Culture as Liability: The Case of UBS

The important role of culture in a company has been long discussed. It can clearly differentiate companies and it is considered by many people as the only truly sustainable competitive advantage.[1]  Indeed, process can be duplicated, the best employees can be hired and idea can be copied.  This could be done by any competitor with the will, money and time. However, it is extremely complicated to duplicate the culture which explains why the culture is an invaluable asset.

In some cases, a strong culture could become a liability. During the class, we have seen that M&A failures can largely be explained by a clash of cultures. A good example is what has been called the worst deal in history: the merger between AOL and Time Warner in 2001[2]. Moreover, in their book Robbins & Judge draw attention to the fact that a strong culture could potentially lead to other dysfunctional behavior, namely institutionalization, barriers to change and barriers to diversity[3].

I would like to shed light on a case where a strong but dysfunctional culture is becoming a huge liability for a respected financial institution: UBS. The facts are simples: UBS has been involved in a new financial scandal almost every year for the last several years. Those scandals include tax evasion, money laundering, rogue trader[4], LIBOR rigging[5] and municipal bond market rigging[6]. It is worth noting that UBS is not the only financial institution being involved in scandals. However, the diversity and the repetition of the scandals over a long period of time make of UBS an interesting case for this class.

One could argue that it is largely a question of bad risk management. In my opinion, this argument fails to explain the repetition and the diversity across all the divisions of the scandals. Therefore, many experienced financial commentators have suggested convincingly that UBS strong culture is at the root of the problem.   

My view on that argument is that we have to distinguish between the culture of UBS and the culture of the whole industry. The financial industry is based on money and taking/managing risk.  As a result it attracts risk-takers and people for whom money is a crucial motivator. In addition, the financial world is known to attract brilliant people with a highly competitive mindset. This selection keeps alive the “Wall Street” culture.  I am convinced that those characteristics are not enough to lead to so many legal and ethical lapses[7]. In addition, no other financial institution has been touched to the same extent as UBS. Therefore it is seems that there is a specific culture at UBS.

Some Investment Banks are renowned to really prone teamwork. Goldman Sachs is the best example of this teamwork culture. At the opposite, some banks have an individualistic (which is not the same as independent) culture.  It seems that UBS is a very good example of a place where individuals matter more than the company. People close to the situation suggest that Mr Adoboli (the rogue trader who cost UBS around $2.3 billion in trading losses) unauthorized trading seems consistent with a culture at UBS that stressed individual advancement over team efforts[8]. Another investment baker explained to the New York Times: “Everyone is separate. People cut their own deals, and it’s every man for himself. A lot of people made a lot of money that way, and it fueled jealousies and efforts to get ever better deals. People thought of themselves first, and then maybe the bank, if they thought about it at all[9].

Interestingly, some people have argued that this is not a sign of a strong individualistic culture but rather a lack of culture.  I understand the reasoning but because this behavior seems to be (unofficially) encouraged by the top management, I still believe that there is a strong culture at UBS. Anyway, at the end the result is the same: UBS is a place where individuality and profits at any price are the rules.

For me the strong individualistic culture is without any doubt the main reason for UBS failures. But fortunately for UBS, I am also convinced that it is the solution. No software, risk management team or process will be able to prevent every rogue trader. The only solution is to build a culture where the company is more important than the individual. This will be extremely difficult and will take time. But it begins with a strong commitment and support by the top management (and not only officially) and also new criteria for the hiring of new employees. It may reduce profits on the short term, but will undoubtedly be beneficial for all the stakeholders on the long run.

Leave a Reply

Your email address will not be published. Required fields are marked *