Question: Deutsche Bank (DB) is the largest bank
Deutsche Bank (DB) is the largest bank in Germany and world’s sixth-largest investment bank.1 Unfortunately, the bank suffered from lackluster leadership, a poor organizational culture, and a complicated governance structure that resulted in bad business decisions that cost the bank dearly with huge fines, penalties, and financial losses. Because of the investment banking division’s poor financial performance and organizational problems, in July 2019, DB announced a restructuring plan costing €7.4 billion and requiring laying off 18,000 employees, or 20% of its workforce, as it exited the investment banking business.2 Illegal and Questionable Activities Since 2008, DB has paid over $9 billion in settlements and fines primarily related to its investment banking activities. This included tax and investor protection violations, securities trading frauds, supporting money laundering activities, as well as helping to rig the London Inter- bank Borrowing Rate (LIBOR) and its contribution to the 2008 financial crisis. Other improprieties included “conspiring to manipulate the price of gold and silver, defrauding mortgage companies, and violating U.S. sanctions by trading in Iran, Syria, Libya, Myanmar, and Sudan.â€3 Lesser fines or settlements included data submission deficiencies, accounting fraud or deficiencies, energy market manipulations, and transaction reporting breaches. This staggering record of malfeasance over many years indicates that DB employees regularly and systematically violated the laws of the countries in which it did business. For example, DB helped Russian oligarchs launder their money through mirrored transactions. A Russian would set up two companies, one in Russia and the other in an offshore tax haven such as the British Virgin Islands. Through a DB broker, the Russian company would buy shares in a Russian company that traded on the Mos- cow Stock Exchange. The DB broker would then instantly sell those shares on the Lon- don Stock Exchange in dollars, pounds, or euros with the proceeds going to the Rus- sian’s offshore company. Since the buyer and seller had the same owner, DB was facilitating the Russian buying and selling to himself and thereby converting his Russian rubles into a Western currency.4 For helping to money launder $10 billion out of Russia, the bank paid fines of £163 million in the United Kingdom and $425 million in the United States.5 DB assisted in the systematic manipulation of the LIBOR through trader misrepresentations that raised or lowered the benchmark rate in order to profit the bank at the expense of its customers. It paid over $2 billion in fines for this debacle. For its role in the 2008 financial crisis, DB paid $55 million in fines.6 Most of the misconduct issues at DB occurred in the investment banking unit. Until promoted to co-CEO in 2012, Anshu Jain was in charge of that unit.7 Organizational Culture DB had a culture that encouraged employees to earn high commissions and profits for the bank through misrepresentations and illegal activities. Kevin Rogers, a former employee, said that DB had a historic culture of ruthless internal competition. It was a culture of internal friction and bickering where departments did not trust each other and developed their own way of doing business.8 As revealed in the Panama Papers and Paradise Papers, for years DB helped its rich clients evade taxes through offshore investments and tax havens. Nor was there strong oversight by management. The German regulator BAFIN said that DB executives “failed to notice irregularities, failed to investigate suspiciously large profits, failed to implement appropriate controls, [and] failed to apply controls where they existed.â€9 Instead, management turned a blind eye to the mis- conduct of its employees in what Heffernan calls “willful blindness.â€10 Governance Structure DB had an ineffective and complicated two-tiered governance structure that is represented in Figure C2.2 below.11 ![Deutsche Bank (DB) is the largest bank in Germany and world’s sixth-largest investment bank.1 Unfortunately, the bank suffered from lackluster leadership, a poor organizational culture, and a complicated governance structure that resulted in bad business decisions that cost the bank dearly with huge fines, penalties, and financial losses. Because of the investment banking division’s poor financial performance and organizational problems, in July 2019, DB announced a restructuring plan costing €7.4 billion and requiring laying off 18,000 employees, or 20% of its workforce, as it exited the investment banking business.2
Illegal and Questionable Activities Since 2008, DB has paid over $9 billion in settlements and fines primarily related to its investment banking activities. This included tax and investor protection violations, securities trading frauds, supporting money laundering activities, as well as helping to rig the London Inter- bank Borrowing Rate (LIBOR) and its contribution to the 2008 financial crisis. Other improprieties included “conspiring to manipulate the price of gold and silver, defrauding mortgage companies, and violating U.S. sanctions by trading in Iran, Syria, Libya, Myanmar, and Sudan.”3
Lesser fines or settlements included data submission deficiencies, accounting fraud or deficiencies, energy market manipulations, and transaction reporting breaches. This staggering record of malfeasance over many years indicates that DB employees regularly and systematically violated the laws of the countries in which it did business.
For example, DB helped Russian oligarchs launder their money through mirrored transactions. A Russian would set up two companies, one in Russia and the other in an offshore tax haven such as the British Virgin Islands. Through a DB broker, the Russian company would buy shares in a Russian company that traded on the Mos- cow Stock Exchange. The DB broker would then instantly sell those shares on the Lon- don Stock Exchange in dollars, pounds, or euros with the proceeds going to the Rus- sian’s offshore company. Since the buyer and seller had the same owner, DB was facilitating the Russian buying and selling to himself and thereby converting his Russian rubles into a Western currency.4 For helping to money launder $10 billion out of Russia, the bank paid fines of £163 million in the United Kingdom and $425 million in the United States.5
DB assisted in the systematic manipulation of the LIBOR through trader misrepresentations that raised or lowered the benchmark rate in order to profit the bank at the expense of its customers. It paid over $2 billion in fines for this debacle. For its role in the 2008 financial crisis, DB paid $55 million in fines.6 Most of the misconduct issues at DB occurred in the investment banking unit. Until promoted to co-CEO in 2012, Anshu Jain was in charge of that unit.7
Organizational Culture
DB had a culture that encouraged employees to earn high commissions and profits for the bank through misrepresentations and illegal activities. Kevin Rogers, a former employee, said that DB had a historic culture of ruthless internal competition. It was a culture of internal friction and bickering where departments did not trust each other and developed their own way of doing business.8 As revealed in the Panama Papers and Paradise Papers, for years DB helped its rich clients evade taxes through offshore investments and tax havens.
Nor was there strong oversight by management. The German regulator BAFIN said that DB executives “failed to notice irregularities, failed to investigate suspiciously large profits, failed to implement appropriate controls, [and] failed to apply controls where they existed.”9 Instead, management turned a blind eye to the mis- conduct of its employees in what Heffernan calls “willful blindness.”10
Governance Structure
DB had an ineffective and complicated two-tiered governance structure that is represented in Figure C2.2 below.11
Although this structure worked well in other German companies, it did not pro- vide effective oversight at DB. The problems included the following:
• A lack of industry and other relevant expertise and tunnel vision by members on the Supervisory Board
• Low Board remuneration relative to a high hour commitment expected
• A German language requirement that made membership unattractive to pro- spective foreign Supervisory Board members
• A lack of gender diversity
• An acceptance of a top-down culture of secrecy that eschewed questioning top management
• Having co-CEOs (Jurgen Fitchen and Anshu Jain) in charge of the bank
Unfortunately, the co-CEOs did not perceive the seriousness of the governance problems. They saw no need to change the culture of DB, and the Supervisory Board did not force them to do so.
Meanwhile, Jain faced criticism about whether he should be leading the bank. Most of the bank’s fines and penalties related to its investment banking activities that occurred when Jain was in charge of investment banking. Shortly after the bank paid its $2 billion LIBOR fine in 2015 and reported poor quarterly earnings, Jain resigned as co-CEO. Fitchen retired in 2016.12
Reinventing Deutsche Bank
In 2016, the bank gave the assignment of changing the bank’s culture to Emma Slatter, the head of strategy in the legal department of DB. She laid out a five-year plan to restore trust in the bank by making DB “less complex, more efficient, less risky and better capitalized.”13 This included the following:
• Eliminating the Executive Board
• Restructuring the bank’s business segments to align them with the legal department
• Setting new financial targets, such as capital ratios
• Introducing more women into positions of power
• Improving career development by set- ting clear measures of job expectations
• Utilizing external advisors to develop a framework for new training programs
Overall, these measures were to support a culture of responsibility. Time will tell if this agenda will be sufficient to change DB’s culture.
Questions
1. What were the deficiencies in the bank’s corporate culture?
2. Do you think that Slatter’s five-year plan will be enough to change the bank’s culture?
3. Are there any other measures that can improve the bank’s culture?
4. Why do you think that the bank devel- oped a culture of willful blindness that deliberately turned a blind eye to the misconduct of its employees?](../images/deutsche-bank-db-is-the-largest-bank-in-germany-and-268035-1.jpg)
Although this structure worked well in other German companies, it did not pro- vide effective oversight at DB. The problems included the following: • A lack of industry and other relevant expertise and tunnel vision by members on the Supervisory Board • Low Board remuneration relative to a high hour commitment expected • A German language requirement that made membership unattractive to pro- spective foreign Supervisory Board members • A lack of gender diversity • An acceptance of a top-down culture of secrecy that eschewed questioning top management • Having co-CEOs (Jurgen Fitchen and Anshu Jain) in charge of the bank Unfortunately, the co-CEOs did not perceive the seriousness of the governance problems. They saw no need to change the culture of DB, and the Supervisory Board did not force them to do so. Meanwhile, Jain faced criticism about whether he should be leading the bank. Most of the bank’s fines and penalties related to its investment banking activities that occurred when Jain was in charge of investment banking. Shortly after the bank paid its $2 billion LIBOR fine in 2015 and reported poor quarterly earnings, Jain resigned as co-CEO. Fitchen retired in 2016.12 Reinventing Deutsche Bank In 2016, the bank gave the assignment of changing the bank’s culture to Emma Slatter, the head of strategy in the legal department of DB. She laid out a five-year plan to restore trust in the bank by making DB “less complex, more efficient, less risky and better capitalized.â€13 This included the following: • Eliminating the Executive Board • Restructuring the bank’s business segments to align them with the legal department • Setting new financial targets, such as capital ratios • Introducing more women into positions of power • Improving career development by set- ting clear measures of job expectations • Utilizing external advisors to develop a framework for new training programs Overall, these measures were to support a culture of responsibility. Time will tell if this agenda will be sufficient to change DB’s culture. Questions 1. What were the deficiencies in the bank’s corporate culture? 2. Do you think that Slatter’s five-year plan will be enough to change the bank’s culture? 3. Are there any other measures that can improve the bank’s culture? 4. Why do you think that the bank devel- oped a culture of willful blindness that deliberately turned a blind eye to the misconduct of its employees?
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> Should executives and directors be sent to jail for the acts of their corporation's employees?
> Why didn’t some corporations protect women employees from sexual abuse before 2017–2019?
> How can corporations ensure that their employees behave ethically?
> Why is it important for the clients of professional accountants to be ethical?
> Why might ethical corporate behavior lead to higher profitability?
> On any given day, a bank may have either a surplus or a deficiency of cash. When this occurs, banks tend to lend to and borrow from other banks at a negotiated rate of interest. These interbank loans could be as short as one day and as long as several mo
> What could professional accountants have done to prevent the development of the credibility gap and the expectations gap?
> Why are we more concerned now than our parents were about fair treatment of employees?
> Why have concerns over pollution become so important for management and directors?
> Should organizations that have a risk-taking culture, such as the one developed by Stan O’Neil at Merrill Lynch, enjoy the gains and suffer the losses, without recourse to government bailouts?
> Should the CEOs who refused to have their firms invest in mortgage-backed securities in the early years because the risks were too great receive bonuses in the latter years because their firms did not incur any mortgage-backed security losses? How would
> Should CEOs who made large bonuses by having their firms invest in mortgage-backed securities in the early years have to repay those bonuses in the later years when the firm records losses on those same securities?
> The government bailout of the financial community included taking an equity interest in publicly traded companies such as American International Group (AIG). Is it right for the government to become an investor in publicly traded companies?
> How much should the exiting CEOs of Fannie Mae and Freddie Mac have received when they were replaced in September 2008?
> Identify and explain five examples where executives or directors faced moral hazards and did not deal with them ethically.
> How could ethical considerations improve unbridled self-interest in ethical decision making?
> Wal-Mart has a brand image that triggers strong reactions in North America, particularly from people whose businesses have been damaged by the company’s over- powering competition with low prices and vast selection and by those who value the small-busine
> How could increased regulation improve the exercise of unbridled self-interest in decision making?
> What were the three most important ethical failures that contributed to the subprime lending fiasco?
> Does the Dodd-Frank Act go far enough, or are some important issues not addressed?
> Should members and executives in investment firms be forced to be members of a profession with entrance exams and with adherence to a professional code such as is the case for professional accountants or lawyers?
> Given that the marketplace for securities is global, and that the risks involved can affect people worldwide, should there be a global regulatory regime to protect investors? If so, should it be based on the regulations of one country? Should enforcement
> The global economic crisis was caused by the meltdown in the U.S. housing market. Should the U.S. government bear some of the responsibility of bailing out the economies of all countries that were harmed by this crisis?
> Are the criticisms that mark-to-market (M2M) accounting rules contributed to the economic crisis valid?
> How much and in which ways did unbridled self-interest contribute to the subprime lending crisis?
> What would you list as the five most important ethical guidelines for dealing with North American employees?
> Do professional accountants have the expertise to audit corporate social performance reports?
> Bernie Madoff perpetrated the world’s largest Ponzi scheme,1 in which investors were initially estimated to have lost up to $65 billion. Essentially, investors were promised—and some received—returns
> Why should a corporation make use of a comprehensive framework for considering, managing and reporting corporate social performance? How should they do so?
> Descriptive commentary about corporate social performance is sometimes included in annual reports. Is this indicative of good performance, or is it just window dressing? How can the credibility of such commentary be enhanced?
> How could a corporation utilize stakeholder analysis to formulate strategies?
> Corporate reporting to stakeholders other than shareholders has exploded. Why is this? Can stakeholders really make good use of all the information now available?
> How will the U.S. external auditor’s mindset change in order to discharge the duties contemplated by SAS 99 on finding fraud?
> If a corporation’s governance process does not involve ethics risk management, what unfortunate consequences might befall a corporation?
> Why should ethical decision making be incorporated into crisis management?
> If a company is to be sentenced for paying bribes 10 years ago, should the company be banned from all government contracts for 10 years, just made to pay a fine, or both? Consider the impacts on all stakeholder groups, including current and past sharehol
> What would you advise that corporations do to recognize the new worldwide reach of antibribery enforcement related to the FCPA and the U.K. Bribery Act?
> How would you advise your company’s personnel to act with regard to expectations of guanxi in China?
> This case presents, with additional information, the WorldCom saga included in this chapter. Questions specific to WorldCom activities are located at the end of the case. WorldCom Lights the Fire WorldCom, Inc., the second-largest U.S. telecommunications
> The #MeToo Movement has finally succeeded in getting women’s allegations of sexual abuse to be taken seriously by management and boards of directors. Why did it take so long for this tipping point to be reached?
> What should a North American company do in a foreign country where women are regarded as secondary to men and are not allowed to negotiate contracts or undertake senior corporate positions?
> Should a North American corporation operating abroad respect each foreign culture encountered, or insist that all employees and agents follow only one corporate culture?
> Is trust really important—can’t employees work effectively for someone they are afraid of or at least where there is some “creative tension”?
> In what ways do ethics risk and opportunity management, as described in this chapter, go beyond the scope of traditional risk management?
> Why is maintaining the confidentiality of client or employer matters essential to the effectiveness of the audit or accountant relationship?
> Which would you chose as the key idea for ethical behavior in the accounting profession: “Protect the public interest” or “Protect the credibility of the profession”? Why?
> When should an accountant place his or her duty to the public ahead of his or her duty to a client or employer?
> Why are most of the ethical decisions accountants face complex rather than straightforward?
