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Saturday, September 24, 2011

Weak Corporate Governance at UBS

UBS chief executive Oswald Gruebel resigned on September 24, 2011 over the $2.3 billion trading loss by one of the Swiss bank’s traders, Kweku Adoboli. Kaspar Villiger, UBS's president, said the board regretted Gruebel's decision but had decided to accept it. "Oswald Gruebel feels that it is his duty to assume responsibility for the recent unauthorized trading incident," Villiger was quoted as saying in the statement. "It is testimony to his uncompromising principles and integrity." In presumably not pushing for the CEO’s resignation because of the magnitude in the lapse of risk management in the system, the bank’s board of directors did not take the initiative in holding the management accountable. Accordingly, shareholders have reason to be concerned about the protection of their owner’s equity, at least in terms of corporate governance providing accountability on the management. The culprit may be corporate governance itself, which as structured may proffer too much power to the CEO.
In the case of UBS, the shareholders ultimately had to rely on Gruebel’s  integrity rather than corporate governance for accountability. To be sure, the resignation of the CEO does not necessarily mean that the management itself has been held accountable. Ethical leadership thus has its limits in this respect. Where a problem is systemic in a company and has been allowed to perpetuate itself by many people in upper- and middle-level management, the resignation of the CEO is not sufficient in terms of accountability. Had the CEO embezzled over $2 billion, the resignation would have been sufficient, but relying on the CEO’s integrity would be foolhardy in such a case.  

In short, the case of UBS suggests that corporate governance ought to be strengthened or fortified with respect to enforcing accountability on a management so as to protect stockholder interests. Villiger said Gruebel, who was brought in to help revive the fortunes of the Zurich-based bank, had achieved "an impressive turnaround and strengthened UBS fundamentally." But surely there must have been some lapse in Gruebel’s oversight of the bank’s system; for over $2 billion to be lost by one trader is itself a red flag concerning the bank itself and its management as a whole. Depending on ethical leadership at the top to step aside in the interest of the design and implementation of a new system does not go far enough.

Source:

“UBS CEO Oswald Gruebel Resigns Over Rogue Trading Loss,” The Huffington Post, September 24, 2011. http://www.huffingtonpost.com/2011/09/24/ubs-ceo-oswald-gruebel-resigns_n_978942.html