As long as 24 years ago, Lynn S. Paine wrote about the myth of the rogue employee in the Harvard Business Review (HBR), in an article entitled “Managing for Organizational Integrity”. In this article she wrote, “executives are quick to describe any wrongdoing as an isolated incident, the work of a rogue employee. The thought that the company could bear any responsibility for an individual’s misdeeds never enters their minds. Ethics, after all, has nothing to do with management. In fact, ethics has everything to do with management.” How prescient she was in her article.
For it is management who sets the tone throughout the organization, whether that is something along the lines of a wink and a nod towards ethics and compliance or the more ubiquitous miss your numbers for two quarters and you will be history, Paine noted, “More typically, unethical business practice involves the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs, language, and behavioral patterns that define an organization’s operating culture. Ethics, then, is as much an organizational as a personal issue.”
However a company’s responsibility is more than simply to set the right tone then sit back and do nothing. The drafters of the Foreign Corrupt Practices Act (FCPA) recognized this when they included the requirement for internal controls to be included in the law. For, as Paine said, “Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds.”
Yet the myth of the rogue employee is more than a simple myth. It is also a dangerous myth. It is dangerous because it excuses negligent or intentional corporate behavior. That was the reaction I had when I read a Wall Street Journal (WSJ) article explaining how “A French labor court Tuesday awarded Jérôme Kerviel, the Société Générale SA (SocGen) rogue trader convicted in 2010 of bringing the bank to the brink of collapse, a total of €450,000 ($511,000) because he was fired without “real or serious cause.”” For those of you who may not remember, Kerviel was criminally convicted for engaging in trades which cost the bank €4.9bn back in 2007 and 2008.
In the French labor court decision, it noted, “Société Générale “could not pretend it hadn’t long been aware of the unauthorized trades conducted by Mr. Kerviel”.” The judges went on to note, “The bank therefore can’t argue that Mr. Kerviel was at fault when it “previously tolerated similar practices”.” While SocGen protested, in a statement that the ruling was “incomprehensible” it did not deny the basic underlying facts that Kerviel’s “managers were aware of his activities and turned a blind eye as long as he made money for the bank.”
The New York Times (NTY), in an article by Nicola Clark entitled “Société Générale Is Ordered to Pay Trader Who Almost Ruined It”, said, “The ruling, by a panel of employers and trade union representatives, is covered by French confidentiality laws so it has not been made public. Yet it appears to accept, at least in part, Mr. Kerviel’s argument from the start: namely, that his managers — many of whom quietly left the bank after the scandal — turned a blind eye to his activities and even tacitly encouraged them, as long as his deals were profitable.” One of Kerviel’s lawyers, David Koubbi, was quoted in the NYT for the following, “This is a huge victory. It is recognizing for the very first time that Société Générale knew everything about his activities, which is a very big thing.”
Lest you think that the above ruling was the result of some French pro-labor types going crazy, consider the following. In 2104, an appellate court, France’s Court of Cassation, reversed a trial court’s ruling that Kerviel must “compensate Société Générale for the full €4.9 billion that it lost in the affair.” The appellate court found “that the lower courts had failed to take proper account of the weaknesses in the bank’s own risk-management procedures at the time.”
This French labor court decision crystalizes the danger of the myth of the rogue employee. Companies use this excuse to shield themselves from the responsibility of preventing bribery and corruption before they occur and then use the same myth to claim they cannot detect it after it happens. Both responses can be catastrophic for companies, leading to massive fines and penalties for violations of anti-bribery laws such as the FCPA or direct losses from trading such as those sustained by SocGen. The French labor court essentially held that Kerviel could not be held liable because SocGen had failed to properly oversee his work.
Mike Volkov, in a blog post entitled “The Myth of the Rogue Employee”, noted that illegal conduct such as that under the FCPA does not occur “in a vacuum.” He explained “There are other employees with whom the person interacts, there are financial controls in place to protect against such misconduct, there are reporting mechanisms for employees to report suspicious activity, and there is likely to be someone in the organization who is close enough to the bad actor, or responsible for the conduct of the bad actor, and who suspected or should have suspected that the actor was engaged in misconduct.” Moreover, the more sophisticated the scheme, the more actors are involved and the more controls are overridden or disregarded as he explained, “As the misconduct becomes more complicated, like in the case of bribery or antitrust violations, where such schemes require additional actors or raise red flags or where others are in a position to know or suspect that misconduct may have occurred”.
The three basic tenets of a best practices compliance program are to prevent, detect and remedy. By claiming employees who engage in bribery and corruption have ‘gone rogue’; companies are attempting to divest themselves of responsibility for actions from which they benefit, particularly if the bribery and corruption generated business sales and revenue. Yet the failure to prevent and detect can cause massive financial losses outside of penalties and fines, as shown by the experience of SocGen and its former trader Jérôme Kerviel.
The myth of the rogue employee is more than a simple myth. It is also a dangerous myth.Click to tweet
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© Thomas R. Fox, 2016