Corporate Governance and Ethics Play at Royal Bank of Scotland - Case Study Example

Introduction Corporate governance is one of the most important aspects of contemporary management practices and require organizations to give due credit to importance. The recent corporate scandals such as Enron and World Com and subsequent introduction of regulations such as SOX indicated that the overall regulatory environment for the businesses may not be entirely easy as multiple expectations from organizations will force them to become transparent in their accounting disclosures and other issues. Due to corporate scandals of such high nature it has now been expected that the organizations will ensure the implementation of regulated code of conducts in terms of their corporate governance and will follow and implement certain regulations in order to provide a certain degree of confidence to their shareholders. However, despite such efforts organizations are still engaged into activities which raise significant ethical corporate governance. The recent moves by the RBS Bank to takeover ABN AMRO and subsequent failure of RBS to withstand the global credit crisis indicated a lot about the corporate governance issues at the bank and many shareholders as well as stakeholders raised serious concerns over the state of affairs at the bank.(Wighton,2009).Though subsequently RBS attempted to make good of the corporate governance issues and accounting disclosures that potentially hide different critical information from the shareholders however, the past practices of the management of RBS warranted for a need to reassess the corporate governance and accounting reporting mechanism in a bid to further ensure that the interests of shareholders are intact. This report will discuss the ethical corporate governance implications of the various ethical and corporate governance issues at RBS. Royal Bank of Scotland Royal Bank of Scotland is one of the oldest and largest banks in UK having more than 7000 branch network spread all over the country. RBS Bank is a part of The Royal Bank of Scotland Group and along with NatWest and Ulster Bank forms one of the most important and largest banking groups in the world. Established in the early 18th Century, RBS was part of an economic revolution that took place in the West and duly supported the economy by providing banking services initially in Scotland and than in England. Bank also subsequently expanded itself through acquisitions and merges with foreign banks in order to achieve exposure and entry into foreign markets. Its most recent acquisition of ABN AMRO- a Dutch Bank- however, raised certain reservations by the various stakeholders as this deal was considered as unfavorable to shareholders. This deal was the largest merger in the history of financial services industry and as such expectations were high however subsequent credit crisis potentially unfolded many important implications of this merger as many shareholders believed that this merger was entirely in the favor of all the stakeholders. The unfolding of largest losses in the British history by a Bank and subsequent underwriting by the British government raised strong concerns over the corporate governance issues in the organization and also exposed the role of various regulatory authorities to effectively ensure that organizations engage into ethical behavior and follow corporate governance rules and regulations. Ethics and Corporate Governance- A Theoretical perspective Ethics is also one of the most important aspects of contemporary organization as increasing demands from different stakeholders require that the organizations must not engage into activities which are considered as unethical. The sustainable leadership ethics is therefore considered as an iterative process as it requires continuous improvement of the various inputs, actions and their output. There are two major philosophical foundations of the ethics in general which are also applicable to the organization and work environment too. These two systems or philosophical foundations are the deontological and the teleological ethics systems and are largely based on the writings and ideas of Kant and Stuart Mill. The deontological system of ethics often reflects upon the individual’s capacity to apply the universal laws of ethics regardless of the actual circumstances. According to this set of principles, ethics are considered as universal and everyone has to follow them in their true spirit. This school of thought if applied to the leadership and ethics within the organization would suggest that the leaders have to follow a certain pre-defined path while negotiating with the issues of ethics and ethical behavior. The implications for such course of action however can be significant too because of high follower expectations that the leaders will demonstrate a particular set of values and ethical behaviors and any off-tracking from such values may result into employee demoralization and de-motivation.(Duarte,2008). Teleological system of ethics however broadens this concept of ethics and discusses it in much larger perspective by also including the relevant consequences of such ethical behaviors or actions also. The ethical implications under this system of ethics are therefore largely focused not on the universal laws of ethics but it discusses the rightness and wrongness of an action from the view point of its consequences. It also means that those actions which may be apparently unethical can be ethical if their actual and overall outcome is in the favor of the majority. This school of thought also therefore gives more credence to those actions of leaders which may be unethical from one point of view but their consequences may be beneficial to the organization as a whole. This also therefore requires that the leaders may engage themselves into activities which can be potentially unethical but their outcome may suggest something else. For example, Wal-Mart has often been accused of many ethical violations, exploitations of suppliers from third world but on the other hand, it has been able to contribute towards increasing the overall well being of the millions of its customers by offering products at low cost thus allowing them to save cost. There is also another important issue of corporate governance and the ethical behavior of the firms and their leadership. The corporate scandals of Enron and World Com have shattered the myth of responsible and ethical corporate behavior thus investors have become relatively more cautious about the different aspects of doing business and are largely questioning certain actions of the organizations. Since shareholders of the firm are often not directly involved in the management of the affairs of the firm and have to rely on the managers and leaders in carefully creating the value for them. In such a scenario, the overall ethical responsibilities of the leaders increase manifolds therefore in order to run the firm in most tactical manner, it is important that the leaders must inculcate an environment of trust as a part of the culture of the organization.(Bhasha,2004). Ethics, Corporate Governance and RBS RBS Bank was exposed in the recent times because of its failure to disclose important accounting information to its board as well as to its shareholders. Billions of dollars of toxic debt in shape of subprime lending which was purchased by the traders of RBS was concealed and not reported to different stakeholders. It is important to note however that the traders who acquired this toxic debt were showered with heavy bonuses and were performing their activities without significant check from either the board or the management.1 This issue is significantly important from the view point of corporate governance and its ethical implications as the important accounting information was concealed and top management of the firm repeatedly informed the general public that RBS does not engage into subprime lending despite the fact that more than 30 billions of subprime lending was made by RBS. It is also argued that the board at RBS was not significantly more active in performing its traditional roles besides ensuring the role of overseeing the corporate affairs of the firms. Studies indicate that the role of members of the board specially in banking sector is directly linked with the incentives provided to the members of the board in terms of monitoring and advise management.(Alonso & Gonzales, 2006). Thus the overall role of members of the board at RBS was also limited to the level of incentives provided to the members. The subsequent events after the bailout witnessed clearing of the board as government appointed non-executive board took over from the previous one to take charge of the affairs of the bank. It is also important to note that most of the top brass of the firm did not have the proper banking qualifications and admitted of not knowing or having the capability to forecast or anticipate future changes. It was openly accepted by the top management of the firm that they underestimated the extent of credit crisis and despite all the indications went into the acquisition of ABN AMRO in one of the biggest deals in the history of financial services industry. It was also because of this reason that most of the important accounting disclosures were not made by RBS. Studies further indicate that there is a positive relationship between the “proportion of non-executive directors and performance of the banks”. (Alonso & Gonzales, 2006). However, the composition of board at RBS was largely based on the executive directors who tend to oversaw all the affairs of the firm and make important strategic decisions. It is also reported that the RBS helped Enron in concealing its various accounting disclosures and as such the role of RBS’s subsidiaries in US were fully aware of the accounting practices of the firm and as such assisted few officers of the Enron in violating their fiduciary duties.2 Lessons Learned From accounting and finance perspectives there are different lessons that one can learn from this episode at RBS Bank. First, there was a clear attempt to conceal and circumvent the facts through the creation of special purpose entities which purchased subprime loans from US financial institutions which were off-loading their own garbage. Further, it was also reported in the press that the higher management of RBS was constantly reminding the board that it is not going to engage into subprime market despite the fact that RBS was already into it. These actions indicate the overall ethical consequences of such actions because at one hand, due to non-reporting of these transactions, shareholders suffered huge losses but also the tax payers money have been spent on the bailout plan for the bank. Further, the pension and benefit policy for the executives of the firm also raised widespread concerns because in absence of any significant performance, bank was offering huge bonuses to those executives who were behind the actual failure of the bank. Further the accounting practices adapted by the RBS were also considered as questionable because the accounting disclosures made did not truly presented the actual affairs of the firm and as such even the auditors of the bank failed to anticipate any significant changes that resulted into such disaster. Conclusion Corporate governance and ethics play an important role in managing the affairs of the firms and as such business are required to follow in order to ensure that business is engaged only in those activities which are in the overall benefit of all stakeholders. The emergence of corporate governance and ethics within the discipline of accounting and finance indicate that the various accounting and financial information presented by the firm shall reflect the actual condition of the firm and as such must be in a manner which assist shareholders in making more prudent decisions and management of the firm is required to take actions which can potentially increase the shareholder value. RBS Bank was one of the largest banking groups in the world however the past few years it was engaged into activities which raised significant ethical issues of importance. The disaster at RBS was considered as the tip of the iceberg as RBS CEO deliberately lied that the RBS was not into subprime lending market. Due to this stance of the top management of the firm all such transactions were concealed from reporting into the financial statements of the firm and as such almost all the stakeholders including government was misinformed about the affairs of the firms and future direction of the firm. References 1. Alonso, P (2006) Corporate governance in banking: The role of Board of Directors Universitat Autonoma de Barcelona., Available: http://ideas.repec.org/p/bbe/wpaper/200604.html Last accessed 16th August, 2009 2. Bhasa, M (2004) Understanding the corporate governance quadrilateral. Corporate Governance. 4 (4) 7-15 3. Duarte, F (2008) What we learn today is how we behave tomorrow”: a study on students perceptions of ethics in management education. Social Responsibility Journal. 4 (1) 120-128 4. Wighton, D (2009) Corporate governance cries out for reform Times Online, Available: http://business.timesonline.co.uk/tol/business/columnists/article5927876.ece Last accessed 14th August, 2009 Read More