Greed, Governance and Ethics:                       lessons from the financial crises and beyond                       EUB...
September 15, 2008…    The bankruptcy that burst the bubble:                        Greed and Corporate Failure   2
The bull run was over…                     Greed and Corporate Failure   3
Greed and Corporate Failure   4
History repeats itself…                                                        8/03/1988                          Greed an...
We don’t learn…“There can be few fields of human endeavour in which historycounts for so little as in the world of finance...
Previous fairly recent banking crises The Secondary Banking Crisis, 1973-75, UK Slater Walker, Edward Bates, Cedar etc ...
A presentation at IMD fourteen years ago…         HOW SAFE IS YOUR COMPANY?      Lessons from recent financial disasters ...
Lessons learned?“(But) a remuneration scheme which gives  perverse rewards to risk taking behavior  may put the control sy...
And beware…..  “[Bankers] who hire money hungry geniuses  should not always express surprise and  amazement when some of t...
The next high profile disasters   Enron                                          Skandia   WorldCom                    ...
© IMD 2009   Greed and Corporate Failure   12
© IMD 2009   Greed and Corporate Failure   13
How did we get into the mess? “Why did corporate governance checks and balances  that served us reasonably well in the pa...
Beware false prophets…On derivatives:“Not only have individual financial institutions become less vulnerable to shocks fro...
And then…   Northern Rock (UK)   Bear Sterns   Lehman Brothers   Wachovia   Washington Mutual   Merrill Lynch   AIG...
Who or what is to blame? The list is long… Boards & Audit Committees Senior management External Auditors Regulators (S...
The role of accounting in the crisis                     After the crisis: what have we learned?   18
And the consequences for auditors….
Leonard Spacek’s topics (1956-1969)      “Accounting has failed to prevent major misrepresentations”      “The elusive t...
Can this be overseen, regulated or audited?    (7000 legal entities in 150+ countries)                    Greed and Corpor...
The Royal Bank of Scotland Story                 (Sir) Fred Goodwin: deposed CEO of RBS                        Greed and C...
A Brief History of The Royal Bank of Scotland   1727 Founded in direct competition with the Bank of Scotland   1960 Firs...
(Sir) Fred Goodwin   Born Paisley, Scotland in 1958   Studies law at Glasgow university   Joins Touche Ross, qualifying...
RBS Growth & Fall                    Greed and Corporate Failure   25
Disaster Strikes   Record loss of £24 billion for 2008   Of that, £16.8 billion write downs re ABN-Amro   Hugh losses o...
Sometimes it pays to be boring….                          Greed and Corporate Failure   27
When we thought the worst was over for thebanks… LIBOR scandal (Barclays, UBS, Deutsche Bank….) Sanctions busting (HSBC,...
And more generally…. Siemens corruption scandal Walmart FCPA violations in Mexico Citigroup toxic mortgage disclosure (...
Some recent bribery cases   April 2011, Johnson & Johnson agreed to pay $70 million to settle charges of foreign    bribe...
Corporate background Siemens has been in business for more than 160  years Siemens is a global player with over 400,000 ...
The “Siemens System” at the Com unit until 1998International contracts included commission charges.The payments were arran...
Legal background in Germany In 1998 the International Bribery Law is enacted:  bribing of foreign officials is considered...
Published in The New Yorker, March 9, 2009 by P.C. Vey© 2009 The New Yorker Collection from cartoonbank.com.All Rights Res...
The “Siemens System” at the Com unit after 1998 Reinhard Siekaczek, senior manager at the Com unit, developed a new system...
The exposure of the “Siemens System”, Part 1 2004:After internal revisions at its Swiss subsidiary, the HQ ofthe Lichtens...
Consequences…In July 2008: In a “show trial” Reinhard Siekaczek is convicted of  breach of trust and sentenced to      tw...
Further prosecutions..In November 2008: Heinz Keil von Jagemann (responsible for Europe and   Nigeria) was sentenced to  ...
Siemens settlementsIn December 2008: Siemens reached its settlement with the Justice Department and   the Securities and ...
Total fines and settlements       €1,300,000,000                      Corruption at Siemens   40
But the real cost was much higher…In 2009, Siemens put the costs of the corruption scandal at       € 2,500,000,000    inc...
The Downwards Spiral                                                              Ineffective Board Inadequate control env...
Boards have to be strengthened                    Greed and Corporate Failure   43
A heavy agenda…      Report reviewing Enron’s GAAP compliance and internal controls      Report on adequacy of reserves ...
With people who actually understand what they are doing…    “Hey, we’re sheep. Everything seems like a good idea”
Professor Stewart Hamilton: Greed, Governance and Ethics: lessons from the banking crisis and beyond (12.11.12)
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Professor Stewart Hamilton: Greed, Governance and Ethics: lessons from the banking crisis and beyond (12.11.12)

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Professor Stewart Hamilton: Greed, Governance and Ethics: lessons from the banking crisis and beyond (12.11.12)

  1. 1. Greed, Governance and Ethics: lessons from the financial crises and beyond EUBS/ICAS Edinburgh 12 November 2012 Professor Stewart Hamilton© 2012 IMD – International Institute for Management Development. Not to be used or reproduced without permission.
  2. 2. September 15, 2008… The bankruptcy that burst the bubble: Greed and Corporate Failure 2
  3. 3. The bull run was over… Greed and Corporate Failure 3
  4. 4. Greed and Corporate Failure 4
  5. 5. History repeats itself… 8/03/1988 Greed and Corporate Failure 5
  6. 6. We don’t learn…“There can be few fields of human endeavour in which historycounts for so little as in the world of finance.” J K Galbraith “A Short History of Financial Euphoria” Greed and Corporate Failure 6
  7. 7. Previous fairly recent banking crises The Secondary Banking Crisis, 1973-75, UK Slater Walker, Edward Bates, Cedar etc Between 1981 and 1983, 435 Savings &Loans failed in US Penn Square Bank, N.A. failed 5 July 1982 Continental Illinois National Bank and Trust Company effectively nationalised summer 1982 Greed, Governance and Ethics 7
  8. 8. A presentation at IMD fourteen years ago… HOW SAFE IS YOUR COMPANY? Lessons from recent financial disasters  Barings Bank  Kidder Peabody  Metalgesellschaft  Showa Shell  Bankers Trust  Daiwa Bank  BCCI  Sumitomo  Maxwell pensions  Deutsch Morgan  NatWest Markets Grenfell Asset Management Greed and Corporate Failure 8
  9. 9. Lessons learned?“(But) a remuneration scheme which gives perverse rewards to risk taking behavior may put the control system under great stress.” Daniel Davies, Bank of England Financial Stability Review, Spring 1997. (After the collapse of Barings Bank) Greed and Corporate Failure 9
  10. 10. And beware….. “[Bankers] who hire money hungry geniuses should not always express surprise and amazement when some of them turn around with brilliant, creative, and (sometimes) illegal means of making money." Linda Davies, Psychology of Risk, Speculation and Fraud, EMU Conference, Amsterdam, 2003 Greed and Corporate Failure 10
  11. 11. The next high profile disasters Enron  Skandia WorldCom  Allied Irish Bank (Allfirst) Global Crossing  Ahold Tyco  HIH Australia TXU Europe  Equitable Life Marconi  Adelphi Swissair  Refco Parmalat Hollinger  ABB HealthSouth  Fannie Mae Asia Pulp and Paper  China Aviation Oil  Société Generale Greed and Corporate Failure 11
  12. 12. © IMD 2009 Greed and Corporate Failure 12
  13. 13. © IMD 2009 Greed and Corporate Failure 13
  14. 14. How did we get into the mess? “Why did corporate governance checks and balances that served us reasonably well in the past break down? ………An infectious greed seemed to grip much of our business community”  Alan Greenspan, to US Senate Banking Committee, 16 July 2002 Greed and Corporate Failure 14
  15. 15. Beware false prophets…On derivatives:“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” Alan Greenspan in 2004 Greed and Corporate Failure 15
  16. 16. And then… Northern Rock (UK) Bear Sterns Lehman Brothers Wachovia Washington Mutual Merrill Lynch AIG HBOS Royal Bank of Scotland (RBS) Fortis Dexia Hypo Real Estate Iceland (the country!) Greed and Corporate Failure 16
  17. 17. Who or what is to blame? The list is long… Boards & Audit Committees Senior management External Auditors Regulators (Stock Exchanges & Central Banks) Rating Agencies Remuneration packages focused on short term “success” significantly increases risk taking No penalty for failure And, above all, GREED Greed and Corporate Failure 17
  18. 18. The role of accounting in the crisis After the crisis: what have we learned? 18
  19. 19. And the consequences for auditors….
  20. 20. Leonard Spacek’s topics (1956-1969)  “Accounting has failed to prevent major misrepresentations”  “The elusive truth of business profits”  “Professional accountants and their public responsibility”  “Unrealistic profits and the Stock Market”  “Accounting is being challenged – do we have the solution?”  “The auditor is also accountable for his work”  and many more“A Search for Fairness in Financial Reporting to the Public”, Leonard Spacek, Chicago 1969© IMD 2009 Greed and Corporate Failure 20
  21. 21. Can this be overseen, regulated or audited? (7000 legal entities in 150+ countries) Greed and Corporate Failure 21
  22. 22. The Royal Bank of Scotland Story (Sir) Fred Goodwin: deposed CEO of RBS Greed and Corporate Failure 22
  23. 23. A Brief History of The Royal Bank of Scotland 1727 Founded in direct competition with the Bank of Scotland 1960 First international office opened in New York 1976-1985 Subject of three separate takeover approaches 1988 Acquires Citizens Financial Group in Rhode Island, US 1999 Acquires National Westminster Bank in UK (+Greenwich) 2002 ceases to be “fully funded” 2004 Citizens acquires Charter One Bank to become 8th largest 2007 leads consortium to acquire ABN Amro (main target is La Salle) Greed and Corporate Failure 23
  24. 24. (Sir) Fred Goodwin Born Paisley, Scotland in 1958 Studies law at Glasgow university Joins Touche Ross, qualifying as a CA in 1983 Becomes partner in 1988 Heads liquidation of Bank of Credit and Commerce International Headhunted by National Australia Bank in 1995 Joins RBS in 1998 as deputy CEO Promoted to CEO in January 2001 Greed and Corporate Failure 24
  25. 25. RBS Growth & Fall Greed and Corporate Failure 25
  26. 26. Disaster Strikes Record loss of £24 billion for 2008 Of that, £16.8 billion write downs re ABN-Amro Hugh losses on CDOs via RBS Greenwich Capital UK Government rescue in October 2008 (now 83% owned) Goodwin stands down as CEO on 15 October 2008 with an immediate pension of £700,000 a year RBS share price falls to 65.7 pence (from a high of £18): today ?p Goodwin described as the “World’s Worst Banker” Greed and Corporate Failure 26
  27. 27. Sometimes it pays to be boring…. Greed and Corporate Failure 27
  28. 28. When we thought the worst was over for thebanks… LIBOR scandal (Barclays, UBS, Deutsche Bank….) Sanctions busting (HSBC, StanChart, Credit Suisse…) Product miss-selling (just about everyone) Tax evasion (UBS, etc)
  29. 29. And more generally…. Siemens corruption scandal Walmart FCPA violations in Mexico Citigroup toxic mortgage disclosure ($590m) Bernie Madoff Ponzi scheme (150 year jail term) HSBC money laundering (provision so far $700m) GSK unlawful promotion of drugs ($3 billion) Etc, etc Please indicate File name in Menu "View" > "Header/Footer..." 29
  30. 30. Some recent bribery cases April 2011, Johnson & Johnson agreed to pay $70 million to settle charges of foreign bribery brought by the U.S. Securities and Exchange Commission and the Department of Justice. End of December 2010, the government filed a criminal information charging Alcatel- Lucent as well as its French, Swiss and Costa-Rica subsidiaries with one count of violating the internal control provisions of the FCPA and one count of violating the books and records provisions of the FCPA. The three subsidiaries entered into plea agreements under which each entity agreed to pay a fine of $500,000. Alcatel-Lucent agreed to pay a $92 million penalty. Also in December 2010, Alcatel-Lucent settled related charges with the SEC and agreed to pay disgorgement and pre-judgment interest for a total of $45,3 million. In November 2010, the DOJ Panalpina World Transport and its US based subsidiary Panalpina, Inc. agreed to pay a penalty of $70,5 million each and to implement a compliance and ethics program designed to detect and prevent violations of the FCPA, other anti-corruption laws, and all applicable foreign bribery laws. On the same day, it also settled related charges with the SEC and agreed to pay a disgorgement of $11,3 million. September 2010, ABB settled the bribery allegation and agreed to pay a $58 million fine to SEC and DOJ In March 2010, BAE entered a guilty plea to conspiring to violate a number of U.S. laws, including making false statements and certifications to various U.S. agencies concerning its compliance with the FCPA. The company agreed to pay a $400 million fine. February 2010, Daimler announced that it had agreed to pay approximately $200 million to settle the DOJ and SEC investigations. Corruption at Siemens 30
  31. 31. Corporate background Siemens has been in business for more than 160 years Siemens is a global player with over 400,000 employees worldwide and a revenue of €76.billion in 2010 Large range of products and services: “Train to light bulbs” conglomerate Corruption at Siemens 31
  32. 32. The “Siemens System” at the Com unit until 1998International contracts included commission charges.The payments were arranged by two managers: Payments were made in cash Or through the managers’ number accounts in Austria Corruption at Siemens 32
  33. 33. Legal background in Germany In 1998 the International Bribery Law is enacted: bribing of foreign officials is considered a crime In 1999, the Tax Exemption Law comes into effect, making bribe money no longer tax deductible Corruption at Siemens 33
  34. 34. Published in The New Yorker, March 9, 2009 by P.C. Vey© 2009 The New Yorker Collection from cartoonbank.com.All Rights Reserved. Corruption at Siemens 34
  35. 35. The “Siemens System” at the Com unit after 1998 Reinhard Siekaczek, senior manager at the Com unit, developed a new system: Shell companies were created in off-shore locations Shell companies signed “consulting agreements” with Siemens that had no business purposes Siemens transferred money for the “consulting agreements”, which arrived in the shell companies when the money was transferred through the Caribbean to the Swiss subsidiary of a Lichtenstein bank From there, the bribes were paid to the ultimate recipient Corruption at Siemens 35
  36. 36. The exposure of the “Siemens System”, Part 1 2004:After internal revisions at its Swiss subsidiary, the HQ ofthe Lichtenstein bank informed the Swiss authoritiesabout suspicious transactions 2005:Swiss and German prosecutors intensified theirinvestigationsIn 2006:30 offices and homes of current and former Siemensmanagers were raided by 200 policemen and prosecutors6 suspects arrested Corruption at Siemens 36
  37. 37. Consequences…In July 2008: In a “show trial” Reinhard Siekaczek is convicted of breach of trust and sentenced to two years in prison and a fine of €108,000 Corruption at Siemens 37
  38. 38. Further prosecutions..In November 2008: Heinz Keil von Jagemann (responsible for Europe and Nigeria) was sentenced to two years in prison and a fine of €12,000 Wolfgang Rudolph (responsible for all other countries) received nine months on two charges and was told to pay €20,000 to charity.Their prison terms were suspended. Corruption at Siemens 38
  39. 39. Siemens settlementsIn December 2008: Siemens reached its settlement with the Justice Department and the Securities and Exchange Commission. Siemens pleaded guilty to violating accounting provisions of the Foreign Corrupt Practices Act, which outlaws bribery abroad. The settlement includes a fine of $450 million for the company and units in Venezuela, Argentina and Bangladesh. Under the agreement with the Securities & Exchange Commission and the Justice Department, Siemens will also forfeit $350 million in profits. Corruption at Siemens 39
  40. 40. Total fines and settlements €1,300,000,000 Corruption at Siemens 40
  41. 41. But the real cost was much higher…In 2009, Siemens put the costs of the corruption scandal at € 2,500,000,000 including fines, legal advisory and criminal defence Corruption at Siemens 41
  42. 42. The Downwards Spiral Ineffective Board Inadequate control environment Inadequate control environment Poor Strategy Dominant CEO Ill-judged acquisitions Greed, hubris Over-expansion Trigger DISASTER Greed and Corporate Failure 42
  43. 43. Boards have to be strengthened Greed and Corporate Failure 43
  44. 44. A heavy agenda…  Report reviewing Enron’s GAAP compliance and internal controls  Report on adequacy of reserves and related party transactions  Report on disclosure of litigation risks  Report on Enron’s 2000 financial statements  Discussion of revision of Audit & Compliance committee charter  Review of 2001 Internal Audit control plan  Review of policy for communication with analysts  Impact of Regulation Fair Disclosure Enron Audit Committee, 21 February 2001© IMD 2009 Greed and Corporate Failure 44
  45. 45. With people who actually understand what they are doing… “Hey, we’re sheep. Everything seems like a good idea”

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