Ethics

French rogue trader Kerviel found guilty, CNN.com This paper will focus on the ethical ramifications surrounding the case of one Jerome Kerviel, who worked for the French bank, Societe Generale. Kerviel was recently sentenced to five years in prison and fined $6.75 billion in damages on charges of: forgery, breach of trust, and unauthorized computer use. The business ethics problem in this case was that Kerviel made risky, negligent trades with the bank’s money ($61 billion worth) without the bank’s knowledge. Kerviel claims his superiors were aware of all his trading and that they covered for him. He further believes that his managers made a lot of money off his trading, and therefore, allowed the risky transactions to occur. Societe Generale denies having knowledge of his actions. In thinking about the ethical dimension of this case, I found it helpful to use the “Ethics Check”, as described by Blanchard/Peale in their book, The Power of Ethical Management. The first question asks, “Is it legal'” In this case, it is not. The second question asks, “Is it balanced'” In this case, no again because the bank lost so much money. The last question asks, “How will it make me feel about myself'” I can’t imagine any of the parties involved in this case feel proud of themselves. So now that we know an ethical problem is established, there may be a solution. On the company level, a Code of Ethics policy should be in place for all employees to adhere to. Because companies compete with other companies, they must find a way to get competitive results while maintaining ethical principles. To do this, I would implement Blanchard/Peale’s “Five P’s of Ethical Power”, which are core principles in ethical decision-making. The first “P” is Purpose – “something toward which you are striving.” Purpose in organizations is the vision of the organization from the top. In crafting a solution to Societe Generale’s ethical problem of rogue trading, I would have the top managers communicate to the employees the intent, values, and mission of the company. I would also communicate and model acceptable and, by implication, unacceptable behavior. In this particular case, honesty played a huge role. Kerviel went behind the backs of his supervisors to conduct his business. Societe Generale (SocGen), needs to intervene and implement a plan to promote honesty. A good way to do this is to create an environment of open communication, listening, and support with problem-solving. If employees are welcomed to approach their managers and communicate freely, they will be less likely to do things behind their backs. Also, managers must speak to their associates about things happening in the company so that associates can feel like they are part of the team, which will boost their company morale, and the managers will model the honesty and open communication they are asking for. If there is not ethical leadership from the top, then it is less likely that the purpose of the organization will be embraced and respected by its employees. The second “P” is Pride – feeling proud of ourselves and our organization. The idea is if employees feel good about themselves, they will be less tempted to behave unethically. There are certain steps Societe Generale can take to ensure their employees feel a sense of pride in their organization, which will in turn motivate them to do the right thing. SocGen can choose and foster employees with a healthy self-esteem; healthy being not too high, not too low. Having confidence, while exhibiting humbleness and humility, are good indicators of a healthy self-esteem. SocGen can also give recognition, praise, and encouragement for ethical behavior. Making people feel appreciated reduces their risk of bad behavior. As said in Blanchard/Peale, “Before they can have pride in their organization, people must feel good about themselves and what they are doing for the company.” (pg. 95) It is also imperative that SocGen implements a performance-review system. Blanchard/Peale lists three parts to the performance-review system. First is performance planning, where goals and objectives are discussed. Second is day-to-day coaching, where managers help employees accomplish their goals. Third is performance evaluation, where it is distinguished whether or not goals have been met. If an effective performance-review system was in place, the ethical problem could have been detected sooner, or avoided. Instead, SocGen may have been too hard on employees and focused their attention on bringing in more money. Kerviel was motivated to make more and more money, which spiraled to a dangerous place and pushed ethics aside. The top authorities at SocGen need to change this mentality and re-create a sense of pride in the organization. They need to catch people doing the right thing and praise that. “When pride is present, people want to uphold the integrity of their organization.” (pg. 105) Patience is the third “P” in the ethical decision-making process. The patience principal implies that holding on to ethical values will pay off in the long run. There must be a balance between obtaining results and how those results are achieved. Employees must be trained to look at the bigger picture versus looking for instant gratification. They must be able to look ahead and be willing to go through the entire process involved in the goal. But that also requires trusting that process and not giving in to the fast-paced world we live in. What SocGen needs to do is communicate to its employees its timing so that everyone is on the same page. If the focus is on moving fast, good decisions will be overlooked. Patience allows people to analyze situations, which is required in making good, ethical decisions. As said in Blanchard/Peale, “…if you don’t keep your eye on the ball, you may not get much on the scoreboard.” (pg. 107) Also, in promoting patience in their organization, SocGen must make sure they don’t have any “seagull management.” This type of manager focuses more on the short-run and is likely to get angry when his or her view of success is not met. He or she will storm into an organization, make lots of demands on employees, and fly out. This causes employees to get frustrated, and a “ripple effect” of frustration occurs. To avoid this, managers must make their purpose clear, and maintain that purpose with patience. If Kerviel was encouraged to be patient, his actions may not have been so irresponsible and extreme. “Most ethical deterioration you find in an organization can be traced to impatience in attaining goals and objectives.” (pg. 110) So, goals must be long-range and employees must trust the process. The fourth “P” is Persistence – sticking to the goals and objectives of the organization. As Winston Churchill once said, “Never! Never! Never! Never! Give up!” For SocGen, that means enforcing a Code of Ethics plan and sticking to it all the time. Persistence also deals with commitment. If management is committed to achieving high standards, employees will follow. In Kerviel’s case, he was not persistent in performing in an ethical manner, and for too long, he was not held accountable for his unethical practices. Without accountability and a commitment towards upholding ethical standards, a program will fail. The fifth and final “P”, and the one that ties it all together, is perspective – what is really important in a given situation. This principal relies heavily on reflection, the ability to focus on one’s inner self to see things more clearly. There must be a balance between inner self (what you know to be right) and external self (what you actually do). It is significant to act on what you think is important rather than reacting to the world around you. “Every problem can be solved if you take some quiet time to reflect, seek guidance, and put things in perspective.” (pg. 78) SocGen needs to reflect and assess where its organization is and what direction it would like to take. They need to analyze their ethical problem and make a strategic plan on how to insure future success. They need to take their time, weigh pros and cons, and use adequate reflection to get a good perspective on their purpose and avoid any “rushed” decisions that may provide a loophole for unethical behavior by their employees. The three-step approach described by Blanchard/Peale (pg. 121) is an excellent way for managers to gain perspective in a team setting. The first step is gaining as much information as possible. The second step is asking the “Right Question” in which the answer will yield the best possible solution. The third step is inward thinking. Each person on the team sits quietly for ten minutes, looking for the answer to the “Right Question”. The idea in this approach is that group thinking is better than individual thinking. For SocGen, a team approach can be so much more powerful than taking an individual approach to gaining perspective on the purpose of the organization. After reflecting and gaining perspective of goals and objectives, SocGen must “check-in” often to assure the company is staying on course and to show its employees that the goals, objectives, and purpose of the organization are on track and everyone is here to support each other. Perspective is at the center of the five P’s and when that perspective is well thought-out and clear, purpose, pride, patience, and persistence are the tools that achieve perspective, and ultimately, an organization with a clear Code of Ethics that employees respect and uphold. Article 1, from Richardson’s Business Ethics compilation is, “Thinking Ethically – A Framework for Moral Decision Making” by Manuel Velasquez Et Al. This article offers five approaches for dealing with moral issues. Before trying to solve the ethical problem, SocGen must get the facts. After taking an objective look at the facts of the case dealing with Kerviel, SocGen must decide which approach it will take in crafting a solution to the ethical problem of rogue trading. Using the Utilitarian Approach as described in the article, it would be beneficial for the organization to determine what is morally best in this situation. Using this approach, the organization must first identify a course of action, then determine who will be affected by the action, and last choose the action that will produce the greatest benefit and least harm. While going through this process, SocGen can also incorporate the “Virtues Approach” in deciding what kind of company it needs to be. Article 6, by Erline Belton is, “Truth or Consequences – The Organizational Importance of Honesty.” According to the article, people tell lies to avoid pain or unpleasant consequences. Lies in the workplace are very damaging because they cause diminished spirits and a disinvestment in the workplace. SocGen must provide an environment of truth and allow individuals to speak truth without consequences. Many times people do not speak up for fear of being naysayers and alienated by management. Kerviel had a “hidden agenda” and acting on his own, which was very dishonest. He may have seen himself as self-righteous and was arrogant in thinking that he had the right to act in a dishonest way. Managers could have also “looked the other way” at Keviel’s risky behavior due to their relationship and past success. SocGen must act quickly to acknowledge the behavior and deal with it to restore the human spirit of the employees. They must run an organization based on truth as truth is the foundation of a successful organization. They can do this by creating visible examples where truth-telling is welcomed, praised, and valued. This turn-around must be an organization-wide effort to ensure success. As the article says, “truth-telling leads to freedom”. Article 22, by Michael Orey is, “Fear of Firing”. The threat of litigation makes companies worried about firing problem employees. Unproductive, unethical, and even criminal employees are kept around for fear of lawsuit in “sue-happy” nations. Part of SocGen’s solution should be to put in place regular performance evaluations highlighting any undesirable or poor performance. The evaluation should be on paper, signed by both parties to create a paper trail. This will cover the organization in the event of a lawsuit because it will show that the employee was put on notice and warned several times. Also, the “fear of firing” element that can weaken a company will be removed. Article 23, by R. Scott Oswald and Jason Zuckerman is, “Protecting the Whistleblower” is number four. This article lists five conditions that can be put in place when conducting an internal investigation as a result of a whistleblower that will deal with the accuser and accused in an ethical manner. First, the concerned employee should be kept “in the loop”. The company can let them know where they are at in the investigation and corrective actions that have been taken. Focus on the concerned employee’s allegations, not their motive. Under the law, motive is irrelevant. Watch for retaliation from the accused towards the whistleblower. This would create an uncomfortable work environment and discourage others from reporting wrongdoing. Be aware of the rights of the accused. Defaming him or her may lead to liability. Finally, comply with privacy laws, especially when dealing with electronic documents. With these internal controls in place, employees who know what is going on in the Kerviel case would step forward and report his actions before the situation got out of control. Article 24 by Don Soeken, “On Witnessing Fraud” brings another factor into the solution for SocGen. The article discusses the fact that an employee may be able to act ethically in a given situation, but may not be able to report a fraud they witnessed in fear of getting a friend in trouble or losing a job. For an organization to be ethically sound, its employees must believe that acting ethically will eventually pay off in the long run. Kerviel may have been acting reckless thinking that no one would have the guts to report him. But if SocGen provides its company with a strong Code of Ethics that promotes honesty and provides protection for those who report fraud, employees are more likely to not act unethically and be confident in doing the right thing. Article 25, by Shel Horowitz is, “His Most Trusted Employee Was a Thief”, and relates to this ethical problem. In this situation, the employee worked for the employer for a long time and had completely gained his trust. Like Kerviel, she knew the ins and outs of the company and even had access to its bank accounts. Because of the trusting relationship between employee and employer, there were no internal controls to make sure everything was running properly. The employee embezzled $20,000 over the course of four years. This case in very similar to the Kerviel case because his unethical gambling cost his company billions of dollars. The solution to the problem of thievery involves two strategies. One, the company must execute strict accounting controls and take an active role in monitoring the company’s finances. Two, the company must make an example out of the thief and the magnitude of the punishment to avoid any future fraudulent behavior by other employees. Article 26, by Bowen H. McCoy is, “The Parable of the Sadhu”, tells a very important story about the dynamics of the individual versus group decision-making. To summarize the story, there were small groups of people trekking through the Himalayas and hiking through dangerous areas. For most of the hikers, this was a once-in-a-lifetime expedition. At a critical point of the trip where time was of the essence, one of the hikers found the sadhu, almost naked and near death. The rest were trying to decide what they should do, help the sadhu, or continue the trail because if they didn’t continue soon, they would lose their opportunity to cross this particular area. Each person did what they thought was enough to help a little bit and moved on. It is not known if enough was done to save the sadhu. In this situation, each person did what they thought was ok enough for them to move on, but as a group, they had no plan. This relates to the corporate world because it demonstrates that working as a group is more effective then acting on an individual level. This applies to SocGen’s ethical solution. They should create a “business ethics plan” with everyone on board. They should also confront risk rather than run away from it. If they have the support of a group, they may feel more powerful in dealing with the issue. Managers can work together to agree on the company’s process for dealing with dilemmas. And most importantly, it must be recognized that individuals who have strong personal values are the foundation of corporate culture, but the individual needs the support of the group. Article 5, by Michele Compton is, “The Ethical Employee”. Before adding ethics guidelines to human resource manuals, SocGen must define exactly what ethics means for its employees. Ethics starts at the top. Managers must model the ethical behavior they require from their employees. Employees like Kerviel need someone of higher authority to look up to, respect, and emulate. Managers can talk about their Code of Ethics and read their mission statement to employees, but actions speak louder than words. Managers must make ethics a priority. It is just as important as strategizing to make more money, if not more important. Employees must know that they can’t get away with stealing. They won’t even try if they know there is an active interest in ethical behavior. There should be an ethics assessment in the hiring process and hired employees should sign an ethics commitment. Article 2, by William I. Sauser, Jr. is, “Business Ethics – Back to Basics” and offers a great solution that SocGen can implement immediately. First and foremost, they must adopt a Code of Ethics using simple language and post it up so it is visible to all employees. Next, provide ethics training led by managers and guest leaders. Use real-world scenarios as examples of ethical and unethical behaviors and their repercussions. Hire and promote ethical people by investigating their character. Correct unethical behavior and show employees that unethical behavior will not be tolerated. Be proactive by getting involved in a project that gives back to the community to show philanthropy and caring for others. Conduct a social audit to identify and correct ethical problems. Protect whistleblowers since employees learn from one another and other employees should be encouraged to report unethical behavior. And finally, every employee should guard the company’s integrity. Article 14, by William I. Sauser, Jr. is, “Employee Theft: Who, How, Why, and What Can Be Done” is the last article to be examined and applied to SocGen’s solution to their ethical problem. Theft is at the center of SocGen’s ethical problem. A 1997 article by Wimbush & Dalton concluded that an estimated $100 billion is lost by theft every year. According to the article, employees steal because they have a motive, desire, and opportunity. A big part of the solution is to minimize or eliminate the opportunity by instilling barriers to deter and quickly catch theft. To reduce theft, there must be pre-employment screening and an organizational culture of good character. The temptation to steal must be removed by installing security devices, conducting audits, and having accounting controls. Also, theft must be punished and honesty rewarded in a public way so all can see the effects of ethical and unethical behavior. My personal ethics problem happened about a year ago at my family-owned restaurant. One of my employees asked the cook for a side of avocado for a customer, and he said no. She came to me and told me what happened. I told him to give her a side of avocado and he said no to me as well in a bad tone and failed to explain he didn’t want to give it because he was running low on avocado. I demanded him to give the avocado and informed him that it was not his right to make those decisions. He gave me attitude, and I gave him attitude back. He stormed out and quit. Six months later he came asking for his job back. He was hired back, on probation, and given less hours. The ethical problem in this case involves bad tempers, distrust, dishonesty, and arrogance. This problem can be solved in a few ways. First, the golden rule should be used by everybody. Treat others as you want to be treated. Next, there needs to be open communication between employees and managers. The cook could have told the employee in a nice way that he did not have enough avocados. I, as manager, should not have taken on the cook’s bad attitude. I could have led by example and handled the situation in a calm, effective way. To empower him to act in a good, responsible way, I should tell him that he can make decisions, but when executed they must be explained. Instead of saying “no”, he should have said, “It may not be a good idea to do so because we are running low on avocado.” To me, ethics deals with common sense, character, and knowing right from wrong. Out of all the articles I have used and the five P’s I have studied, here are the things I find most important in developing an ethics program in any organization. First, lead by example. This is so powerful and I believe if the top acts ethically, the rest will too. Be committed to your Code of Ethics or you will lose credibility and respect of employees. Constantly check in and evaluate employees. This will help catch any wrongdoing quickly. Make examples of ethical and unethical behaviors and highlight rewards and consequences. Never think you can fully trust any employees, always keep them in check (without disrespecting). Reinforce ethics monthly with activities or retreats. Do not allow the opportunity for unethical behavior by putting checks and balances in place. In the SocGen case, it doesn’t seem like there were strict internal controls to catch unethical behavior. Kerviel had made the company so much profit in the past, he was trusted and his managers may have turned the other way at his risky behavior. He, and higher management, may have profited heavily in the short term, but doing the wrong thing never wins in the long-run. SocGen took action and Kerviel got his punishment. Now they must use the solutions discussed in the ten articles along with the points made by the five P’s to put an effective Code of Ethics in place to prevent this or any unethical actions from happening again.