I blogged a little while back on the fascinating battle underway between Barclays and Guardian Care Homes to do with the manipulation of the LIBOR rate. The key question in that case, in which Guardian is alleging deceit against the bank, is how high within the echelons of senior management did knowledge of the manipulation go? A recently published report by Ernst and Young, “Navigating Today’s Complex Business Risks”, makes for unsettling reading in the broader context of the pressures on managers generally to turn a blind eye to unethical conduct in order to be seen to be delivering improved financial performance.
The survey asked 3000 board members and managers in 36 countries about the nature and source of the pressures under which they were operating in the current economic climate. There are some striking findings which include the following:
- One in five respondents has seen financial manipulation of some kind occurring in their own companies.
- 45 percent of respondents in rapid growth countries believe companies in their countries report financial performance as better than it is.
- 57 percent of all respondents feel that corrupt practices are commonplace in their country but only 29 percent feel it common to use bribery to win contracts in their sector.
- 42 percent of directors and senior managers are aware of some type of irregular financial reporting in their company.
- 60 percent of directors and senior managers believe their company would support people who reported cases of suspected fraud or corruption whereas only 34 percent of other employees agree.
“A dangerous cauldron”
What these findings seem to suggest is that a dangerous cauldron of knowledge and inactivity spiced with wishful thinking is simmering within the ranks of senior management. It seems that in the aftermath of future corporate collapses or scandals, plaintiffs and regulators will find ample material on which to base accusations that management were, or should have been, aware of malpractice and failed to take steps to prevent it. Time and again the Courts have made it clear both in the UK and beyond that directors cannot escape liability by delegating their supervisory function. Regulators are making very similar noises. Martin Wheatley, the new head of the UK Financial Conduct Authority, said on taking up office:
“Accountability to justice systems and to customers is what matters. We could put up fines three times, five times, 110 times greater – it will not make a difference unless individuals are held to account.”
It seems that we may not need to wait too long before the next headlines proclaiming that directors are being held to account. There is of course another story here about the sheer extent of fraud and other potentially criminal activity which the survey suggests may be taking place within businesses and the effect of this on global economic activity. That’s a subject for another day!