Fun facts about corporate accounting scandals

Regular readers will know that we have a soft spot for corporate responsibility infographics. The one below, which recently crossed our desk courtesy of Accounting-degree.org, provides a nice overview of some of the big corporate accounting scandals of the last 15 years or so. The title may be misleading - it hardly seeks to capture the biggest scandals of "all time" - but it does give a good summary of those that have happened in recent memory. And the sources of the details they provide are cited - most of which (but not all) are pretty reliable. So if you want a five minute summary of all that's wrong in the world of accounting fraud, and you don't mind a strong US bias, this is a good place to start.

One thing we particularly like are the "fun facts" accompanying each scandal. OK, so most of these are not really much fun at all - is anyone laughing about the introduction of Sarbanes-Oxley after the Worldcom and Enron scandals? - but they do point to some of the absurdities of the system in which the accounting scandals have taken place. Enron being voted most innovative company six times in a row by Fortune magazine, Lehman brothers being honored with "Most Admired Securities Firm" a year before its collapse, AIG execs getting $165m in bonuses just after posting the largest quarterly loss in American corporate history and getting a government bailout? It doesn't say much about how well we scrutinize or reward supposedly "successful" companies, does it?

It's also interesting that the infographic has been created by an organization promoting online accounting degrees (we might add that their other Featured Article is titled "10 Accounting Tricks the 1% Use to Dodge the Taxman", which is also worth a look). Are they saying that an accounting degree will help avoid some of these problems in the future? That what we need are better accounting degrees? That an on-line offering is in any way more or less likely to lead people to engage in shady accounting practices? Clearly there is an important role for accounting education in here somewhere, but we're not too sure about the offerings being recommended by Accounting-degree.org, or even who the organization is or what its methodology is. In the spirit of good accounting, a little more transparency would be a good thing. But don't let that stand in the way of enjoying a nice infographic.

Source: Accounting-Degree.org

Photo by AJC1. Reproduced under Creative Commons Licence

Top 10 Corporate Responsibility Stories of 2012

This year may have lacked the huge catastrophes that have dominated the corporate responsibility headlines of the last couple of years (such as BP's oil spill in 2010 or TEPCO's nuclear disaster at Fukushima in 2011), but 2012 has probably been more packed with serious incidents than any of the previous years. We had real trouble putting these in any kind of order and even getting down to just a top 10 of big stories was tough  - and meant we had to jettison a few favoured good news stories about corporate responsibility just to be able to capture all of the bad news. So it nearly became the Top 15 Corporate Irresponsibility Stories of 2012. But in keeping with tradition, here's our view of the top 10 of the highlights and lowlights of a jam-packed year of corporate responsibility stories. And if you think we've got it wrong, or want to change up the order a bit, do add your comments below.

1. Apple's supply chain odyssey
If there is one thing that seems to be guaranteed now, it's that the tech giants will be at the forefront of the corporate responsibility agenda for the forseeable future. If nothing else, it's simply a function of their size, power and ubiquity. In 2010 we had Google facing human rights issues in China; last year was Facebook's privacy battles. And this year, Apple's ongoing supply chain issues really exploded into the public consciousness, thanks in part to the New York Times stories that kicked off the year. Worker suicides, factory fires, poor labour conditions - none of this was exactly new, but one way or another 2012 saw Apple take over from Nike (and tech take over apparel) as the poster child of inhumane supply chains. Apple reacted fast once the tide had turned, but for many it was too little, too late. Even their own internal audits provided evidence of widespread breaches of their policy. As the bad news rolled in, the company that so-often seemed immune to criticism started to show signs of serious reform. Instead of secrecy, it started moving towards greater transparency, joined the Fair Labor Association and initiated third party inspections, and now reports monthly on the working hours of over a million workers. In what may turn out to be the most significant move yet, the company has begun manufacturing some of its Macs not in China, but in the US.

2. The LIBOR scandal
2012 was a bad year for a finance sector that seems increasingly incapable of holding onto whatever public trust is left after the financial crisis and its aftermath. Whilst the US regulators' continued clampdown on insider trading gained yet more scalps, most prominently former McKinsey head Rajat Gupta, it was the arcane field of inter-bank lending rates that dominated the financial front pages. Most of us probably didn't even know what a LIBOR was until this year, but revelations of deliberate fixing of interest rates among major banks in Europe during the late 2000s means that we all now know more than we want to. First, the CEO of Barclays was forced to resign in the wake of investigations by UK regulators. Now, the Swiss bank UBS has agreed to pay $1.5bn in fines to the Swiss, UK, and US regulators for manipulation of interest rates that according to Britain’s Financial Service Authority, was so “routine and widespread” that “every LIBOR and EURIBOR submission, in currencies and tenors in which UBS traded during the relevant period, was at risk of having been improperly influenced to benefit derivatives trading positions.” Investigations continue, and it is clear that other banks and possibly brokerages will be drawn into the fray. Perhaps the major legacy of the scandal though will be the startling picture it has provided us of the "horribly rotten, comically stupid" alternate moral universe that traders inhabit.

3. HSBC's money laundering fine
If the LIBOR scandal wasn't enough, HSBC's record breaking $1.9bn settlement with US regulators for money laundering in Mexico really capped a year that demonstrated how readily financial services companies could deliberately flout the rule of law, and bypass their own control systems with impunity. The HSBC settlement followed similar (though smaller) money laundering settlements against foreign banks including ING and Credit Suisse. What was particularly remarkable with HSBC was the fact that despite having strong evidence the authorities elected not to indict the bank out of fears of possible financial collapse.  The message? Four years on from the financial meltdown, some financial institutions are still too big to fail ... but their licence to operate looks increasingly at risk.

4. Bangladesh factory fire
The death of 112 workers in the Tazreen fashions factory fire of November marked probably the saddest moment for corporate responsibility in 2012. It also provided a powerful reminder that the global apparel industry still had not got its house in order regarding working conditions in the product supply chain, despite two decades  of codes of conduct and factory audits. Tazreen was making clothes for global brands such as Wal-Mart and Sears, who remarkably did not even know that their products were being manufactured there. All in all, a devastating wake-up call for the world of supply chain monitoring.

5. Lonmin mine shootings
Described by the BBC as the bleakest moment faced by South Africa since the end of Apartheid, the shooting of 34 striking miners by police at the Lonmin Marikana platinum mine demonstrated the escalating difficulties of doing business in the global mining industry and in an increasingly fractious South Africa in particular. Lonmin tried to remain above the security crisis, which in total claimed some 44 lives, but a company that not so long ago had the highest CEO:average worker pay gap on the FT 100, operating in one of the most unequal countries on the planet was bound to breed resentment.  Unfortunately the more fundamental reform required to significantly ease the tensions at Marikana looks unlikely.

6. Wal-Mart's Mexican corruption scandal
Wal-Mart wasn't the only company put under the corruption microscope in 2012. Canadian engineering firm SNC Lavalin, among others, was another high profile casualty of increased vigilance among national prosecutors. But the Wal-Mart de Mexico story makes it into our top ten a) because it marked such a sudden reversal of fortune for the company after its much vaunted CSR makeover of the past few years; b) because retail, unlike construction, is rarely a site for major bribery.  Many of the facts are still to come out, but a devastating investigation by the New York Times points to Wal-Mart's Mexican business being a "an aggressive and creative corrupter", systematically using bribery to obtain store permits for its rapid expansion and subverting democratic processes and regulatory safeguards in the process. Critically, the company was also found to have deliberately hushed-up the problem to protect its burgeoning reputation, closing down an internal investigation in 2006, and failing to report any of the illicit payments to the authorities. Suddenly all those nice sustainability initiatives don't look quite so pretty.

7. The BBC's Newsnight sex abuse fiasco
With the fallout of the News International phone hacking scandal still very much a part of the UK media landscape, the last thing the sector needed was a scandal at the most trusted media organization of them all, the BBC. But when the 2011 decision to terminate a Newsnight investigation into sex abuse claims against the recently deceased, former BBC presenter Jimmy Saville came to light this year, it because clear that something was wrong at the redoubtable British media organization. It was left to a rival broadcaster to finally break a story that has since become probably the largest serial sex abuse case in UK history. The BBC then spiraled further into disaster when Newsnight broadcast sex abuse claims against an unnamed senior establishment figure that were very quickly discovered to be untrue. The Director General of the BBC resigned amid the panic and confusion whilst a subsequent report into the BBCs handling of the Saville investigation labelled the organization "incapable and chaotic" with a culture of distrust. It's better than "immoral and deceitful", but hardly a ringing endorsement of responsible management.

8. Starbucks' "voluntary" tax payment.
After bubbling away for a few years, 2012 was really the year that tax justice broke into the mainstream consciousness. Campaigners have targeted various companies over the years, but when the spotlight fell on Starbucks, along with Amazon and Google, for their failure to pay tax on millions of dollars of profits in the UK, activists, politicians and consumers called for change. Not that any one suggested that any of the companies had broken the law, merely that such aggressive tax avoidance didn't align with many people's conceptions of fair play. Starbucks' offer to make a "voluntary" payment of $30m to make up for the shortfall suggested that they could read the message in the coffee grinds about where the debate was headed - towards greater expectations placed on companies to be "good citizens". But clearly the onus is also on politicians to beef up the rules ... rather than just criticize companies who are able to take advantage of their shortcomings.

9.  The Super PAC election
The US election was one of the big news stories of the year, and one of the main corporate responsibility issues swirling around the election was about the role of corporate money in politics. This was the first US national election since the 2010 Citizens United legislation which effectively removed any cap on political donations by companies. No surprise then that the election was the most expensive in history with corporate money aggressively channelled to candidates through super PACs (political action committees). Even though this was expected to benefit former hedge fund boss Mitt Romney, Obama came out ahead, perhaps demonstrating that money can't always buy elections. But when even the Harvard Business Review blog starts carping on about getting corporate money out of politics, you know that a tipping point could be fast approaching.

10. BP oil spill aftershocks
Just because it was our no.1 story two years ago, that doesn't mean the BP oil spill isn't still telling us something new about corporate responsibility. This year, we saw the company slapped with a record $4.5bn fine from the US Justice Department after it admitted to criminal responsibility for the explosion that led to 11 deaths on the Deepwater Horizon well. The company could still face a bigger fine following a civil suit for the damages caused by environmental pollution. But maybe the most significant aftershock of the spill was the decision by the US Environmental Protection Agency to suspend BP from bidding for federal contracts over their "lack of business integrity". Although it's still unclear how long the suspension will last, this suggests a potentially significant shift in the government's strategy for dealing with irresponsible companies. Or maybe it just means that BP didn't get its lobbying strategy right!


Photo copyright meteo. Reproduced under Creative Commons Licence

Film Review 'The City Below'

Among the spate of movies inspired by the ongoing financial crisis, ‘The City Below’ (German: ‘Unter dir die Stadt’) is definitely one exceptional voice. While many of those – think ‘Too big to fail’ or ‘Margin Call’ - provide us with a tension filled account of the inner workings of events that led to the crash of banks and markets in 2008 this movie is anything but a thriller. Technically it is a romance, but it is essentially a portrait of the ‘sociotop’ which is the world of the ‘one percent’, the top echelons of a global bank in Germany’s banking capital Frankfurt.

As such the movie – rather than adding to feelings of anger, rage and disgust about greedy bankers – provides us, as it were, with a clinical diagnosis of the de-humanized, de-emotionalized and fake rational world which steers our contemporary version of capitalism. We enter a world actually devoid of glamour or anything to aspire to – and the film leaves us wondering whether the working life of the ‘one percent’ after all is, if anything, worth our pity rather than our envy. The synopsis of the plot runs like this:

A man and a woman at an art exhibition share a fleeting moment of attraction, which neither can act upon. Days later, a chance second meeting leads to an innocent coffee and the two strangers - both married - toy with their unexplainable fascination for each other. Svenja is curious and finds herself in a hotel room with Roland, but she does not consummate an affair. A powerful executive at the large bank where Svenja's husband works, Roland is used to getting what he wants. He manipulates the transfer of her husband to Indonesia to replace a recently murdered bank manager. Unaware of Roland's actions, Svenja now ceases to resist...

Watching the movie I could not help being reminded of Marx’s point in ‘Das Kapital’ where he differentiates between ‘dead labor’ (as in machines and assets) and ‘living labor’ (as in human workers). Marx made the point that capitalism ultimately results in the subjugation of living labor under dead labor, the ultimate de-humanization and alienation of 'human resources' (as we are called in today's business world)  through a rationale of maximal value extraction. In his fascinating book ‘Dead Men Working’, our colleague Peter Fleming argues based on studies of call centre workers and other low skilled labor jobs, that we increasingly witness an army of all but physically dead men and women roped into the relentless pursuit of productivity and efficiency. Mind you, in today’s movie, death is quite physically part of the business: Svenja’s husband Oliver only finds out after being transferred to run the bank’s operations in Indonesia that his predecessor there had actually been brutally butchered while doing his job. ‘Necrocapitalism’ – as as onother of our colleagues, Bobby Banerjee, has coined the current system of global capitalism – though is not just hitting the disenfranchised, under skilled and exploited working masses (such as those killed South African miners in their attempt to resist exploitation and abuse this summer). ‘The city below’ shows us the life of those at the top – the ‘dead men working’ in the power houses of capitalism - and how their capacity for true human interaction, emotion, and passion has been extinguished, channeled and crowed out.

What better backdrop for exposing this than the realm of romantic endeavors? When Svenja’s husband, as she puts it, is ‘annoyingly’ friendly to her she immediately knows there must be an agenda: she smells that he ‘invests’ some niceties into their relations for a ‘return’: her putting up with him relocating for two years to Indonesia. The grammar of their relationship is the one of business relations: they had some sort of contract, ‘a deal’ that they would stay for some time in Frankfurt and we witness Oliver’s skills - brilliant but utterly dismal for a lover – to re-negotiate.

Svenja’s affair with Roland (a board member at the bank where Oliver works) takes this even further. For Roland, who is used to being obeyed and not questioned, the ‘execution’ of his desire follows a strictly transactional pattern, hoping that his status and clout will open him the doors. Even after their first sexual encounters he occasionally lapses back into addressing Svenja in the third person – the polite German level of addressing business partners. Roland has lost any sense of a human, emotional touch: when they make love the first time Svenja has to remind him that she is not ‘made of glass’ – unlike the soulless, deceivingly transparent furniture of ‘dead capital’, which surrounds most of his living days. One time she asks him to extinguish their ritual post-coital cigarette on her arm. But this movie is not ‘Fight Club’, where at least the sensation of pain allows the heroes to feel human again in an otherwise commoditized and instrumentalized word. In 'The City Below' Roland just manages a hapless Freudian ‘Übersprungshandlung’ (Displacement Activity), he can all but inflict this pain on her purse. The movie is modeled on the biblical story of King David who sends the husband of his lover out to be killed in battle. But unlike the ancient romance, Roland and Svenja’s relationship goes nowhere – and even that is part of their negotiated arrangements.

Smoking, by the way, has an unmissably symbolic presence in this movie. Currently in most Western countries banned from all spaces of capitalist work, travel and relaxation as a pleasure ultimately leading to death, in the movie it becomes the great one thing where rules can be broken and intimacy is still possible. The affair between Roland and Svenja starts over the inadvertently shared cigarette in a museum. His first line ever to her is in fact ‘Smoking is forbidden here’, and arguably it is this moment when his passion is ignited. There is not a single of the love scenes in the film which is not – I am not sure what – clouded or mystified by cigarette smoke. In a world of those dead alive the forbidden is the sensual; and an arguably dangerous pleasure is the niche in where whatever is left of human passion and emotion can be fleetingly enjoyed.

Roland and Svenja’s affair shows that humans, of course, cannot totally survive in a world where every decision, every relation is governed by an instrumental, self-interest driven rationale for maximizing one’s own or the company’s returns and economic success. Roland carves out spaces where he tries to escape. Once a day his driver takes him to some dump where he watches Junkies injecting their drugs. In essence the affair with Svenja is a similar attempt, and towards her he tries to reconstruct himself as a human being by taking her to what he pretends to be his modest working class childhood home (which in fact is the home of the murdered employee). These are not just kinky distractions in the movie, these are common patterns among top executives. We should not be surprised, for instance,  that Ex-Goldman Sachs Boss and US Treasury Secretary Hank Paulson for all his life has been an avid environmentalist and nature conservancy wonk in his free time – a contrast to his day job which could not be more gasping and irrational.

Having worked as a consultant for three month at Germany’s largest Bank in Frankfurt 13 years ago the entire movie struck a strange déjà vu for me. It's silent pace, the sterile, nearly theatrical acting of the main protagonists, the architecture and interior design, the language ridden with Anglicisms - all this resonates very well with my memories from that time. Despite unearthing a rather dire reality the movie is a very watchable, even humerous experience leading us into an otherwise hard to be experienced space – the world of global finance taking place far above ‘the city below’...

DM

The movie 'The City Below' plays at the GOETHE FILMS@TIFF Bell Lightbox in Toronto, October 30, 6.30pm

Why Occupy Wall Street should occupy corporate leaders' minds

This weekend, the Occupy Wall Street protest will go global. Protests, marches and occupations are planned across the world, with almost a thousand events across every continent scheduled to go ahead on October 15th. Here in Toronto, the financial district around Bay Street is preparing for an occupation that has so far garnered more than 9000 followers on Facebook. In London, social media sites have registered more than 15000 followers for the planned occupation of the London Stock Exchange. Similar smaller scale events are in the offing from everywhere from Alaska to Auckland. Whatever the success of these protests, it is remarkable the speed at which a local event in New York which was hardly reported on two weeks ago, has now been turned into a global movement.

Although the range of issues and demands of the Occupy Wall Street campaign and its various international incarnations are many and diverse, they share a strong single point of focus. The financial sector is very much the villain here. This is in some contrast to the movement that the current events most parallel, the anti-globalization protests that took to the streets in late 1990s and early 2000s, exemplified best by the Battle in Seattle in 1999. At that time, although many of the issues were the same as those receiving attention now, the main point of focus was international finance and trade organizations such as the WTO and the IMF, and meetings of political leaders such as the G8 were major targets. Now, by occupying the financial centers of major cities, the focus is much tighter. The financial sector is public enemy no.1.

In many respects, this is not too surprising. Economies across much of the developed world have been in a constant state of crisis for the past three years. Austerity measures are biting hard. Unemployment is up. And a significant proportion of society feels excluded, exploited, and ready for an alternative. The financial sector is an obvious target because it is here that the systemic risks have been created, and it is here that so much of taxpayers money has ended up, shoring up institutions that are too big to fail. When these same organizations continue to post substantial profits, pay out huge bonuses and generally carry on as before, it is fairly predictable that they will become the focus of so much public ire.

Much of the initial response to Occupy Wall Street has been dismissive. The financial sector, which must be getting quite used to being the bad guy these days, has hardly raised a murmur in response. As of yet, we haven't seen a single press release on the events from major financial services organizations such as Bank of America, Barclays, Citigroup, Goldman Sachs, HSBC, or anyone else. Don't business leaders have anything to say about what's going on?  Don't they want to be part of the conversation? Or are they just so concerned that anything they say will just be ridiculed by the protesters, or simply set them up as even more of a fall guy, that they are fearful of trying to put their position across in public?

But big business, and big finance in particular, needs to take this seriously. Here's why.

First, because governments are looking to be responsive and populist, especially with elections around the corner in the US. That could mean tighter controls, less freedom and more regulation. As even Dominic Barton of McKinsey made clear in the Harvard Business Review earlier this year, "Business leaders face a choice: They can reform the system, or watch as the government exerts control ... there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results." Better regulation might fix some of these problems, but knee-jerk regulation, borne of anti-corporate prejudice is not going to be the best fix for the capitalist system, and not necessarily the one that we need.

Second, because the protests create a great opportunity for collective action on the part of business. Problems of financial risk, executive pay and corporate lobbying aren't going to be fixed by individual company initiatives, or even by national government regulation. If one firm or one country reduces its attractiveness by, for example, controlling pay, then talent will likely migrate to more rewarding shores. If one company puts a limit on government influence, then the attention of policy makers will simply be taken up by its competitors. That's the savage logic of the global marketplace. The best recipe for meaningful change is collective action across an entire industry. Like a financial sector executive pay protocol. Or a banking industry code of practice on political influence. But to be effective these would need to include government and civil society participation and include effective monitoring and sanctions across borders. No one is pretending this wouldn't require a huge effort. But crises of trust, like the current protests, could be the context that is needed for collective action such as this to arise and prosper.

Third, because these protests clearly signal that for some proportion of the population, all the money, time and effort expended on CSR simply isn't working. And spending more isn't going to make a difference. These people are looking for a change in the system, in the rules that govern business and it's relationship with government.They're looking for more accountability, less political influence, and if their demands are for better corporate citizenship, they mean the kind of citizenship where you pay your fair share of taxes and don't just simply offshore when it suits you. This requires a very different approach to CSR than the one now predominant in the corporate sector. It means fixing attention on how to devise better rules, not how to behave better within the existing rules.

The challenge here, clearly, is a big one. Perhaps then it is no surprise that corporate leaders have been content so far to just cover their ears and hope it all blows over. But there are fundamental issues that need addressing at the heart of our model of global capitalism. Occupying Wall Street, Bay Street, or the City of London may not be any kind of solution, but that does not mean it should just be dismissed either. Business leaders would be foolish not to see this as an opportunity to create an improved system of capitalism that serves us all better.

Photo by david_shankbone. Reproduced under Creative Commons licence 

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

The art of finance

Money. Cash, moolah, dough, readies, greenbacks, dosh. Whatever you call it, you can't get away from it. Most of us like to have it, of course, but we also know that it's a dangerous drug. "Money," as the saying goes, "is the root of all evil."

With the financial crisis and executive greed currently giving money a particularly bad name, we were interested to hear of a recent experiment in Amsterdam in the Netherlands which is seeking to provide a new and more positive way of thinking about the value of money. It's called the Bijlmer Euro, named after a much maligned quarter of the city called de Bijlmer which is home to many of Amsterdam's many immigrant communities and a good proportion of its less successful examles of high rise urban planning.

The Bijlmer Euro is a local currency, which for those of you that have not come across them before, are specially designed notes or other form of exchange certificate that are used within a specific locality to enhance local social and economic systems.

Local currencies like the Bijlmer Euro operate as exchange tools giving people the opportunity to buy and sell goods and services among a particular community without resorting to the usual pounds, euros or dollars. Why would communities want to do this? Well there are a whole lot of reasons, which vary depending on the local currency concerned. But some of the more common reasons are that they are help stimulate the local economy (because they can only be used locally), they can encourage people to ‘buy local’ and get to know local providers, or they can be part of an attempt to reduce reliance on existing financial systems and actors such as banks and credit card providers.

There are thousands of local currencies out there, including in our own home town of Toronto, where the Toronto Dollar operates around the St Laurence Market community. But what makes the Bijlmer Euro so interesting is that the whole project was designed by an artist, namely Christian Nold, who is mainly known for his 'emotional cartographies' project which saw him using lie detector technology and Google Earth to create user-generated emotion-based maps of neighbourhoods and towns. Interesting stuff. So while in Amsterdam recently, we spoke to Nold about the Bijlmer Euro and what he's hoping to achieve.

Probably the most interesting aspect of the whole project is that Nold has designed it so that you can actually see how the money is circulating in the local economy. The Bijlmer Euro notes are regular Euros with a special chip (recycled from used public transport tickets) overlaid on them which means that everytime a note is used, the transaction is tracked. In this way it is possible to trace the networks of exchange that are taking place among the participants. You can see a live visualization on the project website. This, Nold says, is especially important for an area like de Bijlmer which is most commonly presented as a 'problem area'. So his central objective was to help people see the Bijlmer also as a thriving economic network. "People described it to me as the Dutch Bronx" he says, "but with this you can replace that with a vision that gets you a little bit closer to the NASDAQ."

Of course, to get people involved in the whole project, it needed more tangible aspects that this. So users of the notes get discounts at local stores,and shop keepers get to make new connections with residents and hopefully stop leakage of economic value from the local economy. There are also some fun touches included such as the ability to put electronic messages on the notes for people to read, and a bright yellow, bicycle-powered 'mobile bank' (as shown above) where you can get the notes and input your messages. Even these though have a deeper purpose, as Nold explains:

"Money is an economic tool, but I think it is also very much a social tool. Banknotes are this weird thing that doesn’t really belong to us, but is really a social medium that moves between people. I think that having messages on them is a funny way of reclaiming the money in some way and making it personal."

Looking at it this way, you can see how there's more to money than meets the eye. Talking to Nold - whose personal explanation for the project takes in everything from the financial meltdown, baffled economists, the Falun Gong, transition towns, the end of capitalism, and the Iranian 'Green Revolution' - makes you look at the spare change in your pocket in ways that you really haven't considered before. However, whether the residents in de Bijlmer have seen this as anything more than a fun way to save a few cents remains to be seen. But Nold certainly thinks that a number of people have gotten sufficiently excited about the initiative that it may now go into a new phase now that the initial experiment is over. As he says:

"At the start of the project lots of people were telling us this is impossible, this is totally illegal, you can’t do it. But it’s possible, it’s doable and we’ve just done it. We have almost 2000 notes in circulation... I’m not sure it’s having huge mass appeal – we’re not getting tens of thousands of people using it – but we’re certainly getting a committed group of people who are seeing the value of it. The next really big step is the continuity of it."

And that really is where we'll see if this turns out to be anything more than an interesting experiment. Having now discovered who's spending what and where, Nold has been turning his thoughts to the large employers in the neighbourhood, especially the major banks, many of whom have their headquarters nearby, and whose staff have been using the Bijlmer Euros. Perhaps they can be persuaded to have a rethink about the social and economic value of money in the communities that border their offices.

We think it would be a fascinating development to have a major financial player involved in supporting a alternative currency like this in Amsterdam. And if they don't get involved, it looks like Nold will be taking things in new directions. He's already planning a book about the project to serve as a model for others, and is even plotting to set up an alternative financial organization to support low cost overseas remittances."We want to become a bank," he says boldly, "to see if we can get rid of Western Union." Finance, it seems, is the new art.

Will the financial crisis lead to more or less CSR?

As the turmoil in financial markets continues unabated, some of those in the responsible business arena are considering what the likely effects of all this are going to be on the practice of CSR. The last decade or so has seen a seemingly unstoppable rise in interest, attention, and action on CSR issues, at least from some quarters of the business community. But with recession around the corner (or apparently already arriving for some countries), what is the prognosis for responsible business when times are hard?

Out here in the blogosphere a range of opinions are circulating. One post that has gotten quite a lot of attention came from Adam Jones of the Financial Times, who was among the first to raise the issue, and ended up somewhat hedging his bets:

"I suspect there are lots of Milton Friedman-reading managers in the private sector who grumblingly tolerated CSR programmes during the boom and would now love to get rid of them on similar cost grounds. Instead of throwing the money changers out of the temple, it would be a case of throwing the CSR priests out of the marketplace. But that would be a pretty dumb move at a time when the public mood is for more accountability and regulation, not less."

Reenita Malhotra, writing on her "Inspired Economist" blog, focused on the specific effects on CSR in the investment banking industry, arguing that such enterprises should be protected exactly because of their positive social benefits:

"A high return on investment has enabled many of the investment banks to show a solid to commitment to corporate social responsibility in the last few years"

Taking an opposite point of view, Nic Paton at the online resource Management-Issues suggested that a lack of attention to genuine CSR was actually to blame for the crisis in the first place:

"While many companies believed they were engaging in corporate social responsibility, they were in fact missing the point. Truly responsible business, rather than chasing a fast buck and in the process taking overly dangerous risks, would have considered the interests of all those who had a stake in their business."

Finally, Mallen Baker, writing for Business Respect, has taken a similar line, but has also sought to move the debate forward by looking at what this should mean for practicing CSR in the future

"Bear Stearns produced no CSR report of any sort. Lehman Brothers did not produce a CSR report, but they produced a philanthropy report. Even if they had gone further, it seems unlikely that the complex nature of how they created wealth would have been a feature. Now it needs to change. If anything is to come out of this, it has to be that corporate social responsibility once and for all leaves behind the philanthropy tag, and we see clear focus on two areas:

* How we create a different ownership structure for businesses where responsibility for consequences is a more real feature of share ownership.
* That the oversight and accountability demanded of companies now goes into the detail of how they make their money - and what are the consequences of their actions.

Two months ago, such concepts were unthinkable. Now they are essential."

Pretty profound stuff. But the prognosis for CSR is, as far as we can see, far from clear. Changing ownership structures for businesses seems a long way off, unless by this Baker means the movement into public ownership of banking institutions in the UK, US, Iceland and elsewhere. But somehow we doubt that's what he is getting at.

So, really, it's probably too soon to say for sure what will happen next on the rocky road of CSR. But hopefully our poll at the top of the page will give some indication of where our readers think it should be heading....

Ethics and financial crisis

With stock markets plummeting, financial institutions going belly-up, and governments on both sides of the Atlantic stepping in to bail out failing companies, the prospects for investors, the financial community, and even tax payers do not look good. And with the likely knock on effects for employment in other sectors almost certain to result in job losses, the fall-out from the current market turmoil is going to be widely felt.

For us business ethics professors, however, the picture is somewhat mixed. On the one hand, issues of social responsibility tend to be higher on the agenda when times are good. On the other, when greed and corruption contribute to downturns (such as in the post Enron wake of the early 2000s), significantly more attention can shift to issues of integrity and governance in business. Its no coincidence that the 2000s have witnessed perhaps the most sustained growth yet in the corporate responsibility 'industry' and in courses, books, conferences, and workshops on the subject.

Today's financial crisis clearly has at least some of its roots in corporate iresponsibility around the subprime mortgage market in the US. If 'responsible lending' practices had been observed (or if tighter regulatory oversight had been imposed), we might not all be in this position right now. Certainly, the financial industries of other countries appeared to be more attuned to the problem than in the US, such as in the UK, where the British Banking Association has in place a code on responsible lending:

Responsible lending is providing credit, based on background checks and professional judgement, to people who can accommodate regular repayments without getting into financial difficulty.

But although the sub-prime problem was the rockfall that got the financial landslide going, there are a number of structural issues that also need to be considered. And here we need to perhaps look at deeper institutional issues rather than the ethics of individual people or companies. As with Enron, the fault lines for disaster run through the system of risk management, regulation, transparency, business interdependence, and reward systems, not simply rogue traders crossing the ethical boundaries.

There are ethical issues here too of course, but they are at a different level to the ones that most people think of when they think about corporate responsibility. Here, we are talking about the ethics embedded in business systems and institutions, and how ethics and the law intersect to ensure that markets work effectively, fairly, and ultimately securely. Sure, a lot of our current problems with the financial crisis can be put down to individual greed, mismanagement, and bad decisions, but ultimately it goes deeper than that. Whether this means that the current crisis will be a boon to business ethics however depends on how well us ethical experts manage to get to grips with these deeper level problems.

For further reading on this, check out our paper on challenges to the business ethics curriculum, published in an early version available free online and later in the Journal of Business Ethics.