Here is how MF
Global describes itself on its web site:
“Indispensable, well-timed insight. Forward-thinking, unwavering vision.
Deeply rooted passion for the markets. At MF Global, our relentless pursuit of
market opportunity separates us from the pack and binds us in a common
purpose—to help clients find an edge in today’s fast-paced, ever-evolving
markets.
“Bringing together superior market access, well-timed market
insights and powerful trading and hedging solutions. It’s our passion. And
it’s why clients rely on MF Global to sharpen their edge in the world’s
ever-changing markets.”
What
a bunch of baloney!
Now it appears
that Jon Corzine used the firm’s capital, and possibly the capital of his
clients, to place bets on European bonds. He ignored the advice of other
managers and senior executives by apparently circumventing the company’s system
of internal control.
And MF Global
broke the cardinal rule in this industry: it failed to segregate customer funds
from its own working capital. Now MF Global clients may be out more than $1.2
billion.
Wall Street
traders normally recognize they are in a high risk business. They often put in
place a system of internal control designed to minimize the risk that a firm could
place outsized bets that will put it out of business.
Those controls
require a specific trading strategy to be approved by a series of oversight
panels, including:
·
The Board of Directors
·
The Chief Executive Officer or President
·
The Head of Sales and Trading
·
The Chief Risk officer
·
The Trading Chief
·
The Risk Manager.
MF Global had
an Audit and Risk Committee. The Audit and Risk Committee Charter included the
following:
I. Purpose of the Committee
The purpose of the Audit and Risk Committee (the “Committee”) of the
Board of Directors (the “Board”) of MF Global Holdings Ltd. (the “Company”) is
to assist the Board in its oversight of:
·
the integrity of the Company’s financial statements
and internal controls,
·
the Company’s compliance with legal and regulatory
requirements,
·
the independent auditors’ qualifications and
independence,
·
the performance of the Company’s internal audit
function and independent auditors, and
·
the Company’s risk management policies,
processes and profile.
IV. Committee Duties and Responsibilities
The Committee shall have the following duties and responsibilities:
With respect to risk management:
·
Review generally the overall enterprise risk
management framework and related governance model and recommend to the Board
approval of same.
·
Discuss the Company’s guidelines and policies that
govern the risk management process.
·
Review periodically the Company’s major
operational, financial, reputational, legal and compliance risk exposures and
the steps management has taken to identify, assess, monitor and mitigate such
exposures.
·
Receive regular independent reports from the Chief
Risk Officer about the risk profile of the Company, against the risk appetite
and risk tolerances adopted by the Board, and any reports on material breaches
of related policy.
·
Review and provide advice to the Board’s
Compensation Committee with respect to the compensation of the Company’s Chief
Risk Officer.
VI. Performance Evaluation
The Committee shall conduct and review with the Board annually a
performance evaluation of the Committee, which evaluation shall compare the
performance of the Committee with the requirements of this charter. The
performance evaluation shall also include a review of the adequacy of this
charter and shall recommend to the Board any revisions the Committee deems
necessary or desirable, although the Board shall have the sole authority to
amend this charter. The framework for conducting the performance evaluation
shall be established in such manner as the Nominating and Corporate Governance
Committee deems appropriate.
(DRH:
I’d love to see this evaluation!)
*********************
Despite all
the right words written in its policies and procedures – the Board failed
miserably. The normal oversight functions that are in place at other trading
firms were ignored.
Mr. Corzine
was the Chairman and Chief Executive Officer of MF Global – a bad decision. The
Chairman is the head of the Board of Directors. The Board’s job is to oversee
management. Management is headed by the Chief Executive Officer.
So, when the
Chairman and the CEO is the same person – do you really believe effective
oversight will occur???
Give me a break!
So Mr. Corzine
traded $6.3 billion on European debt and talks only with the Board of
Directors. He doesn’t follow the normal process which would have included the
Chief Risk Officer. As we see time and again, management decides to override
the system of control and the firm goes out of business and harms the financial
interests of its shareholders and creditors.
In assessing
control systems, we can see the wisdom of the Treadway Commission when it said
the control
environment (tone at the top) is the foundation of a control
system.
It’s time for
senior managers to recognize they are not necessarily the “smartest person in
the room.” They need to adhere to a well thought out system of control, just as
they expect all others to do.
Overriding the
system of control is not a management right. It should only occur in extreme
circumstances and only with the approval of the Board and other senior
executives.
As we see in this example with MF Global, the words
that are written and relied upon by others have no meaning when small minded
managers decide the rules and values of a company do not apply to them.dave@davehancox.com |
Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.
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Management Audit