investment bankers get paid bonuses based B u s i n e s s F i n a n c e

investment bankers get paid bonuses based B u s i n e s s F i n a n c e

The fifth case study is UBS: A Pattern of Ethics Scandals on p. 524. Use the structure in the Guidelines

The relevant chapters are Ch. 11 (Organizational Design: Structure, Culture, & Control) and Ch. 12 (Corporate Governance & Business Ethics).

A few notes to help you with this case:

  1. This is UBS’ organizational structure in 2017.
  2. Some wealthy Americans and corporations in the United States use off-shore accounts (accounts in other countries) to avoid paying taxes in the United States. Instead of depositing money in a U.S. bank, they deposit in an off-shore account. It is this practice that UBS was actively promoting to prospective American clients. And it wasn’t just the U.S. where UBS was engaged in this practice. Israel, Germany, France, and Belgium also initiated proceedings against UBS. It is important to note that depositers looked to Swiss banks because of the strict secrecy laws in Switzerland.
  3. The way that investment banking works is that investment banks get a commission on every trade made; and investment bankers get paid bonuses based on their and the bank’s performance. Banks can either use their client’s funds or the bank’s own funds. When they use their own funds, they make a profit if the trade works out well (and a loss if it does not). But the traders have to be authorized to make trades and there are risk limits as to the types of trades that can be made. Kweku Adoboli, a trader in the London office, was making supposedly unauthorized trades on the bank’s account and ran up losses on these trades. He then used a loophole in the bank’s computer systems to make phantom trades to cover his losses. Eventually, everything caught up to him and he had to admit what he did to the bank. Two issues for UBS. The first was that someone at the bank warned UBS management that Adoboli was hiding losses and making fraudulent trades but the bank ignored it. The second is that Adoboli claimed at his trial that UBS knew he and others were exceeding trading limits but allowed it because it was generating higher profits for the bank.
  4. LIBOR is an interest rate that is used globally when banks lend to each other. It is also used in many other loan arrangements, including bond issuances. For example, a company may issue a bond and the rate paid to bondholders is set on the LIBOR rate for the past quarter or year. Fluctuations in the LIBOR had a significant impact on bonds and other types of debts. What UBS did in manipulating LIBOR had widespread impacts on the bond markets. Note that the rate would be set in a country’s currency, so the U.S. LIBOR rate would impact bonds using the U.S. Dollar. Also, UBS traders were able to profit on their own trades because of the rate manipulation.

Some issues to consider:

  1. What is it about UBS’s culture that led to these ethical lapses?
  2. What role did UBS’s corporate structure play in the lapses?
  3. What was UBS’s control and reward system?
  4. What was UBS’s ethics approach?
  5. Were these cases an example of “bad apples” or a “bad barrel”? (See section 12.3).
  6. Textbook:
    Strategic Management 4e, Rothaermel, McGrawHill, ISBN 978125992762.