Bank's corporate culture at heart of the problem

Business Opinion/John McManus: The problem with accountability AIB style is that if you take the view that a $691 million (€580 million) foreign exchange fraud is not sufficient grounds for the chief executive to resign, you can't really demand his head for a €14 million overcharging scandal.

But this time Michael Buckley, AIB's chief executive, should carry the can for the bank's failure. Not because the bank "accidentally" overcharged customers, but because of what last week's revelations confirm about the corporate culture at AIB and Mr Buckley's failure to confront it.

There is a common thread between last week's overcharging scandal and the circumstances surrounding the foreign exchange losses racked up by John Rusnak, which went undetected for six years. In both cases, individuals lower down the hierarchy became aware or suspected that something was wrong, but did not feel under any imperative to ensure that it was resolved.

In both cases, the matter was just passed up the line to a level at which it was effectively shelved. And, in both cases, the problem related to very profitable parts of the business. Proprietary trading in the case of Rusnak and retail foreign exchange in last week's debacle.

There are many possible explanations as to why people might behave in this fashion, but here are two. One is that those involved simply didn't care as long as their pay packet was not affected at the end of the month. Another is that there are precious few incentives in AIB for bringing a problem to your superior's attention, particularly if confronting it is likely to cost the bank money.

Either way, big problems that should be brought to the attention of the top management just seem to get lost in the ether.

This less-than-positive aspect of AIB's business culture was a central plank of the defence mounted by Mr Buckley when he came under pressure in the wake of the Rusnak scandal. His premise was simple and can be paraphrased as follows: I didn't know anything about it but when it was brought to my attention I acted.

Post-Rusnak he talked about his "misplaced" trust in his managers, whose passivity was "as good or as bad" as collusion. In the aftermath, he dismissed six executives who were "directly responsible for oversight" or "should have been aware" of the fraud.

This strategy seemed to do the trick and Mr Buckley survived to fight another day.

Therefore, it is no surprise that something similar is being attempted to limit the fall out from the latest crisis. AIB senior executives are falling over themselves to point out that the problem was not brought to their attention until last week and, once it was, they acted appropriately.

This might provide some cover for the senior management in the immediate aftermath of the revelations but the real problem remains glaringly obvious.

Last week's revelation and the reaction of Mr Buckley and his management merely serves to confirm an impression that backside covering is a core value in AIB and accepted management practice.

The consequences of this are there for all to see and go back to the DIRT inquiry and the Insurance Corporation of Ireland collapse.

It is an issue that now has to be confronted and you would have to question whether Mr Buckley, who has been in the hot seat for both the Rusnak scandal and the current debacle, is the man to do it.

On the face of it, he does not look like the best candidate. After all, he has had two years since the Rusnak affair to try and stamp out what he called a culture of "passivity" and has manifestly failed if the events of last week are any guide.

It now looks very likely that, while Mr Buckley was talking tough in the wake of Rusnak, some of his employees were brushing a similar - but significantly smaller - problem under the carpet at bank centre. Either these people were not listening to him or they didn't think he was serious.

Ultimately, Mr Buckley's fate will be decided by big shareholders.

The culture of an organisation is not normally a factor to which hard-headed investment analysts pay very much attention.

Enron, Tyco and a host of other failed companies are testament to the investment community's myopia about business ethics when the share price is moving in the right direction.

But nasty surprises delivered with the sort of regularity that AIB appears to be doing are something that interest them very much. And when these nasty surprises create a direct link between share performance and institutional corporate culture, one can expect the remorseless logic of the market to force a change in culture.

And culture - in any organisation - is embodied by the chief executive. It is hard to change an organisation's culture without changing the person at the top.

But so much for theory. What about practicalities. Mr Buckley is not due to go until early 2006, when he will be 61. But that is precisely the sort of problem that the newly installed chairman Dermot Gleeson is paid €217,000 a year to resolve.

jmcmanus@irish-times.ie