MF Global case raises questions for director oversight of CEOs

November 8, 2011

By Emmanuel Olaoye

NEW YORK, Nov. 8 (Thomson Reuters Accelus) – The collapse of MF Global and charges that millions of dollars are unaccounted for highlights the challenges that powerful corporate executives pose to a firm’s governance controls, experts said.

Jon Corzine, MF Global’s chief executive officer resigned on Friday, four days after the futures brokerage firms filed for bankruptcy. Before his time with the firm, Corzine ran the investment bank Goldman Sachs in the 90s before he went on to be a senator for the state of New Jersey. He then served as New Jersey’s governor for four years before joining MF Global in March 2010.

Corzine lobbied regulators to persuade them that MF Global had no need to raise capital, the New York Times has reported. Although the firm later improved its capital position, the capital it raised wasn’t enough for the firm to survive.

William K. Black, associate professor of economics and law at the University of Missouri’s Kansas City, said that dominant chief executive officers will always be able to influence the organization’s governance structure. “The CEO is the greatest hope of an honest corporation, and the greatest danger is a dishonest CEO,” Black said.

Black, who is a former litigation director of the Federal Home Loan Bank Board, and senior deputy chief counsel, Office of Thrift Supervision, said boards would need to adopt constraints to rein in aggressive leaders. He said it was vital that boards avoid a scenario where a dominant CEO is the single most important component in a company’s leadership.

“You want CEOs to take prudent risks. What you don’t want is them doing a whole series of things that are absolutely impermissible,” he said.

The Sarbanes Oxley law that was passed in 2002, in the aftermath of the Enron and WorldCom scandals, required that public companies only recruit independent directors with no material relationship to the company can sit on their audit committees.

The rules were intended to increase the quality of board oversight and limit the possibility of conflicts of interests that could lead to fraud or large losses.

Howard Schilit, founder and chief executive of the Financial Shenanigans Detection Group LLC, said that employees in internal audit are often under tremendous pressure to be team players in companies that have powerful and authoritarian managers. It is even more difficult for internal auditors to maintain their independence if they are reporting to the chief financial officer or the Treasury department, he said.

“WorldCom and Enron had very powerful executives. If you had even a mid-level person in charge of internal controls or internal audit there is tremendous pressure to be a team player,” Schilit said.

Billy M Atkinson, a past chairman of the National Association of State Boards of Accountants, said a good corporate culture was just as important as having good governance structures.

Atkinson, who wanted to make it clear that he was unfamiliar with the details of the events that caused MF Global’s collapse, said that companies that developed an honest corporate culture tended to create the type of environment where employees will want to come forward and report wrongdoing in the organization.

“The most important control that can often fail is the control environment. Where there is not a culture or an environment that understands the objectives of good internal controls, it can [filter] throughout the organization,” he said.


(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete ( ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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