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…

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