This thesis employs the lenses of principal-agency theory and stewardship theory to examine the case of Lehman Brothers. It is based on a comprehensive examination of the theoretical foundations of principal-agency theory and stewardship theory, as well as an in-depth analysis of the business practices of Lehman Brothers.
One of the key findings of this thesis is that the self-interest postulated by the Principal Agency Theory is arguably too short-sighted. However, given that the firm failed to fulfil the principles of the Stewardship Theory, it can also be argued that this theory is similarly untenable. The application of principal-agency theory to the firm's actors demonstrates the complex nature of the crisis and the extent to which almost every actor was involved in its ultimate outcome. A multiplicity of actors, including the board, management, employees, auditors, and state actors, were involved, rendering it inappropriate to ascribe culpability to any single entity.
The primary causes of the demise of Lehman Brothers can be attributed to a combination of greed and deficiencies in corporate governance structures, compounded by an unfavourable macroeconomic environment. A confluence of macroeconomic factors, an organisational culture of excessive risk-taking and an inadequately constituted board of directors, all linked by a CEO who had been rewarded for excessive risk-taking in the past, resulted in the collapse of Lehman Brothers.
Table of Contents
1. Introduction
1.1 Methodology
2. Theoretic background
2.1 Principal – Agent Theory
2.2 Stewardship Theory
2.2.1 Drivers in Stewardship Theory
3. Macro-Economic Factors of the Crisis
3.1 Neoliberal Economic Policies
3.2 Housing Bubbles
3.3 Securitization of Debt and Subprime
4. Lehman Brothers’ Business in a Nutshell
4.1 Historic Lehman
4.2 Common Day Lehman
4.3 Lehman’s Corporate Structure
4.4 Lehman Brothers and the Real Estate Market
4.5 Overleverage
4.6 Repo 105
4.7 Failed Takeover
4.8 Governance of Lehman Brothers and the Agency Framework
4.9 Debt Governance at Lehman Brothers
5. Application of the Principal Agency Theory and Stewardship Theory
5.1 Principal Agency Theory at Lehman Brothers: Different Stakeholders
5.1.1 Equity: Shareholders (Principals)
5.1.2 Board
5.1.3 Management and Employees (Agents)
5.1.4 Auditors, Ernst& Young (Agents)
5.1.5 State – Entities (Fed)
5.2 Application of Principal – Agency Theory
5.2.1 Risk Taking and Moral Hazard
5.2.2 Information Asymmetry
5.2.3 Other Practices
6. Stewardship Theory in Lehman Brothers
6.1 Withdrawal of Confidence
6.2 Organizational Culture
7. Conclusion: Which learnings can be taken away from the Lehman Brothers case?
Objective & Core Themes
This thesis investigates the collapse of Lehman Brothers by analyzing the institution through the competing frameworks of Principal-Agent theory and Stewardship theory to determine whether the firm's failure was driven by opportunistic self-interest or external environmental factors.
- Application of Principal-Agent theory to evaluate stakeholder behavior at Lehman Brothers.
- Critique of Stewardship theory in the context of organizational culture and trust.
- Examination of macroeconomic drivers including deregulation and housing bubbles.
- Assessment of corporate governance structures and risk management failures.
- Comparative analysis of internal and external factors influencing the bank's collapse.
Excerpt from the Book
1. Introduction
The case of Lehman Brothers, which shattered the financial world in 2008, still has important lessons to teach us, and the bank is examined as a case study through the prism of principal-agent and stewardship theory. This thesis seeks to deliver insights that can be gained from the application of the principal-agent theory and the stewardship theory.
In this work, the financial crisis and its roots are analysed from an intra-firm perspective by looking at the psyche of the Lehman Brothers firm through the application of the principal-agency and stewardship theoretical frameworks. Considering macro factors helps explain the environment in which the Lehman Brothers bank was embedded, such as low interest rates, growing debt and complex financial instruments. As other financial institutions were equally troubled, it is not possible to attribute the entire crisis to any single corporate culture. In contrast to other firms, which were bailed out by the taxpayer, Lehman Brothers was not. However, when looking at the case of Lehman Brothers, one finds a unique situation and characteristics. The two frameworks, the principal-agency framework and the stewardship framework, are used to analyse the shortcomings, but also some of the strengths that Lehman Brothers had.
By applying these frameworks, we answer the question of whether the actors at Lehman Brothers took unfair advantage of the firm and, if so, by what means. Stewardship theory is presented as a counterargument that the employees and other actors of Lehman Brothers were essentially honest people, stewards, who simply witnessed unfortunate market circumstances.
Summary of Chapters
1. Introduction: Outlines the research scope, employing the prism of principal-agent and stewardship theories to examine the Lehman Brothers crisis and its roots.
2. Theoretic background: Provides the foundational literature for principal-agent theory and stewardship theory, contrasting self-interested utility maximization with altruistic, pro-organizational behavior.
3. Macro-Economic Factors of the Crisis: Explores external conditions such as neoliberal policies, housing bubbles, and debt securitization that created the environment for the financial collapse.
4. Lehman Brothers’ Business in a Nutshell: Details the firm’s history, business model, and structural vulnerabilities, including its overexposure to real estate and reliance on high leverage.
5. Application of the Principal Agency Theory and Stewardship Theory: Analyzes the roles of shareholders, the board, management, auditors, and the Fed through the specific lens of agency costs and stakeholder interests.
6. Stewardship Theory in Lehman Brothers: Evaluates the loss of trust and the organizational culture within Lehman, contrasting the ideal of the steward with the actual behaviors observed prior to collapse.
7. Conclusion: Which learnings can be taken away from the Lehman Brothers case?: Synthesizes findings, emphasizing that the collapse was a result of a complex interplay between systemic macroeconomic issues and internal governance failures.
Keywords
Lehman Brothers, Principal-Agent Theory, Stewardship Theory, Financial Crisis, Corporate Governance, Risk Management, Leverage, Repo 105, Information Asymmetry, Moral Hazard, Banking Regulation, Institutional Failure, Market Confidence.
Frequently Asked Questions
What is the primary focus of this thesis?
The thesis examines the collapse of Lehman Brothers in 2008 through the theoretical lenses of Principal-Agent theory and Stewardship theory to understand the underlying causes of its failure.
What are the central themes of the work?
Key themes include corporate governance, management behavior, the impact of macroeconomic factors, risk-taking, and the validity of competing organizational theories in financial institutions.
What is the main research question?
The work seeks to determine whether the actors at Lehman Brothers acted out of self-interest (Agency Theory) or if they were stewards operating under unfortunate market conditions (Stewardship Theory).
What research methodology is employed?
The author utilizes a comparative literature review methodology, drawing on existing theoretical frameworks and empirical data related to Lehman Brothers.
What does the main body cover?
The body covers the theoretical foundations, the macroeconomic environment of the 2008 crisis, the business structure of Lehman, and a detailed stakeholder analysis of board members, management, and auditors.
What key terms characterize the study?
Keywords include Principal-Agent theory, Stewardship theory, risk management, overleverage, information asymmetry, and corporate governance.
How does the author analyze the role of the Federal Reserve?
The author discusses the decision not to bail out Lehman Brothers, analyzing it as a potential strategy to curb moral hazard while noting the inconsistency compared to the Bear Stearns rescue.
What specific accounting practices are highlighted?
The study highlights "Repo 105" transactions as a primary device used for window-dressing the balance sheet to disguise the firm's true leverage and financial health.
- Quote paper
- Samuel Tokmak (Author), 2024, What Can Be Learned from the Lehman Brothers Case Through the Lens of Principal Agent and Stewardship Theory?, Munich, GRIN Verlag, https://www.grin.com/document/1603062
