Who really should resign for the Barclays interest rate scandal?

The banking sector needs another scandal like a hole in the head. Or maybe that's the wrong metaphor. Because a quick death from a headshot might be more preferable to the excruciating, but likely never fatal, torture of interminable crises that we seem to be constantly enduring.

The latest bout of banking misery comes from the UK, where Barclays, the retail and investment banking giant has fallen foul of regulators for manipulating the interbank interest rate over a number of years during the mid 2000s.  It's a huge scandal that looks set to engulf not just Barclays, but potentially also a slew of other banks, and even maybe the Bank of England and the UK Government.

One of the more interesting facets has been the reaction from Barclays. What a week it has been. First a number of senior executives including the CEO Bob Diamond reacted to the media criticism by announcing they would forgo their bonuses. Then, as the scandal escalated, the Barclays Chairman, Marcus Agius announced his resignation. In a dramatic turnaround, the following day Agius was reinstated and CEO Diamond announced his resignation, along with his right hand man, Jerry del Missier.

So the big question is: who really should go in a scandal like this? The Chairman, the CEO, or someone else? The answer, of course, depends on the type of scandal, the level of knowledge of the activity that the senior leadership had (or should of had) as the events unfolded, the likely best route to reform, and of course the likely reaction of stakeholders. With Barclays it seems right that Agius, the Chairman, has (on second thoughts) decided to stay. The Board is unlikely to know about an activity such as the interest rate rigging, and so cannot be held culpable in their overseeing function. It is different from, say, the role of the Board in something like Enron's accounting fraud, which is directly related to the Board's role, and relates to accounts that they must have seen and approved.

With Barclays, you would expect the Board and its Chairman to take a central role in dealing with the problem once it has been revealed to them, which apparently was only days ago. As one member of the House of Lords scathingly remarked upon Agius's resignation: "The board is so hopeless they've just shot the head of the firing squad and missed the prisoner." By resigning Agius was signalling that the Board was unfit to be a "firing squad" and instigate the kind of change necessary at the bank.

Turning to Diamond, one of the main reasons forwarded for his resignation has been the "lightening rod" argument, as in the UK newspaper, The Guardian's analysis: "Diamond, under pressure from the banking regulator and the governor of the Bank of England, Sir Mervyn King, quit after he decided he would be the lightning rod for the scandal at the hearing".

It's not the first time we have heard this argument about the resignation of a prominent CEO in recent times;  News International made exactly the same claim regarding the departure of CEO Rebekah Brooks in July last year in the wake of the phone hacking scandal.

Why the lightening rod argument? Well, it enables the CEO to continue to proclaim their innocence, despite stepping down. Their resignation is not due to guilt but is to save their firm from excessive media and political criticism. The idea is that it is supposed to diffuse the storm of negative publicity - the brave leader falling on their sword to save the company.

The problem, which we saw with News International, and which is already happening with Barclays, is that it doesn't really work.  For a start, no one really believes the argument. So the media is just as likely to respond by digging even deeper expecting there to be more secrets that the company is trying to hide by jettisoning the CEO.  Secondly, even if you get rid of one lightening rod, the critics will readily find another .... or they will simply continue targeting the same one in the hope of more revelations. Barclays found this to their cost last week after lightening rod no.1, Agius quit, only to be replaced by lightening rod no.2, Diamond. As The Telegraph put it: "Mr Agius is thought to have hoped his departure would serve as a lightning rod to conduct anger away from the bank and Mr Diamond". No chance.

It seems in this instance Diamond was responding primarily to pressure from politicians and to a lesser extent shareholders. Numerous influential voices were calling for the CEOs resignation and it is no coincidence that the Barclays share price rose on the announcement of Diamond's departure, despite him being up until recently strongly supported by investors. In other words, Diamond's resignation was primarily a symbolic act to appease stakeholders.

This is all very well, especially at a time when trust in big banks is at an all time low. But it is not necessarily the best course of action for actually dealing with the root problem. Mind you, the root problem is not 100% clear at the moment. Whilst Diamond was blaming "a small minority", others were were laying the blame at the culture at the bank or even of the entire sector. So although Diamond's proposed solution  - to “get to the bottom of what happened”, punish those involved, enhance internal controls, and change the bank's culture - may on the face of it make sense, this scandal has all the hallmarks of a more deep-seated systemic problem.

One bank and one CEO can't change an entire sector, especially when no one, not even the guy that's resigning, seems willing to take personal responsibility. Did he symbolise a culture that needed changing, Diamond was asked today. "I don't think so at all," he replied. Institutions like the banking industry are based on taken for granted assumptions that are highly resistant to change. Symbolic resignations are not the answer. But maybe they are a start.

Photo by SomeDriftwood. Reproduced under Creative Commons Licence

CSR – It is still Greek to European Banks!

Yesterday, Greek Prime Minister George Papandreou narrowly won the support of the Greek parliament for his ongoing efforts to steer the country away from bankruptcy. Whether this has given him a second political life though is an open question. Greece’s financial troubles are far from over.

As a member the EU and the Eurozone the survival of Greece within these European institutions seems still anything but certain. Last week, the debate among European heads of state and Finance Ministers on further support for Greece was tough and controversial. Finally an agreement of another multi billion Euro cash injection from mostly France and Germany paved the way for keeping Greece floating for another month or so.

A thorny nettle of disagreement between the countries was the question, in how far private sector banks should be part of the solution. Germany, whose banks exposure of some €20bn is much lower than France’s was insisting on more involvement, while France opposed this approach in fear of a downgrading of their private banks by rating agencies. The compromise turned out to appeal to banks to ‘voluntarily’ become involved – but precious little is found in the news about whether banks have actually taken up this ‘invitation’.

If we watch the footage of protests and civil unrest in Greece it is conceivable that further ‘austerity’ measures (i.e. cutting public services) – let alone an outright bankruptcy – of the Greek government will pose a serious threat to the country’s democratic institutions. Much (admittedly not all) of Greece’s current troubles are following the global financial crisis. Greece is perhaps the most visible example of what many citizens in North America and Europe think: that Governments pile up huge debts to fix the irresponsible behaviour of wealthy bankers and investors while asking the common taxpayer and middle/working class people to put up with reduced public services or – as for instance in the case of UK university students – higher prices for those services.

It reflects a recent debate in the CSR literature which was initiated by Colin Crouch, a prominent sociologist and, more recently, CSR expert at Warwick University. He argues that capitalism has been able to coexist with democracy in most Western countries only because there were mechanisms to deal with two problems inherent in capitalist market economies: first, the cyclical ups and downs of the economy, which exposes particularly middle and lower income groups to economic hardship. Second, the harmonious coexistence of both systems is only possible if the inherent inequality of income distribution in capitalist systems can be addressed in a way that some income at the top end is redistributed to those at the bottom.

For decades after World War II the mechanism to address this problem was referred to as Keynesianism. Government spending during recession as well as progressive taxation and a welfare state helped addressing these two problems. This system was somewhat obliterated in the 1980s with policies most visibly linked to Reagan and Thatcher, often referred to as ‘neo-liberalism’. Crouch though argues that those changes in fact created a policy regime of ‘privatized Keynesianism’. By encouraging and extending home ownership, pension plans based on investments in capital markets and other models of making the saving middle class to small scale investors, the two inherent contradictions between capitalism and democracy were basically to turn lower income citizens in ‘mini capitalists’.

With the so-called ‘financial crisis’ in the late 2000s though this system has proven to be no longer effective. Many lower and middle income citizens in Western countries have lost their homes and pensions – or at least have suffered a severe reduction of their value. Currently, he suggests, we see this mechanism of ‘privatized Keynesianism’ weakened, if not absent, with no real alternatives in sight.

In this situation we face two stark options. The first possibility is that similar to the 1920s and early 1930s, this absence of a mediating policy regime may give rise to political extremism, anti-democratic movements or outright the re-invigoration of fascism or left wing authoritarianism. In this light, the developments in Greece, but also the ongoing rise of the political extreme right in many European countries and the United States actually get quite a daunting character. We are not quite there yet, but the signs of far reaching unrest and despair about the effects of a global, largely unregulated capitalist system are clearly there and by all accounts, are likely to rise.

The other option though, in Crouch’s argument, is that one group among the winners of global capitalism and arguably the most powerful players step into the role of addressing the two inherent tensions between capitalism and democracy. This is exactly the point where corporate social responsibility would kick in. And in fact, as we have argued elsewhere, much of what companies are doing under the label of CSR is in fact very similar to classic welfare state activities. CSR in this perspective would see private corporations as pivotal actors in addressing those two inherent tensions between capitalism and democracy.

The reaction of European banks to support the effort of saving Greece from bankruptcy so far however shows little sign of awareness of this broader context for corporate responsibility. The Greek bailout situation is probably a blatant example of a country at the brink of severe political unrest where direct involvement of the private sector might indeed prevent a country sliding into anarchy or political extremism. So far though there are no signs that any of the European banks have seriously thought about their broader role in society. Maybe it is because the business case for this kind of CSR is so hard to make...

Picture by PIAZZA del POPOLO. Reproduced under Creative Commons Licence.