Thursday, January 31, 2008

Rogue trader, latest edition

One of the bets you can place these days at Ladbrokes (a British chain of betting shops) is who will play the role of Jérôme Kerviel in a movie some people are planning to make this year. It is a dubious honor for Kerviel, whose covert trading gambles at Société Générale in Paris has brought down the bank last week. The funny thing though is that if a movie script writer would dream up this story, including the whopping €4.9bn losses Kerviel amassed, the plot would sound way too unrealistic to be credible screen material.

It is amazing that since legendary Nick Leeson, whose hidden trading brought down Barings Bank in the 1990s, these cases have keeping happening with a certain regularity (see Ethics in Action 4.1 in Crane & Matten). What’s different in this case is not only the magnitude of losses but also the fact that Kerviel had no immediate personal gain of his dealing and was acquitted of attempted fraud by a French court this week. The focus of the public is much more on the bank rather than the employee who caused the scandal.

While it is yet unclear how much the management at Société Générale actually knew about the secret deals the case is yet another example how unavoidable business ethics has become for companies. By all accounts, Kerviel himself has no record of criminal behaviour, on the opposite; he was a highly successful, skilled and appreciated employee of the bank. His bonus in 2007 was a nice €300,000. What the case makes blatantly obvious is the role of the organizational context in either encouraging or subduing ethical behaviour.

With ever more complex financial products, electronic systems and multifaceted global markets it appears to be increasingly challenging for senior bank managers to keep up with the pace of innovation and to design policies which would allow for better control of traders such as Kerviel. It also appears that rules at Société Générale, in so far they existed, seemingly were open to interpretation and discretion, though much of these things are just about coming out as a result of the ongoing investigation.

This case then ultimately leads us back to the old question why unethical behaviour occurs in business. Is it because the individual managers are inherently evil? Or is it because the organizational and bureaucratic context incentivized individuals to cut corners and take advantage of infringing the rules? Just today, French investigators published the first transcripts of the interrogation of Kerviel. What seems to emerge then is that Société Générale for some time had somehow known about his dealings, not at least as he allegedly made a profit of €1.4bn for the bank in 2007. His own explanation for his gambling is that he just wanted to show his superiors that he is better than his colleagues. His strongest argument for why the bank should have been suspicious much earlier: he only took 4 days of holidays in 2007: “One of the hard and fast rules of auditing is that a trader who never takes time off is a trader who just wants to keep auditors away from checking his books!” Whether Jérôme Kerviel will get away with this stance however will be a question of future investigations. It will continue to be a fascinating piece of corporate crime to watch over the next couple of weeks…

Tuesday, January 22, 2008

CSR or regulation for food advertising?

CSR is often seen as a way of forestalling legislation, or of replacing hard government regulation with softer self-regulation from industry. In the UK, where governments since the 1980s have tended to champion CSR, comes news of another victory for self-regulation over mandatory restrictions, this time in the area of food advertising.

In the wake of increasing concerns over childhood obesity, and a general dismay over the junk that makes up many children's diets today (cynics will say that all British people eat crap food, but one half of Crane and Matten at least tends to deny that), fast food companies and soft drinks multinationals have been on the receiving end of a lot of criticism.

So expectation was high that a new "obesity strategy" about to be launched by the UK Government would impose tighter restrictions on advertising of junk food. This follows a self-regulatory code launched by the soft drinks industry a couple of years ago, and new TV advertising restrictions from the communications regulator Ofcom last year that banned advertising of unhealthy food during kids programs. Health campaigners were anticipating an announcement that would extend these restrictions yet further.

According to the UK newspaper, The Guardian, though, the plans have been put on ice in favour of a more "collaborative approach" between government and industry. By this, we suppose, we can expect more CSR style self-regulation. What remains to be seen however is what form it will take.

One promising route would be something along the lines of the Europe wide voluntary initiative introduced by Coca-Cola and friends in 2006 that commited members of the Union of European Beverages Associations (Unesda), to ban advertising to children under 12, to no longer install vending machines in primary schools, and to supply machines in secondary schools with healthier products.

The initiative's first independent monitoring report, by PriceWaterhouseCoopers is now available on-line. This shows that some progress has certainly been made, especially in terms of direct advertising, whilst the vending machines issue still requires some greater effort to reach compliance.

OK, so the initiative is voluntary and there are no fines for non-compliance, but for a CSR programme it probably should be appauded - after all, it sets out measureable targets, establishes independent monitoring, and commits to publish them where we can all take a look and see how they're doing.

So if the UK government does go down the CSR route to further self-regulation in food advertising to children, it will certainly be a blow to the advocates of good old fashioned regulation as a means of keeping the big corporations on the right track. But let's hope that if that is the case, they at least use - and let's be optimistic here, maybe even improve upon - the models that are already being introduced into the industry. True, on their own, they're not going to stop anyone getting fat, but the less scope corporations have to simply shrug their shoulders and say "it's not our problem", the better.

Friday, January 18, 2008

Corporations and political responsibilities

Just today the latest issue of Business Ethics Quarterly has dropped into the mailbox, featuring our latest article on corporate citizenship - well, actually an invited response to someone else's article about whether the label of 'citizens' fitted corporations or not. Oh, the joys of becoming "those two corporate citizenship guys" - available 24/7 to answer all your CC questions ... and more often that not to be roundly disagreed with by just about everyone.

Unusually for us, this time around we actually agreed with most of what our colleagues had written. Anyway, one thing that we particularly liked in this paper, and which we have been talking about in our work for some time, is the idea that once you start to acknowledge some role for corporations in the realm of citizenship, then you are effectively moving towards the idea that corporations have a political role in society.

Now, for various reasons, this whole idea that corporations might have political roles and responsibilities is for many people a fairly controversial one. Obviously none of us are very comfortable with the whole blurring of boundaries between business and government, between the economic and the political. But this is the situation that we find ourselves in at the moment. And, as people interested in nature of business ethics and responsibility, it represents one of the more fascinating, yet challenging aspects of the whole debate.

On the one hand, we applaud corporations that step in where governments have failed, such as in the provision of decent roads, schools, and hospitals, or where they move to protect their workers from HIV/AIDS infection. This is just good citizenship, right? On the other hand, we have many legitimate doubts about the presence of multinationals in delivering the basic entitlements of citizens, or when corporations get involved in lobbying governments to prevent legislation that might curb some of their worse excesses. Bad citizenship, huh?

So the area is something of a minefield, albeit quite a fun one to hop around in ... until you put a foot in the wrong place of course. But over the next few months we'll be commenting quite a bit on some of these political issues as they relate to corporations. There could be a few explosions along the way, but we're ready for it, helmets on, and ... well ... you can finish off the metaphor for yourselves...