Tuesday, October 5, 2010

Management ... do they have responsibility? Accountability?

Dear Colleagues

The 2008 Societe Generale court case about a rogue trader has now been adjudicated in the French courts. Why am I not surprised at the outcome ... a rogue trader is culpable and the banking organization is judged to have had absolutely no knowledge of or responsibility for what he was doing!

In the USA, General Electric is widely considered to be a very well managed company, but twice they have failed to manage their financial unit and have been caught short. In one case it was their own version of a rogue trader, and the other case was the general sub-prime implosion and their lack of appropriate risk management.

Financial people seem to be only interested in profit ... and nothing must get in the way ... nothing! Ethics and such ideas are anathema to this group ... it seems!

Corporate management seems to be perfectly capable of managing when they need to ... but they seem to turn a blind eye when there is high profit performance. A good management system should be asking why there are high profits just as they ask questions when profit performance is inadequate.

I did audit work early in my career ... and learned that if you do not understand where the profits are coming from, you probably have a problem. Management, in my view, has responsibility to understand how profits are being created ... and should be fully accountable. But my idea of management responsibility went obsolete decades ago, with perfectly predicable consequences.

The recent French court decision is not good news ... but will be popular with a lot of people in management at the top of financial institutions of various sorts! Bad news indeed!

There needs to be a strong system of external accountability so that big organizations and their management do not have excessive concentration of economic power ... a system that is independent of the organizations, professional and accountable to the public. In some ways this was the role of the press ... the 4th estate ... and in many ways the press continues in that role, except that in the press there is also a high level of concentration of economic power within media ownership that is inconsistent with their status as an independent 4th estate!

It seems that value accounting and accountability is needed to step up to support the function of the 4th estate in some meaningful way!

Peter Burgess

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