The French banking company Societe Generale (SocGen) was founded on May 4, 1864, and at the time of writing this case is headed by co-CEOs Philippe Citerne and Daniel Bouton. The bank has grown to serve 19.2 million individual customers in 76 countries. It employs 103,000 workers from 114 different nationalities. SocGen operates in three major businesses: retail banking and financial services, global investment management and services, and corporate and investment banking. The core values at the company are professionalism, team spirit, and innovation.
In 2006, SocGem ranked 67on Fortune’s 2006 Global 500. Societe Generale managed to build a $72 billion position in European stock index figures. The year before, the company ranked 152 on Fortune’s list. In addition to top line growth, SocGen also posted a more important improvement in overall profitability, at $5.5 billion, up 42% from the prior year. It was the 14th largest company among the banking institutions on the list.
Things were about to change for SocGen. Recent turmoil in 2006 revolved around the collapsing housing market and a mortgage industry that witnessed loan defaults in record numbers. Several banks engaged in purchasing high risk mortgage loans, but the overall economic recession, primarily in the United States but also felt globally, constrained this bank’s financial status. SocGen saw its stock price cut almost in half throughout the year, but this was not the only potential pitfall for this once robust Company. It was the action of one rogue trader, Jerome Kerviel , that could have signaled the ultimate downfall of SocGen.
On January 24, 2008, SocGen announced to the world that it had discovered a $7.14 billion trading fraud caused by a single trader, Kerviel. Additionally, a nearly $3 billion loss was posted due to the loss in investments in the U.S. subprime mortgage industry. Kerviel had been an employee at SocGen since 2000.He began in a monitoring support role, and oversaw the futures traders for five years. He was then promoted to the futures trading desk. He traded European futures by betting on the future performance of these funds. Kerviel saw his trading profits increase throughout 2007 as he bet that the markets would fall during this time.
By the end of the year he needed to mask his significant gains, so he created fictional losing positions to erode his gains. These included the purchasing of 140,000 DAX futures. By mid-january, Kerviel has lost over $3 billion. He was hedging more than $73.3 billion, an amount far in excess of the trading limits created by SocGen for a single trader. This amount even exceeded SocGen’s overall market cap of $52.6 billion1.
Once the fraud was detected in mid-January, 2008, SocGen immediately reported it to France’s central bank, Bank of France. On January 25, 2008, SocGen took out a article apologizing to its customers for the scandal. On January 30, the board announced the formation of an independent committee to investigate the current monitoring practices and determine what measures can be put in place to prevent it from happening again. The Company also announced that it needs an influx of capital to stay afloat, and began looking to outside help to raise $8.02 billion in new capital.
After Kerviel admitted his guilt, his employment was terminated along with that of his supervisors. CEO David Bouton submitted a formal resignation, along with second-in-command Phillipe Citerne; however, both were rejected by the Board of Directors. 2. What are the issues/problems you noticed in the case? Issues/Problems faced: There are two main problems that are evident in the case:
a) Creation of fictitious accounts and fictional losing positions by Kerviel to mask his significant gains from betting. b) Usage of employee’s computer access codes and falsified trading documents by Kerviel to hide gains. c) Violation of rules (put in place by the governing committee) by Kerviel for his self interest and for Company’s profit. For instance, he was hedging more than $73.3 billion, an amount far in excess of the trading limits created by SocGen for a single trader. This amount even exceeded SocGen’s overall market cap of $52.6 billion.
d) Indifference towards e-mails (describing about Kerviel’s trading activity ) by Kerviel’s supervisors because of Kerviel’s overall profitability to the company. e) Inability of SocGen to detect Kerviel’s illegal activities. 3. What are the solutions/suggestions on how it could have been done effectively? Solutions/Suggestions: Seeing the problems conspicuous in the case, following are some steps to do it effectively and in proper manner:
a) Tightening of internal controls: Even though SocGen had corporate governance committees and the board of directors for creating and policing the Company through its internal rules and regulations, still these were not affective as evident from the case where supervisors were indifferent towards mail (about Kerviel’s trading activity) and trigger of red flag. Independent team has to be set up that would ensure employees adhere to rules and regulations set up by the committee. Also, this independent team should review all mails related to employee’s activity and address the issue by consulting with employee concerned and his/her supervisor. By this way, instances of illegal trading can be avoided.
b) Good Corporate Governance: Even though SocGen has established its Corporate Governance committees and the Board of directors, there seems to be more of a self interest amongst members than implementing fair and transparent practices. This can be resolved if company introduces independent members in the committee, who would work without self-interest and with transparent and fair practices. Audit committee should have more than 50% of independent non-executive members. Also, an independent external audit firm has to be selected for auditing SocGen’s financial statements.
c) Effective monitoring: Kerviel knew when he would be monitored by the bank and avoided any activity during those periods. But to have an effective monitoring, inspection has to be random and unknown to employees. This can be accomplished by setting up a monitoring committee having members from different backgrounds like finance, IT. They should have control and power to check and monitor each and every system. Diversity would ensure all aspects of inspections are covered and understood by members.
d) Educating employees about what is ethical and what is unethical: Most of the times employee thinks that end can justify means( consequentialist approach). For instance, in Kerviel’s case, whatever he did was for his company but it was unethical from deontological point of view. Whatever we do has to be done in a way that respects and treats all others involved as ends as well as means to an end. Hence, Kerviel’s activity might have given profits to company but there were other shareholders and stakeholders whose trusts were breached. To avoid these issues, company should train employees on how to resolve problem when confronted with ethical dilemma. “Who should be given more priority and why?”- these thins should be addressed in trainings.