Corporate Governance Anglo Irish Bank

Corporate Governance

Corporate Governance Definition:

Corporate Governance can be defined as the following "The system by which companies are directed and controlled" (Cadbury Committee 1992)

Anglo Introduction:

Anglo rapidly arose from relatively humble beginnings, on the 10th of August 1964, Henry Fottrell a Dublin solicitor introduced the foundations for a new financial institution on the behalf of a London Banker Lionel Essex and Henry Prevezer an accountant, and Anglo was born. 50 Merrion Square in Dublin city centre was Anglo's first home, situated in the epicenter of the firms whose business they wished to attract. Initially the bank offered a diverse range of financial services ranging from personal loans; car financing and mortgages to aid business owners secure their own premises. In 1971 Anglo was taken over by Irish businessman Colm Dunne. The Central Bank stipulated that no more than 20 per cent of a bank could be owned by one individual, Dunne had an 85 per cent stake and was forced to sell and line up new investors. Following this the Central Bank approached an accountant from Limerick, Tom Duffy to help source cash to fund Anglo. Duffy brought in two well-connected brothers from Mayo, the Kennedy Brothers. Between 1972 and 1976 Anglo incurred the equivalent of €300,000 in losses and held €2 million of depositors cash. However the Central Bank still wasn't convinced of Anglo's stability and didn't favour the banks formation of ownership - an accountant and two builders! With that, City of Dublin Bank was thrown into the mix, and took over Anglo. City of Dublin Bank had also acquired another bank during this time, The Irish Bank of Commerce, within this bank was a hungry young employee named Sean Fitzpatrick.

Sean 'Seanie' Fitzpatrick hails from Bray and comes from a mediocre working class family. Seanie attended UCD and pursued a degree in Commerce. After college he qualified as a charted accountant in 1972. Seanie was by no means a great student but he possessed impeccable interpersonal skills. In the early eighties with the backing of Hay recruitment Seanie had been dispatched in search of a chief executive for Anglo. Instead Seanie fancied himself for the job, 'before I went down to Hay MSL, it struck me that I could get the job, even though I was now financial controller in a senior influential position, it was unlikely that I would become general manager in The Irish Bank of Commerce in the foreseeable future. On the other hand, while Anglo Irish bank had gross assets of less than €500,000, I would be the CEO, I would hire new talent and over time together we would grow Anglo into a serious bank' Seanie was pulled out of Irish Bank of Commerce and was now in charge of Anglo Irish Bank. At this stage Anglo had only four employees, once Seanie took over he employed Peter Killen who had previously been a senior lender with AIB. Killen was to become Seanie's right hand man. He also hired two more bankers who were pivotal to Anglo's success, Tiarnan O'Mahony and John Rowan. Anglo Irish Bank Corporation Plc appeared on the Irish Stock Exchange for the first time on the 1st of February 1987.

'There was just twenty of us when we floated. It was like we were lending our own money, not the banks money. It was all smart, simple, straightforward. It was like we used to say, we can't make money if we don't lend money. And unlike some others, we never employed people to tell us why we shouldn't lend'

~ Sean Fitzpatrick

David Drum succeeded Seanie as CEO of Anglo, he was considered an outsider and was not known amongst the public. He joined Anglo in 1993 and setup in Boston, he was only 38 years old when launched to the top of Anglo Irish Bank. Seanie described Drum as 'soaked in the ethos of the bank' Drum was very much so a property man.

Anglo's Collapse:

The key reasons why the Directors of Anglo Irish Bank were the principal authors of the difficulties faced by Anglo Irish Bank are highlighted throughout this assignment, (i) Anglos unorthodox aggressive banking style, where other banks took five days for a loan verdict Anglo would have a decision in 5 hours (ii) Anglo's lack of diversification left them heavily exposed to the crippling property sector (iii) Anglo's negligent approach to corporate governance (iv) Directors loans, Seanies 'dirty little secret' (v) Failure to monitor high-risk borrowers, (Sean Quinn) (vi) Sean Fitzpatrick, all of which ultimately lead to the nationalisation of Anglo Irish Bank.

The Combined Code

The combined code on corporate governance is based on a caliber of standards of corporate governance for companies listed on the Irish Stock Exchange. Listed companies are adhered to report on how they have applied the principals of the combined code or where they have not complied with the code they must give a reason justifying non-compliance in their annual report. The combined code establishes principals of good governance.

(i) The combined code states 'there should be a clear division of responsibility between the running of the board (chairman) and the executive. No one individual should have unfettered powers of decision' Anglo completely disregarded this principal; Seanie was CEO and then Chairman. He had the board in his pocket; ultimately he had the power and the audacity to run amok without any repercussions. The board had no control over him or the bank. Anglo Irish Bank was a powerful bank in the grip of one man. This principal of corporate governance was tailor made to prevent people like Sean Fitzpatrick from holding too much power.

(ii) The combined code states that 'remuneration should be sufficient to attract, retain, motivate directors of the quality required but avoid paying more than necessary' Anglo's 'crème de le crème' started raking in absurd amounts of money. In 2003 Seanie took home €2.3 million and none of his fellow executives pocketed less than €1 million. In 2008 Seanies pay as chairman shot up a staggering 48 per cent to €539,000. David Drum received a 'performance' bonus of €2 million not even a year later Anglo was staring down the barrel at nationalization. 'The Anglo lads were the best paid lads in town' Evidently the Anglo directors overlooked this principal.

(iii) The combined code states 'the board should present a balanced and understandable assessment of the company's