Commonwealth Bank of Australia Misconduct - Literature review Example

CBA Misconduct Name Course Lecture Date Introduction Organization that are involved with the handling of investor funds run the risk of getting caught in fraud scandals. It falls on the organizations leaders to handle the crisis properly and restore investor and customer confidence as soon as possible. Proper handling of such a crisis should see the organization rebound from the fraud crisis. A crisis response plan is one of the best ways an organization can that such a crisis can be pre-empted and prevented (Seeger, Sellnow and Ulmer, 2012). Shareholders in the organization and other affected stakeholder expect top management to minimize the impact of the organizational crisis (Ulmer 2001). Top leadership must be able to handle the crisis properly by taking various aspects of crisis handling into consideration (Smits and Ally 2003). First, they should never attempt to deny culpability and claim ignorance of the misconduct. Neither should the organizations attempt to make its unethical action seem insignificant. Unfortunately, the CEO of Commonwealth Bank attracted the wrath of the Australian public. He arrogantly claimed that the compensation to customers affected by the financial planning scandal would have little consequence to the organization margins. A proper crisis response would have followed a pre-established course of action. This paper discusses the Commonwealth Bank of Australia response to the financial planning scandal that has engulfed the bank since 2013. It starts by an analysis of the financial planning scandal which runs ten years back. Secondly, it analyzes the CBA’s shortcomings in responding to the scandal. Thirdly, it recommends the appropriate action the CBA should have taken to successfully handle the crisis. Case Analysis According to Butler and Ferguson (2014), the CBA was involved in an unethical scheme involving offering misleading advice about the kind of investment product their money will be put into. Between 2003 and 2012, the giant bank had been secretly investing customer’s funds in high risk investment schemes without informing them. Worse, CBA employees were accused of forging client signatures to fraudulently get their approval to invest their money into the high risk schemes. Over almost 10 years, the bank unethical practices continued, but as long as the bank was making profits nobody cared about the risk to clients funds (Butler and Ferguson 2014). However, the bank was exposed after an investigation by Fairfax media (Ferguson, A 2014B). The Fairfax investigation followed a letter correspondence between the banks customers and financial planners after the customer’s funds were lost in mysterious circumstances. Client funds adding up to millions of dollars were lost in the scandal. According to Ferguson (2014B), the bank blamed the global financial crisis on the loss of funds that were experienced. However, recent investigations reveal that Rogue financial planners at the CBA put clients’ funds at extreme risk by investing them in high risk investment products (Creigton 2014). The CBA became an immediate target of the ASIC; the financial services regulator in Australia. Later, the ASIC was accused of taking too long and doing too little to punish the perpetrators of the scheme (West 2014). Several, financial planners involved in the scandal were banned for life from holding position in the Australian financial industry. But the ASIC did not take any step to punish the bank or its top management. The CBA’s reaction to the scandal has also been criticized for being insensitive and inadequate. Similar cases Indeed the rogue act of the CBA financial planners are not isolated incidents. In fact, the global financial crisis was a result of rogue trading and greed among agents entrusted with client funds. In 2011, a financial planner for the Swiss Bank UBS lost over $2.3 billion of client’s money after making rogue investments (Der Spiegel 2011). However, the UK authorities responded adequately by prosecuting and jailing the 31-year Old investment broker. The bank’s Chief executive resigned shortly after the scandal. In contrast, the unapologetic Chief Executive of CBA has remained in office despite the embarrassing scandal occurring during his watch. Between 2007 and 2008, Jérôme Kerviel lost billions of client’s funds in rogue investment. Kerviel was then an employee of giant French bank Société Générale. Der Spiegel (2011) faults banks for failing to take tough measure like prosecution and firing of top executives to stop these situations from recurring. The inadequate response to such situations by banks and regulatory bodies give the impression that banks are above the law. The failure of the financial sector to deal with rogue trading has also caused a major loss of public faith in banking institutions. The Response The CBA has been criticized in recent times because of its inadequate and arrogant response to the financial planning scandal. It took a whole week for the CEO of the CBA to react to the accusations of fraud and unconscionable conduct levelled against CBA financial planners. The first response by the CBA was not an apology. Instead the CBA introduced a plan to compensate some of the clients who lost their funds when the high risk investment schemes collapsed (Creigton 2014). According to Ferguson, A 2014, the CBA seemed unapologetic over its unethical conduct. At one point the CBA CEO was quoted saying that the compensation they were offering the affected customers would not have an effect on the banks shareholders. Mr. Narev, the group Chief Executive only emerged seven days after the scandal began to issue an apology. The CEO claimed that the group was truly sorry and acknowledged the financial hardships it had caused the people (Butler and Ferguson 2014). However, most observers noted that the Chief executives apology was insincere as the actions of the bank were contrary to the statement. The poor response by both the bank and Australia securities commission (ASIC) led to people asking whether banks were above the law (West 2015). CBA has also been in the news for rewarding rather than punishing the bosses of the disgraced financial division. In August this year, the bank announced multimillion payouts for the executives who headed the investment division (Butler and Ferguson 2014). Pay rise and obscene bonuses were awarded to two of the bosses who headed the division at the time the misconduct occurred. The victims who lost their funds in the scandal complained bitterly about the banks move terming it as irresponsible (Ferguson, A 2014B). The banks action came in the face of senate findings that found the financial planning division had committed forgery, fraud and a management cover-up. Mr. Petersen the head of the financial planning division received a pay rise of $1.1 million taking his salary to a obscene $5.6 million (Butler and Ferguson 2014). Most victims and observers view this as a pat on the back for helping the bank continue its exemplary but dishonest financial performance. Another executive who was also in charge during the scandal now receives a salary of $3 million. Indeed, the CBA this year announced that it had made an obscene profit of $8.68 billion. The bonuses awarded to the banks executives have incensed many customer who lost their lifetime investment in the scandal. The bank is also expected to experience a backlash from some of its existing customers. Butler and Ferguson (2014) reported that some of the bank customers had defected to competitors as the banks response to the crisis is totally unacceptable. Nilsen (2010), argues that the bank should have used some of the funds to assist in efforts to unearth the fraud. Some commentators argue that executive receiving the kind of money CBA pays out would view the amounts lost by customers as “coffee money” (Butler and Ferguson 2014). The profits and the bonuses remain a point of focus in the scandal with many people still infuriated by the bank’s insensitive attitude (Ferguson, 2014). The bonuses have made the tragedy of those who lost their funds even more devastating. Unfortunately, the bank employee’s reap the rewards of customer’s investments but never share in the risk. Instead of using client’s money as instructed they use it to enrich themselves (Butler and Ferguson 2014). Despite these complaints, the CBA paid and promoted Mr. Petersen to head the business and private banking division (Butler and Ferguson 2014). When Mr.Petersen finally quit in the face of the financial planning scandal he took home a final payout of $1.3 million . Recommendations 1. Reduce Emphasis on Financial incentives According to Loewenstein, Sah and Cain (2012), the use of financial incentive is a good way of ensuring employee engagement rise. However, financial incentives can fuel unethical behaviour and discontent among customers. The fraud and financial misconduct at the CBA can be linked to the executive incentive program. Ulmer, Sellnow and Seeger (2010), argue that it is time to reduce emphasis as monitery incentive for employee performance. According to Gagnon (2013), managers should pay attention to intrinsic motivation which is more effective in improving employee engagement. Indeed, the global financial crisis was associated to the widespread use of financial incentive. The problem is aggravated by intense competition between the main players in the financial services industries. Firms are always under pressure to perform better than rival. Performance of organizations is most gauged on revenue and profits. This means some employee under pressure to contribute to the organizations profitability may involve them in irregular dealings. The agency theory argues that the primary role of corporate management is to maximize value for shareholders (Goodhart et al 2013). The theory has become a major contributor to financial fraud. Thus, the company offers incentives to its managers to ensure the organization is making profits (Gruman and Saks 2011). The financial reward system heavily rewards executives for short-term performances. Like other organizations that relied solely on financial incentives, the CBA compensation scheme proved disastrous as employee focus is solely on profits (Schrand and Zechman 2012). The Question of what is ethical or what is unethical is ignored in the cutthroat pursuit of profits. Organizations can offer other rewards like tangible prizes, holiday packages and others. However, finding the rights incentives for every employee in the organization is a challenge to many executive (Kompaso and Sridevi 2010). However, a well considered mixture of non-cash rewards will be equally effective in motivating employees. Adopt and stick to a Professional Codes of Conduct The CBA should adopt an organizational code of conduct to act as an ethical benchmark for the employees. The code of conduct should be strictly followed by everybody in an organization (Ritchie et al 2011). The CFA argues an effective code of conduct should be guided by (Center for Audit Quality 2010): Professional integrity and putting the interest of clients above individual interest Acting with competence, integrity and respect. Maintaining and developing professional competence. Best Practices Paine (2005) argues that the adoption of best practices for the financial management industry may reduce the risk of financial fraud. The organization should adopt a set of best practices which should be observed throughout the organization on a daily basis (Wang and Ritchie 2012). Such practices should include management setting the tone and establishing an ethical culture within the organization (Ahmed, Nanda and Schnusenberg 2010). Management should consistently reinforce the idea that ethical conduct should never be comprised. Scepticism is another best practice that can prevent financial misconduct. Management should also pay attention to inconsistencies and anomalies and critically question why such anomalies arise. Conclusion Serious misconduct by the CBA financial planning department was exposed recently to the media. The CBA financial planning had irregularly transferred millions of client funds to high risk investment schemes without their approval. In some cases, the banks employees were forging client signature and faking consent to switch funds to more risky investment. As a result thousands of the banks clients lost their hard earned deposits. The misconduct was exposed to the regulator (ASIC) which was later accused of taking inadequate action against the perpetrators of the scheme. The CBA itself responded inadequately leading to angry and disgruntled customers. The CEO took also too long to appear in public to address the public concern about the banks integrity. When he finally addressed the public he gave the impression that the bank regarded the scandal as insignificant. He only issued an insincere apology after pressure from various quarters. The CBA response to the crisis was viewed by many as arrogant and insensitive. In comparison to similar case the CBA response was indeed inadequate. In similar circumstance the CEO of the UBS bank was forced to resign. Some went as far as asking whether banks are above the law. Instead of firing and prosecuting the executives who headed the financial planning division, the bank promoted them and offered salary increments. Financial incentives have been criticized as they are linked to financial misconduct in many organizations. CBA has adopted a financial incentive system where executive who produce short term gains are heavily rewarded. The CBA offered some of the executive running the troubled financial planning department obscene salary increases. These salary increases infuriated some of the customers who lost their money in high-risk investment. Under pressure to perform, CBA employees went to the extent of forging client signature to allow for transfer of their funds to high yielding and equally high risk investment products. This paper recommends the use of alternative methods of improving employee engagement. It is unfortunate that the CBA continues to use monetary based incentives despite their association with financial misconduct and fraud. The paper also recommends the adoption of a professional code of conduct that will put client interest before those of employees. The code would have to be followed by every individual who handle customer’s funds at the bank. Finally, the paper recommends a set of best practices which may mitigate the occurrence of crisis involving financial misconduct. 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