CORPORATE GOVERNANCE AND ETHICS 1

Running Head: RESEARCH METHODOLOGY

Corporate Governance and Ethics

Name of the Writer

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Date
CORPORATE GOVERNANCE AND ETHICS 2

Corporate Governance and Ethics

Kendallville Bank
Kendallville bank had been founded in the early 1900s and was situated in northern
Indiana, serving small and mid-sized towns in that area along with Ohio and Michigan. The bank
had 37 branches offering services to commercial and consumer banking services. For
commercial, Kendallville offers cash management services, checking and loan products,
payment processing, and other banking services. For consumers, the services provided by the
bank include savings, checking, personal loans, money market accounts, online banking
services, ATM, and many other facilities. The bank was caught involved in financial reporting
fraud that has been discussed in this report to highlight what went wrong with the bank and how
it could have prevented it.

Review of the Board of Directors

The directors of the Kendallville bank have been selected for a period of three-years.
The total number of directors at a time is eleven, who are responsible for monitoring the
executive committee of the bank, which they do not do as they have high trust in the
management of the bank. The board of directors meetings is held every month, with the meeting
agenda being sent to them ten days before, following the suggestion of literature of at least
seven days.

Kendallville bank allows the board of directors to be in the board of other institutions as well.
Because of that, two directors were serving at other financial institutions, along with serving at
Kendallville. One of the biggest management mistakes made by Kendallville was that many
directors were the customers of the bank, which allows them to make decisions that will be in
the best interest of them as the customers as indicated by Kao, Hodgkinson, & Jaafar (2019).
The policy of Kendallville to enable directors to be the customers of the bank affects the
independence of the directors who have to monitor the management as they will not focus on
the administration as long as they have been getting maximum profit as customers and directors
and the accountability towards the shareholders may be compromised in this way.

The CEO, Renwood, also took decisions that will secure her position. She allowed
directors to be in other institutions so that their focus can be diverted, and they will not interfere
in the management. That will ease Renwood's work as she can make decisions easily, allowing
her to commit fraud in the Allowance for loan and lease losses (ALLL), because of low
monitoring by the directors.
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Naciti (2019), highlighted that good corporate governance practice requires three boards
to oversee the board of directors: the remuneration committee, the nomination committee, and
the audit committee. Renwood didn't call any nomination committee and decided on her own.
She suggests directors resign and decides about the membership of the board all by herself.
The equivalent belongs to the remuneration committee. Renwood believes that the Directors'
own-initiative proposals are subject to a structured implementation review process. The current
procedure does not make the Compensation Board redundant under Renwood. The members
of the audit committees were receiving continuous benefits from the bank in the form of loans,
all known to Renwood.

Review of the Corporate Governance Structures

The estimate of one of the essential monetary details, the Allowance for loan and lease
losses (ALLL), was modified in Kendallville bank that leads to all the fraud. This change leads to
an increase in the total amount of compensation, but only by changing the calculation and not
by improving the results. This change takes place in the context of a worsening financial
climate, making the extension of the total compensation period illusory. People behind this
change include the executive team and, most importantly, the Chief landing officer, Dan Davis.
Davis Dan was responsible for the loans and leases of the bank. Hence, the difference in the
Allowance for loan and lease in Kendallville raises doubts about its credibility and honesty
towards the bank.

According to Eisenberg (2016), Davis has served for Kendallville for a long time and has
been a valuable asset to the bank. It can not be said that he had been disloyal with the bank
ever since he joined it. Davis to succeed in his mission of making amendments prepared memo
to be approved by Kmetko and loan revenue officer in the second meeting of the bank in which
Davis didn't mention the changes he will be going to make in the ALLL policy. Davis did the
same in the memo for the third meeting in which he gave only a short explanation regarding
ALLL so that it can get approved, and he can get success in his mission. He remembered all the
things that he knew would not be checked either by the credit officer or by Kmetko. During the
external audit phase, Davis postponed the documentation of ALLL and the response to the
auditors' requests, so the audit was carried out without examining ALLL. These methods
underline the asymmetry of data sent by Davis and his ability to conceal his conjecture. As he
had experience and was master in his field, he knew all the tricks and applied them to fulfill his
mission.
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The overall environment in Kendallville was very positive and business-friendly. The
board of directors had all the trust in the management and didn't monitor them instead supports
them on every decision. The CEO of Kendallville made sure that the profitability, growth, and
returns of the shareholders are persued so that no one can focus on the changes made in
ALLL. The trust of the shareholders on the management was the reason that they didn't
question the credibility of Dan Davis and approved all the proposals made by him because of
his experience an excellent work for the betterment of the bank.

Recommendations for Future changes in the Corporate Governance Practices

Kendallville bank lacks corporate governance, and its drawbacks lead to all the fraud in
the bank. The lack of control and monitoring on the executive team of the bank results in letting
them do what's in the best interest of them as individuals, not for the bank. The fraud could have
been prevented if the corporate governance of Kendallville bank was strong, and the executive
team was being monitored critically, as indicated by De Haan & Vlahu (2016). Following are the
recommendations for future changes in the corporate governance practices of the bank to
prevent such cases in the future:

The biggest mess in the bank happened because of the mismanagement. Therefore, for
improving the monitoring and management, Kendallville bank should have a separate CEO and
chairman of the board of directors so that both can independently as well as collectively monitor
the operations of the bank, mentioned by Yamori, Harimaya & Tomimura (2017). Elections
should happen to elect the chairman of the board of directors, and in this way, fair elections will
take place, and the person right for the chair will be selected.

The directors of the Kendallville bank are not well aware of their jobs and are mostly
customers of the bank. Therefore, according to John, De Masi, & Paci (2016), training for
enhancing the skills of the directors should be conducted so that directors can get well aware of
their jobs and, based on those training, can perform their role correctly, in the best interest of
the bank. Also, directors should not be allowed to remain customers of the bank as well so that
they can make decisions freely and independently favourable for the bank.

Another major fault in corporate governance was the non-formation of committees

required to access the overall performance. Therefore, nomination, ethics, and remuneration
committees should be made under the supervision of skilled directors so that the burden on the
CEO and the chairman of the board can be minimized. In this way, the CEO and the chairman
can focus on the critical operations and activities of the bank. Renwood overburdened her self
CORPORATE GOVERNANCE AND ETHICS 5

and made all the decisions on her own without proposals by any committees resulting in the
wrong choices and fraud done by the bank.

Also, for proper monitoring and good corporate governance, the responsibilities should
be divided so that each employee and the authority as well could be clear in terms of their role
and in this way they can focus on only one task assigned to them resulting in minimization of the
fraud as people trying to commit the fraud would be well aware of the fact that every document
will be cross-checked multiple times, and no leniency would be given if someone would be
found doing unethical practices.

Another recommendation for good corporate governance is that the code of conduct
should be reformed in which punishments for unethical practices and the duty of every
employee should be discussed in detail. In this way, the employees could be well aware of the
result they will need to face if they will even try to harm the position of the bank by committing
fraud.

The fraud could have been prevented if the audit had been done accurately. For this, the
management should change the external auditors every few years so that employees shouldn't
be aware of their way of doing auditing. Experts and well-positioned auditors should be hired
who do not compromise on any missing documents so that if any employee has done any fraud,
it could be highlighted in the first step by the auditors resulting in less devaluation of the bank.

Ethical Issues in the Bank

There was no name of ethics in Kendallville bank. The whole case that happened is the
ethical issue as Davis conducted an unethical practice of committing fraud in the bank. The
changes made by Davis in the Allowance for loan and lease losses (ALLL), without taking the
board of directors in confidence is an unethical practice. Davis unethically made the members of
the meetings signed the memo that represents incomplete or false information related to the
changes he has been going to make in ALLL. The auditors audit the financial records without
checking the document describing fraud committed by Davis that is also an ethical issue as
auditors are required to cross-check all the financial statements (Sharma, & Singh, 2016). The
directors did not fulfill the job of monitoring the operations in the banks. Quaas & Pennings
(2018), mentioned that since they didn't perform their job accurately and honestly, this is also an
ethical issue.

CSR Issues in Kendallville Bank

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According to García‐Sánchez & García‐Meca (2017), Every institution, including banks,

have the corporate social responsibility that includes legal, economic, and ethical practices to be
performed by them. Kendallville didn't fulfill its corporate social responsibility as it did unethical
practices and illegally tried to make changes in the Allowance for Loan and lease losses (ALLL)
as given by Abou Fayad & Ayoub (2017) in their study. Bad corporate governance in the bank
with no monitoring and proper management is a CSR issue in Kendallville as since there were
CSR issues in the bank, Davis succeeded in committing fraud, which results in illegal and
unethical practices. The whole case shows Kendallville's lack of interest in corporate social
responsibility.

Sustainability Issues in Kendallville Bank

Kunitsyna, Britchenko, & Kunitsyn (2018), highlighted that sustainability refers to
business practices not only in the best interest of today's people but for future generations as
well. In banking, sustainability refers to conducting those operations that should be free from
any illegal or unethical practices so that it should not harm any other person, as mentioned by
Weber (2017). In Kendallville bank, since the illegal and immoral activity was conducted that
could harm the customers associated with the bank, this is the sustainability issue. Lack of
transparency in records, fraud, lack of CSR, mismanagement, and lack of stakeholder
engagement is the sustainability issues associated with Kendallville bank.

Management Control System of the Bank

According to Rad (2016), A management control system monitors the performance of an
organization by collecting information on how organizational resources such as physical,
Human, and financial have been working based on the strategies decided by the organization.
The management control system in the bank is very critical as banks operate under high risk. To
gradually achieve their goals, banks need to implement management control systems that
enable the board of directors and representatives to achieve their goals.

One risk associated with the bank is how customers and the overall operations of the
bank will respond to change in any policy as banks need to secure the money deposited by
people, they need to take a calculated risk. Pandey & Kapoor (2017), said that the monitoring of
change made in ALLL by Davis shows that attractive net profit growth can be achieved with
dubious methods. Controlling the business requires careful management. Davis manipulated
the accounts department of Kendallville bank because of a lack of monitoring on him. In the
management control system, personal control checks the employees' that either they have been
fulfilling the organizational goals or have been benefiting themselves. The management control
CORPORATE GOVERNANCE AND ETHICS 7

system also suggests methods to brainstorm the employees to focus on the organizational
goals rather than personal benefits through training, influence distribution, and resources to the
employees. As an exceptionally talented and competent manager, Davis could have been
refrained from doing fraud in the ALLL if the management control system had been
implemented in Kendallville bank. That could have monitored the performance of David and
would have guided and prevented him from damaging the image of the bank, as indicated by
Zalozhnev (2017, October).

Culture of the Bank

Stulz (2016) mentioned that culture aims to measure the overall environment of the
business by measuring how employees associates with other members. A good culture
represents the healthy condition of the business as people there have strong bonding, and they
have the power to express what they feel and can contribute to the decision making process.

The overall culture of Kendallville is very nonserious. The executive team and the
directors do not perform their job accurately, and there is no culture of belonging in the bank.
There is neither a group of morality advisors at headquarters nor the development of an
employee information hotline, which leads to a non-collectivist culture of power-sharing, where
control is perceived as inferior. To prevent further crimes through the introduction of culture
control, this lifestyle at the bank has not yet changed. There is no culture of monitoring or
culture of ethical control that has resulted in massive damage to the bank.

Recommendations for improving Management Control System and culture of

Kendallville
The way to improve the business of Kendallville is to implement the management control
system and change the culture of the bank. A friendly environment is pleasant, but when it
comes to working, the employees should know that the management will monitor their
performance and will not compromise on any misconduct, as highlighted by Agarwal, Gupta,
Kumar & Tamilselvam (2019). Culture control should be set up. Accentuation must be set on
corporate administration control instruments. Additionally, a reliable duty to corporate
administration esteems at the head of the association is vital to fill the new condition with life.
After this change in culture, Kendallville will be better prepared to confront business risks as
people in power will take a calculated risk because of knowing the strict culture in terms of
overall performance that should be top-notch.
CORPORATE GOVERNANCE AND ETHICS 8

Uzkurt, Kumar, Kimzan, & Eminoğlu (2013), said that technology should be used to
monitor the performance of employees such as artificial intelligence so that employees could
know that there is a technology unbiasedly monitoring their performance that will be checked by
the higher authority. In this way, employees will never even think of doing any unethical work as
they will know the price they have to pay for that as technology will be monitoring them every
time (Hughes, Robert, Frady, & Arroyos, 2019).
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