Fannie Mae's board of directors failed to fulfill important obligations to shareholders, allowing the mortgage giant's collapse. The compensation committee mishandled executive pay, permitting maximum bonuses without oversight of risky accounting practices. This negligence contributed to the financial crisis, as the CEO took advantage of a compensation plan that incentivized reckless behavior.

1. Chapter 2: Page 42 #6 Connect LO5 6.
Based on the information provided in Illustration Capsule 2.4, explain how corporate governance
at Freddie ac failed the enterprise's shareholders and other stakeholders. Which important
obligations to shareholders were fulfilled by Fannie Mae's board of directors? What is your
assessment of how well Fannie Mae's compensation committee handled executive compensation
at the government-sponsored mortgage giant?
Solution
The financial collapse had happened due to the following reasons:
The shareholder’s obligations that have been fulfilled by the Board of directors are as
follows:
The committee which was supposed to monitor the accounting practices of the executives has
failed to monitor it. Due to their negligence, the CEO employed a consultant who framed a
compensation plan that permitted the executives to receive maximum bonus without any
difficulty. This has been very well planned by the CEO as found by the federal Housing
Enterprise.