What the SocGen Mess Means for Your Company

The trading scandal raises all kinds of questions about management's responsibility for employees' actions for creating a culture that may encourage bad behavior

by Gill Corkindale

Posted on Letter from London:January 30, 2008 10:38 AM

Paris is awestruck and aghast. Jerome Kerviel, the 31-year-old trader denounced by Societe Generale last week for bringing the French bank to its knees with a Euro 4.9bn loss, is on course for a potentially stunning reversal of fortune. He is now in hiding with his lawyer, facing a bidding war for his story and rumours about which A-list actor might play him in the movie of his life.

Kerviel, who was credited last week with perpetrating the biggest trading fraud in history, has naturally drawn fire from his employers. Daniel Bouton, SocGen's CEO, called him "a great pretender." The bank has portrayed him as a devious maverick who operated alone to gamble huge sums of money without his superiors' knowledge.

Yet, as the story unfolds, it is becoming clear that there were some serious issues with the bank's management procedures. Kerviel's bosses may also have known more about the trader's position than they earlier admitted. Kerviel had apparently attracted attention among his colleagues for his actions and internal checks last November showed he had been taking risky positions with large sums.

The trader's lawyers say he has 'committed no dishonest act' but that he has been scapegoated by the bank since his superiors had known what was happening. Kerviel has apparently given investigators the names of other traders who flouted the rules on how much money they could gamble and has said that his sole aim was to make money for the bank. He says he had already made £1billion for the bank and would have made more had it not sold his position in a panic.

In France, the debate is raging. Kerviel has been released on bail after being charged for abuse of trust and forgery, rather than fraud. Nicolas Sarkozy, the French president, has said he hoped Bouton would not "exonerate himself from his responsibilities" while the bank's shareholders are filing a lawsuit alleging insider dealing in SocGen's shares. In typically Gallic style, Kerviels' supporters have set up an appeal for bank workers to unite in his defence, claiming he was the victim of a cover-up to protect 'the incompetent managers who govern us'. He is now being hailed as the 'Che Guevara of finance' and the 'James Bond of SocGen' for his daring exploits.

Where all this will go is anyone's guess, but already it is revealing a rich seam of lessons for leaders, managers, bankers, economists, regulators, investors, and employees. My guess is that SocGen is only the first bank to be exposed in this way.

In the meantime, here are some of the questions that need answers:

— How far are you, the CEO or Chairman, personally responsible for an employee's actions?

— As CEO, how do you ensure that important information is being passed to you by your senior executives?

— What can you do as a manager if your concerns about wrongdoing are not heard by the hierarchy?

— Should an individual be punished for following tacit orders?

— Can you fully trust your colleagues and delegate responsibility for work that might jeopardise your own career?

— What power does the individual or team have to influence or change an organisational culture whose only driver is the ruthless quest for profit?

— How does the banking sector regulate itself in the face of such practices?

— What are the knock-on effects for the global economy of such practices?

— How far do these practices undermine the trust and confidence of SocGen's and other banks' stakeholders—investors, customers and employees?

There are many angles and questions left to explore, not least what made a 'solitary Mr Average,' in the words of the headlines, take such a phenomenal gamble? What are the key lessons here? And what is the best course of action for Kerviel—and his former bosses and colleagues?

Provided by Harvard Business—Where Leaders Get Their Edge