Organisational Behaviour and the Standard Chartered Bank Scandal - Essay Example

? Organisational Behaviour and the Standard Chartered Bank Scandal Introduction Corporate scandals like the Enron saga is blamed on poor corporate governance and ethics and when they occur, the business has to undertake a lot of internal structural changes to maintain its position (Mendel, 2009). On August 6th 2012, the New York Department of Financial Services (DFS) accused Standard Chartered Bank of hiding $250 billion in transactions relating to Iran (BBC News, 2012a). Iran had been under sanctions for the past decade by Standard Chartered Bank supported Iran to go around the sanctions, sell its oil on the international market and receive funds for their sales. This was used to fund terrorist groups. The US branch of the bank hid 60,000 transactions with Iran for almost a decade. Speaking in a press conference on August 8th, Standard Chartered Bank CEO, Peter Sands stated that “there was no systematic attempt to circumvent sanctions in Iran”. He admitted that some deals violated US sanctions of Iran but that was not the whole representative policy of the bank. However, this incident wiped off $17billion from the bank's market value and shares fell by 7% within the 24-hour period (BBC News, 2012a). According to the Telegraph (2012) the US Treasury department showed suspicion that some US banks are collaborating with Iran to fund the nuclear weapons programme of Iran. However, Standard Chartered Bank kept this secret until the lid was opened upon them. A senior business writer for the Guardian in the UK did a thorough critique of the situation at hand (Palmer, 2012). In his critique, he identified important pointers and actions that are relevant to the case and give a broader view of the concepts involved in the breach. He identifies that widespread illegal activities committed in different parts of the world cannot succeed unless some international banks cooperate with the persons indicted for the activity. In citing a similar case, Palmer identifies that HSBC bank was indicted for helping Mexican drug traffickers to circumvent sanctions by covering up their transactions and presenting them as legal (Palmer, 2012). In the events leading to the Standard Chartered scandal, it is said that the head of Standard Chartered Americas wrote to the director on 5th October, 2005 stating that the UK headquarters' transactions with Iran were “very serious and even catastrophic enough to cause major reputational damage of the bank” (Palmer, 2012). However, the warning was not heeded and this led to the scandal. However, Standard Chartered went on and altered wire transactions for the Iranian government (see Appendix 1). Deloitte, the bank's auditors came out and claimed that they had no knowledge of the actions of the bank's employees and this activity was not disclosed to them (Palmer, 2012). However, Palmer insists that the current CEO, Peter Sands served as the finance director between 2002 and 2006 before assuming his current position and he had served long enough to know about this spate of illegal transactions. This is an offence and the management and staff of Standard Chartered Bank are indicted for their role in breaking an international legal convention. This is clearly the case of an unethical behaviour and requires a lot of attention from the major stakeholders. This paper undertakes analysis of the subject and its implications to organisational behaviour. Organisational Structures/Culture and the Scandal “In banking, there has always been an overlap between corporate governance and banking regulations” (Gup, 2007 p13). This implies that banking has always had a corporate governance culture that requires the people charged with directing the affairs of the bank to follow some important regulations and considerations in decision making and the running of the banks. Gup goes on to state that these rules and imperative requirements were in place since the 1930s where most banks in the developed world had to react to the major economic crises that came up prior to the Second World War (2007). Another angle to look at the culture of corporate governance in the banking sector is from the need to be careful with public funds. This is because banking relates to safeguarding and use of other people's money. Hence, the directors of banks have an absolute obligation to be convincingly careful in their actions and inactions. This was the primary obligation of Standard Chartered to its shareholders and customers. They had their money and their funds and therefore had to invest it in the best and the most credible and most significant venture. So in this case, one may ask, was what the directors did wrong? After all, it was meant to bring the highest levels of returns from trading with oil rich Iran. The only person hurt was the American government which seem to be the head of the alliance that is meant to see that Iran is punished. On investigations, one can identify that the issue of Iran being branded as a negative nation goes back to the 1979 hostage crises which led to the hold up of American diplomats for over a year. In that case, America has an interest in the matter not the whole world and certainly not Standard Chartered. According to the New York State Department, when warned by an American colleague about dealing with Iran, a British executive of the Standard Chartered bank answered that “You f--king Americans. Who are you to tell us, the rest of the world that we are not going to deal with the Iranians” (Rushe and Treanor, The Guardian, 2012). Clearly, this executive of Standard Chartered did not see the essence of the bank following up with the sanctions. After all, it was an American-led initiative and since Standard Chartered's headquarters was not in America, it could perfectly proceed with trade with Iran since this was not a major criminal offence in Britain. From these facts, the directors of Standard Chartered seem to be justified in trading with Iran in the spirit of increasing the wealth of their shareholders. After all, the bank is in to make money for their customers and their shareholders. And if this can come up through trade with Iran, they could go ahead and do it. However, looking at corporate governance from another angle, it seems the action was absolutely wrong. Mannino, (2009) states that “corporate directors owe fiduciary duties both to the corporation they serve and to its shareholders” (p11 – 3). A fiduciary duty is an obligation placed on an agent to act in the best interest of the principal who appoints him (Mannino, 2009). This means that the directors of Standard Chartered have the obligation to ensure that the entire organisation, was being operated in the right direction. This is because they owed the bank a duty of care to ensure that they perform their functions in good faith (Mannino, 2009). In the banking sector, this obligation is enhanced. This is because of the above mentioned issue of the fact that banks have to be run in a much more responsible manner since it involves public funds and the funds of the entire society. “Bank directors face enhanced liability to failure to supervise” (Garten, 2008 p82). This means that they have to act and pass their judgements in a very responsible manner. However as a convention, they are excused for making honest business errors in their decisions (Mannino, 2009). The organisational structure of Standard Chartered Bank is centred around the Chief Executive Officer, who happens to be Peter Sands. Under Peter Sands, there are various CEOs for the regions and strategic business units. The main regions are the EMEA and Americas zone and the Asia Region. Basically, these leaders are directly responsible for actions and activities that comes up. Standard Chartered Americas is primarily responsible for what goes on in the Americas. And it has to increase shareholder wealth and the director is responsible for the actions and activities of operations in that region. However, Standard Chartered Americas has an indirect obligation for what the CEO and the whole organisation does in the rest of the world, especially if it causes serious breaches under American law. Under American law, if there are major breaches by the global branch, they have a direct jurisdiction and control to shut down the American operations. And that is the action that the New York Financial Services Department sought to attain. In order to act responsibly, organisations have to come up with various types and forms of corporate governance. Organisational behaviour is regulated and controlled by two different models of corporate governance: the shareholder model and the stakeholder model (Ferrell et al, 2010). The shareholder model focuses on maximising the wealth of shareholders. Fundamentally, this is the essence of businesses and judging strictly by this model, Standard Chartered is an organisation that has absolutely no issues in this matter. And hence, this situation must not be called a fair attempt to maximise shareholders' wealth. On the other hand, the stakeholder model indicates that a business must be sensitive to the broader view and context within which it operates (Ferrell et al, 2010). A stakeholder is one who affects and is affected by the activities of an organisation (Freeman, 2011). This means that the stakeholder approach requires directors to be sensitive to the needs of relevant elements and aspects of their activities and operations. And this includes amongst other parties, employees, suppliers, government agencies and communities (Ferrell, 2010). This means that Standard Chartered owes an obligation to the government and being an international organisational organisation that transcends borders around the world, they owe a major duty of care to the international community and ought to respect international law. In this case, all civilized nations around the world rose up against Iran for two reasons. First of all, Iran disregarded international customs and held diplomats hostage. They turned a blind eye on the concept of diplomatic immunity and kept American diplomats in custody so the collective punishment must be observed. Secondly, Iran has been identified and accused with evidence of supporting terrorist groups and aggressors that is destabilizing the Middle East. In this case, every business operating in the international context would have to refuse to deal with Iran in order to enforce the sanctions against them. In all cases, an organisation should consider the interest of stakeholders and use appropriate ethical values to guide their decisionmaking processes to come up with the best actions (Brooks and Dunn, 2009). This means that Standard Chartered Bank should have considered the interests and requirements of the US government and international conventions at the point in time that they started trading with Iran and made the right decisions. In doing this, they have to draw a balance between corporate governance and corporate performance (Fernando, 2009). In other words, they should have balanced the need to make enough profits for their shareholders in the short run, against the potential survival and long-term interest of the company like the need to remain in business into the distant future. Clearly, the Iran situation seem to have tilted in favour of making profits in the short run and meeting performance target. They gave little consideration to the survival and reputational issues that led to the fall in the value of shares in the company within hours after the scandal became public. Change Management Applications to the Scandal The scandal involving Standard Chartered has had an effect on the bank in several ways. It has had a reputational issue with the bank. This is because most people, particularly shareholders and the public now sense that Standard Chartered is not ran as ethically as it should be. This is because the failure to check an important thing like this means that the directors have been very lax and are not very trustworthy. Also, employees are indicted for covering up and knowing about this thing but failed to blow the whistle on the bank. Secondly, some interest groups are likely to be very upset with Standard Chartered Bank's link to Iran. This is because Iran is seen as a threat to the Middle East. Nations like Israel and Saudi Arabia are under the shadow of an Iranian nuclear threat. Due to this, they have a strong tendency to seek all means to prevent Iran from getting nuclear weapons. And one of the most publicised tools used in the past decade was sanctions. However, in spite of the sanctions, it appears that Iran has continued developing nuclear weapons and nuclear capabilities. So now that it has come out that Standard Chartered Bank is the brain behind Iran's progress towards destabilizing the Middle East, these groups are likely to become hostile and less cooperative with the bank. This has a major impact on the bank's goodwill and its reputation. In order to gain any major comeback in this situation, Standard Chartered would have to undertake some important elements and aspects of change that would reassure the world that they can be trusted. This will enable them to win back their prestige and their r eputation on the international markets. According to the Wall Street Journal, some of the major shareholders are demanding change, particularly in the top level management and governance structures (Venkant and Enrich, 2012). They are seeking the inclusion of more independent directors to control and monitor ethical decision making and ensure that the directors are sensitive to stakeholder matters and risks (Venkant and Enrich, 2012). Clearly, there is the need for change. However, this change must be well managed in order to prevent stakeholder issues and other problems that might affect the behaviour and operation of the bank. Change management refers to the shifting and transitions that organisations go through to get to a defined future state (Paton and McCalman, 2008). This means that change management incorporates important elements and aspects of running a business and making significant adjustments in order to get to a certain expressly identified end. In this case, there are important changes that are steeped in ethics and the need to work in a manner that is legally and morally acceptable to all stakeholders. Also, there is the need for the company to incorporate these changes to the work environment so that it becomes a part of the culture of the whole bank. According to the Lewin model of change management, there is the need for three things: 1. Unfreezing 2. Change and 3. Refreezing (Simms, 2009). This means that some old practices and systems need to be discontinued. Once there is a discontinuation, there will be the need to institute changes in a manner that is appropriate. When the change is instituted, the way the dynamics and internal elements of the company reacts will lead to the creation of a completely new attitude and culture towards the new activities. This will cause the refreezing or consolidation of a new culture system and structure. Ethical Changes In terms of ethics, there seem to be four main things that are missing in Standard Chartered that needs to be re-examined. They are: 1. Transparency 2. Reputation risk management 3. Accountability and 4. Legal compliance in international conventions In order to do this, there is the need for the leadership structure to change. This is because the core function of the leadership is to conduct regular risk management sections and make changes where and when necessary. Due to this, the Standard Chartered Bank would have to get new independent directors who have no interest in the affairs of the business. They would continue to monitor and ensure that there are changes in the company. After this is done, there are tighter rules that require transparency and sensitivity to stakeholder issues. This will compel directors to become more responsive in their actions and try to become accountable for decisions they take. The old system of covering up things and remaining confidential in many cases that could be risk oriented should be discontinued. When this is discontinued, the new rules on transparency and accountability must be instituted. When new standards and systems are instituted, there should be a close monitoring by the risk management and internal auditing units. These units, although they exist in Standard Chartered would have to pay more attention to the activities in day-to-day matters and make report to the board from time to time. Also, the internal audit unit must focus on compliance matters and issues and ensure that these things are adhered to. With the new system structured and in place, there should be the implementation through directives to relevant directors and managers. Also, the new internal audit and risk management unit would need to start playing a more proactive role in the activities of the relevant managers. This will keep the ethical system and structures of the company in line and help to guarantee better results and actions throughout the banks. Corporate Culture The new ethical systems must become part of the organisation's corporate culture. In other words, there is the need to ensure that all units and segments of Standard Chartered becomes responsive and sensitive to the need to remain ethical and cooperate only in matters that are in the best interest of the bank's stakeholders. Corporate culture refers to the dominant norms and values that determines how things are done in a business (Schein, 2009). This means that the norms of operations would have to change in Standard Chartered Bank to enable the people to support the important elements and aspects of ethical behaviour. Thus, the management of Standard Chartered and the Board would have to ensure that there is a “continuing commitment by the business to behaving ethically and contributing to economic development” (Simms, 2003 p43). This means that they have to allow the company's new arrangement to become known to the other members of staff and help them to adjust and remain committed to attaining the ends of the new arrangements. The board must decide and the management must implement these changes (Parson, 2008). In practical terms, there would be the need to create compliance requirements to all units of the bank with linkages to the strategic changes relating to new ethics (Rezaee, 2008). In this situation, the changes will centre on transparency, accountability and legal compliance. This will provide guidelines on what and how each of the components and staff members of the bank must operate. Like the ethical changes, the principles of change management are also relevant here. First of all, there is the need to request for the affected areas of organisational culture to discontinue. This will include some extreme confidentiality requirements and other matters which requires employees to remain mute when they see that things are not right. Employees and members of the bank must be made to know that this is not going to continue gain. In lieu of these halts, there should be training and information of staff members about the new arrangements that would come up. This should include how to report matters to risk management units and internal audit units. The way to give information now and how to carry out actions will be emphasized at this point in the organisation. This can be done through training session and the circulation of directives on how things would happen. Also, the risk management teams and the internal audit unit must hold sessions on how they are going to operate differently. This way, the employees would be told their obligations under the new system and structure. After that, implementation should proceed. Implementation should include the operation of the new systems and standards. The reactions of employees and other members of Standard Chartered should be noted carefully. Areas of friction must be changed and areas where success are attained must be encouraged. Through this, there will be a change in culture and the company would become reformed and a new culture can be refreezed around the new implementation plans. Stress Management Generally, the process of unfreezing and refreezing comes with a great deal of adjustments and changes. These changes are likely to cause stress to employees of Standard Chartered Bank in several ways. According to Kottler and Chen, the three main areas of stress management that are applicable to this case are stimulus trigger in the environment, individual perception and subjectivity (2008). The changes in the environment is likely to cause stress. This is due to the fact that the need to become more transparent and the need for people's works to be vetted more closely is likely to lead to tensions and fears of the implications that may come up. Also, since this is a new situation, people are likely to have different ways of decoding the need to get things adjusted in the bank. They are likely to see it as a threat to their privacy in the workplace and this might trigger various kinds of differences which might not be so good. Additionally, the way changes would be interpreted is likely to vary. This is because the different units affected by these changes are likely to have different opinions about this. The result could be that there might be conflicts and other issues that may trigger differences All these would come together to cause stress and anxiety. The management of Standard Chartered would have to include stress management in the change process that would affect the ethics and the culture. The main tool that can be used is communication. They would have to do things in a transparent manner and all board meetings that would lead to relevant changes should be sent directly to workers of the bank. There should be period briefings and meetings with leaders like CEOs of business units. They should be made to relay their information to the other members and get them to understand things in a fair and rational way. This would dispel rumours and make it possible for people to understand things as they happen. There must also be a way of getting employees to air their grievances and present them directly to the appropriate quarters. This will cause employees to get enough relief and explanations for things that they do not understand. Counselling and psychological issues must also be taken seriously by the bank when the change is happening. This is because there is the need for some people to receive professional help so that their mental and psychological problems concerning this matter can be resolved. Conclusion This paper examined the case of Standard Chartered Bank and their breach of international sanctions by working with Iran. Clearly, this was an effort to seek the interest of the shareholders. However, from an organisational context, the management of the bank made a mistake because they should have balanced their long term existence issues by satisfying stakeholders and not just shareholders who had a relatively short term interest. The incident has caused reputational issues to the bank and in order to do this, there is the need for change to occur. This can be done through change management principles to ensure that all the various stakeholders, particularly employees get the right results in the unfreezing and refreezing of the activities of the bank. Changes must affect the corporate culture and this could lead to stress matters in the areas of stimulus, individual perceptions and subjectivity. This can be handled through strong communication and the provision of professional help to those affected. Appendix 1 Iranian U-Turn System: Courtesy BBC World Service Appendix 2 Figure 2: Standard Chartered Organisational Chart Standard Chartered Bank is a global financial institution with its headquarters in Britain. The company runs an organisational structure that is based on its geographical scope and operations. 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