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

Ethics and MP's expenses: storm in a (claimable) teacup?

Crane and Matten have been in the UK this week, and the big issue absolutely dominating the media has been that of the expense claims of the country's Members of Parliament (MPs). The press and TV have been all over this one like a bad rash, and don't look ready to letup soon. Now no one likes to see elected politicians misappropriating the public's hard earned money - and Britain has already seen itself slipping down the greasy poll of the corruption perception rankings as we mentioned last autumn. But over the course of the past few weeks the media storm has relentlessly criticised politicians from across the political spectrum for abusing the public's trust to such a degree that we've already seen one senior figure resign (the Speaker of the House of Commons), various politicians have had their knuckles rapped and have promised to repay their overenthusiastic claims, and party leaders have been scrabbling for the moral high ground in trying to instigate new systems of control.

When all is said and done, there is little evidence in all this that any of the politicians involved have actually broken any rules; in fact, it would appear that in many instances, their claims were not only approved, but actively encouraged by administrators. This has all been going on for years without anyone getting in much of a commotion about it. Besides, the padding of expenses is a problem that is hardly unique to poilitical circles - the private sector has just as many problems to deal with, and the media industry itself is hardly whiter than white. So is this all a fuss about nothing? Not exactly. There are some real issues here, especially around how to maintain public trust. There are also many lessons to be learnt about business ethics too - particuarly in terms of the limits to compliance systems in managing ethics, and the importance of getting to the deeper problems of how institutions are governed. Some of these points are dissected nicely in some recent posts on the Added Values blog by the folks in the Professional Ethics Network at the University of Leeds. They also link to a nice little interview clip from everyone's favourite Twitter-er Stephen Fry.

Another way of looking at this is to try and understand why such problems have gone on for so long, and how such a culture of corruption ever managed to get cemented into the heart of government in the UK. One of our favourite concepts in exploring institutionalised bad behaviour is "rationalization tactics", as described by Anand et al in the Academy of Management Perspectives. It doesn't take much effort to see in the case of MP's expenses some clear examples of how processes such as incrementalism, socialization, and cooptation have successively socialized MPs into unethical behaviour ... and how rationalizations such as appealing to higher loyalties and balancing the ledger have given them the kinds of excuses that deny wrongdoing and keep everyone in a state of denial. Of course, if we follw this path, the obvious solution that comes to mind therefore, is a fundamental culture change, a new broom in the dusty cupboards of Parliament. But for that, it's going to take a whole lot more than the rhetoric we've heard so far.

Ethics pledges, business schools, and the financial crisis

With all the talk recently of greedy bankers and guilty fraudsters, some people have been looking to business schools as a potential source of some of the problems. The New York Times recently published a stinging criticism highlighting the failure of schools to focus their students' skills and attention on anything more than short term shareholder value. Not surprisingly, it generated a lot of attention, not only in the business school community, but also among the broader readership of the paper.

Obviously schools can not be wholly to blame for sowing the seeds of the financial crisis, but the points made about the inattention to ethics and social responsibility in many MBA programs are well made. Things are changing, but there are still only a few schools (among which we'd count our own) where such critical issues have become deeply and meaningfully embedded in the curriculum. Students meanwhile have demonstrated that they are increasingly attentive to social and environmental issues. Survey evidence, growing course enrollments, and escalating membership of student clubs and competitions around CSR issues are all testament to that. Another way that this has started to surface though is in the emergence of "ethics pledges" - a growing phenomenon, particularly in the USA.


Emanating originally from Bentley University in the USA, the ‘Graduation Pledge of Social and Environmental Responsibility’ is perhaps the best known of these pledges. It is based around a pledge to ‘to explore and take into account the social and environmental consequences of any job’ that signers might consider, and commits signers ‘to try to improve these aspects of any organizations for which [they] work.’ The initiative’s website enables potential organizers to learn about how to organize on-campus campaigns, and to download posters, wallet cards, and other resources. So basically, the pledge is about sticking to your values, regardless of the various pressures or seductions of the workplace. Of course, making career choices can be hard when you want to make a difference in society. What if a potential employer seems to be offering you a great position but you’re not convinced that it shares your values? The ethics pledge aims to help students navigate these tough choices while keeping their commitments to ethics and social responsibility intact.

More than a hundred schools and colleges are using the pledge, but other initiatives have also emerged including the ‘Shanghai Consensus’ pledge organized by the China-Europe International Business School (CEIBS) in Shanghai, and for business leaders, the ‘Business Ethics Pledge’, which begins ‘I pledge allegiance, in my heart and soul, to the concepts of honesty, integrity, and quality in business.’ Unlike the other alternatives, the Business Ethics Pledge even allows you to sign electronically and start advertising your business on-line as a signatory.

As might be expected, such pledges have been particularly popular in North America and, to a lesser extent China and Taiwan, reflecting perhaps the focus in such cultures on individual level agency in business ethics. Those who subscribe to such initiatives clearly believe in the importance of personal integrity and of the power of individuals to make a difference. As the Business Ethics Pledge founder, Shel Horowitz says, ‘This is about changing the world! About creating a climate where businesses are expected to behave ethically, and where executives who try to drag their companies into the unethical swamplands find that nobody's willing to carry out their orders.’

We're not wholly convinced by this - especially since so many of the problems we're seeing today are not so much the result of individual miscreants (well, OK, maybe Bernie Madoff could have done with keeping to a decent pledge), but because of deeper level structural issues in financial markets, governance and remuneration systems, and regulatory problems. But still, when the focus of attention is so much on changing the culture of business, a good old fashioned pledge of allegiance may not be such a bad idea. After all, you've got to start somewhere. And it will certainly show those business schools that've been slow to get their ethics education together that their students mean business. Just not business at any cost.

Getting an ethics fix

This week’s blog is a bit late. Sorry, but there is an excuse: Crane and Matten have recently been introduced to the TV series ‘The Wire’ and, though we are somewhat behind the rest of the civilized world in this, have been avidly watching the third season on DVD. This stuff is so addictive that one of us even managed to watch all 12 episodes in 2 ½ days. Well, sometimes you need to stop writing, and just starting watching…

The Wire is set in Baltimore and introduces us to the world of drugs, smuggling, crime, dodgy police and sleazy backroom local politics. As far as we’re concerned it’s probably one of the best TV serials ever made. The storylines are gripping, the plot credible and the acting is just superb. Each series operates between two ‘camps’. ‘The Law’ is basically the police, prosecutors, lawyers and local politicians. On the other side, there is the ‘The Street’: the local drug trade, constituted by various rivaling gangs.

There are many reasons for the popularity of the show, one of which is the apparent amorality with which the two camps are displayed. Unlike in many standard cop shows, the ‘good guys’ are actually not quite that good. And the ‘bad guys’ are even at times fairly decent: despite the drug dealing and murdering, there are strict rules, very clear notions of fairness and an honor code among the gangsters. Most of all, nearly all characters are so likeable. If bad things happen, they are mostly the result of ‘the system’ – be it the police bureaucracy, politics or the power relations within and between gangs.

Now – some of you might be wondering by now what all this has to do with business ethics – or if it does, why Crane and Matten can’t even have the least bit of fun without bringing their ethics perspective into everything. Fair enough, so let us just say this much: ‘The Wire’ is absolutely superb if you want a lively laboratory of what we call ‘context related factors’ in ethical decision making (Chapter 4 of our business ethics book). The show gives a pretty vivid account of why it is that normal people end up doing some pretty bad things. This is what the Stanford University psychology professor Philip Zimbardo (of the infamous Stanford Prison Experiment) calls the ‘Lucifer Effect’ in his latest book: how personal morality is fundamentally shaped by social context.

And, besides, the link to business here is by no means artificial either. Stringer Bell, one of the gang leaders in the Wire, is actually doing a business degree part-time in the show, and he brings to bear some of the lessons from the classroom to his business on the street. Mind you, we doubt that he’ll have spent much time in any ethics classes. But that’s a shame. Not only could he have learnt more about why ‘The Street’ and ‘The Law’ behave the way they do, but he could also have provided us with some knowledge in the other direction. As some of our European colleagues have discussed recently, we can learn a thing or two about CSR from the way that organized crime outfits like the Sicilian mafia offer very instrumentalized forms of philanthropy to survive and flourish in governance vacuums. Oh, yes, but that was another show…