Malaysia’s leading business newspaper
Ready to take responsibility?
by Nicholas Krasno
€4.9 billion. That is the amount you have been ordered to repay your employers. Actually, former employers, as you are now out of work. Well, not quite out of work, as you will be spending the next three years in prison, breaking rocks, or sewing mail bags, or whatever goes on in French prisons. Because your name is Jérôme Kerviel, and that is the amount of loss suffered by Société Générale as a result of unwinding your secret trades (yes, secret – your bosses did not know, and if anyone says they did the same judge will put them in an adjoining cell for contempt) totalling a €50 billion position. As for SocGen itself, blasted by its regulators’ criticisms for its wholly inadequate controls, France’s second-biggest bank was punished by a €4 million fine. Yes – that’s millions, not billions. And the senior management? The chief executive? The directors? Do they join young Jérôme in the exercise yard next week? Well no, not quite.
What has happened to the responsibility owed by the directors of companies that have either failed, or come near to it? Coincidentally, as Prisoner Kerviel’s sentence was being read out in Paris’s ancient and magnificent palais de justice, at the other end of the Channel Tunnel Hector Sants of Britain’s FSA regulators was addressing an august gathering in the Lord Mayor of London’s rather less ancient but even more magnificent official residence, on the topic of moral standards in his financial world. Culture and ethics, he said, were a prime responsibility of the board of directors, who needed to play a greater role. Boards should have a structured process for reviewing culture, identifying its drivers, and the behaviours and outcomes. And if needed, regulators would force them to comply, even ordering changes to the membership of management or the board.
“Better late than never,” you say, but where was the FSA when the directors allowed most of the UK banking industry to slide beneath the waves – or indeed where were regulators in other countries? And have the criminal prosecutors, or the civil trial lawyers, been busy as the tumbrels roll towards the guillotine? Well no, not quite. And yet…
The notorious 25-year Enron and WorldCom sentences are as excessive as Kerviel’s, but clearly in some countries at least executives are at risk. The CEO of the failed German bank IKB received a prison sentence (suspended) and large fine in July – a remarkable change in attitude to ‘white collar’ crime. But prosecutions, at least from the latest financial crisis, are few and (hitherto) far from successful. Perhaps, because the crisis is still continuing, the time for settling scores is not yet come.
But what of non-executive directors? Reports on the financial crisis indicate that non-execs played little role in taming the overweening egos, the disastrous ambitions, and the recklessness of their executive colleagues. Perhaps they felt owed they their place to them (they often did), or simply felt unempowered or inadequately experienced to disagree with management and dissent from the status quo and the group-think in the boardroom. But most likely, at least in this writer’s opinion, non-execs in every country often genuinely do not understand, or even fully accept, their role in providing an independent counterbalance to the management, to (in the words of the now-venerable Higgs Report) “both support executives in their leadership of the business, and to monitor and supervise their conduct”. Non-executive directors share with executive directors the responsibility for managing the company, and both “have the same general legal duties to the company”, or at least they do in theory. For in practice it seems only the executives are held to account.
Will this change? Lawsuits against non-executive directors are rarely very profitable given their often limited means, though at the public policy margin they form a useful deterrent against the negligent or reckless. Perhaps – to be more positive for a moment – we must remember what motivates non-execs in the first place: their desire (at the upside) to contribute to society’s greater good and the building and development of successful enterprises, and – on the downside – the preservation of their hard-won reputations.
Working on that, we might see that better disclosure and reporting, and analysis, of boardroom deficiencies and delinquencies becomes especially valuable. Public exposure of folly is a powerful deterrent. But we must also advise and (respectfully) educate non-execs on their role, and here boards and their declared corporate governance principles and actual corporate governance practices come in. The vast majority of non-execs (again, in the writer’s view) do want to do what is right, and most can – sometimes with a little help.
So as the rewards for a job well done differ for executives versus non-execs, so the penalties for failure need to differ. Though non-execs do not need to join Kerviel in the dock, a few lost reputations among the great and the good in major boardrooms after a major scandal or failure are a good thing, if only, as Voltaire said, “to encourage the others.” But then Admiral Byng was executed…
‡ Kerviel surrendered to French police in May 2014 to serve his three-year sentence. The appeal courts found him guilty of criminal charges, but overturned the €4.9 billion in damages he was set to ‘pay’. A later civil trial will set those damages, to include some measure of culpability by his employers, Société Générale.
© Nicholas Krasno published October 2010