Four top governance stories you may have missed.
After looking at the headlines that have dominated the news within the past few days, only one question comes to mind: is governance seen as a joke? A lot of businesses are spending too much time ignoring risks and scrambling to shore up profits instead of focusing on the larger issues at hand.
Here’s a list of stories that have recently caught my attention.
1) Jail time for anti-fraud chief: Topping the list this week is Jessica Harper, a former employee of Lloyds Banking Group, who admitted to funneling £2.4 million ($3.9 million) over a four-year period while serving as the chief of fraud and security of the UK bank's digital banking division. Given that one of the main functions of Harper’s job was to protect the firm from fraud, her unethical actions call into question: why do good employees go bad? By the same token, why did it take so long for the banking giant to uncover her scams?
2) Regulation: MasterCard has antitrust problems with the European Union after investigations reveal its soaring cross-border fees violated antitrust rules. Bloomberg reports that the financial services company filed its plea at the EU Court of Justice in Luxembourg after its first appeal was turned down. This case has sparked renewed interest in the argument over whether inflated fees paid by consumers and retailers are in fact ethical. If unsuccessful in Europe’s top court, the New York-based company could incur ‘substantial damages’ from private actions, the report says.
High transaction fees have always been a somewhat uncontrollable issue and MasterCard’s case might affect credit card companies around the world. At the same time, regulators are taking antitrust breaches seriously as failure to comply with competition rules can result in hefty penalties and a bad reputation.
3) Risk management: The technological glitches that caused brokerage firm Knight Capital $440 million is a clear indication that board members should pay more attention to the high-level risks technology can impose on businesses. It was indeed a grave situation at Knight. Thomas Joyce, the company’s chief executive, tried to sway the SEC to allow the firm to cancel some of its trades, says the Wall Street Journal, but the regulator rejected compromising market integrity and stood by the rules governing trades.
It is unclear how serious Knight Capital took technology and operational risks. In its 2011 annual report, the firm reported that unanticipated system failures could lead to major regulatory and reputational trouble. Reuters notes that in its 2012 proxy statement, the company met to discuss risk management but neglected to tackle the technological issues directly.
4) Compliance: The Network, a provider of integrated governance, risk and compliance solutions, recently unveiled its 2012 Corporate Governance and Compliance Hotline Benchmarking Report, which suggests that more employees are coming forward to report corporate wrongdoing. After two years of rapid decline, this is seen as a drastic improvement given that the cross-industry incident-reporting rate has increased to 8.58 reports per 1,000 employees.
On the downside, however, the number of fraud-related incidents reported has skyrocketed. The Corporate Fraud Index for 2011 fraudulent activity rose to 21.1 percent – an all-time high since the index was first issued in 2005. This is not good news for the compliance and ethics community because now corporate wrongdoing may spiral out of control as businesses spend too much time focusing on one area rather than another.
It appears some companies fail to understand that the true cost of staying in compliance with regulations is not trivial. The cases mentioned above serve as clear examples that governance is no joking matter; clearly a minor problem can morph into something more costly and serious.
