Tuesday, September 20, 2011

UBS and that missing $2.3bn: Rogue trader, rogue company or rogue industry?

Revelations last week that UBS, the Swiss-based global financial services company, had shipped close to $2.3bn due to "unauthorized trading" in its London investment banking division focused intense media speculation on the derivatives trader at the heart of the scandal, Kweku Adoboli. Earning himself the now familiar epithet of the "rogue trader", Adoboli also claimed the dubious honor of a position at number 3 in the all time Rogue Trader Top 10, placing well behind Jérôme Kerviel at number 1 (with nearly $7bn in losses), but close to Yasuo Hamanaka at number 2 ($2.6 bn) and well in front of Nick Leeson at number 4 ($1.3bn). Like those before him, Adoboli's losses have had grave repercussions for his employer and for the bank's stakeholders. UBS's share price dropped by 10% after the losses were reported, and with almost the entire quarterly earnings of the firm wiped out, the bank is reportedly aiming to accelerate a major restructuring of its business, involving thousands of job losses. Meanwhile UBS was quick to reassure its well-heeled customers that none of their money was at risk, though a downswing in the bank's reputation and overall trust levels seems inevitable.

The narrative of the "rogue trader" is a seductive one in making sense of events like those at UBS. A lone trader going off the rails, committing fraud to make himself rich - what could be a simpler explanation? But as with Kerviel, Leeson and others before him, Adoboli does not appear to have been seeking to profit directly from the unauthorized trades (although clearly would benefit indirectly in terms of a higher bonus if the gamble paid off). In reality it was more a case of taking an illegal route to try and make the firm more money. Likewise, Adoboli hardly fits the stereotype of the evil genius that many will picture when thinking of a rogue trader. By all accounts the Ghanaian born, 31 year old seems to be pretty unremarkable.  He likes art and photography. He's "very polite", "very loyal" to his employers a "really nice guy" according to the neighbors, even his former landlord speaks highly of him. He went to private school and graduated from a respectable university (Full disclosure: actually he studied at the University of Nottingham, and graduated whilst Crane and Matten were teaching there - but did not, we might add, attend our ethics class). Clearly, a major share of the blame for UBS's losses must rest of the person who cooked the books to keep his spiraling losses secret. But he's hardly much of a rogue, it has to be said.

So where does the rest of the blame lie? UBS itself certainly has to take a large proportion of the responsibility. After all, what kind of financial institution doesn't realize that one of its employees is taking such wildly speculative positions and then cooking the books to hide it? Adobodi appears to have been making some unauthorized trades since 2008. In the end it was the trader himself who blew the whistle on his activities, not those who were responsible for exercising financial control. Internal and external auditing, back office controls, risk management, compliance -aren't they supposed to stop this kind of thing happening? Moody's the rating agency is belatedly pointing at "ongoing weaknesses" in the bank's risk management."We have continued to express concerns with regards to the ability of management to develop a robust risk culture and effective control framework," the agency said in the aftermath of the last week's disclosures. But this is hardly news for a bank like UBS that lost $37bn in the subprime mortgage crisis and had to be bailed out by Swiss taxpayers.

Myret Zaki, the author of a best-selling book on the bank has presented the situation as "a never-ending story repeating itself". "I'm not surprised at all about this," she told the UK newspaper the Telegraph "[UBS CEO] Oswald Grubel kept advocating an increase in risk-taking. When you have a CEO talking like that, you are not in a climate where you feel restricted, as a trader. He was on the side of continuing to make money on the markets, even though wealth management was employing 30pc fewer staff for double the profitability." Others, such as Richard Abbey, the senior managing director of financial investigations at Kroll, point to UBS's recent downsizing as a factor: "It's no coincidence that after downsizing and lay-offs these type of losses are more common. There may not be enough people to physically control checks and balances. It may be institutions are too reliant on computer controls and they are the easiest to bypass." In many respects then this was a time bomb waiting to go off - with Adobodi as much the symptom as the cause. This could be "rogue bank" just as much as "rogue trader".

Taking a broader perspective on the scandal, maybe we don't need to stop the blame game at Adobodi  and UBS. As with the recent financial crisis, perhaps this is also a deeper rooted problem of the financial services industry as a whole. According to the Telegraph, "unauthorized" trading could be considerably more widespread than the occasional huge rogue trader incident suggests: "experts and insiders warn the amount of risky unauthorised trading is difficult to quantify and often not brought to the public eye unless losses are huge enough to be announced". The paper goes on to quote a "senior trader" at a London bank: "People are fired every year for having stuff on their book that they shouldn't. All the banks tend to know what has happened and why someone has left, but it doesn't get publicised. It's usually only a couple of million bucks." So while Adobodi may be number 3 in the rogue trader top 10, we never even get to hear about all those entries lower down the charts. Jérôme Kerviel, who's still there at the top of the list has suggested that companies like Société Générale, his then employer, may even tacitly endorse such trades as long as they are making the bank money. It's only when they start registering huge losses that the controls really kick in. As even the Wall Street Journal recently quipped: "what do you call a 'rogue' trader who makes $2 billion? A Managing Director!" These may of course be little more than jokes, rumors and groundless accusations. But clearly the financial services industry has a major task ahead of it to clean up its reputation and regain the trust of its stakeholders. The events at UBS are going to make that task even harder now. We don't just have a rogue trader on our hands. We have a rogue industry.

Photo by Ahmad Nawawi. Reproduced under Creative Commons Licence

Sunday, September 11, 2011

Has 9/11 changed business ethics?

I can’t believe I just wrote this headline. Looking at today’s punch lines in North American papers or on TV, you can get the impression that 9/11 was the all defining event of the new millennium. And that pretty much nothing in the world has remained the same ever since.
There is a lot of hyperbole out there these days. As shocking as 9/11 appeared at the time the last decade has seen – in terms of loss of life or any other criteria we want to apply – much worse tragedies, injustices and atrocities. This includes a number of ways in which America and its allies have responded to 9/11 (8,500 American soldiers and contractors killed, 103.000 Iraqi civilians killed, according to today’s New York Times).
World politics aside – and there are more gifted minds and eloquent writers out there to address those issues – it’s still worth just engaging in this little thought experiment. So let’s play around with this thought for a second: if 9/11 is the day ‘that changed everything’ – what has its effect been on the niche of the world we are commenting on in this blog? Here are some thoughts off the cuff.

Blurring lines between the public and the private. 9/11 has given many governments new legitimacy in redefing the public and the private in their relation to their citizens. Email, phone conversations, financial records, tax statements are just prominent examples where governments have attempted to intrude the privacy of citizens – all of course in the name of fighting ‘the war on terror’. Conspicuously, many of this information is administered by private companies. Unsurprisingly, we then see that electronic privacy, identity protection and a host of other privacy issues have turned in ethical dilemmas for private business. Arguably, many of the ethical issues here would be on the agenda without 9/11 though, as the main driver of ethical contestation is the mere fact that advances in information technology have made those new ways of information gathering possible in the first place.

New business opportunities. Looking at how America and its allies have approached the wars in Iraq and Afghanistan it is evident that we have seen a surge in business opportunities for private military contractors, mercenary companies and security providers. As the Wall Street Journal investigation ‘Top Secret America’ has highlighted this also pertains to intelligence gathering, counterterrorism or homeland security. This all has propelled private business in a sphere traditionally occupied by governments and other – at least on paper – publicly and democratically accountable societal actors. Again, we can legitimately ask in how far this is really triggered by 9/11. As Naomi Klein has pointed out (‘The Shock Doctrine, Chapter 14), it was exactly on September 10, 2001, when Donald Rumsfeld held a Town Hall Meeting in the Pentagon announcing far flung privatization of military operations leading CNN to the headline on the very eve of 9/11: ‘Defence Secretary Declares War on the Pentagon’s Bureaucracy’! In this sense then 9/11 might have accelerated these developments and provided some much needed legitimacy – but the underlying ideas and intentions were hardly new.

Soaring government deficits. The current debate on government deficits in the US, UK and elsewhere is often directly linked to the so-called financial crisis of 2008/9. This however overlooks the fact that due to the ‘response’ to 9/11 certainly the US and the UK, had already heavily overstretched their budgets. The New York Times today cites a figure of $1.6trillion in costs for just the wars post-9/11. In some ways one could even argue that due to the constant distraction of two wars the looming financial disaster could grow largely unnoticed by governmental scrutiny. And the need to finance those wars made it all too tempting to keep interest rates low - with the widely known effects on cheap credit in America. As a result we now see more or less in all Western democracies an increase slashing of classic welfare state provision. As many commentators have pointed out retreating governmental provision of health, education or other public services has been a key driver in a shifting expectation towards business in engaging in these arenas – the UK probably being the best laboratory to substantiate that thesis.

New issues in diversity and discrimination. Certainly in the US, 9/11 has heightened scepticism towards all things Muslim. This is certainly reflected in tightened immigration laws and the general perception of the public. Conspicuously, there is relatively little case evidence that this has also played out in business. While gender or sexual orientation have been well documented there is only scant evidence of actual discrimination on the basis of being of Muslim faith. This may, however, be more credited to the fairly palpable ‘Teflon’ of political correctness with which those topics have been touched since then in business.

A multipolar world and the rise of China and India. One of the most interesting developments in the US has been its heightened restrictions on immigration of highly educated young people including those graduating from American universities. This has had a number of implications for business both in the US and the rest of the world. Most obvious are changes in those industries where America is still quite advanced, most notably IT, electronics and software. All these industries have in the past and still at present do rely heavily on an influx of foreign-born professionals. While it has become more difficult to hire this talent at home, places such as India have immensely benefited from this. Much of the software development and business process outsourcing of leading US companies is now done in Bangalore, Hyderabad or Mumbai. In this sense, with the US becoming less open to a free movement of people we see that this has benefited other parts of the global economy. This has also been visible in University education. Countries such as the UK, Canada or Australia have seen a surge in international students who found their ambition to study in the US rendered impossible after 9/11.
For business ethics this move towards a world where the US in many fields has lost a pole position is quite interesting. With growing business interests in emerging economies we see, at the same time, an interest in business responsibilities and ethics growing in these parts of the globe. We can certainly argue that the last decade has seen much stronger influence and relevance of other areas of the globe. Business ethics, 30 years ago, was by and large an American subject. This is no longer the case today.

Arguably, much of the changes we discuss here have a fairly tenuous link to 9/11 as such. The events had their most severe impacts on ethics in government, warfare, international relations and how governments have (dis-)respected basic human rights since then. Some of it, as we think, has had a trickle-down effect on business. But maybe the gist of it is still best summarized by commodity trader Carlton Brown in the movie The Corporation: ‘In devastation, there is opportunity!’

Photo by JessyeAnne, reproduced under the Creative Commons licence.

Tuesday, September 6, 2011

Lessons in politics from Starbucks: sign of the times or storm in a coffee cup?

Drip, latte, cappuccino, espresso, frappuccino; short, tall, grande, venti, trenta. Starbucks, the international coffee chain is great at giving choice in getting our daily dose of java. But what about campaign contributions or no contributions? Doesn't exactly roll off the tongue in the same way, but that is the stark choice that Starbucks CEO Howard Schultz is now offering US politicians in the face of the country's ongoing debt crisis. For the past few weeks Schultz has been seeking to build a coalition of US business leaders ready to join him in withholding campaign contributions from Washington until the main political parties start working together and agree a debt deal to turn around the beleaguered economy.

In the last few days Schultz has stepped up the campaign with full-page ads in the US press, including the New York Times, taking the form of an open letter on Starbucks headed paper to his "fellow citizens" to join him in "restoring hope in the American Dream" by sending "the message to today's elected officials in a civil, respectful voice they hear and understand, that the time to put citizenship ahead of partisanship is now".

It's quite a remarkable campaign. Schultz has the support of more than a hundred business leaders joining his pledge. Among those listed as "key supporters" on the campaign website are the CEOs of AOL, BBDO, NYSE, NASDAQ, Wholefoods Market and Zipcar. It is not such a significant coalition yet to cause the main political parties any real loss of sleep - compared with major contributors, most of these individuals and companies are not heavily involved in funding political parties. But for a business leader like Schultz to come out and so explicitly take a stand that effectively seeks to hold his domestic politicians to ransom until they do his bidding represents a fairly unique twist on the growing involvement of business in politics and the claim by corporations to be "good citizens".

In one sense, Schultz should be applauded for seeking to use his own and his company's economic muscle to try and achieve what he sees as a greater public good. Management guru, Rosabeth Moss Kanter, for instance has come out in favor of his "courage and leadership" in attempting to restore confidence. Even the more cynical corporate critics will find it difficult to see a clear-cut corporate self-interest at stake here. Sure it could help reinforce the famous Starbucks brand but at the same time its also going to annoy a lot of people too, especially those in Washington who are being labelled by Schultz and his CEO friends as having a "pervasive failure of leadership".

On the other hand, though, we might also question what's really going on here when we have a company CEO leveraging his company brand in such a way to make a political rather than an economic point, and at the same time claiming to be a "fellow citizen" with the rest of us (who can hardly afford to take out full page ads in the New York Times to present our own views on the current political logjam). This is not just Schultz the individual citizen speaking here but Schultz the corporate CEO and representative of Starbucks. But then, if (and it is a big "if") we accept corporations as political actors, then at least this example represents a fairly good case of building coalitions, providing an arena for free and fair deliberation, and moving beyond mere corporate self-interest.

To our mind the whole situation presents a really interesting insight into the emerging political role of the corporation and the difficult decisions that have to be made when business leaders start increasing their involvement in public debates. According to a McKinsey survey, "almost half of US executives believe they and their peers should play a leadership role in publicly shaping debate and in efforts to address sociopolitical issues such as education, health care, and foreign policy ... yet only one-seventh of survey respondents consider themselves to be playing that role now". Schultz's efforts to restore economic confidence by taking a step into politics gives us a taste of what might happen when these executives really start doing so. We still have a choice about whether and how those steps should be taken.

Photo by Nick Humphries. Reproduced under Creative Commons Licence.