Corporate governance: the case of Banco Espírito Santo

Abstract

This is a comprehensive case study of the collapse of BES that failed in 2014 and prompted the government to draft and implement a resolution plan for BES in which they created NOVO Banco, a bridge bank to transfer all the healthy operations of the bank and left the toxic assets in BES to be liquidated. BES collapsed after 145 years of existence after it founded by Jose Maria do Espírito Santo e Silva, who started in Lisbon in 1869 as a moneychanger. This study aims to study the causes of the collapse of BES and discuss the corporate governance mechanism that has gone wrong. This study also examines the evidence of clan culture in BES which is probably one of the core strength of the BES and the ES family that helped the bank to survive 145 years, both world wars, dictatorship regimes and nationalisation. The case of BES gives the opportunity to understand that corporate governance rules and recommendations are just as relevant in family businesses as they are in other businesses. Our study found that the desire to diversify the operations of the ES family by investing into many business sectors through its non-financial companies, combined with the economic recession put significant pressure on Ricardo Salgado, who with his status in the family and his power on the board of directors of BES used fraudulent financial reporting and related parties transactions to hide the bank’s toxic assets made mainly of debt instruments of its holding parent. We also found the clan culture in BES gave significant decision powers to Ricardo Salgado. At one point, he was CEO of BES and chairman of the group, which was likely to have intimidated directors on the board of BES. Our main finding on this study is that the collapse of BES could have been avoided if the corporate governance in BES emphasised on accountability and integrity of financial reporting.