Volkswagen, Forex, LIBOR and Enron. All names that resonate with anyone involved in modern business.
In recent times, it seems a major corporate scandal is always lurking around the corner. Despite the severe consequences of these scandals – huge fines from regulators and imprisonment – cheating in business continues to rear its head; but why does it occur?
In a letter to the FT in 2014 Kweku Adoboli, the infamous UBS rogue trader, made a statement which gives us an insight into his perspective on the matter: "no one in finance ever realises how close they are to the imaginary, transitory red line until they cross it and get smashed in the face by a million camera lenses". It is difficult to accept that, in an industry dominated by well-educated and highly motivated individuals, there is a lack of awareness as to the 'transitory red line' but, before we denounce Adoboli as another evil banker, let's look more closely at this assertion.
Forex and LIBOR rate-rigging are shining examples of the issues that have plagued the banking sector, and an analysis of the two seems a logical place to start.
Firstly, LIBOR and Forex were both unregulated benchmarks with no clear legal framework. The boundaries, in terms of acceptable conduct, were largely untested. For a number of traders, pushing these boundaries was commonplace. Those who pushed too far caught the attention of regulators. There were definite grey areas between the law and accepted City practice.
Secondly, most of the major banks were to some degree involved in the manipulation. The misconduct was widespread, to the point that some bankers may have felt the bank would be worse off if they did not partake in the cheating. Traders entered into a negative feedback system which was self-justifying because "everyone else was doing it".
Thirdly, the banking culture was to focus on profit margins above all else. Traders were incentivised on the basis of how much money they brought in. Those participating in the manipulation often felt they were doing a good job by exceeding their targets. The conduct which attracted huge bonuses and plaudits from colleagues became the misconduct that led to billions in regulatory fines. It is no coincidence that, at the end of October 2015, John McFarlane, the chairman of Barclays, attacked the bonus culture and argued that it encourages individuals to "cut corners".
Taking a step back, the transitory red line is rather more blurred than it first appears. Beyond benchmark fixing there are other examples – accountants who push the books until a company collapses, staff pressured into mis-selling financial products and financial inducements adjudged to be bribes.
The striking reality of these scenarios is that the misconduct of the individual is adjacent to their previously acceptable behaviour and, when regulators begin to investigate their conduct, it takes a substantial amount of time to ascertain the point at which the 'transitory red line' was crossed.
This reasoning does not excuse or validate malpractice in business but it goes a small way to identifying its root causes. A combination of profit-driven culture, a lack of legal clarity and the attitude that "everyone else is doing it" can foster an atmosphere which may encourage an individual, who is by no means a traditional crook, to drift onto the wrong side of the red line. Businesses should seek to promote a culture which prevents employees from blurring the lines between cheating and competing.