Corporate Governance and Ethics 1: Running Head: Research Methodology
Corporate Governance and Ethics 1: Running Head: Research Methodology
Date
CORPORATE GOVERNANCE AND ETHICS 2
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.
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.
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.
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.
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).
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.
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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