CASE STUDY ANALYSIS BUSINESS STRATEGY AND ENTERPRISE MODELING
UBS: A Pattern of Ethics Scandals
By : Annisa Kharina (29115699) Karina Permata Sari (29115447)
Master of Business Administration Program School of Business and Management Institut Teknologi Bandung
TABLE OF CONTENTS
Chapter 1: Case Synopsis........................................................................................................3 Chapter 2: Issue Identification................................................................................................4 Chapter 3: Related Theories...................................................................................................5 3.1 Corporate Social Responsibility ...................................................................................5 3.2 Corporate Governance ..................................................................................................5 3.3 Strategic Leadership .....................................................................................................6 Chapter 4: Case Analysis and Solution Chapter 5: Conclusion and Recommendation Chapter 6: Lesson Learned REFERENCES
Chapter 1: Case Synopsis
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UBS: A Pattern of Ethics Scandals UBS, formed in 1997 from the merger of Swiss Bank Corp. and Union Bank of Switzerland, become one of the top financial services companies in the world and the biggest bank in Switzerland after acquiring Paine Webber, a 120-year-old U.S wealh management firm in 2000 with the combination of aggressive hiring for its investment banking business. However, between 2008 and 2015 UBS’s reputation was severely damaged by a series of ethics scandals which resemble a troubling pattern: 1. U.S Tax Evasion After the acquisition of Paine Webber, UBS entered into a qualified intermediary (QI) agreement with the Internal Revenue Service (lRS), the federal tax agency of the U.S. government. Like other foreign financial institutions under a QI agreement, UBS agreed to report and withhold taxes on accounts receiving U.S.-source of income. In mid-2008, it came to light that since 2000, UBS had actively participated in helping its U.S. clients evade taxes. To avoid QI reporting requirements, UBS's Switzerland-based bankers had assisted the U.S. clients to structure their accounts by divesting U.S. securities and setting up sham entities offlhore to acquire non-U.S. account holder status. The U.S. prosecutors pressed charges on UBS for conspiring to defraud the United States by impeding the IRS. To close loopholes in the QI program and crack down on tax evasion in countries with strict bank secrecy traditions, President Obama signed into law the Foreign Account Tax Compliance Act (FATCA) in 2010. The law requires all foreign financial institutions to report offshore accounts and activities of their U.S. clients with assets over $50,000, and to impose a 30 percent withholding tax on U.S. investments or to exit the U.S. business. Switzerland has agreed to implement the FATCA. 2. Rogue Trader On September 15, 2011, UBS announced that a rogue trader named Kweku Adoboli at its London branch had racked up an unauthorized trading loss of $2.3 billion over a period of three years. The case was concluded with findings that systems and controls at UBS were "seriously defective." As a result, Adoboli, a relatively junior trader, was able to take highly risky positions with vast amounts of money. More alarmingly, all three of Adoboli's desk colleagues admitted that they knew more or less of his unauthorized trades. UBS was fined $47.6 million in late 2012. 3. LIBOR Manipulation LIBOR, or the London Interbank Offered Rate, is the interest rate at which international banks based in London would lend to each other. UBS, as one of the panel banks, was fined $1.5 billion in December 2012 by the U.S., U.K., and Swiss regulators for manipulating LIBOR submissions from 2005 to 2010. Besides the fine, UBS 3
pleaded guilty to U.S. prosecutors for committing wire fraud. During the said period, UBS acted on its own or colluded with other panel banks to adjust LIBOR submissions to benefit UBS's own trading positions. In addition, during the second half of 2008, UBS instructed its LIBOR submitters to keep submissions low to make the bank look stronger. In particular, 35-year-old Tom Hayes, a former UBS (and Citibank) trader was sentenced to
14
years
in prison for fraudulently rigging the LIBOR. The autistic mathematician Hayes argues that he is the scapegoat for senior management failings. In contrast, prosecutors maintained that Hayes was the mastermind behind a corrupt ring of traders and brokers globally, motivated by making his performance look stronger 4. UBS “Did It Again” UBS had avoided prosecution in 2012 by agreeing to cooperate with authorities and promising not to engage in rate rigging and other illegal activities in the future. The Department of Justice alleges that UBS had violated terms of the agreement and "did it again." This time, prosecutors allege that UBS manipulated foreignexchange rate. The Justice Department views UBS as a "repeat offender," especially in light of a 20ll settlement related to antitrust violations in the municipal-bond investments market.
Chapter 2: Issue Identification 1. This MiniCase details several ethics scandals at UBS in recent years. What does that tell you about UBS? 2. Given UBS’s repeated ethics failings, who is to blame? The CEO? The board of directors? The individuals directly involved? Who should be held accountable? Is it sufficient just to fine the bank? 3. Given the information herein, do you think that 14-year jail sentence for Tom Hayes was harsh? Did he serve as scapegoat? 4. What lessons in terms of business ethics and competitive advantage can be drawn from this MiniCase? 5. What can UBS do to avoid more ethics failures in the future and repair its damaged reputation?
Chapter 3: Related Theories 3.1. Corporate Social Responsibility (CSR) 4
Corporate social responsibility is a framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time. Economic Responsibilities The business enterprise is first and foremost an economic institution. Investors expect an adequate return for their risk capital. Consumers expect safe products and services at appropriate prices and quality. Suppliers expect to be paid in full and on time. Governments expect the firm to pay taxes and to manage natural resources such as air and water under a decent stewardship. To accomplish all this, firms must obey the law and act ethically in their
quest to gain and sustain competitive advantage. Legal Responsibilities Laws and regulations are a society's codified ethics, as they embody notions of right and wrong. They also establish the rules of the game. w. Managers must ensure that their firms obey all the laws and regulations, including but
not limited to labor, consumer, and environmental laws. Ethical Responsibilities A firm's ethical responsibilities, therefore, go beyond its legal responsibilities; they embody the full scope of expectations, norms, and values
of its stakeholders. Managers are called upon to do what society deems just and fair. Philanthropic Responsibilities Philanthropic responsibilities are often subsumed under the idea of corporate citizenship, reflecting the notion of voluntarily giving back to society.
3.2. Corporate Governance Corporate governance concerns the mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. Corporate governance is about checks and balances; it's about asking the tough questions at the right time. The board of directors, the centerpiece of corporate governance, is composed
of
inside
and outside directors. Inside directors are board members who are generally part of the company's senior management team; appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance. Outside directors are board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals. Given their independence, they are more likely to watch out for shareholder interests. While the board of directors is the central governance piece for a public stock company, several other corporate mechanisms are worth noting—executive compensation, the 5
market for corporate control, and financial statement auditors and government regulators. Thus, Corporate-governance mechanisms play an important part in aligning the interests of principals and agents. 3.3. Strategic Leadership Strategic Leadership is the behaviors and styles of executives that influence others to achieve organizational goals. Strategic leadership typically resides in “executives who have overall responsibility for an organization—their characteristics, what they do, how they do it, and particularly, how they affect organizational outcomes.” These executives can be individuals, generally CEOs, but also can be top-management teams. The key point is that they have responsibility for the performance of the entire company or for an important strategic business unit. It is important to know the role that strategic leaders play as the interpersonal role (figurehead, liaison, leader), informational role (monitor, disseminator, spokesperson) and decisional role (entrepreneur, disturbance handler, resource allocator, negotiator). But to be an effective and ethical strategic leader, we must complete the level-5 leadership pyramid, which is a conceptual framework of leadership progression with five distinct sequential levels: The Level-1 manager is a highly capable individual who makes productive contributions through motivation, talent, knowledge, and skills. The Level-2 manager masters the skills required at Level 1, but is also a contributing team member who works effectively with others in order to achieve synergies and team objectives. The Level-3 manager is a well-rounded and competent manager, a highly capable individual who is an effective team player and organizes resources effectively to achieve predetermined goals. He or she “does things right.” At Level 4, the effective manager from Level 3 turns into a leader who determines what the right decisions are. The Level-4 leader presents and effectively communicates a compelling vision and mission to guide the firm toward superior performance. He or she “does the right things.” Finally, at Level 5, the manager reaches a leadership pinnacle, turning into a strategic leader. An effective strategic leader is an executive who builds enduring greatness into the organizations he or she leads.
Chapter 4: Case Analysis and Solution 1. UBS: The Series of Ethics Failings.
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We can say that UBS had blinded by their determination of gaining sustainable competitive advantage, thus lead them to unethical and illegal conduct which destroyed their reputation. They should know that even though staying within the law is minimum acceptable standard, finding its loophole does make them violate the codes of conduct. These codes go above and beyond the law in detailing how the organization expects an employee to behave and to represent the company in business dealings. UBS should know that their business actions are unethical and violate codes of conducts even though they are completely legal according to the loophole of the law. And as the consequences, UBS got their punishment for their unethical and illegal conducts when they caught red handed. From this we can learn aside from obey the law and ethical codes of conduct within the company, the law and regulation itself should be clear and close the loopholes in order to prevent the reason of unethical wrongdoings and illegal conduct for the future. 2. UBS: Stakeholders behind Ethics Failings In our opinion, people who should be held accountable regarding with UBS’s corporate rap sheet are the individuals who involved in those ethics failings, whether involved directly or indirectly, no matter what his or her position is. The one who got the most blame is usually the CEO, as he or she is the leader and responsible of any wrongdoings within the company. But, this does not mean that the Board of Directors (BODs) does not get the blame too, because they responsible of their subordinates’ misconducts. And also, the individuals directly involved (usually the BOD’s subordinate) will get the blame too since they are who conduct the wrongdoings directly. This usually happened because of the principal-agent problem. In publicly traded companies, the stockholders (the principals) are the legal owners of the company, and they give the professional managers (the agents) the authority to make decisions on their behalf. The conflict arises if the agents also pursue their own personal interests, which can be at odds with the principals' goals. The risk of opportunism on behalf of agents is exacerbated by information asymmetry: the agents are generally better informed than the principals. Indeed, managers tend to have access to private information that outsiders, especially investors, are not privy to. Insider trading cases provide an example of egregious exploitation of information asymmetry. The principal–agent problem is a core part of agency theory, which views the firm as a nexus of legal contracts. Besides dealing with the relationship between shareholders and managers, its concerns also cascade down the organizational hierarchy. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such front-line employees often enjoy an informational 7
advantage over management. They may tell their supervisor that it took longer to complete a project or serve a customer than it actually did. The managerial implication of agency theory relates to the management functions of organization and control: The firm needs to design work tasks, incentives, and employment contracts and other control mechanisms in ways that minimize opportunism on behalf of the agents. At the same time, the activities of the agents should maximize shareholder value creation for the principals. That is why we can say that fine the bank is not sufficient enough. UBS should put several governance mechanisms in place. Governance mechanisms are used to reduce information asymmetry and to align incentives between principals and agent. And not only the internal corporate-governance mechanisms like BODs and executive compensation, but also external corporate-governance mechanisms like the market for corporate control and financial statement auditors and government regulators. That is why it is important for UBS to apply good corporate governance. Good corporate governance creates a transparent set of rules and controls in which shareholders, directors and officers have aligned incentives. Most companies strive to have a high level of corporate governance. For many shareholders, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior and sound corporate governance practices. 3. Tom Hayes: Scapegoat or not? In our opinion, Tom Hayes not deserved his punishment of 14-year jail sentence. The penalty it so heavy even there are killers who get less punishment than him. No matter he is the scapegoat or not, we can say that Tom Hayes is the unluckiest trader. The first reason is regarding with his unfair sentence. At Hayes’ trial, the judge said the maximum sentence is 10 years for a count of conspiracy, which is generally recognized as too low. But in reviewing the list of City traders convicted of serious fraud over the last 20 years, no sentence equals that given to Hayes. Under the Sentencing Guidelines for judges, the tariff has normally been around half of what he originally received. The following serve as useful benchmarks: In 2012, Kweku Adoboli, a former UBS equity trader was given a seven-year sentence in London for unauthorized trading that cost the bank $2 billion while in July 2016, four former Barclays traders were sentenced by a British court to between 33 months and six-and-a-half years each for conspiring to rig Libor. The second reason is the fact that Hayes alone was prosecuted and convicted, even though he was not a rogue trader acting in isolation like Adoboli. Instead, he was 8
part of an alleged conspiracy: traders at up to 16 different banks, who between them allegedly requested Libor rates from within that day’s market trading range but which were drawn from the high, middle or low end of that range. These were marginally in favor of the traders’ employer banks, thereby making money for them by trading derivatives that fixed against the published Libor rate. But in this alleged conspiracy involving multiple participants acting in concert with each other to fix Libor, only Hayes was convicted. Nearly four years on from his arrest, all of Hayes’ alleged co-conspirators who have been charged have since been acquitted and no other co-conspirator has subsequently been charged by the Serious Fraud Office (SFO). One of his managers has even been exonerated by the Financial Conduct Authority (FCA) despite having engaged in this behavior with Hayes. At his trial, Hayes alleged that the behavior described above was both common market practice for 20 years (although that did not provide a defense, according to the trial judge), and the subject of a written instruction sheet at UBS, so enshrined was it in bank culture. The third reason is that there is no senior figure at any bank operating in London has been charged by the SFO in relation to any rate-rigging by any of their Libor traders or in relation to ‘lowballing’. At his trial, the chief prosecutor, Mukul Chawla QC, indicated to the jury that Hayes’ “managers will be next”. But to this day, no one else from Hayes’ former employer banks has been charged. Meanwhile, senior bank executives claim not to have known what was going on and that the individual traders concerned were acting on their own account – without any authority from the bank, or from their immediate managers. From all those reasons above, we can see that Tom Hayes seems to be paying an unduly heavy price for the misdeeds of many. Tom Hayes is certainly an unlucky man whether he is a scapegoat or not. 4. UBS: Lesson Learned in Terms of Business Ethics and Competitive Advantage In terms of business ethics, we can learn from UBS case that before we conduct the business decision, it important to know that staying within the law is a minimum acceptable standard. But, even though the actions can be completely legal, we should consider the ethical side. Since business decisions are not made in a vacuum but are embedded within a societal context that expects ethical behavior, managers can use a number of questions to improve their decision making. When facing an ethical dilemma, a manager can ask whether the intended course of action falls within the acceptable norms of professional behavior as outlined in the organization's code of conduct. Moreover, the manager should imagine whether he or she would feel comfortable explaining and defending the decision in public. In terms of competitive advantage, UBS absolutely not 9
apply the corporate social responsibility (CSR), which is the big mistake as they continue to fall and far from reaching competitive advantage. Learning from their mistake, we should know that applying the CSR help firms to gain sustain competitive advantage. Moreover, CSR provides managers with a conceptual model that more completely describes a society's expectations and thus can guide strategic decision making more effectively. In particular, CSR has four components: economic, legal, ethical, and philanthropic responsibilities. With economic responsibilities, it helps the company to gain and sustain competitive advantage as the business enterprise is first and foremost an economic institution. With legal responsibilities, it helps the firms to define minimum acceptable standards in their business decision making in terms of law and regulations as a society’s codified ethics. With ethical responsibilities, it helps the firms to embody the full scope of expectations, norms, and values of its stakeholders. Managers are called upon to do what society deems just and fair. The last, with philanthropic responsibility, it helps the firms to gain a characteristic of corporate citizenship, as it reflecting the notion of voluntarily giving back to society. Doing so ensures not only effective strategy implementation, but also long-term competitiveness within the industry. 5. UBS: Prevention of Ethics Failure in the Future and Repair its Damaged Reputation What UBS should do regarding with prevention of ethics failure in the future is implementing good corporate governance. Corporate governance is often associated with public companies, but small businesses can also benefit from this practice. Corporate governance consists of rules that direct the roles and actions of key people rather than processes. Unlike simple policies and procedures, such as a dress code or expense reimbursement procedure, corporate governance rules focus on creating better management and fewer ethical or legal problems. Corporate governance limits the potential for bad behavior of employees by instituting rules to reduce potential fraud and conflict of interest. For example, the company might draft a conflict of interest statement that top executives must sign, requiring them to disclose and avoid potential conflicts, such as awarding contracts to family members or contracts in which an executive has an ownership interest. The company might forbid loans to officers and family members or the hiring of family members. External audits or requiring checks over a certain amount to be approved and signed by two people help reduce errors and fraud. Next, to repair its damaged reputation, UBS should implement Corporate Social Responsibility (CSR). At its heart, CSR is about an organization taking responsibility for the impacts of its decisions and activities on all aspects of society, the community and the environment. 10
CSR is more than just donating money or printing double-sided to save trees, it’s about contributing to the health and welfare of society, operating transparently and ethically. More importantly, this way of operating should be embedded in the business, rather than an afterthought. CSR could help in having positive impact in the community, by Keeping social responsibility front of mind encourages businesses to act ethically and to consider the social and environmental impacts of their business. In doing so, organizations can avoid or mitigate detrimental impacts of their business on the community. CSR could also help in supporting public value outcomes. Put simply, public value is about the value that an organization contributes to society. A sound, robust corporate CSR framework and organizational mindset can genuinely help organizations deliver public value outcomes by focusing on how their services can make a difference in the community. CSR could also help in enhancing relationships with clients. A strong CSR framework is essential to building and maintaining trust between the company and clients. It can strengthen ties, build alliances and foster strong working relationships with both existing and new clients.
Chapter 5: Conclusion and Recommendation
Conclusion In conclusion, UBS has been embroiled in a series of recent scandals involving its role in helping wealthy Americans evade taxes, its role in the manipulation of the LIBOR interest rate index and its failure to prevent one of its traders from running up more than $2 billion in losses and in 2015 it had to plead guilty to a criminal charge in the U.S. Those scandals are the consequences of the failure in applying good corporate governance and CSR, which leads UBS to their downfall, damaged reputation, and competitive disadvantage. It is important to implement good corporate governance and CSR in order to keep the company in control to ensure that it pursues its strategic goals successfully and legally. Thus, the company will reach the sustain competitive advantage.
Recommendation We recommend that UBS should pursue strategic leadership for their future managers. With the role of interpersonal, informational, and decisional that strategic leaders have, it would make them effective for the firm performance, which could lead to the competitive advantage. But, those strategic leaders must be both effective and ethical by applying level-5 leadership pyramid, which is a natural progression of five different levels of 11
leaderships. A strategic leader who has mastered Level 5 simultaneously combines and reconciles tremendous will power and personal modesty. It's not that Level 5 leaders have no ego or self-interest. Indeed, they are incredibly ambitious—but their ambition is first and foremost for the institution, not themselves.
Chapter 6: Lesson Learned From the case, we can learned that before we conduct the business decision, we should know whether it is legal and ethical or not. The ethical pursuit of competitive advantage lays the foundation for long-term superior performance. Law and ethics are not synonymous; obeying the law is the minimum that society expects of a corporation and its managers.
REFERENCES Frank Rothaermel, 2014. Strategic Management: Concepts. 2nd Edition. New York: McGrawHill Education http://www.corp-research.org/UBS (accessed at February 5th, 2017 at 00.56 P.M) http://www.investopedia.com/terms/c/corporategovernance.asp (accessed at February 5th, 2017 at 01.31 P.M) http://cubegroup.com.au/top-5-benefits-of-corporate-social-responsibility/ February 5th, 2017 at 03.13 P.M)
(accessed
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http://smallbusiness.chron.com/advantages-corporate-governance-65692.html (accessed at February 5th, 2017 at 03.26 P.M) http://www.barristermagazine.com/tom-hayes-the-unluckiest-trader-or-a-scapegoat/ (accessed at February 5th, 2017 at 04.12 P.M)
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