Enterprise Risk Management: From Incentives to Controls, 2nd Edition

CHAPTER 5

Corporate Governance

The 1990s can be considered the early years in ERM. These years were marked by a series of major risk management failures, with some of them—including those that struck at Barings Bank, Metallgesellschaft, and Sumitomo—generating damages of more than one billion dollars. The 2000s saw even more dramatic corporate frauds and failures—Enron, WorldCom, Adelphia—that destroyed tens of billions of shareholder value and brought equity markets to their knees.

These disasters had devastating consequences for the stakeholders of the companies involved—investors, employees, customers, and business partners. Some even threatened the stability of entire markets. For example, the collapse of Barings, in which rogue trader Nick Leeson racked up his colossal losses, threatened to seriously unsettle the futures markets. In the global copper market, Sumitomo's Yasuo Hamanaka was notoriously known as “Mr. Five Percent” due to his share of the market. The downfall of Enron—ironically once considered a leading institution in energy risk management—had severely hurt the energy trading markets.

The 2008 financial crisis brought even more turmoil to the global financial markets and underlying investor confidence in these markets. Notably, the collapse of AIG, Bear Stearns, Lehman Brothers, and other large financial institutions wreaked havoc in the interconnected global economies, dried up liquidity and trading in financial markets, and resulted in the loss of confidence ...