companies need to have an effective corporate governance process, and corporate
boards and senior management must have integrity and promote ethical behavior.
I believe that most companies do have good corporate governance processes.
They follow the rules not only to avoid the reputational risk of an enforcement
action, but also because it is just good business practice and the right thing to
do. As regulators, while we cannot impose these values, we can encourage good
behavior through well-designed rules and discourage bad behavior through civil
and criminal law enforcement. In this way, we can help bridge any gaps between
owners’ goals and management’s goals.
Integrity and ethical behavior start at the top of a bank and work their
way down through the entire organization. But what happens when there is
a breach at the top? First we consider the cases of Deutsche Bank and
Citigroup, two of the world’s largest banks. Finally, we examine Banca
Popolare Italiana, Italy.
Deutsche Bank
Bank managers are accountable if and when they break the criminal laws.
Consider the case of Dr Josef Ackermann, Deutsche Bank’s Spokesman
of the Management Board and Chairman of the Group Executive
Committee. He went on trial for allegedly enriching certain corporate
executives of Mannesmann AG with $74 million in bonuses and retirement
packages in order to drop their opposition to being acquired by Vodafone
in 2000. The deal was considered illegal because it enriched Mannesmann
executives without benefiting the shareholders. Ackermann and the other
defendants were acquitted of those charges, but they face a new corporate
criminal trial. According to Deutsche Bank’s 2005 Annual Report, ‘The
Düsseldorf Public Prosecutor filed notice of appeal with the Federal
Supreme Court (Bundesgerichtshof). On December 21, 2005, the Federal
Supreme Court ordered a retrial with the District Court in Düsseldorf.
When the new criminal trial will begin is not yet known.’
Citigroup Inc.
Citigroup grew to be a global giant under the leadership of Sanford Weill.
But it is hard to control every aspect of a global giant bent on growth.
Salaries were based on performance, and the more services you sold, the
more you made. Thus, problems and scandals began to surface. For
example:
Japan In 2001, Japan’s Financial Services Agency (FSA) had concerns
about Citibank’s Japan Branch (the Marunouchi Branch of Citibank). In
2004, the FSA took administrative actions to close four offices of the Japan
Branch because several of the bank officers misled customers into investing
in structured bonds and complex securities in violation of Japan’s security
laws, as well as numerous other violations.
Germany Citigroup bond traders were accused of ‘market manipulation’
using the ‘Dr Evil Strategy’. But that strategy did not violate Germany’s
laws, and the charges were dropped.
Brazil It is alleged that a Citigroup Private Equity manager tried to coerce
a large investor into selling its shares in a Brazilian telecom at below market
prices. The manager was fired.
Australia Citigroup faced a $715 million fine in Australia for insider
trading in connection with a takeover bid of a large company.
New York Citigroup settles Enron class action law suit for $2 billion.
Chicago The headline in the Chicago Tribune Online Edition stated ‘Even
big boys get scammed: A tense corporate drama unfolds when one of the
nation’s major lenders finds its Chicago Operation enmeshed in mortgage
fraud.’
28 The major lender was part of Citigroup.
When Charles Prince took over the controls as the Chief Executive Officer
of Citigroup, he announced that there would be a change in the corporate
culture, with increased emphasis on internal controls and ethics.
29 The organizational structure remains the same, but the corporate governance is
different. In April 2006, The Federal Reserve lifted a year-long ban on
Citicorp’s acquisitions, citing that they now had better internal controls.
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