Brief History of the Company
This essay has been undertaken for presenting a critical evaluation of a public listed company that has suffered insolvency due to financial crisis. In this context, the essay in particular discusses about the selected company’s history. Initial success drivers, major changes in its structure, generally accepted reason that caused its failure, the social impact of the failure and at lastly a brief summary of the lessons learned. The company selected in this context is Anglo Irish Bank that has merged with the Irish nationwide building society in the year 2011 after nationalization in the year 2009.
Anglo Irish Bank was an Irish bank that has ceased its operations after nationalization in the year 2009. It was established in the year 1964 headquartered in Dublin in Ireland. The banking corporation was one of the recognized banks within Ireland that mainly dealt in the business of commercial banking. The bank however had only limited presence within the major Irish cities and also have divisions within wealth management and treasury units. The banking corporation operates mainly within the cities of Austria, Switzerland, the UK and the US. The bank has a history of achieving high success in the initial year of its establishment. The acquisition policy adopted by the bank in the year 1988 supported its plan of business expansion and growth. As a result of its policy of acquisition, the banking corporation acquired Irish Bank, Royal Trust Bank, Credit Lyonnais and many other banking corporations (Byrne, 2015). This enabled it to gain a dominant position within the banking sector at an international level as it started conducting its operations within the developed economies such as the US and the UK. The acquisition policy of the bank has caused it to gain the position of one of the largest bank within Ireland (Kelly, 2014).
The banking corporation decline began in the year 2008 when the downturn in the Irish property market has started. The bank has high exposure to property lending and has provided large amount of loans to the property developers. Thus, the collapse of the property market had a large negative impact on the property market. The loan fraud was identified within the bank when its chairman has admitted to have a total loan of about £ 87 million and also resigned from his position. The resignation was followed by that of its non-executive director beginning its collapse (Neill, 2011). The Irish government in the year 2009 after consultation with the Board of the bank decided to nationalize the bank so that it can be taken into the public ownership. The Anglo Irish Bank Corporation Act was passed in the year 2009 for transferring the ownership of the bank to the minister of finance. The Dublin and London Stock Exchange has stopped trading in the Anglo Irish shares. The bank has undergone a merger with the Irish Nationwide Building Society and this lead to establishment of a new company known as Irish Bank Resolution Corporation in the year 2009 (Carswell, 2013).
Key Initial Success Drivers, Financial Milestones or Achievements
The bank after its initial years of establishment has enjoyed larger success with recognizing its presence in the international market. The acquisition and the expansion policies of the bank enabled it to achieve growth and development within the global banking sector. The shareholders of the banking corporation also received high dividends. The bank’s profits have risen by 3.4 per cent and shareholders receive an increase of about 22.5 per cent in the dividend payment in the year 2003. The executive’s and the director’s were overwhelmed by the bank’s performance due to large rise in the dividend and healthy financial performance. The bank’s share prices was increased by about 60 per cent in the year 2004 and this lead the bank in making it a high performance stock in Ireland. The banking corporation was recognized to be one of the largest bank within England in the year 2003 supported by its healthy financial performance and increased share prices (Anglo Irish Bank meeting full of happy investors, 2003). The key milestones in the banking success that enabled it to acquire a competitive position within the global financial service industry can be stated as follows:
- The bank has acquired the Irish Bank of Commerce in the year 1988
- It has also acquired Royal Trust Bank in the year 1995
- It acquired Ansbacher Bankers, Credit Lyonnais and Smurfit Paribas Bank also in the consecutive years
The major financial awards that have been received by the Anglo Irish Bank before its collapse are as follows:
- It has been regarded as the world’ top performing bank over the past five years in the year 2006
- The share price of the bank has increased with more than 300pc from the financial year period 2001-2005
- It has also been awarded the status of being the most high profile and searched after bank in the financial services industry
- The bank in the year 2008 has also been awarded for maintaining the best investor relations within the banking sector
The financial crisis in the Irish property market resulted in causing major changes in the corporate structure of the bank. The identification of the unethical and illegal business activities within the bank carried out by its CEO, Sean FitzPatrick, was identified after the occurrence of the financial crisis. It was identified that Sean FitzPatrick has adopted the use of funds from the banks for taking personal loans. The information about such loans was concealed from the regulators and there was shifted to another bank on a temporary basis during the auditing period. The identification of such a crisis within the banking corporation resulted in causing major changes in its corporate structure. The increased scrutiny of the bank has caused the CEO to admit of hiding such large amount of personal loans from the general public and he has resigned from his post significantly in the year 2009. In this context, the further investigation has revealed that directors also adopted the use of funds within the bank for taking personal loans. The director of the bank has also resigned from the post after the identification of the crisis for promoting the company’s welfare. The Irish government after announcing its plans of nationalization of the banking corporation has caused the major changes within the corporate structure. This is because the nationalization of the bank in the year 2009 has caused its merger within the Irish Nationwide Building society and it has undergone a major corporate restructuring (Department of Finance, 2017).
The major reason attributed to the failure of the Anglo Irish Bank as identified can be stated as follows:
Occurrence of Global Financial Crisis
The share price of the banking corporation started to decline after the occurrence of US mortgage crisis that spread eventually into the global financial market. The occurrence of the crisis has caused the downturn in the Irish property market which exposed the personal loans that are hidden within the banking corporation by its executives and directors. The bank share price decline by the downturn of the property market and lead to identification of the unethical and illegal activities that were carried by the bank internally. This is because the banking crisis has exposed the personal loans that were taken the bank’s executives and directors and were hidden from the general public (Mihet, 2013).
Major Changes in the Corporate Structure
Ethical Issues
The occurrence of unethical and illegal activities by the bank can be regarded as the major reason for its downfall. They mislead the investors, depositors and lenders of the bank by manipulating the financial information and using the investor’s funds for gaining personal profits. They acted against the agency theory which regards the business manager’s as agents responsible for maximizing their return for the shareholders that are the principals. Thus, it can be said that the directors and executives acted against the agency theory and placed emphasis on maximizing their personal profits rather that increasing the financial performance of the bank. In this context, the agency theory has stated that it is essential for the long-term growth and development of the company to align the interest of the business managers with that of the shareholders. However, non-alignment of the goals between the two lead to the collapse of the banking corporation as the business managers emphasizes on maximizing personal profits rather than increasing the banking corporation profits (Levine, 2009).
Lack of effective Corporate Governance Structure
The stewardship theory of corporate governance has stated that business managers need to be responsible in carrying out their roles for protecting the public interest. However, the absence of an effective corporate governance mechanism leads to ineffective compliance with this theory by the business managers within Irish bank. The lack of adequate internal control mechanisms was responsible for the occurrence of illegal activities of taking massive loans by the business leaders themselves by using the funds of the investors. The lack of an established code of conduct for the auditors also leads to un-identification of such manipulation of financial information in the financial reports of the banking corporation. The auditors of the bank provided inaccurate disclose regarding the bank deposits that made it possible for the bank to deceive its customers and investors. They did not comply within the standard accounting regulations that have been developed in this context. As such, it can be said that lack of an effective corporate governance structure that is necessary to provide ethical guidelines to the business managers and employees for carrying out their responsibility is responsible for the occurrence of fraudulent activities within the bank (O’Sullivan & Kennedy, 2007).
The major internal social impact resulted from the downfall of the banking corporation of Anglo Irish Bank is that its collapse caused the lost of large number of people working within the bank. The banking corporation conducts its activities both at national as well as international level and thus its downfall significantly resulted in making large number of people at global unemployed. This negatively impacted their social life to a large extent.
Also, in this context, its major external impact is causing an increase in the unemployment rate at an international level. In addition to this, the investors lost their hard-earned money after the emergence of the global financial crisis that caused devaluation in the property market of the Ireland. It caused the Irish government to suffer largely as it caused the lost of the general public in the banking sector who restricted to invest within the banks after the occurrence of such a financial crisis (Benetrix, 2009).
It is evident form the collapse of the Anglo Irish bank that business leaders need to carry out their responsibilities in an ethical manner as per the established code of conduct within an organization. The Board of directors needs to develop and implement an effective internal control mechanism to evaluate the performance of the business leaders. This is essential for protecting the interest of the stakeholders of an organization and maximizes their welfare. Also, it has caused major banking reforms that have been taken by the regulator to promote financial stability within the banking sector. In this context, the central bank of Ireland has been developed a revised Corporate Governance Code for Credit Institutions and insurance Undertakings in the year 2015. This has been developed for stating the minimum statutory requirements that credit institutions should meet for ensuring the presence of an effective corporate governance structure. The code is required the establishment of risk and audit committee, appointment of a Chief Risk Officer and introduced a diversity policy for maintaining an effective board size (Marshall, 2009).
Conclusion:
Thus, it can be stated form the overall discussion held in the essay that business entities need to adopt an effective corporate governance structure for maintaining integrity and transparency in the business operations. It is important for the business leaders to carry out their operations in an ethical and integrated manner to promote the long-term growth of business entities.
References:
Anglo Irish Bank meeting full of happy investors. (2003). Retrieved 27 October, 2018, from https://www.irishtimes.com/business/anglo-irish-bank-meeting-full-of-happy-investors-1.346578
Benetrix, A.S. (2009). The impact of fiscal shocks on the Irish Economy. Economic and Social Review 40 (4), 407-434.
Byrne, W. (2015). The Irish Financial Crisis – Governance Lessons Learned. Retrieved 27 October, 2018, from https://www.cmc-global.org/content/irish-financial-crisis-%E2%80%93-governance-lessons-learned
Carswell, S. (2013). Anglo’s failure and the banking meltdown left an indelible mark on the body poitic. Retrieved 27 October, 2018, from https://www.irishtimes.com/business/anglo-s-failure-and-the-banking-meltdown-left-an-indelible-mark-on-the-body-poitic-1.1593406
Department of Finance. (2017). Irish Bank Resolution Corporation. Retrieved 27 October, 2018, from https://www.finance.gov.ie/what-we-do/shareholding-financial-advisory/irish-bank-resolution-corporate/
Kelly, W. (2014). Anglo Irish Bank- An corrupt Irish bank. Periodic Article Journal, 3(2), 5-8.
Levine, R. (2009). Bank Governance, Ownership, and Risk Taking. Journal of Financial Economics 93(2), 259-275.
Marshall, W. (2009). Origins of Banking crisis in Latin America: A critical view. Journal Of Post Keynesian Economics 31 (4), 669-690.
Mihet, R. (2013). Macro-Prudential Policies to Mitigate Financial System Vulnerabilities,” forthcoming. Journal of International Money and Finance.
Neill, M. (2011). Anglo Irish Bank- The end is near’. Periodic article journal, 2(3), 7-11.
O’Sullivan, K.P.V. & Kennedy T. (2007). A model for regulatory intervention in Irish banking. Journal Of Banking Regulation 8 (2), 113-130.
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