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Cost 2_updated20130310

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by

car yung

on 11 March 2013

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Transcript of Cost 2_updated20130310

South Korea Haengbok Bancorp
A small nationwide Korean Bank
Customers: SMEs with some international operations Haengbok Bancorp Opened the first foreign branch in New York New York External Environment
Threat:
Fierce competition for US-based Korean customers

Opportunities:
Many businesses were having difficulty raising capital as a result of financial crisis
New York is the largest US money center, relatively high concentration of Korean-owned and oriented businesses The USA Cons:
Time-consuming: may take a long time to approve
Problem of independence: 2 most experienced account managers are in the committee
Little involvement for branch account managers: Headquarter may not understand the US market and make wrong judgment credited with the interest earned on the loans initiated
charged for the expenses incurred(E.g. cost of funding the loans)
Accounting Measure Result Control 10% Cash Bonus based on the profit of mini profit center
Cash bonus will distribute shortly after year end
No punishment if loss incurred Personnel Control - Job assignment Regular review by management, national bank examiners and external auditors Assigned by geographic locations
Assign two account managers to develop opportunities with prospective clients in industry that they had prior experiences Personnel Control - Recruitment process Culture Control Result-oriented culture
Senior manager(Jae): Did not care how they identified and cultivated their clients as long as they eventually ‘booked good deals’ People control Suggestion on Control System Action control Suggestion on Control System Result control Suggestion on Control System Culture control Suggestion on Control System Description of the client and its business, the proposed use of the loan funds, the proposed loan terms, and an analysis of the loan’s risk.
Risk was addressed in many ways, but market prospects and the client’s financial statements were always considered.
Behavioral constraints: restrict account manager’s loan application process
Prevention nature Action Control Result Control Personnel Control and Culture Control Review loan application by Branch Credit Committee according to guildlines and checklists, to ensure adequate material information is collected and analyzed in a proper manner

Establish a mechanism for re-assessment of rejected loan application

Effective Communication: For >$5m loan, Meetings are held with the presense of all responsible parties: Corporate Credit Committee, Branch Credit Committee and the Accounting Manager Solution Reduced morale: effort is not proportionate with the result
avoid making >5m loan application: avoid headquarter involvement. Easy approval
Circumvention of $5m control Effects on Accountant Managers’ Behaviors and Performace Branch Credit Committee:
Granting approval of loan based on trust of Accounting Manager's judgement
No further review on application
Failed to discover the omission of material information
Lose the function of check and balance Rejected Loan Application – Problem The Corporate Credit Committee heard allegations that FETC might be involved in transfer pricing disputes with tax authorities

The Committee believed there was high possibility of failure of meeting its cash flow obligation

Allegations and impact of legal settlements not confirmed

Loan REJECTED Rejected Loan Application - Situation Attractiveness:
Priced with a relatively wide spread
P+5% floating rate
Fully collateralized with inventory
Good business history
Assessed by experienced manager
Relatively low risk Rejected Loan Application - Background Rejected Loan Application – Problem Corporate Credit Committee:
Rejected application based on uncofirmed allegations
Impact of Legal settlement not known
Miscommunication and no mutual trust Rejected Loan Application - Requirement Approval by Branch Credit Committee, which was granted based on trust of Jae's judgement

>$5m loan needs to be approved by Corporate Credit Committee in Seoul, South Korea

Jae answered all enquires from the Corporate Credit Committee Objectives:

Fulfill the goal to be an international bank
Allow the bank to provide better support to its Korean partners and generate additional business from primarily US-based-Korean –owned businesses
To be better informed about worldwide banking trends Mr. Kim
Senior Manager
Experienced account manager in Seoul Establishment of loan application package
Pros:
Reduce credit risk: Ensure enough assessment of loan applicants have been done
Efficient way of coordination: Facilitates process of approval
Help accumulate knowledge of US-based-Korean customers Cons:
Not specific enough. Manager may use favourable analysis to get approval Procedures for approval of loan application <1 million, approved by Mr. Kim
>1 million, approved by branch credit committee
>5 million, approved by headquarter’s credit committee
Preaction review: scrutiny of proposals
Prevention nature Pros:
Double Approval to reduce loan risks
Accumulate information on worldwide banking trends Pros
Provide more incentives to account managers
Help achieving the branch’s objective – to grow rapidly
Develop the full potential of each account managers Management Philosophy Management Philosophy Management Philosophy Result-oriented
Remuneration directly links to profit generated
The instructions made – Kim only cares about the result Rejected Loan Application – Problem What type(s) of philiposophy do you think this company is parcticing? Q & A Q & A If you were Jae,
1. how will you think?
2. what will you do
if the same thing
happens again? Q & A Which type of job allocation method do you think this company should use? Mini profit center Pros:
Encourage entrepreneurship
Freedom
Comprehensive – Incorporate different aspects of performance
Precise and Understandable
Cons:
Conflict of interest
- Expenses incurred directly affect the bonus of account managers
- Conflicts between interest of company and interest of inidividual mini profit-center Cash Bonus Pros:
Motivation - Incentive to boost revenue and reduce cost
Cost effective
Bonus system: precise ; objective ; understandable ; controllable
Cons:
Encourage manipulation (shift profit to next year)
Encourage risk-taking
No / Low retention
Cash flow problem due to distribution of cash bonus Regular Review Pros:
Identify potential problems (E.g. declining business conditions, violations of covenant, and missed payments)
Pros:
Concentrate on specific location
Make use of their prior experiences to develop specific industries
Cons:
Conflict - Responsibilities may be overlapped with those assigned by geographical location Recuit by himself
Hire experienced managers with track records of success Pros:
High efficiency in recruitment process
Managers are experienced in US banking industry
Different people bring new ideas Cons:
Cannot cooperate together due to various operating style
Inadequate consideration before hiring
Cons:
Not specific
Not understandable (Meaning of “good deal” ?)
Pros:
Flexibility
A. Centralization B. Decentralization C. Result-oriented D. Culture-oriented Decentralization
Only a few and not well-defined action control
Almost no supervision on how the work is done
Each account manager work independently like a small and separate business.
Cons
Encourage the account managers to take risk
No communication between Kim and the account managers
No retention
Pay cash bonus
Conflict between personal interest and company’s interest A. By industrial segmentation B. By geographical segmentation Recruitment procedure:
Set up human resources department for recruitment
Establish a comprehensive recruitment procedure
Consider other factors in evaluating the suitability of candidates Job allocation
Allocate work by industry instead of geographical location
Loan application
Establish a standard loan application package
Instruction on the composition of risk analysis and required supporting documents Loan approval
Change the composition of the credit committee
To enhance segregation of duties
Remove the two senior account managers and introduce one independent senior staff Remuneration package

Basic salary: raise to the level of industry average
Maintain the competitiveness Bonus: change 10% stock option
Vesting period improves the retention rate of account managers
Induce account managers to consider long term profitability and hence avoid risk taking behavior for short term profit
No loss penalty
No bonus is already a penalty
External environment affects return Goal setting

Set up a five-year goal for the whole branch
i.e. Attain overall certain market share in merchant bank sector
Enhance sense of belongings Set up short term goal for each account manager
i.e. Attain certain market share in the industry that they are responsible for
Serve as the lower cap for getting bonus
Provide motivation to work harder
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