Assignment on Lehman Brothers Bank Case

The agency problem is a situation in which directors of an organization act in such a way that result in against the interest of investors and shareholders of the company. Following Companies Act, organizations are responsible to comply with the interest of shareholders. In the case of Lehman Brothers, the directors of the bank decided against the interest of the shareholders as a result of which they created agency problems for them. Board of directors in Lehman Brothers invested money in risky products such as subprime derivatives and commercial real estate markets. These products had clear risky future. While the excessive debt taken from the financial markets was also an example of a risky decision on the invested money of shareholders. Consequently, the majority of actions by the Lehman brothers board of directors were against the key interest of shareholders. Investors and shareholders of the bank were interested to earn maximum return on their investments with minimum chances of loss. However, when the board of directors invested their money in highly risky products and resulted in a decrease of liquidity level then investors and shareholders faced a direct decline in their return on investment amounts. In fact, analysis represents that Lehman Brothers Bank was bankrupted with zero liquidation of available current assets. Bank was failed to meet its obligations regarding the excessive debt taken from the market. Moreover, the risky products failed to produce the required level of revenue streams which could manage the liquidity conditions in the bank. Thus the whole situation suggests that boards of directors in Lehman Brothers Bank created agency problem because of wrong decisions taken at the corporate level.

A proposed solution to mitigate this agency problem is to pay more attention to the NED. NED stands for non-executive directors of an organization. A non-executive director (NED) mitigate the agency problem by reviewing the decisions of corporate management and relating these decisions to the interest of shareholders. Moreover, non-executive directors can encourage full transparency in the organization. Furthermore, non-executive director NED also creates restrictions on the capabilities of agents while supporting the compensation structure to the well-being of the principal. NED in corporate governance also stands for the protection of shareholders and investors interest in the bank. Thus, conclusively it can be said that such a situation of agency problem can be mitigated by supporting and using non-executive director NED’s in the organization.