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UBS: A Pattern of Ethics Scandals

By :

Annisa Kharina (29115699)

Karina Permata Sari (29115447)

Master of Business Administration Program

School of Business and Management

Institut Teknologi Bandung

Chapter 1: Case Synopsis........................................................................................................3
Chapter 2: Issue Identification................................................................................................4
Chapter 3: Related Theories...................................................................................................5
3.1 Corporate Social Responsibility ...................................................................................5
3.2 Corporate Governance ..................................................................................................5
3.3 Strategic Leadership .....................................................................................................6
Chapter 4: Case Analysis and Solution
Chapter 5: Conclusion and Recommendation
Chapter 6: Lesson Learned

Chapter 1: Case Synopsis

UBS: A Pattern of Ethics Scandals

UBS, formed in 1997 from the merger of Swiss Bank Corp. and Union Bank of Switzerland,
become one of the top financial services companies in the world and the biggest bank in
Switzerland after acquiring Paine Webber, a 120-year-old U.S wealh management firm in
2000 with the combination of aggressive hiring for its investment banking business.
However, between 2008 and 2015 UBSs reputation was severely damaged by a series of
ethics scandals which resemble a troubling pattern:

1. U.S Tax Evasion After the acquisition of Paine Webber, UBS entered into a qualified
intermediary (QI) agreement with the Internal Revenue Service (lRS), the federal tax
agency of the U.S. government. Like other foreign financial institutions under a QI
agreement, UBS agreed to report and withhold taxes on accounts receiving U.S.-source of
income. In mid-2008, it came to light that since 2000, UBS had actively participated in
helping its U.S. clients evade taxes. To avoid QI reporting requirements, UBS's
Switzerland-based bankers had assisted the U.S. clients to structure their accounts by
divesting U.S. securities and setting up sham entities offlhore to acquire non-U.S. account
holder status. The U.S. prosecutors pressed charges on UBS for conspiring to defraud the
United States by impeding the IRS. To close loopholes in the QI program and crack down
on tax evasion in countries with strict bank secrecy traditions, President Obama signed
into law the Foreign Account Tax Compliance Act (FATCA) in 2010. The law requires all
foreign financial institutions to report offshore accounts and activities of their U.S. clients
with assets over $50,000, and to impose a 30 percent withholding tax on U.S. investments
or to exit the U.S. business. Switzerland has agreed to implement the FATCA.
2. Rogue Trader On September 15, 2011, UBS announced that a rogue trader named
Kweku Adoboli at its London branch had racked up an unauthorized trading loss of $2.3
billion over a period of three years. The case was concluded with findings that systems and
controls at UBS were "seriously defective." As a result, Adoboli, a relatively junior trader,
was able to take highly risky positions with vast amounts of money. More alarmingly, all
three of Adoboli's desk colleagues admitted that they knew more or less of his
unauthorized trades. UBS was fined $47.6 million in late 2012.
3. LIBOR Manipulation LIBOR, or the London Interbank Offered Rate, is the interest
rate at which international banks based in London would lend to each other. UBS, as one
of the panel banks, was fined $1.5 billion in December 2012 by the U.S., U.K., and Swiss
regulators for manipulating LIBOR submissions from 2005 to 2010. Besides the fine, UBS

pleaded guilty to U.S. prosecutors for committing wire fraud. During the said period, UBS
acted on its own or colluded with other panel banks to adjust LIBOR submissions to
benefit UBS's own trading positions. In addition, during the second half of 2008, UBS
instructed its LIBOR submitters to keep submissions low to make the bank look stronger.
In particular, 35-year-old Tom Hayes, a former UBS (and Citibank) trader was sentenced
to 14 years
in prison for fraudulently rigging the LIBOR. The autistic mathematician Hayes argues
that he is the scapegoat for senior management failings. In contrast, prosecutors
that Hayes was the mastermind behind a corrupt ring of traders and brokers globally,
motivated by making his performance look stronger
4. UBS Did It Again UBS had avoided prosecution in 2012 by agreeing to cooperate
with authorities and promising not to engage in rate rigging and other illegal activities in
the future. The Department of Justice alleges that UBS had violated terms of the
agreement and "did it again." This time, prosecutors allege that UBS manipulated foreign-
exchange rate. The Justice Department views UBS as a "repeat offender," especially in
light of a 20ll settlement related to antitrust violations in the municipal-bond investments

Chapter 2: Issue Identification

1. This MiniCase details several ethics scandals at UBS in recent years. What does that tell
you about UBS?
2. Given UBSs repeated ethics failings, who is to blame? The CEO? The board of directors?
The individuals directly involved? Who should be held accountable? Is it sufficient just to
fine the bank?
3. Given the information herein, do you think that 14-year jail sentence for Tom Hayes was
harsh? Did he serve as scapegoat?
4. What lessons in terms of business ethics and competitive advantage can be drawn from
this MiniCase?
5. What can UBS do to avoid more ethics failures in the future and repair its damaged

Chapter 3: Related Theories

3.1. Corporate Social Responsibility (CSR)

Corporate social responsibility is a framework that helps firms recognize and address the
economic, legal, social, and philanthropic expectations that society has of the business
enterprise at a given point in time.
Economic Responsibilities The business enterprise is first and foremost an
economic institution. Investors expect an adequate return for their risk capital.
Consumers expect safe products and services at appropriate prices and quality.
Suppliers expect to be paid in full and on time. Governments expect the firm to pay
taxes and to manage natural resources such as air and water under a decent
stewardship. To accomplish all this, firms must obey the law and act ethically in their
quest to gain and sustain competitive advantage.
Legal Responsibilities Laws and regulations are a society's codified ethics, as they
embody notions of right and wrong. They also establish the rules of the game. w.
Managers must ensure that their firms obey all the laws and regulations, including but

not limited to labor, consumer, and environmental laws.

Ethical Responsibilities A firm's ethical responsibilities, therefore, go beyond its
legal responsibilities; they embody the full scope of expectations, norms, and values
of its stakeholders. Managers are called upon to do what society deems just and fair.
Philanthropic Responsibilities Philanthropic responsibilities are often subsumed
under the idea of corporate citizenship, reflecting the notion of voluntarily giving
back to society.

3.2. Corporate Governance

Corporate governance concerns the mechanisms to direct and control an enterprise in
order to ensure that it pursues its strategic goals successfully and legally. Corporate
governance is about checks and balances; it's about asking the tough questions at the
right time. The board of directors, the centerpiece of corporate governance, is
composed of inside
and outside directors. Inside directors are board members who are generally part of the
company's senior management team; appointed by shareholders to provide the board
with necessary information pertaining to the company's internal workings and
performance. Outside directors are board members who are not employees of the firm,
but who are frequently senior executives from other firms or full-time professionals.
Given their independence, they are more likely to watch out for shareholder interests.
While the board of directors is the central governance piece for a public stock company,
several other corporate mechanisms are worth notingexecutive compensation, the

market for corporate control, and financial statement auditors and government
regulators. Thus, Corporate-governance mechanisms play an important part in aligning
the interests of principals and agents.

3.3. Strategic Leadership

Strategic Leadership is the behaviors and styles of executives that influence others to
achieve organizational goals. Strategic leadership typically resides in executives who
have overall responsibility for an organizationtheir characteristics, what they do, how
they do it, and particularly, how they affect organizational outcomes. These executives
can be individuals, generally CEOs, but also can be top-management teams. The key
point is that they have responsibility for the performance of the entire company or for an
important strategic business unit. It is important to know the role that strategic leaders
play as the interpersonal role (figurehead, liaison, leader), informational role (monitor,
disseminator, spokesperson) and decisional role (entrepreneur, disturbance handler,
resource allocator, negotiator). But to be an effective and ethical strategic leader, we
must complete the level-5 leadership pyramid, which is a conceptual framework of
leadership progression with five distinct sequential levels:
The Level-1 manager is a highly capable individual who makes productive
contributions through motivation, talent, knowledge, and skills.
The Level-2 manager masters the skills required at Level 1, but is also a contributing
team member who works effectively with others in order to achieve synergies and
team objectives.
The Level-3 manager is a well-rounded and competent manager, a highly capable
individual who is an effective team player and organizes resources effectively to
achieve predetermined goals. He or she does things right.
At Level 4, the effective manager from Level 3 turns into a leader who determines
what the right decisions are. The Level-4 leader presents and effectively
communicates a compelling vision and mission to guide the firm toward superior
performance. He or she does the right things.
Finally, at Level 5, the manager reaches a leadership pinnacle, turning into a strategic
leader. An effective strategic leader is an executive who builds enduring greatness into
the organizations he or she leads.

Chapter 4: Case Analysis and Solution

1. UBS: The Series of Ethics Failings.

We can say that UBS had blinded by their determination of gaining sustainable
competitive advantage, thus lead them to unethical and illegal conduct which destroyed
their reputation. They should know that even though staying within the law is minimum
acceptable standard, finding its loophole does make them violate the codes of conduct.
These codes go above and beyond the law in detailing how the organization expects an
employee to behave and to represent the company in business dealings. UBS should know
that their business actions are unethical and violate codes of conducts even though they
are completely legal according to the loophole of the law. And as the consequences, UBS
got their punishment for their unethical and illegal conducts when they caught red
handed. From this we can learn aside from obey the law and ethical codes of conduct
within the company, the law and regulation itself should be clear and close the loopholes
in order to prevent the reason of unethical wrongdoings and illegal conduct for the future.

2. UBS: Stakeholders behind Ethics Failings

In our opinion, people who should be held accountable regarding with UBSs corporate
rap sheet are the individuals who involved in those ethics failings, whether involved
directly or indirectly, no matter what his or her position is. The one who got the most
blame is usually the CEO, as he or she is the leader and responsible of any wrongdoings
within the company. But, this does not mean that the Board of Directors (BODs) does not
get the blame too, because they responsible of their subordinates misconducts. And also,
the individuals directly involved (usually the BODs subordinate) will get the blame too
since they are who conduct the wrongdoings directly. This usually happened because of
the principal-agent problem. In publicly traded companies, the stockholders (the
principals) are the legal owners of the company, and they give the professional managers
(the agents) the authority to make decisions on their behalf. The conflict arises if the
agents also pursue their own personal interests, which can be at odds with the principals'
goals. The risk of opportunism on behalf of agents is exacerbated by information
asymmetry: the agents are generally better informed than the principals. Indeed, managers
tend to have access to private information that outsiders, especially investors, are not
privy to. Insider trading cases provide an example of egregious exploitation of
information asymmetry. The principalagent problem is a core part of agency theory,
which views the firm as a nexus of legal contracts. Besides dealing with the relationship
between shareholders and managers, its concerns also cascade down the organizational
hierarchy. Employees who perform the actual operational labor are agents who work on
behalf of the managers. Such front-line employees often enjoy an informational

advantage over management. They may tell their supervisor that it took longer to
complete a project or serve a customer than it actually did. The managerial implication of
agency theory relates to the management functions of organization and control: The firm
needs to design work tasks, incentives, and employment contracts and other control
mechanisms in ways that minimize opportunism on behalf of the agents. At the same
time, the activities of the agents should maximize shareholder value creation for the
principals. That is why we can say that fine the bank is not sufficient enough. UBS should
put several governance mechanisms in place. Governance mechanisms are used to reduce
information asymmetry and to align incentives between principals and agent. And not
only the internal corporate-governance mechanisms like BODs and executive
compensation, but also external corporate-governance mechanisms like the market for
corporate control and financial statement auditors and government regulators. That is why
it is important for UBS to apply good corporate governance. Good corporate governance
creates a transparent set of rules and controls in which shareholders, directors and officers
have aligned incentives. Most companies strive to have a high level of corporate
governance. For many shareholders, it is not enough for a company to merely be
profitable; it also needs to demonstrate good corporate citizenship through environmental

awareness, ethical behavior and sound corporate governance practices.

3. Tom Hayes: Scapegoat or not?

In our opinion, Tom Hayes not deserved his punishment of 14-year jail sentence. The
penalty it so heavy even there are killers who get less punishment than him. No matter he
is the scapegoat or not, we can say that Tom Hayes is the unluckiest trader. The first
reason is regarding with his unfair sentence. At Hayes trial, the judge said the
maximum sentence is 10 years for a count of conspiracy, which is generally recognized as
too low. But in reviewing the list of City traders convicted of serious fraud over the last
20 years, no sentence equals that given to Hayes. Under the Sentencing Guidelines for
judges, the tariff has normally been around half of what he originally received. The
following serve as useful benchmarks: In 2012, Kweku Adoboli, a former UBS equity
trader was given a seven-year sentence in London for unauthorized trading that cost the
bank $2 billion while in July 2016, four former Barclays traders were sentenced by a
British court to between 33 months and six-and-a-half years each for conspiring to rig
Libor. The second reason is the fact that Hayes alone was prosecuted and convicted,
even though he was not a rogue trader acting in isolation like Adoboli. Instead, he was

part of an alleged conspiracy: traders at up to 16 different banks, who between them
allegedly requested Libor rates from within that days market trading range but which
were drawn from the high, middle or low end of that range. These were marginally in
favor of the traders employer banks, thereby making money for them by trading
derivatives that fixed against the published Libor rate. But in this alleged conspiracy
involving multiple participants acting in concert with each other to fix Libor, only Hayes
was convicted. Nearly four years on from his arrest, all of Hayes alleged co-conspirators
who have been charged have since been acquitted and no other co-conspirator has
subsequently been charged by the Serious Fraud Office (SFO). One of his managers has
even been exonerated by the Financial Conduct Authority (FCA) despite having engaged
in this behavior with Hayes. At his trial, Hayes alleged that the behavior described above
was both common market practice for 20 years (although that did not provide a defense,
according to the trial judge), and the subject of a written instruction sheet at UBS, so
enshrined was it in bank culture. The third reason is that there is no senior figure at any
bank operating in London has been charged by the SFO in relation to any rate-rigging
by any of their Libor traders or in relation to lowballing. At his trial, the chief
prosecutor, Mukul Chawla QC, indicated to the jury that Hayes managers will be next.
But to this day, no one else from Hayes former employer banks has been charged.
Meanwhile, senior bank executives claim not to have known what was going on and that
the individual traders concerned were acting on their own account without any authority
from the bank, or from their immediate managers. From all those reasons above, we can
see that Tom Hayes seems to be paying an unduly heavy price for the misdeeds of many.
Tom Hayes is certainly an unlucky man whether he is a scapegoat or not.

4. UBS: Lesson Learned in Terms of Business Ethics and Competitive Advantage

In terms of business ethics, we can learn from UBS case that before we conduct the
business decision, it important to know that staying within the law is a minimum
acceptable standard. But, even though the actions can be completely legal, we should
consider the ethical side. Since business decisions are not made in a vacuum but are
embedded within a societal context that expects ethical behavior, managers can use a
number of questions to improve their decision making. When facing an ethical dilemma, a
manager can ask whether the intended course of action falls within the acceptable norms
of professional behavior as outlined in the organization's code of conduct. Moreover, the
manager should imagine whether he or she would feel comfortable explaining and
defending the decision in public. In terms of competitive advantage, UBS absolutely not

apply the corporate social responsibility (CSR), which is the big mistake as they continue
to fall and far from reaching competitive advantage. Learning from their mistake, we
should know that applying the CSR help firms to gain sustain competitive advantage.
Moreover, CSR provides managers with a conceptual model that more completely
describes a society's expectations and thus can guide strategic decision making more
effectively. In particular, CSR has four components: economic, legal, ethical, and
philanthropic responsibilities. With economic responsibilities, it helps the company to
gain and sustain competitive advantage as the business enterprise is first and foremost an
economic institution. With legal responsibilities, it helps the firms to define minimum
acceptable standards in their business decision making in terms of law and regulations as
a societys codified ethics. With ethical responsibilities, it helps the firms to embody the
full scope of expectations, norms, and values of its stakeholders. Managers are called
upon to do what society deems just and fair. The last, with philanthropic responsibility, it
helps the firms to gain a characteristic of corporate citizenship, as it reflecting the notion
of voluntarily giving back to society. Doing so ensures not only effective strategy
implementation, but also long-term competitiveness within the industry.

5. UBS: Prevention of Ethics Failure in the Future and Repair its Damaged Reputation
What UBS should do regarding with prevention of ethics failure in the future is
implementing good corporate governance. Corporate governance is often associated with
public companies, but small businesses can also benefit from this practice. Corporate
governance consists of rules that direct the roles and actions of key people rather than
processes. Unlike simple policies and procedures, such as a dress code or expense
reimbursement procedure, corporate governance rules focus on creating better
management and fewer ethical or legal problems. Corporate governance limits the
potential for bad behavior of employees by instituting rules to reduce potential fraud and
conflict of interest. For example, the company might draft a conflict of interest statement
that top executives must sign, requiring them to disclose and avoid potential conflicts,
such as awarding contracts to family members or contracts in which an executive has an
ownership interest. The company might forbid loans to officers and family members or
the hiring of family members. External audits or requiring checks over a certain amount
to be approved and signed by two people help reduce errors and fraud. Next, to repair its
damaged reputation, UBS should implement Corporate Social Responsibility (CSR). At
its heart, CSR is about an organization taking responsibility for the impacts of its
decisions and activities on all aspects of society, the community and the environment.

CSR is more than just donating money or printing double-sided to save trees, its about
contributing to the health and welfare of society, operating transparently and ethically.
More importantly, this way of operating should be embedded in the business, rather than
an afterthought. CSR could help in having positive impact in the community, by Keeping
social responsibility front of mind encourages businesses to act ethically and to consider
the social and environmental impacts of their business. In doing so, organizations can
avoid or mitigate detrimental impacts of their business on the community. CSR could also
help in supporting public value outcomes. Put simply, public value is about the value that
an organization contributes to society. A sound, robust corporate CSR framework and
organizational mindset can genuinely help organizations deliver public value outcomes by
focusing on how their services can make a difference in the community. CSR could also
help in enhancing relationships with clients. A strong CSR framework is essential to
building and maintaining trust between the company and clients. It can strengthen ties,
build alliances and foster strong working relationships with both existing and new clients.

Chapter 5: Conclusion and Recommendation

In conclusion, UBS has been embroiled in a series of recent scandals involving its role in
helping wealthy Americans evade taxes, its role in the manipulation of the LIBOR interest
rate index and its failure to prevent one of its traders from running up more than $2 billion
in losses and in 2015 it had to plead guilty to a criminal charge in the U.S. Those scandals
are the consequences of the failure in applying good corporate governance and CSR,
which leads UBS to their downfall, damaged reputation, and competitive disadvantage. It
is important to implement good corporate governance and CSR in order to keep the
company in control to ensure that it pursues its strategic goals successfully and legally.
Thus, the company will reach the sustain competitive advantage.

We recommend that UBS should pursue strategic leadership for their future managers.
With the role of interpersonal, informational, and decisional that strategic leaders have, it
would make them effective for the firm performance, which could lead to the competitive
advantage. But, those strategic leaders must be both effective and ethical by applying
level-5 leadership pyramid, which is a natural progression of five different levels of

leaderships. A strategic leader who has mastered Level 5 simultaneously combines and
reconciles tremendous will power and personal modesty. It's not that Level 5 leaders have
ego or self-interest. Indeed, they are incredibly ambitiousbut their ambition is first and
foremost for the institution, not themselves.

Chapter 6: Lesson Learned

From the case, we can learned that before we conduct the business decision, we should know
whether it is legal and ethical or not. The ethical pursuit of competitive advantage lays the
foundation for long-term superior performance. Law and ethics are not synonymous; obeying
the law is the minimum that society expects of a corporation and its managers.

Frank Rothaermel, 2014. Strategic Management: Concepts. 2nd Edition. New York: McGraw-
Hill Education
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