The Scandal Effect
Shops will swindle
Owners swindle
To ensure the store will fail
Pull a fast one
It’s not the last one
Not even one knight[1] in gaol!
Our politicians
Clever magicians
Always ready to do a deal
Profits record breaking
It’s all there for the taking
Life is one big steal!
(From “Alles Schwindel”, a Berlin Cabaret Song by Marcellus Schiffer, 1931)
Introduction
This is the first edition of the FIX & FIDDLE magazine. It is edited by a small team of Business & Consumer Psychologists who strongly believe that future successful businesses will have to become more transparent, more honest, and more responsible to a wider audience of stakeholders than currently is the case. ‘Success’ for the enlightened businesses of the 21st Century will mean being able to attract the most talented employees who can identify with the core values and philosophy of their chosen organization. Similarly, loyal customers who are committed to the brand will in return demand a high standard of responsible behaviour from the business.
Our research at the Synaptic-Spark Factory[2] is focussing on dysfunctional organizational behaviour and its subsequent consequences. We have quickly become aware of the growing concern about the poor decision-making at some of our largest and well-known brands. These dodgy-decisions range from self-serving salary and bonus hikes (e.g. John Fallon at Pearson[3]), Dickensian-treatment of employees (e.g. Sports Direct[4]) to morally suspect activity and borderline criminal behaviour (e.g. Sir Phillip Green of BHS[5]).
These and other blatant examples of unchecked appetites, delusional decision-making, deceptive behaviour and spineless cowardice in the face of moral obligations and social responsibilities has led to calls from the larger investment companies and some prominent politicians for serious changes in the Governance of businesses and the make-up of their boardrooms; here is the draft manifesto of the UK’s Prime Minister for a shake-up in the boardrooms:
Teresa May’s recipe for corporate responsibility: her 5 key ingredients
- Put workers on boards
Workers add to the diversity of Boards and offer a different set of values and perceptions on the business. This would also support investors’ calls for more restraint on directors’ pay. It might also mean a more equitable share-out of the profit-pie and a healthier atmosphere in the organization and a greater perception of ‘fairness’ in society generally.
- Publish pay-ratios
There is increasing pressure from various think-tanks (e.g. High Pay Centre) calling for measures to make companies more transparent. Part of this would be the compulsory publication of the ratio between the chief executive’s pay and the average company worker’s pay. A further restraint on the runaway self-gratification gravy-train of boardroom pay would be the introduction of a legal framework to make shareholders’ votes on Directors pay binding and not just advisory as it is now.
- Involve all stakeholders in a business
People outside the boardrooms are calling for a more enlightened approach to business in the future. Why, in the 21st Century, should businesses exist just for the benefit for the few? This is the traditional capitalist philosophy, which belongs to a by-gone age that had its heyday in Queen Victoria’s reign. Businesses should now recognise their wider responsibilities to their employees, communities and the environment. The narrow focus on share-holder value needs to be changed and a more diverse and inclusive attitude introduced that can be backed-up by legal and economic contingency schedules.
- Require a high standard of behaviour from company directors
The BHS collapse has highlighted the need for a higher-calibre of directors on boards to scrutinise decisions and speak out when necessary. This sought-after improvement in skills levels and core integrity will involve would-be Board members having to undertake a series of stringent tests (Company Director Assessment Centre) to assess their intelligence, personality and other psychological characteristics. These would lead to a professional qualification and certification for Directors. This screening and selection process would protect Boardrooms from weak and dysfunctional personalities who allow personal appetites to influence corporate decision-making.
- Government must play a part
If the benefits of businesses are to be shared more equitably, Government must develop policies that offer people economic security. Working households need stability of employment (not zero-hour contracts) and affordable support services such as child-care, fuel supply, together with a fair rent system that is controlled. The Government requires a socio-economic system that allows businesses to thrive responsibly and where people are satisfied with ‘enough’ rather than stuffing themselves with more than their fair share, just because they can.
“Fix & Fiddle” supports this call for organizations to accept a greater role in society and for business leaders to have the courage to take-on a more visionary role with moral and ethical responsibilities, guided by a keen sense of duty to all stakeholders in the business, including the dumb-environment.
Aim
The main aim of FIX & FIDDLE is to collect together in a single volume the many examples of poor decision-making that take place in UK organisations at the highest Executive levels each year. The motivation for doing this is not to criticise businesses generally, but rather it is to highlight how a few errant executives are costing individual firms, investors, employees, communities and the UK economy millions of pounds.
Their poor decision-making has embroiled businesses in legal action, created malodorous headlines and tainted the Brand Images of the organisations concerned with disastrous effects on sales, profits and share-prices. Employees at scandal-hit companies also experience a ‘hidden’ collateral penalty in the job market. Even if they can clearly show that they were not involved in the ‘dodgy ’decision making, their own ‘image’ is tainted by association and future earnings are negatively affected.
The Psychology of Brand Stigmatization
“Stigmatization” (as defined by Erving Goffman, 1963) is the discrediting and rejection of an individual e.g. Sir Phillip Green, a brand e.g. Barclays or even whole industries e.g. banking, because of a perceived association with a reckless, amoral or harmful decision that has been taken willingly. (The important point psychologically is that the wrongdoing must be perceived as an active choice; accidental transgressions of social norms and values are usually tolerated).
Organisational stigmatization can lead to consumer boycotts, social media trolling, negative WOM, and the collapse of employee confidence and morale. The stigmatization is contagious and can spread through whole industries leading to a general malaise that affects talent recruitment and retention.
Stigmatization is a process that happens at the emotional level without much conscious thought. It is a “disgusted” response that springs from subconscious instinctual behaviour; designed to help us avoid contamination by distancing ourselves from moral wrongdoing and deviancy (or any kind of pollution and infection).
Summary
Brand stigmatization is a phenomenon created by poor decision making from within the organisation. It is a psychological concept and exists in the minds of consumers. It can be looked upon as a negative or shadow brand image that, if left unchallenged, will destroy a business. The stigma is contagious; employees in a business and other firms within an industry can quickly become contaminated through “guilt by association”.
There is no quick cure, only a long period of hurt and pain until the links between the Brand and negative associations weaken with time. The quick Fix & Fiddle does not work!
“Management is doing things right; leadership is doing the right things[6]”.
We hope you find this issue both interesting and eye-opening!
Dorothy Spry & Nigel Marlow
Editors
Contents
- Volkswagen emission scandal £14.0 billion
- RBS covers “costly mistakes” £2.5 billion
- Fraud at TESCO
- The “Panama Papers”
- The ‘good-guys’: British Aerospace & Aston Martin
- The Banking Industry’s Bonus Culture £53.0 billion
- At first VW; now Suzuki & Mitsubishi have emission problems
- RBS again! Deliberately ‘distressing’ small-business clients £550.0 million
- New laws to help identify ‘shy’ business owners
- More detail about the misdemeanours of the Bankers
- Theresa May’s new recipe for a ‘Boardroom-Mix’
- The new phenomenon of Lending Clubs
- Mike Ashley, the Mr Bumble of Sports Direct
- Barclays Libor-fiddlers escape justice
- HSBC fined for lack of control £216.00 million
- HSBC fined for lack of control again £1.5 billion
- Kids Company collapses £42.0 million
- Sir Phillip Green’s cat’s arse £571.0 million
- Wells Fargo Bank fraud £150.0 million
- Tesco Directors charged with fraud
- An article explaining ‘Brand Stigma’
- Lloyds Bank mis-sells PPI £17.0 billion
- BHS co-conspirator arrested
SCORE for April-September 2016
Attempted FIXES: 8
Attempted FIDDLES: 12
Total Cost of the FIXES & FIDDLES, an estimated: £89.91 billion
- VW investors seek around $9 billion in damages over emissions scandal
About 1,400 lawsuits have been lodged at the regional court in Braunschweig near Volkswagen’s (VW) Wolfsburg headquarters in Germany. This is a poor celebration for the VW Brand close to the anniversary of its diesel emissions test-rigging scandal.
The case put against VW is that it didn’t inform its shareholders quickly enough over its cheating software, which was installed in around 11 million vehicles worldwide.
VW has so far set aside about $18 billion to cover the cost of vehicle refits and a settlement with U.S. authorities, but analysts think the bill could rise much further as a result of more lawsuits for damages and other regulatory penalties.
(Ref: https://uk.finance.yahoo.com/news/vw-investors-seek-8-2-085549218.html)
- RBS earmarks £2.5bn for ‘clean-up’
The Royal Bank of Scotland (RBS) has set aside an extra £2.5bn to ‘clean-up’ past mistakes, which will push the bank into a loss for 2015. In a statement, the taxpayer-backed bank said it was setting aside another £500m to pay for payment protection insurance (PPI) and £1.5bn for bad housing debts in the US. Chief executive Ross McEwan said: “I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank.” The ‘clean-up’ will include an enhanced schedule to repay the deficit in the business’s pension fund.
- Tesco deliberately delayed payments to suppliers to boost profits
The watchdog for the grocery trade, GCA (Groceries Code Adjudicator), has found that Tesco deliberately and repeatedly withheld money owed to suppliers as a business strategy, with the aim of artificially boosting its sales performance figures. This pressure on suppliers seems to have coincided with Tesco’s presentations of results to City investors. This potentially fraudulent misreporting to the stock market is now being investigated by the SFO (Serious Fraud Office).
The GCA also uncovered another possible corrupt practice, whereby Tesco suppliers were ‘encouraged’ to offer ‘inducements’ in order to reserve premium shelf-space for their products.
The Groceries Code Adjudicator (GCA) also said that the supermarket would encourage suppliers to give extra cash in return for more control over where products appeared on shelves or to avoid losing out to rivals.
- The Panama Papers
On 3rd April, 2016, it was announced that a whistle-blower at the Panama-based law firm Mossack Fonseca had been systematically leaking documents, which gave details of how members of the world’s rich-list are dodging tax payments. There are over 11.5 million documents naming names of ‘dodgy’ people, including David Cameron’s millionaire father, who have enough money to employ accountants and legal advisors in order to exploit legal loopholes and avoid paying tax dues. As seems usual, the law favours the rich in this instance, because tax avoidance is perfectly legal. However, if you cannot afford to avoid tax, then not paying it becomes tax evasion, which is illegal. Therefore, tax avoidance is ‘good tax-dodging’; whereas tax evasion is ‘bad tax-dodging’.
Only a few snippets of the leaked information have so far been published. It will be interesting when further revelations are made; and perhaps even more interesting if the remaining details become ‘lost’!
(Ref: http://www.thecanary.co/2016/04/04/establishment-excuse-panama-tax-scandal-heres-utter-bullsht/)
- BRAND REPUTATION
Only two UK companies have managed to make it into the top 10 of the Reputation Institute’s UK ‘RepTrak 150’ list of the most reputable companies in Britain. The list rates companies that operate within the UK market on their ability to deliver on stakeholder expectations on seven areas of reputation: products and services, innovation, workplace, governance, citizenship, leadership and performance.
Only two ‘home-grown’ companies achieved a top-10 ranking; Rolls Royce Aerospace and Aston Martin placed fifth and sixth respectively.
The UK’s most reputable companies
- Lego Group
- IKEA
- BMW Group
- Sony
- Rolls-Royce Aerospace
- Aston Martin
- Rolex
- Samsung
- Bosch
- Kellogg’s
(Ref: https://www.icas.com/ca-today-news/uk-plcs-lag-behind-in-list-of-most-reputable-companies)
- THE TRUE COST OF BANKING BONUSES
Recent research by Associate Professor Iain Clacher has revealed the true extent (so far) of the cost of the Banking Sector’s ‘bonus culture’. Lawsuits and fines for misconduct have cost the UK’s retail banks in the region of £53 billion over the last 15 years. However, as yet, there has been no concerted effort to change the business culture. This is because the cost of the misbehaviour has been passed on to the tax-payer. The bonus –beneficiaries have kept their money and have so far escaped any scrutiny by the relevant watchdogs or legal institutions.
(Ref: http://business.leeds.ac.uk/about-us/article/the-cost-of-banking-sector-scandals/)
- A Carload of Trouble
Mitsubishi have admitted to cheating fuel efficiency tests in order to circumvent new regulations introduced in 1991 by the Japanese Government. Mitsubishi’s shares have tumbled 50 per cent and the company’s president, Tetsuro Aikawa has resigned adding, “The wrongdoing was intentional. It is clear the falsification was done to make the mileage look better. Why they would resort to fraud to do this is still unclear”.
Suzuki has also announced “discrepancies” in fuel economy and emissions testing. Its shares have fallen.
Meanwhile, Volkswagen has asked shareholders to support the decisions of its senior management in the wake of the emissions scandal. Currently ‘no evidence can be found’ to suggest a decision to fit defeat devices to VW cars was made at boardroom level. The financial effects of the emissions scandal appeared in VW Group’s annual results, which estimated a loss of 1.36 billion Euros. The company has also put aside 16.2 billion Euros anticipating lawsuits worldwide.
- RBS-tards!
The Royal Bank of Scotland has been accused of “artificially distressing viable businesses via their Global Restructuring Group (GRG) in order to confiscate assets”. The bank now faces legal action from coalitions of previous business-owners, claiming compensation for ‘a forced insolvency processes. The claim amounts to £550 million. In a 2013 report from the Department of Business, Innovation and Skills, accused the bank bosses of being biased and resorting to “heavy-handed and abhorrent behaviour in the pursuit of profit. A full report on this GRG scandal is being prepared by the City’s Financial Conduct Authority (FCA) focusing on RBS’s attempt to defraud its business customers. In 2015 the Bank set aside £2.9 billion to pay for the amorality and questionable legality of its decision making.
http://www.exaronews.com/articles/5813/royal-bank-of-scotland-faces-call-to-compensate-grg-victims
- Who are the fat controllers?
From April 2016, UK companies will be legally required to identify and maintain a public register (PSC register) of the people who own or control them. Failing to comply will be a criminal offence and may result in a fine and/or a prison sentence of up to 2 years.
The measures have been introduced as part of the government’s effort to increase transparency over the ownership and control of UK businesses so as to avoid money laundering, tax evasion and general abuse of the corporate structure.
- Who are these Bankers?
UK banks have been forced to set aside more than £53 billion since 2000 to cover the costs of dodgy decision making. The PPI scandal alone required at least £37.5 billion for fines and compensation for the strategy of selling unnecessary insurance cover.
New City Agenda, a City think-tank, is calling for change in the culture in the financial and banking industry, which at present seems focussed on aggressive selling of dubious products and services, and free-floating bonus schemes.
The behaviour of the banks is tantamount to ‘brand-suicide’. Individual brands such as Lloyds and Barclays have lost reputation and the trust of the public. As an industry, banking has now replaced estate agents and politicians of the opprobrium heap!
Investors should be asking themselves whether the current Board Members and Top Executives of the Banks are up to their jobs. The profitability at the big banks has effectively been wiped out by scandals brought about by allowing dysfunctional individuals make recurring dodgy decisions.
As an example, Barclays have paid out billions of pounds in fines for amoral and illegal behaviour, reducing their earnings in the period 2012-2015 to near zero. Jes Stanley, the new CEO has promised to change the culture at Barclays so that it is more sensitive to issues facing its customers and society as a whole. A refocussing of the business’s values is required to help welcome aboard more diversity and promote a change in attitude that is more inclusive and meaningful for staff and clients.
http://uk.businessinsider.com/ten-biggest-bank-scandals-have-cost-uk-lenders-53-billion-2016-4
- Bad behaviour in the business playground
Theresa May has vowed to reform the way some business leaders behave. It appears that a few have scant regard for the welfare of others and ‘run amok’ within their organisations and are responsible for amoral, anti-social and downright illegal behaviour in the wider economy. These rotten apples in the business-barrel, not always of the ‘Sweet Green’ type, are according to the Parliamentary Committee looking into the BHS collapse, the “unacceptable face of capitalism”. The Prime Minister wants businesses “that ‘work’ for everyone in society and not just the privileged few”.
The Guardian reports on ideas that might be tried to make the way businesses are run more virtuous.
- Greater Diversity on the Boards of Companies: This means drafting-in members from all the stakeholders of the company, employees, customers, and perhaps suppliers. More enlightened businesses might, Heaven forefend, even look at the gender, race and age ratios on their boards, and be prepared to lose a few ‘old-farts’ whose current position stems from their membership of the non-executive circus that tours golf-courses, luncheon-clubs and boardrooms with equal effectiveness.
- Transparency of salaries and bonuses: A further control mechanism would be the publishing of earnings and in particular the pay-ratio between the CEO’s disbursements and the average pay of the company’s employees. Business brands, pursuing more equitable remuneration policies can benefit from an enhanced brand-value, such as that enjoyed by John Lewis.
- Allow business leaders to be more authentic: At the moment in UK law, company directors are obliged to make business decisions in the interests of the shareholders only. This usually means choosing decisions which have the best cost-benefit ratio for investors, which lead to higher profits and higher dividends. However, the decisions of business leaders usually always have an important impact on the well-being of other stakeholders such as employees, local communities and the environment. Business leaders need to be more aware of the greater responsibility they carry. New regulations are required to soften the mantra “maximise shareholder value” and allow business leaders to behave according to their true-selves.
- The need for careful screening and selection of business leaders: It follows that if business leaders are to be trusted with the wider responsibility of looking after the welfare of employees, communities and the environment, then it is necessary that such leaders are of high-calibre. They need to have a set of values that gives them a strong moral compass, a sense of justice and the courage “to be themselves” in the face of pressure to go along with dodgy decisions. The Institute of Directors has since published a booklet setting out their expectations of the behaviour of directors at companies of all sizes and types. However this falls short of the necessary screening of Directors for potentially dysfunctional, socially-pathological and illegal behaviour, and makes their call for “more training” sound like more of an excuse for the status quo.
https://www.theguardian.com/business/2016/jul/30/five-ways-reform-capitalism-bhs-scandal-theresa-may
- P2P or not P2P; beware the bandwagon-effect as investment funds move-in to “wet their beaks”
With formal interest rates bumping along at all-time lows and traditional financial institutions still unenthusiastic about small business loans, peer-to-peer lending is being hyped as the new way for businesses to obtain funding. At the same time peer-to-peer lending offers investors a more attractive return. Peer-to-Peer lending cuts out the ‘middlemen’ (and their commissions) by arranging for savers to lend money to individuals or businesses in the form of a loan.
It is a rapidly growing market with over £700m of loans being made in this way since the beginning of 2016. However, it is unclear how risky this form of arrangement can be, and defaults on the loans can mean savers losing their cash.
In the USA, the very successful P2P Company, Lending Club, is being investigated for falsifying the paperwork on the sale of financial products, which involved the ‘bundling’ of ‘near-prime’ loans and their sale to the investment bank Jeffries. It also appears that the Lending Club founder, Renaud Laplanche, has attracted further investigation from the U.S. Department of Justice and the U.S. Securities and Exchange Commission focusing on a $720,000 ‘family loan, and has since stepped-down.
Two UK-based P2P companies, Global Investments and VPC Speciality have denied any dealings with Lending Club.
The share prices of P2P Global Investments fell 2.6% and that of VPC Speciality by 1.9%. Remember, the value of your investments can fall as well as rise.
- “Mr Bumble…..can we have some more please?”
Mike Ashley, the SPORTS DIRECT ‘beadle’ is under fire as the result of a recent parliamentary report, which accuses the brand of “Victorian practices” in its shops and warehouses.
http://www.breakingviews.com/considered-view/sports-direct-scandal-debunks-uk-employment-glory/
- BARCLAYS ‘LIBOR-ated’, but FIDDLERS free!
Three former BARCLAYS’ traders were found guilty of conspiracy in July 2016 for manipulating LIBOR[7] between 2005 and 2007. Although some individual traders were falsifying the rates for personal gain, it seems there was a systematic attempt to conceal the availability of funds and hence the true cost from investors and business customers. It seems that there was a high-level decision in BARCLAYS to maximize profits by artificially maintaining lower levels of LIBOR interest rates. This decision may have been sanctioned at Government levels.
The Bank of England had warned BARCLAYS (via a phone call between Paul Tucker, Deputy Governor and Bob Diamond, then head of Investment Banking at BARCLAYS) about its LIBOR rates, and the scandal that might be about to break. Bob Diamond is known to have ‘instructed’ his traders to lower the rates, and these were readily accepted by subordinates as they were given the impression that the orders emanated from the Bank of England.
Later Tucker denied any record of the conversation being specifically about LIBOR, “I greatly wish there were a note of it.”
In December 2013, Tucker received a knighthood for his “substantial contribution to the stability of the U.K. economy and financial system.”
https://www.bloomberg.com/view/articles/2016-07-05/the-real-libor-scandal-may-be-who-isn-t-in-court
- HSBC’s Mr. FIXIT
A former HSBC currency trader is accused of dodgy dealings involving the artificial manipulating of exchange rates ahead of a £2.7 billion deal for the oil firm Cairn Energy in December 2011. Telegraph Travel Collection Stuart Scott strongly denied any wrongdoing after an arrest warrant was issued by the USA authorities and the possibility of extradition arose. Scott’s former colleague and Global Head of HSBC’s foreign exchange, Mark Johnson was meanwhile bailed for $1 million.
The US Department of Justice allege that the pair of Mr Fixits generated £6 million profit for themselves by driving up the price of sterling just ahead of the Cairn Energy trade. The cost of the £6m was borne by Cairn Energy having to trade $3.5 billion into sterling at a poorer exchange rate.
HSBC was fined £216m for the lax supervision of its traders, with the Financial Conduct Authority saying its failure to control HSBC employees’ activities “undermines confidence in the UK financial system and puts its integrity at risk”.
HSBC has since carried out an internal review of the Cairn Energy trade and cleared the pair of FIXITS of FIDDLING.
http://www.telegraph.co.uk/business/2016/07/21/former-hsbc-trader-denies-fraud-claims/
- HSBC’s DODGY DECISIONS BRING “reasonable returns”
Stuart Gulliver, the chief executive of HSBC, described the Bank’s performance as “reasonable in the face of considerable uncertainty” as profits fell by 29%. This slump in the brand value comes in the face of allegations that senior HSBC management have been involved in the manipulation of currency trading with the intent of defrauding clients (see 15 above).
This has been followed by news of compliance issues with US authorities with regard to guarding against financial crime, which in layman’s terms means doing nothing to curb the illegal activities of HSBC’s customers in the realms of TAX EVASION and MONEY LAUNDERING.
Four years ago HSBC was fined $1.9 billion by the US authorities for lack of proper diligence relating to money laundering, and has since been warned about the slow pace of the required improvement in the moral and ethical screening of staff, in order to combat CRIMINAL behaviour.
- “As the purse is emptied the heart is filled” Victor Hugo
“It is not the job of the CHARITY COMMISSION to regulate and police UK charities.” In making this statement, William Shawcross, the Commission’s Chairperson was placing the responsibility for recent less than charitable behaviour firmly in the lap of the trustees of individual organizations.
The Charity-Scandal headlines have been grabbed by KIDS COMPANY, which was headed by Camila Batmanghelidjh, and which collapsed despite £42 million of funding from the Government. This was closely followed by the exposure of the dodgy relationship between AGE UK and the power company EON. The ‘arrangement’ allowed EON to target elderly people with power supply contracts that had their prices DECEPTIVELY inflated.
EON has a really strong Brand reputation.
“The Charity’s Trustees ought to have stepped in to prevent these and other problems.” Pontius Shawcross defended his position without any sign of embarrassment about the rising number of stories about mismanagement in the sector, which includes over-aggressive fund-raising, tax-avoidance and the lack of accountability for the destination of millions of pounds of tax-payers money.
https://www.ft.com/content/d42d924e-5f99-11e6-ae3f-77baadeb1c93
- ‘Sir’ Phillip Green’s Legacy – a Testament or Trash!
“The greatest legacy one can pass on to one’s children is not money or other material things accumulated in one’s life, but rather a legacy of character and faith.” Billy Graham
It looks as if Phillip Green’s leftovers will be no legacy for children Chloe and Brandon, his wife Tina or (RIP) ‘Uncle Tony’. Former business ventures such as “Cupcraft”, “Buzzville” and “Tarbrook” went bust in the 1980’s owing lots of money with few assets to cover the debts (sound familiar)? In the early 1990’s, his latest retail business, Amber Day, went into terminal decline. A slide in profits led to a share-price crash from a high of 129p to 23p in little more than a year. The accounts revealed a loss of £6m on the sale of part of the company and a further £8m ‘write-off’ for the loss of goodwill!
There was also little goodwill on offer from the members of the House of Commons Honours Forfeiture Committee who branded Sir Philip as a “billionaire spiv” and unanimously agreed to recommend that he be stripped of his knighthood in the wake of his dysfunctional wheeling and dealing with the BHS pension fund[8].
In a letter from Taveta Investments, (a Green family’s holding company), Sir Philip is reported as being both distressed and angered by this process that includes the accusations from MP Frank Field that Green is “guilty of nicking money off other people.”
Some have suggested that Sir Philip take his own advice with regard to this letter, recalling his earlier response to a two-paragraph comment in the Independent (September, 1992) that upset him:
“I just thought you should know I tore your fucking article out and put it under my cat’s arse where it belongs”.
Maybe another quote is more dignified: “No legacy is as rich as honesty”. William Shakespeare
http://www.bbc.co.uk/news/business-37715920
- Wells Farrago!
Wells Fargo has just admitted to sacking over 5000 employees since 2011 because of their criminal behaviour. Apparently, the bonus culture at the Bank, driven by sales targets, was responsible for institutionally-wide fraud. The scam, which was widely-known by employees of Wells Farrago (but not by their clients), involved the setting-up of millions of ghost current and credit card accounts. These were created as a means of boosting sales figures to achieve lucrative bonuses.
The accounts were given credibility by arrangements to transfer money between the Clients’ genuine accounts and these dummy ones. The fraud only came to the notice of the authorities after several customers complained after being erroneously charged ‘insufficient funds’ fees.
Wells Farrago has been fined $185 million and told to recompense affected clients to the tune of $5 million.
Law Professor David Vladeck, former director of the Federal Trade Commission’s Bureau of Consumer Protection was shocked: “How does a bank that is supposed to have robust internal controls permit the creation of over a half-million dummy accounts? If I was a Wells Fargo customer, and fortunately I am not, I’d think seriously about finding a new bank.”
Warren Buffett a major investor in Wells Fargo.
http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts-bank-fees/
- Every Little Helps! TESCO fraudsters arrested
Three former directors of Tesco, Carl Rogberg, Christopher Bush and John Scouler have been arrested and charged with fraud and false accounting. The Serious Fraud Office (SFO) has since said that investigations into the accounting scandal are on-going and further arrests cannot be ruled-out.
The SFO launched its criminal investigation into the accounting practices at Tesco in October 2014 after it came to light that the company had overstated profits by £263m.
All three of the senior directors have since left Tesco. John Scouler joined TalkTalk in February 2015 but is now on sabbatical[9].
Meanwhile, the Financial Reporting Council, the accountancy watchdog, is continuing an investigation into Tesco’s former auditors PwC.
Tesco has also been ordered to make significant changes in the way it deals with suppliers, after the finding that it was deliberately delaying payments in order to maximise profits (see section 3 in this issue).
*Note: the SFO has recently asked for more funding from the government to help with the on-going investigations into allegations concerning Tata Steel, Airbus GlaxoSmithKline, Rolls-Royce and Barclays.
https://www.theguardian.com/business/2016/sep/09/sfo-charges-former-tesco-directors-with-fraud
- Brand Stigma
Introduction
In this Spring 2016 issue of Fix & Fiddle there are many examples of poor decision-making at Executive and Boardroom levels, that have embroiled businesses in legal action, created malodorous headlines and tainted the Brand image with negative effects sales, profits and share-prices.
For example, Volkswagen has been exposed as having intentionally set controls on its diesel engines to misrepresent emissions levels. This discovery led to an immediate plunge in Volkswagen’s stock price; government investigations in North America, Europe, and Asia; the resignation of its CEO and the suspension of other executives. Subsequently, the company registered a record loss in 2015 and is estimated to currently have set aside a contingency fund of over $19 billion to meet future liabilities.
But this is not the limit of the damage. Groysberg et al (2016) research has found that there is a ‘hidden’ collateral damage associated with the damage to the Brand image. Employees at scandal-hit companies pay a penalty on the job market. Even if they can clearly show that they were not involved in the decision making, their own ‘image’ is tainted by association, and future earnings are negatively affected.
Brand Stigma
“Stigma” was defined by Erving Goffman (1963) as being the discrediting and rejection of a person because of a perceived association with a negative characteristic. Psychologically, if the characteristic is seen as uncontrollable/natural, then any discrimination is seen as unjust e.g. race or disability discrimination. However, discrimination is seen as socially acceptable if the association with the negative characteristic is perceived as controllable (i.e. a result of the person’s own willingness or discretion).
This process of stigmatization also occurs with Brands and even whole industries (e.g. banking) when they become associated with reckless or amoral decision making. The important point is that the perceived wrongdoing must be perceived as an active choice; accidental transgressions of social norms and values are tolerated.
Organisational stigma can lead to consumer boycotts, social media trolling, negative WOM, and the collapse of employee confidence and morale. The stigma is contagious and can spread through whole industries leading to a general malaise that affects talent recruitment and retention.
Stigmatization is hardly ever rational
The process of stigmatization is part of the human survival system and belongs with the instinctual behaviour that happens without much thought. At this emotional level, the “disgust” response helps us avoid contamination. Usually as good citizens, we “want nothing to do with” infection & pollution, moral wrongdoing, deviancy, or other taboo substances or practices. We are protecting our set of values from “otherness”.
This instinctual evaluation or judgement happens automatically and almost instantaneously, and is the basis of stereotyping.
Summary
Brand stigma is a phenomenon generated by poor decision making. It is a psychological concept and exists in the minds of consumers. It can be looked upon as a negative or shadow Brand image that will destroy a business. The stigma is contagious, so that employees in a business and other firms within an industry become contaminated. The process is that well-known one of “guilt by association”.
There is no quick cure, only a long period of hurt and pain until the links between the Brand and negative associations weaken with time.
The quick fix or fiddle will not work.
(This excerpt is an edited version from the original article titled “The Scandal Effect” by Boris Groysberg, Eric Lin, George Serafeim and Robin Adams in the September 2016 Issue of the Harvard Business Review p.90-98).
https://hbr.org/2016/09/the-scandal-effect
- PPI is still haunting LLOYDS BANK
Lloyds Banking Group is one of the hardest hit institutions involved in the PPI (payment protection insurance) scandal. They have been required to set aside a further £1billion to cover possible new claims after the Financial Conduct Authority proposed extending the claim-deadline to June 2019.
This takes the amount set aside by the bank to cover the fall-out from PPI to around £17 billion.
Pre-tax profits at the bank have fallen 15% to £811m in the three months to the end of September, and the share-price has dropped 3.8%.
http://www.telegraph.co.uk/business/2016/10/26/lloyds-bank-takes-another-1bn-hit-from-ppi-scandal/
- BHS co-conspirator arrested!
Dominic Chappell, who was sold BHS for £1 by Sir Phillip Green, has been arrested. The charges he is facing relate to his company “Swiss Rock”, which he has put into liquidation, owing over £500.000 to HMRC. It appears that the company made a “deliberate decision” not to pay corporation tax and VAT bills in favour of payments to Mr Chappell.
In a separate High Court action, BHS’s administrators, Duff &Phelps are attempting to push Mr Chappell’s other company, “Retail Acquisitions” into administration. This will then enable them to investigate the £8.4 million loan that BHS made to Retail Acquisitions before its collapse in April, with the loss of 11,000 jobs and a £571 million hole in its pension fund.
Source: Ashley Armstrong, The Daily Telegraph, Business News, 14th November, 2016.
http://www.ibe.org.uk/business-ethics-news/93/52
- RBS Apology – Too little too late!
Ross McEwan, the boss at RBS, has apologised to their small business customers as it revealed a £400m bill to compensate them for poor treatment in the wake of the banking crisis. After at least three years of complaining of bad service from the bailed-out bank, small businesses will receive refunds of the fees they were charged and will be allowed to make fresh complaints about their treatment between 2008 and 2013 in a process that will be overseen by a retired high court judge. https://www.theguardian.com/business/2016/nov/08/rbs-facing-400m-bill-to-compensate-small-business-customers
- BT’s Italian Job – Big impact on UK shares
BT has issued a shock profit warning after revealing that the impact of an accounting scandal in its Italian business is nearly four times worse than originally thought. Originally, the company had said it believed the impact of the “inappropriate behaviour” to be around £145m, but now says the write-down is expected to be as high as £530m.
Shares in the company plunged more than 19% in early trade, wiping roughly £7.2bn off its value. BT issued a profit warning for 2016/2017, saying earnings would be £175m lower. http://www.telegraph.co.uk/business/2017/01/24/ftse-100-rises-pound-nears-six-week-high-traders-bet-government/
- BT Snails called to order
BT bosses attempted to hide a £530m Italian fraud scandal for over a year after three employees raised alarm. Key staff at its Italian operation HQ in Madrid warned their bosses long before the telecoms giant came clean and told investors about the irregularities. The news reports now being received raise questions over how promptly BT started investigating the fraud, which wiped almost £8bn off its share-value when it was made public. This lack of transparency piles fresh pressure on BT chief executive Gavin Patterson and questions how robust existing checks and balances are. http://www.thisismoney.co.uk/money/markets/article-4365406/BT-bosses-hid-530m-Italian-fraud-scandal-year.html#ixzz4tmyukaGT
- Tesco coughs up £235m for accounting fraud scandal Tesco is to pay out £235m to settle the investigations being conducted by the Serious Fraud Office and Financial Conduct Authority into the 2014 accounting scandal that has rocked Britain’s biggest retailer.
It will pay a fine of £129m as part of a deferred prosecution agreement (DPA) with the SFO, although this deal still requires court approval. The supermarket group has separately agreed with the FCA to pay about £85m in compensation to investors affected by a trading statement in August 2014 that overstated profits.
Tesco will also pay legal costs associated with the agreements and said the total exceptional charge was expected to be around £235m. Dave Lewis, the chief executive of Tesco, said the settlement allowed the company to move on. “I want to apologise to all those affected. What happened is a huge source of regret to us all at Tesco
- Tesco – Three servings of porridge coming up!
It is reported that three former Tesco executives will stand trial in September 2017. The court case is in relation to a £326m accounting scandal at Britain’s biggest supermarket. The executives named are Carl Rogberg ex finance director, Christopher Bus ex managing director and John Scouler, commercial director. Each has been charged on counts of fraud by abuse of position and of false accounting. The trio could face up to 10 years in jail if found guilty of the fraud charges with an additional seven years for false accounting. http://www.independent.co.uk/news/business/news/tesco-trial-accounting-scandal-executives-face-court-2017-a7371241.html
- Corporate mis-behaviour- size matters!
Business had a tough time of it throughout the preceding 12 months. Business has hit the headlines for all the wrong reasons. For example there have been several instances of multi-national corporations failing to pay the correct amount of corporation tax; there has been the demise of BHS; private details of customers stolen in high-profile hacking attacks and the scandal of Dickensian working conditions for some of the staff at Sports Direct.
Reputations have suffered, brand images have been damaged and the politicians and general public have begun to seriously question the integrity of certain businesses. Can organizations continue to be allowed to behave irresponsibly, seemingly without any moral or ethical compass?
A recent survey by “Populus” asked a cross-section of the public what they thought about businesses.
The results showed that big-business and multinationals were rated very poorly and thoroughly mistrusted; smaller, family-owned firms and SME’s were generally viewed in a more positive light. It seems that in the minds of the public “small is beautiful”……..now where have we heard that before?
https://www.prweek.com/article/1419784/2016-taught-us-corporate-reputation#UHSMHeiJzhtZGKhD.99
- Corporate Governance – Troops called in
Throughout the last 12 months some of the world’s largest businesses have been rocked by major scandals, and the question of social and environmental responsibility as well as amoral and unethical conduct at board level has been raised.
The UK’s Prime Minister has raised this issue of apparent weakness in the boardroom and has undertaken to reform the structures and processes that currently inform corporate governance.
http://www.barclaysimpson.com/news/top-3-corporate-governance-scandals-of-2016-news-801832630
EDITORS’ SUMMARY and COMMENTS
In this first issue of Fix & Fiddle, we have attempted to highlight some of the major scandals that have affected UK business organisations in the previous 12 months and by collecting them together, hopefully given the reader some sense of the costs of this reckless and irresponsible behaviour undertaken by powerful decision-makers. Some of the behaviour may be the result of the “capricious workings of fate” in a volatile business environment, but many instances are the result of deliberate attempts to corrupt, deceive, swindle and fraud. The amoral, unethical and at times downright criminal behaviour emanating from the boardrooms suggest a weakness in the individuals populating them. They lack the strength of character to stand-up for what they know is right; they lack the courage to protect those weaker and less privileged than themselves and they feel no responsibility for community or environment. The only sense they possess derives from the sensual, through which they can indulge their numerous and prodigious appetites. It is business as usual!
Anyone who has worked for an organisation, particularly the larger ones, knows that they can be singular laboratories for studying human behaviour. On the surface organisational behaviour is rational, efficient, ‘business-like’ and ‘proper’. However, sometimes behind the smiles lies wickedness; on the far side of the office door is wrongdoing; corruption is disguised with whispers, rumour and innuendo; deleted emails and lost files camouflage shortcomings and transgressions; true feelings are repressed, emotions are banned!
An increasing number of Business and Occupational Psychologists are adopting this ‘behavioural’ view of organisations, realising that it offers a more realistic description of the typical organizational culture. That is, just as the human mind has a conscious and subconscious, so business organisations have a visible part and also a hidden ‘undercover’ part; a rational part and a non-rational part.
From the perspective of Business Psychology, it is the non-rational part that has the most powerful influence on peoples’ experiences whether they are working within the business or are coming into contact with it as consumers or suppliers etc. There are many factors that influence a business’s culture, but one of the most obvious and most important influences is the type and quality of the leadership. Just what kind of leaders allow such decadent organisational cultures to evolve and display decision making and other behaviour that is only notable for what it lacks, namely: morality, principles, restraint and self-control.
This negative and dysfunctional leadership has negative effects on the organisational culture and through this a dramatic negative influence on business performance.
One possible way of improving the present situation is to tighten up the process of screening and succession planning processes undertaken by organisations. Currently, recruitment and selection professionals may be basing their decisions on leadership profiles that do not take into account the behavioural-approach.
The table below has two columns. In the left-hand column is a list of characteristics/skills that make a reasonable profile for a would-be “Captain-of-Industry”. A candidate that could tick all these boxes would certainly be considered for short-listing.
However, in the right-hand column, the descriptions of the potential leadership characteristics have been given a ‘behavioural-gloss’. The idealised leadership qualities no longer seem so desirable!
| POTENTIAL LEADERSHIP CHARACTERISTICS
(Positive-spin of surface appearance & behaviour) |
BEHAVIOURAL CHARACTERISTICS
(Behind the Mask – a dark side lurks ready to emerge, given a suitable climate/culture) |
| Charismatic | Superficial |
| Self-confidence | Grandiose |
| Ability to influence | Manipulative |
| Persuasive | Con-artist |
| Visionary thinking | Bull – concoction of truths and half truths |
| Ability to take risks | Impulsiveness |
| Ability to manage stress | Brain malfunction – hidden fact that they have no fear or anxiety |
| Action orientated | Thrill seeking/Low in fear |
| Ability to make tough decisions. | Brain malfunction –hidden fact they are void of empathy, are emotionally impoverished |
When we consider the table above, the difference between ‘Leadership’ and ‘Dysfunctional Behaviour’ is startling! After all, they appear to be the two sides of the same coin. Is the difference just “in-the-eyes-of-the-beholder” or is it the result of the individual being able to mask his/her ‘dark-side’[10]? Maybe it is the already polluted environment of today’s corporates that is acting like a Dr Jekyll’s potion and transforming potential authentic leaders into Mr Hyde-like executives.
On-going research is urgently needed in this area. At the moment organisations are recruiting and selecting on the basis of what appears to be a profile of ambiguous criteria. HR professionals generally lack the appropriate psychological training to look for ‘hidden’ data, and the current Likert-scaled assessment tools are also unhelpful in eliciting implicit information. Businesses are therefore unwittingly allowing latent dysfunctional leaders to join their ranks with potential ruinous consequences to balance sheet and brand reputation.
[1] Editors’ reference to Sir Phillip Green, who despite making some dodgy decisions, escaped any sanctions over his part in the BHS infamy…so far!
[2] http://synaptic-spark.eu/
[3] Educational publisher Pearson, which made a £2.5bn loss in 2016, has awarded its chief executive John Fallon a 20 per cent pay rise for the year.
[4] Guardian undercover reporters find world where staff are searched daily, harangued via tannoy to hit targets and can be sacked in a ‘six strikes and you’re out’ regime: https://www.theguardian.com/business/2015/dec/09/how-sports-direct-effectively-pays-below-minimum-wage-pay
[5] Sir Phillip Green ran BHS for 15 years before selling it in 2015 to bankrupt former racing car driver Dominic Chappell for £1. During that time, the billionaire tycoon took more than £400m in dividends from the business, and left it with a £571m pension deficit.
[6] Drucker, Peter F., (2008). The Five Most Important Questions You Will Ever Ask About Your Organization, Jossey-Bass, San Francisco.
[7] London Interbank Offered Rates
[8] Green sold BHS for £1 to a thrice-declared bankrupt a little over one year before the business went into administration with a pension deficit of £571 million and the loss of 11,000 jobs.
[9] TalkTalk may be attempting to avoid cross-contamination from the “Brand-Shadow” effect. (See section 20 in this issue on Brand Stigmatization).
[10] D. Spry, (2017), Psychopathic Leadership: The Good, the Bad and the Downright Ugly.