organizations and institutions get more attention from people and governments than others do (Bolat & Korkmaz, 2021; Kar, 2018). This bias is magnified because of the strategic importance of some economics sectors to the functioning of the global economic system. This is why some organizations and institutions are considered critical to the economic viability of a state, or an economy, while others are not.
Focused on national interventions, the importance of critical institutions to the functioning of an economy means that they may attract government intervention to protect public interests. The involvement of public entities comes from the potential that the collapse of one critical financial institution would have one other industries or businesses (Gill, 2017; Klein, 2017). Indeed, fears of job losses, erosion of public confidence in economic management, and distortion of demands or supply chain patterns are likely to see government agencies bail out, or intervene in the management of, critical corporations (Babalola et al., 2019; Bavik et al., 2018; Byun et al., 2018; Cheng et al., 2019). Consequently, there is preferential treatment that happens in most economies where some firms get government backing, while others do not (Barmeyer et al., 2019; Godelier, 2020; Zhao et al., 2020; Sheth, 2020). This practice has created a culture where managers are less accountable for their actions than an alternate situation where the risk of collapse was real.
The elevated importance of some of organizations to economies happens within a risk management framework and culture. This framework explains why culture is an essential aspect of risk management and, by extension, corporate management (Feng et al., 2021). A culture of “Too big to fail” has emerged from these practices and it refers to the critical importance of certain companies to the overall functioning of an economy to the extent that the players involved would not allow it to collapse (Knowledge at Wharton Staff, 2022). The idea behind this reasoning is that the government would do all it can to prevent the collapse of such firms to protect the economic viability of a state (Dursta et al., 2019). Thus, there are intertwined political and economic interests to the development of the “Too big to fail” philosophy, which underpins the risk management practices of certain companies.
Summary
The insights generated from the literature review show that risk management is an important process in corporate governance. However, unique organizational and context-specific factors force managers to make decisions that are detrimental to the viability of a business. Additional pieces of evidence in this review show that some managers may be encouraged to expose their shareholders to unnecessary risks because of weaknesses in their agency relationships. These statements indicate the need for understanding the context-specific nature of risk. The case study on Lehman Brothers emerges from this background and it is fixated on highlighting special circumstances that may force managers to ignore fundamental risk management principles, thereby exposing shareholders to financial ruin.
Findings and Conclusion
Findings
The 2007/2008 financial crisis and the collapse of the Lehman investment bank is part of a history of disasters to affect the global financial system. Particularly, the Asian financial crisis of 1997 draws parallels to this crisis because it highlights the importance of effective risk management in corporate and economic governance (Wong et al., 2020). The crisis also showed that ignoring basic risks management principles in one, or several, critical organizations could lead to economy-wide financial repercussions (Arner et al., 2020; Prentice, 2021). Furthermore, similar to the 2007/2008 economic crisis, the Asian financial crisis was preceded by a period of economic boom and prosperity, which masked weak risk management principles underlying economic governance (Bülent, 2021). Thus, it can be deduced that crises follow periods of economic boom.
In the Lehman case study, its corporate culture led its managers to invest in complicated financial instruments when the housing market was about to collapse. This investment decision was supported by years of positive financial performance that had seen the company’s revenue increase by nearly 130% between the years 200 and 2006 (Amadeo & Rasure, 2022). This growth was supported by a mortgage-backed security strategy that was pegged on a risk-taking and overconfident managerial attitude (Sheyretova, 2018). This zeal was also witnessed in subsequent investments decisions that followed, oblivious of the dangers of pursuing it to no end.
The Lehman case study draws many lessons for businesses and managers because its collapse could have been forestalled by adhering to fundamental risk management principles. Indeed, one of the major causes of its collapse was poor risk management because the bank had taken too much risk without a proper risk management plan to guide it in the event that payments are due urgently (Jones et al., 2018; Kelly & Nicholson, 2022). This weakness could be seen in the manner the company treated its assets and liabilities (Eseryel et al., 2021). Theoretically, the company had enough assets to cover for its liabilities because its cumulative asset value was $639 billion and it had accumulated short-term debt obligations amounting to $613 billion (Amadeo & Rasure, 2022). It needed to pay its debts fast but was unable to do so given that its assets could not be sold quickly (Erra, 2018; Fligstein et al., 2017). Therefore, while it was theoretically correct to assume that, the company’s assets were sufficient to cover its liabilities; most of the assets were in immovable form, which means that they could not be sold quickly. This problem led to the cash flow problems that eventually contributed to the collapse of the firm.
The mismatch between the assets and liabilities of Lehman Brothers could lead any serious manager to conclude that the company was not in a position to meet its short-term financial obligations, with the current asset set up. Management’s failure to correct this situation means that there was laxity and noncompliance with fundamental accounting and risk management principles (Sadler-Smith, 2018; Sharma et al., 2020). Particularly, it was difficult to understand why the company could not maintain sufficient reserves of current assets that could be held either in cash, or in fast-moving assets, to minimize exposure. Researchers who have investigated this issue allude to a weak corporate culture that encouraged irresponsible risk-taking (Díez-Esteban et al., 2019; Vague, 2019; Snyder, 2020). This environment may have led its managers to ignore basic risk management principles.
The practice was rooted in the “too big to fail” culture that was mentioned in the literature review section of this paper. Indeed, managers believed that the company could not fail because authorities would not allow it to do so (Hearit, 2018; Peeters et al., 2020; Song & Wang, 2020). They were wrong because this irresponsible risk-taking culture exposed them to many market perils and they lacked the capacity to contain their effects (Duncan, 2020). The details of management attitudes and their roles in creating the crisis are highlighted in the appendix section.
Borrowing from the lessons of the Lehman case, a company’s corporate culture has an effect on various aspects of operations- risk management included. Indeed, the relationship between Lehman Bother’s corporate culture and its poor risk performance highlights the power of culture on organizational performance (Kirikkaleli et al., 2020; Rebelo et al., 2017). From this background, several researchers have concluded that corporate culture has the power to positively, or negatively, affect organizational performance (Campbell, 2019; Fan & Stevenson, 2018; Shou et al., 2017). Concisely, from a risk management perspective, a poor corporate culture would encourage managers to make wrong decisions that are to the detriment of their organizations or shareholders (Christopher, 2019; Lam, 2018). Conversely, a positive culture can encourage managers to be consultative before making decisions, thereby developing robust risk management plans.
Conclusion
As highlighted in the first section of this report, four objectives underpinned the present probe. They focused on identifying the main reasons why managers may ignore fundamental risk management policies, roles that employees and shareholders play in risk management, the nature of risk management in the financial sector, and recommendations for improving corporate governance. Key tenets of this paper have shown that top managers of Lehman Brothers disregarded fundamental risk management principles due to a lax corporate culture that encouraged irresponsible risk taking. The evidence deduced from this report also show that due to this high-risk management culture, the investment bank had accumulated immense financial risks with minimal cash reserves that would have protected its core investments. Therefore, it could not withstand the financial repercussions of the housing bubble burst in 2008. Overall, it should be understood that the purpose of a successful risk management program is not to eliminate risk but to add value to an organization by making smart risk management decisions.
Recommendations and Implementation Plan
As highlighted in this study, developing a robust plan to manage risks requires a holistic understanding of the main sources of risk present in an organization and their impact on the operations of a business. The case study findings highlighted in this investigation suggest that Lehman Brother’s corporate culture was responsible for the firm’s collapse (Hoch et al., 2018). They also demonstrate the lack of proper accountancy systems for its managers because they had freedom to make unwise investment decisions on behalf of their shareholders without proper accountability mechanisms in place. From this background, it is recommended that investment banks should boost their corporate governance systems for top management to enhance fiscal and policy responsiveness to risk management.
From an implementation perspective, managers may consider integrating their risk management programs with their goals and strategies to promote synchronicity of purpose. This implementation plan would address agency issues that commonly emerge between managers and their shareholders. To realize this objective, it is important for organizations to define their risk appetite, as a basis for outlining the context of risk management. This process may involve communicating to all employees the level of acceptable risk for the firm (Hu & Judge, 2017. Thereafter, employees should be trained to be familiar with new risk management policies. Additionally, to secure their commitment, their overall appraisal systems may be pegged on their risk management performance.
References
Abolafia, M. (2021). Taking the floor: Models, morals, and management in a Wall Street trading room. Contemporary Sociology, 50(1), 31-33.
Ahmadi-Javid, A., Fateminia, S. H., & Gemünden, H. G. (2020). A method for risk response planning in project portfolio management. Project Management Journal, 51(1), 77-95.
Akbar, M., Akbar, A., & Draz, M. U. (2021). Global financial crisis, working capital management, and firm performance: Evidence from an Islamic market index. SAGE Open, 4(2), 1-12.
Aliber, R. Z., & Zoega, G. (Eds.). (2019). The 2008 global financial crisis in retrospect: Causes of the crisis and national regulatory responses. Springer.
Amadeo, K., & Rasure, E. (2022) Lehman Brothers collapse. Web.
Arner, D. W., Wan, Y., Godwin, A., Shen, W., & Gibson, E. (Eds.). (2020). Research handbook on Asian financial law. Edward Elgar Publishing.
Babalola, M. T., Stouten, J., Camps, J., & Euwema, M. (2019). When do ethical leaders become less effective? The moderating role of perceived leader ethical conviction on employee discretionary reactions to ethical leadership. Journal of Business Ethics, 1(4), 85-102.
Ball, L. M. (2018). The fed and Lehman Brothers: Setting the record straight on a financial disaster. Cambridge University Press.
Basanna, P., & Vittala, K. R. P. (2019). An analysis of foreign exchange risk management: Techniques employed in Indian pharma industry. Jindal Journal of Business Research, 8(1), 92-107.
Barmeyer, C., Bausch, M., & Moncayo, D. (2019). Cross-cultural management research: Topics, paradigms, and methods – A journal-based longitudinal analysis between 2001 and 2018. International Journal of Cross Cultural Management, 19(2), 218-244.
Bavik, Y. L., Tang, P. M., Shao, R., & Lam, L. W. (2018). Ethical leadership and employee knowledge sharing: Exploring dual-mediation paths. Leadership Quarterly, 2(9), 322-332.
Biersteker, E., van Marrewijk, A., & Koppenjan, J. (2022). Identifying subjective perspectives on managing underground risks at Schiphol airport. Project Management Journal, 53(2), 181-195.
Bolat, Y., & Korkmaz, C. (2021). Social values and life skills as predictors of organizational culture: A study on teachers. SAGE Open, 11(2), 22-29.
Bottema, M. J., Bush, S. R., & Oosterveer, P. (2021). Territories of state-led aquaculture risk management: Thailand’s Plang Yai program. Environment and Planning: Politics and Space, 39(6), 1231-1251.
Byun, G., Xu, L., & Lee, S. (2018). A study of mechanisms in the relationship between ethical leadership and job performance. Korean Journal of Business Administration, 3(1), 1877-1902.
Bülent, A. (Ed.). (2021). Handbook of research on current trends in Asian economics, business, and administration. IGI Global.
Bustamante, V. C. (2019). Strategic choices: Accelerated startups’ outsourcing decisions. Journal of Business Research, 5(1), 359-369.
Campbell, J. L. (2019). Self-responsibility gone bad: Institutions and the 2008 financial crisis. American Behavioral Scientist, 63(1), 10-26.
Cantero-Saiz, M., Torre-Olmo, B., & Sanfilippo-Azofra, S. (2021). Creditor rights, monetary policy, financial crisis, and trade credit. Business Research Quarterly, 4(2), 1-10.
Chan, E. Y. Y., & Ho, Y. J. (2018). Urban community disaster and emergency health risk perceptions and preparedness. Science and Technology in Disaster Risk Reduction in Asia, 6(2), 95-110.
Chen, C. L., Weng, P. Y., & Lin, Y. C. (2020). Global financial crisis, institutional ownership, and the earnings informativeness of income smoothing. Journal of Accounting, Auditing & Finance, 35(1), 53-78.
Cheng, J., Bai, H., & Yang, X. (2019). Ethical leadership and internal whistleblowing: A mediated moderation model. Journal of Business Ethics, 1(5), 115-130.
Chiniara, M., & Bentein, K. (2018). The servant leadership advantage: When perceiving low differentiation in leader-member relationship quality influences team cohesion, team task performance and service OCB. Leadership Quarterly, 2(9), 333-345.
Christopher, J. (2019). The failure of internal audit: Monitoring gaps and a case for a new focus. Journal of Management Inquiry, 28(4), 472-483.
Crawford, J. A., Dawkins, S., Martin, A., & Lewis, G. (2020). Putting the leader back into authentic leadership: Reconceptualising and rethinking leaders. Australian Journal of Management, 45(1), 114-133.
Deloitte. (2020). Mitigating compliance risk implications for global supply chains. Web.
social and environmental practices in the context of the 2008 global financial crisis. Journal of Management, 45(4), 1434-1460.
Dhingra, S., Huang, H., Ottaviano, G. I. P., Pessoa, J. P., Sampson, T., & Reenen, J. V. (2017). The costs and benefits of leaving the EU: Trade effects. Economic Policy, 32(92), 651-705.
Díez-Esteban, J. M., Farinha, J. B., & García-Gómez, C. D. (2019). Are religion and culture relevant for corporate risk-taking? International evidence. Business Research Quarterly, 22(1), 36-55.
Donthu, N., & Gustafsson, A. (2020). Effects of COVID-19 on business and research. Journal of Business Research, 117(1), 284-289.
Duncan, L. R. L. (2020). Identifying the influence of supervisors on strengthening climate and culture for creating value. Journal of Creating Value, 6(1), 97-118.
Dursta, S., Hintereggerb, C., & Ziebac, M. (2019). The linkage between knowledge risk management and organizational performance. Journal of Business Research, 105(1), 1-10.
Dust, S. B., Resick, C. J., Margolis, J. A., Mawritz, M. B., Greenbaum, R. L. (2018). Ethical leadership and employee success: Examining the roles of psychological empowerment and emotional exhaustion. Leadership Quarterly, 2(9), 570-583.
Elamer, A. A., Ntim, C. G., & Abdou, H. A. (2020). Islamic governance, national governance, and bank risk management and disclosure in MENA countries. Business & Society, 59(5), 914-955.
Engelen, E. (2017). Shadow banking after the crisis: The Dutch case. Theory, Culture & Society, 34(6), 53-75.
Erra, K. S. S. (2018). Laurence M. Ball, the fed and Lehman Brothers. The Indian Economic Journal, 66(3), 403-405.
Eriksson, L. (2017). Components and drivers of long-term risk communication: exploring the within-communicator, relational, and content dimensions in the Swedish forest context. Organization & Environment, 30(2), 162-179.
Eseryel, U. Y., Crowston, K., & Heckman, R. (2021). Functional and visionary leadership in self-managing virtual teams. Group & Organization Management, 46(2), 424-460.
Fan, Y., & Stevenson, M. (2018). A review of supply chain risk management: Definition, theory, and research agenda. International Journal of Physical Distribution & Logistics Management, 48(3), 205-230.
Feng, C., Li, Z., & Peng, Z. (2021). The impact of banking competition on firm credit risk and leverage. SAGE Open, 4(2), 1-10.
Fligstein, N., Stuart Brundage, J., & Schultz, M. (2017). Seeing like the fed: Culture, cognition, and framing in the failure to anticipate the financial crisis of 2008. American Sociological Review, 82(5), 879-909.
Giambona, E., Graham, J. R., Harvey, C. R., & Bodnar, G. M. (2018). The theory and practice of corporate risk management: Evidence from the field. Financial Management, 9(2), 783-832.
Gill, R. (2017). The affective, cultural and psychic life of postfeminism: A postfeminist sensibility 10 years on. European Journal of Cultural Studies, 20(6), 606-626.
Godelier, E. (2020). The corporate nationality: A question of culture and community? Journal of Modern European History, 18(1), 28-47.
Groves, C. (2019). Sustainability and the future: Reflections on the ethical and political significance of sustainability. Sustainability Science, 14(4), 915-924.
Hartono, B., Wijaya, D. F., & Arini, H. M. (2019). The impact of project risk management maturity on performance: Complexity as a moderating variable. International Journal of Engineering Business Management, 7(2), 1-10.
Hearit, L. B. (2018). JPMorgan Chase, Bank of America, Wells Fargo, and the financial crisis of 2008. International Journal of Business Communication, 55(2), 237-260.
Hernando, M. G. (2019). British think-tanks after the 2008 global financial crisis. Springer.
Hoch, J. E., Bommer, W. H., Dulebohn, J. H., & Wu, D. (2018). Do ethical, authentic, and servant leadership explain variance above and beyond transformational leadership? A meta-analysis. Journal of Management, 4(4), 501-529.
Hu, J., & Judge, T. A. (2017). Leader-team complementarity: Exploring the interactive effects of leader personality traits and team power distance values on team processes and performance. Journal of Applied Psychology, 1(2), 935-955.
Johnstone, S., Saridakis, G., & Wilkinson, A. (2019). The global financial crisis, work and employment: ten years on. Economic and Industrial Democracy, 40(3), 455-468.
Jones, C., Cowe, S., & Trevillion, E. (2018). Property boom and banking bust: The role of commercial lending in the bankruptcy of banks. John Wiley & Sons.
Kar, M. (2018). Price discovery mechanism in spot and futures market of agricultural commodities: The case of India. Journal of International Business, 5(2), 44-67.
Kaur, M., Malik, K., & Sharma, S. (2021). A note on boardroom challenge, board effectiveness and corporate stewardship during COVID-19. Vision, 25(2), 131-135.
Kelly, D., & Nicholson, A. (2022). Ancestral leadership: Place-based intergenerational leadership. Leadership, 18(1), 140-161.
Kirikkaleli, D., Yaylali, P., & Safakli, O. V. (2020). The perception and culture of operational risk in the banking sector: Evidence from Northern Cyprus. SAGE Open, 5(2), 1-11.
Klein, N. (2017). No is not enough. Penguin.
Knowledge at Wharton Staff. (2022). Not too big to fail: Why Lehman had to go bankrupt. Web.
Lam, K. S. H. (2018). Doing good across organizational boundaries: Sustainable supply chain practices and firms’ financial risk. International Journal of Operations & Production Management, 38(12), 2389-2412.
Latta, G. F. (2021). Eliciting the true self: The effects of doctoral education on students’ implicit leadership theories and authentic leader identity development. Journal of Research on Leadership Education, 16(1), 30-56.
Lee, C. Y., Kaneko, S., Yoshida, Y., Hangcheng, S., Ichihashi, M., & Fukuda, K. (2021). Equivalence gain of the global financial crisis: A note. Journal of Economic Theory and Practice, 20(1), 111-121.
Malach, S. E., & Malach, R. L. (2019). Regulatory and risk management issues arising in the context of experiential entrepreneurship education. Entrepreneurship Education and Pedagogy, 2(1), 82-95.
Marisa, R., & Oigo, D. (2018). Influence of organizational resources and structure on business continuity management of private security firms in Kenya. Journal of Human Resource Management, 6(1), 18-25.
Maxwell, P. (2020). Director of enterprise risk management. Coca-Cola Company.
McKinsey. (2019). A practical approach to supply-chain risk management. Web.
Meah, M. R., & Chaudhory, N. U. (2019). Corporate governance and firm’s profitability: An emerging economy-based investigation. Indian Journal of Corporate Governance, 12(1), 71-93.
Michie, R. C. (2021). Banks, exchanges, and regulators: Global financial markets from the 1970s. Oxford University Press.
Mogos, M. F., Fredriksson, A., & Alfnes, E. (2019). A production transfer procedure based on risk management principles. Journal of Global Operations and Strategic Sourcing, 12(1), 103-150.
Murthy, Y. S. R., & Al-Muharrami, S. (2020). Credit rating strategies: A study of GCC banks. SAGE Open, 4(2), 1-16.
Nützenadel, A. (2021). The financial crisis of 2008 – Experience, memory, history. Journal of Modern European History, 19(1), 3-7.
Peeters, M., Denkers, A., & Huisman, W. (2020). Rule violations by SMEs: The influence of conduct within the industry, company culture and personal motives. European Journal of Criminology, 17(1), 50-69.
Popkova, E. G. (2018). The future of the global financial system: Downfall or harmony. Springer.
Prentice, M. M. (2021). Dynastic aura: Proximity to the powerful and its promise in corporate South Korea. Critique of Anthropology, 41(3), 247-266.
Pulapa, S. R. (2020). Business ethics and the Bhagavad Gita: Cost of unethical acts: directions of the Dharmatman for ethical leadership. Springer Nature.
Rebelo, F. M., Silva, R., & Santos, G. (2017). The integration of standardized management systems: Managing business risk. International Journal of Quality & Reliability Management, 34(3), 395-405.
Sadler-Smith, E. (2018). Hubristic leadership. SAGE.
Schenk, C. R. (2021). The global financial crisis and banking regulation: Another turn of the wheel? Journal of Modern European History, 19(1), 8-13.
Schinzel, U. (2020). “I am a responsible leader” responsible corporate social responsibility: The example of Luxembourg. Business Perspectives and Research, 8(1), 21-35.
Schweiger, S., Müller, B., & Güttel, W. H. (2020). Barriers to leadership development: Why is it so difficult to abandon the hero? Leadership, 16(4), 411-433.
Sharma, P., Leung, Y. T., Kingshott, P. J. R., Davcik, S. & Cardinali, S. (2020). Managing uncertainty during a global pandemic: An international business perspective. Journal of Business Research, 116(2020), 188-192.
Shen, C. H., & Wang, C. A. (2019). Do new brooms sweep clean? Evidence that new CEOs take a ‘big bath’ in the banking industry. Journal of Emerging Market Finance, 18(1), 106-144.
Sheth, J. (2020). Impact of Covid-19 on consumer behavior: Will the old habits return or die? Journal of Business Research, 117(2), 280-283.
Sheyretova, V. (2018). Did the accounting treatment of financial instruments contribute to the collapse of Lehman Brothers?: A case study of the repurchase agreement Repo 105. GRIN Verlag.
Shou, W., Li, Y., Park, Y., & Kang, M. (2017). The impact of product complexity and variety on supply chain integration. International Journal of Physical Distribution & Logistics Management, 47(4), 297-317.
Shou, Y. H., Kang, M. Y., & Park, Y. (2019). Risk management of manufacturing multinational corporations: The moderating effects of international asset dispersion and supply chain integration. Supply Chain Management, 25(1), 61-76.
Snyder, H. (2020). Literature review as a research methodology: An overview and guidelines. Journal of Business Research, 104(1), 333-339.
Song, W. L., & Wang, H. (2020). Do Institutional investors know banks better? Evidence from institutional trading surrounding the 2008 financial crisis. Journal of Accounting, Auditing & Finance, 35(4), 777-802.
Suprin, M., Chow, A., Pillwein, M., Rowe, J., Ryan, M., Rygiel-Zbikowska, B., Wilson, K. J., & Tomlin, I. (2019). Quality risk management framework: Guidance for successful implementation of risk management in clinical development. Therapeutic Innovation & Regulatory Science, 53(1), 36-44.
Sun, H., Ichihashi, M., & Fukuda, K. (2019). Welfare gains of China’s WTO access: A note. Review of Economics and Institutions, 10(2), 1-15.
Suša Vugec, D., Tomičić-Pupek, K., & Vukšić, V. B. (2018). Social business process management in practice: Overcoming the limitations of the traditional business process management. International Journal of Engineering Business Management, 5(3), 1-11.
Tafvelin, S., Hasson, H., Holmström, S., & von Thiele Schwarz, U. (2019). Are formal leaders the only ones benefitting from leadership training? A shared leadership perspective. Journal of Leadership & Organizational Studies, 26(1), 32-43.
United Nations Disaster Risk Reduction. (2019). Global assessment report on disaster risk reduction, part II—Implementation of the Sendai Framework for disaster risk reduction and disaster risk-informed sustainable development. Web.
Vague, R. (2019). A brief history of doom: two hundred years of financial crises. University of Pennsylvania Press.
Waldman, D. A., Siegel, D. S., & Stahl, G. K. (2020). Defining the socially responsible leader: revisiting issues in responsible leadership. Journal of Leadership & Organizational Studies, 27(1), 5-20.
Wang, S., Liu, Q., Dinçer, H., & Yüksel, S. (2020). Analysis of innovation performance for retail banking industry with the hybrid fuzzy decision-making approach. SAGE Open, 11(2), 1-12.
Wigmore, B. A. (2021). The financial crisis of 2008: A history of us financial markets 2000–2012. Cambridge University Press.
Winston, C. (2018). Norm structure, diffusion, and evolution: A conceptual approach. European Journal of International Relations, 24(3), 638-661.
Wong,W., Guo, X., & Lozza, O. (Eds.). (2020). Mathematical finance with applications. MDPI.
World Bank Group. (2019). World Bank open data. Web.
Zhao, H., Xu, J., Chen, Y., & Sun, W. (2020). The employee attributions of corporate hypocrisy in corporate social responsibility: An exploratory research based on grounded theory. SAGE Open, 5(2), 1-10.
Appendix
Details of Lehman’s Brother’s Collapse
Lehman Brothers was one of the largest investment banks in the United States (US) with roots in New York. At its height, the Wall Street firm controlled billions of dollars in assets, held in trust on behalf of various groups of investors (Jones et al., 2018; Kelly & Nicholson, 2022). Before, it filed for bankruptcy in 2008, the company had been inexistence for more than 160 years (Amadeo & Rasure, 2022). The collapse of the financial institution happened after the 2007/2008 global financial crisis, which started from the US housing bubble (Erra, 2018; Fligstein et al., 2017). The company was tied to the global financial crisis because, in 2006, it had made significant investments in the collapsed subprime mortgage market (Jones et al., 2018). Therefore, when the collapse happened, the company could not raise adequate cash to stay in business due to the losses made in this market.
Lehman Brothers traces its financial woes to over-lending in the sub-prime mortgage market. Concerns about the collapse of the investment firm had emerged when government officials bailed out its competitor, Bear Sterns (Díez-Esteban et al., 2019; Vague, 2019; Snyder, 2020). Logically, it was expected that Lehman Brothers would need a similar intervention. Therefore, government encouraged managers of the bank to find a buyer in the same manner as Bear Sterns did, but it was unsuccessful in doing so (Erra, 2018; Fligstein et al., 2017). An alternative strategy to save the business was nationalization but this strategy did not work because Lehman Brothers was an investment bank (Díez-Esteban et al., 2019; Vague, 2019; Snyder, 2020). Therefore, it could not be bailed out in the manner other financial institutions, such as Fannie Mae and Freddie Mac were saved (Erra, 2018; Fligstein et al., 2017). Due to the same reasons, federal regulators could not intervene. Furthermore, Lehman Brother’s lack of sufficient assets to guarantee a loan made it difficult to pursue any other remedy. Therefore, in September of 2008, the company filed a notice of bankruptcy in a Southern District Court of New York.
Overall, the collapse of the Lehman Brothers corporation was the largest in the history of the US and it was traceable to poor risk management. Again, the collapse of the financial institution can be traced to its heavy investments in the subprime mortgage market, just before the bubble was about to burst. The failure of the government to bail it out worsened the effects of the economic crisis and investors bore the brunt of the crisis. This case study provides an example of the conflicts of interest that often emerge between managers and their shareholders. Additionally, it explains the extent that the pursuit of investment greed without a proper risk management plan to back it up could do to business performance.