Analysis of Topical Ethical Issue in Business: A Case Study on Royal Bank of Scotland (Research Paper Sample)

Analysis of Topical Ethical Issue in Business: A Case Study on Royal Bank of Scotland
Name of Student
Institution
Background
Royal Bank of Scotland (RBS) is one of many leading banks accused of manipulating the London inter-bank offered rates (LIBOR) in the year 2012. LIBOR is defined as a 'global benchmark' for both the financial trust and health between banks and a measure for the interest rate utilised in setting a range of financial transactions by the British Banking Association (BBA) (BBC, 2012). The financial deals can be in the form of inter-bank lending, loans and mortgages. LIBOR is vital as it accounts for nearly four and a half of the global gross domestic product (GDP) equivalent to $300 trillion. LIBOR is the only authorised body that submits rates for three month inter-bank borrowing although the rates are merely estimations making them vulnerable to manipulation (BBC, 2012). Unfortunately, this was the case for RBS and other leading banks like Barclays. The misconduct of RBS occurred between 2006 and November 2010 occasioning an international investigation in 2012 (BBC, 2013a; FSA, 2013). The Financial Services Authority (FSA) reported that people involved in the incident were employees in the US, UK, Singapore and Japan (FSA, 2013).
The FSA investigation revealed that at least 23 staff members were engaged in this scandal: one manager and 21 individuals which included traders and derivatives (Sky, 2013; FSA, 2013). However, city watchdog showed collaboration on manipulating LIBOR between RBS staff and other traders in other banks in 220 rigged submissions (Sky, 2013). The practice was tailored in order to increase profitability through betting on rates affected by LIBOR rate (BBC, 2013a). The RBS breach included firstly, making false LIBOR submissions of the yen Japanese currency (JPY) and the Swiss franc (CHF) considering the position of the 'derivative traders'. The secondly breach was authorisation of traders to play with the JPY submissions by RBS.
Thirdly, providing US dollar, JPY, CHF rigged submissions based on loss and profit. The fourth breach was collusion of 'derivative traders' with other LIBOR banks and broker corporations to impact the JPY LIBOR submissions. Finally, the scandal extended to include cooperation of 'derivatives and traders' with interdealer companies and traders in other banks to change the LIBOR submissions for JPY, CHF (FSA, 2013). Hence, the US Commodity Futures Trading Commission revealed that fixing the LIBOR rate was done through instant messages on Bloomberg's system, mails and calls (BBC, 2013b). Therefore, the seeds of such a practice was US regulators fine for RBS with more than $390 million and RBS Japan was found guilty (Sky, 2013; BBC, 2013a). '96 million was to be paid to the US Department of Justice (DoJ, '207 million fined by the CFTC and an additional penalty of '87.5 million from FSA for LIBOR fixing (Sky, 2013). George Osborne the Chancellor of the UK treasury insisted that no taxpayer would handle the clear the fine payment but the bankers (BBC, 2013c). Despite that RBS was not the only one but one of 20 firms being questioned on LIBOR rate when banks lend each other. In addition, RBS had less fine that UBS and more than Barclays (Sky, 2013).
From the aforementioned, it is evident that RBS had a low integrity in measuring LIBOR by submitters. In addition, the reckless behaviour in monitoring employee's submission and allowing them to influence other banks not only that yet dealing with broker firms. This is exemplified by the long period from 2006 ' 2010 until RBS recognised what is happening. All that and more lead RBS to failure and disgrace. LIBOR has a major necessity to both the UK and global financial markets (FSA, 2013).
Key Stakeholders Affected
Many have advanced several definitions of a stakeholder. In this respect, this paper considers Freeman's comprehensive contribution in defining a stakeholder. In the definition, he combines the 'claimant' and the 'influencer' as one to denote any group or individual that can affect or is affected by the achievement of an organisation's objective' (Freeman cited in Fassin, 2008). A stakeholder theory aims to improve the moral regulations of operations within the firm. The theory obliges the organisation to consider ethically the impact of their actions on community and on the account of profit and loss (Fisher and Lovell, 2005). There are different types of stakeholders: primary (direct), secondary (indirect), internal, and traditional (external) stakeholders (Pesqueux et al, 2007). These stakeholders are classified as derivative and legitimate (Fassin, 2008). The significant distinguishing factors are made by Phillips, which differentiate the 'normative' stakeholders who has 'moral obligation' towards the organisation from the 'derivative' stakeholders who has no 'moral obligation' but has the power to either benefit or harm the firm (2003). There are the 'dormant' stakeholders who are dangerous and may damage the organisation; however, the former (derivative) and the latter (dormant) stakeholders have no legitimate connection with the organisation (Fassin, 2008).
In terms of RBS, the 'taxpayer- owned bank', the stakeholders influenced by the LIBOR scandal includes; the US regulators CFTC, DoJ, and the UK FSA who imposed penalties on RBS since they considered the false submissions of Yen and Swiss franc a deprive for the public to have an accurate and honest benchmark interest rates (CFTC, 2013). In addition, US CFTC criticised RBS slow response and how the bank traders cooperated with Tom Hays, an interdealer broker from UBS other panel bank (Roland, 2013). However, the bank chief executive Stephen Hester stated that the small group who committed the manipulation was 'selfish and had a self-serving culture' that contradicted ethical requirements (Royal bank of Scotland, 2013).
RBS traders and other panel banks brokers involved in the manipulation misconduct as the stakeholder theory includes 'who can affect or be affected '. It is clear that the employees and brokers did what they have done purely for profit. The transcripts revealed by CTFC shows that the Bank traders considered the labor fixing as 'amazing' generator for money. Interdealer from other banks aimed mainly for the commission (Blackden, 2013). Thirdly, Royal bank of Scotland group was also engaged as they had been influenced by unethical issues and played a huge role in easing the scandal. Following the investigation, it was found that RBS was not engaged in the misconduct or doing anything contrary to the law to suppress the scandal (Blackden, 2013). Finally, RBS shareholders and the bank key stakeholders included investors, customers and employees, advocacy group, and Non-governmental organisations (NGOs). Government, regulators, and the media were also part of the stakeholders (Royal bank of Scotland, 2013).
Overall, with reference to types of stakeholders, it is clear that the dangerous stakeholders were the RBS traders and other broker firms. Yet findings showed that the bank inadequacy to have full control in operations and risk management were the main cause of the scandal as they allowed the employees to work closely with the traders.
Complete a Stakeholder Map highlighting the internal and external parties who were directly or indirectly affected by the Scandal Issue
Internal External Directly Affected/Involved S1
Financiers ( RBS group, John Hourican RBS head investment bank, Tom Hayes UBS interdealer)
Shareholders(taxpayers)
Customers trust
Employees' integrity(RBS traders)
S2
NGOs(CFTC, FSA,BBA)
Regulators (DoJ)Indirectly Affected/Involved S3
Suppliers
communities
S4
Governments (UK, USA).
Inter-governmental organisations, such as
3)Media(Thomson Reuters)Consequences
Following the ethical issue, RBS was forced deal with the fine imposed by the US and the UK regulators. One of the main consequences of the scandal was the experienced by the UK consumers. The false high or low submissions caused a fluctuating price trend in the UK market where products were either extremely expensive or cheap depending on how the manipulation was done (FSA, 2013). Regarding the 21 individual and 2 managers who were involved in the dilemma, a disciplinary action was taken against them and those found guilty were apprehended as per the provision of the law. The chief executive that was in charge the time of the manipulation John Hourican also left RBS deprived of bonuses (RBS, 2013).
According to 'managing stakeholders' theory Freeman suggests that executives need to assure that all stakes are moving equally and in a balanced way , and to care for the overall status of the company. In addition 'management for stakeholders' concerns creating maximum value for customer 'without restoring tradeoffs' (Freeman, 2008). In the meantime, RBS group is trying to overcome the issue by overhauling the entire staff that presided over the scandal. The chairperson of RBS stated the need to change the culture in the bank. This is exemplified by dismissing the wrongdoers and trying to develop monitoring and risk management system (RBS, 2013). One of the ways that banks can retain customers' trust back is to take some harsh decisions such as dismissing rogue members of the boardroom. Banks should also consider enhancing teamwork, integrity, and value embedded in the organisation culture (Studzinki, 2012).
Analysis
Evidently, RBS' ethical dilemma has two dimensions, one is from an employee perspective and the other is from the bank perspective. On one hand, there is the criticism about employee's level of integrity and moral turpitude. Fisher and Lovell define ethical egoism, as seeking own happiness through a productive independent life in which their own rational judgment is their only guide (Carroll & Buchholtz, 2009: 89). Therefore,...