On 19 July 1995 in London, the Board of Banking Supervision issued a report referring to ‘a failure of controls of management and other internal controls of the most basic kind’.2Much of the blame was attributed to Norris and Baker, and Baker told investigators ‘There is no doubt in my mind that my lack of experience in the area was a contributing factor to what happened’.3In addition Coopers and Lybrand were criticized for fail-ing to detect Leeson’s fraud. The Bank of England report concluded that Barings’ collapse was due to the unauthorized activities of one individual, Nick Leeson, but these activities had not been detected by management due to internal control failures of a most basic kind.
A report by the Singapore authorities, published in October 1995, was more critical of Barings’ executives, in particular Peter Norris, Head of Investment Banking, and James Bax, Regional Manager for South Asia (Rawnsley, 1996). Norris was described as ‘untruthful’ in the report. In addition, Norris and Bax were accused of playing down the importance of the £50m discrepancy related to the purported Spear, Leeds and Kellogg transaction and of actively discouraging investigations.
Nick and Lisa Leeson had attempted to escape from Malaysia back to London. Although they managed to leave Malaysia, they could not take a direct flight to London but had to break their journey in Germany and Leeson was arrested at Frankfurt airport on Thursday 2 March. Leeson attempted to fight extradition back to Singapore for several months, fear-ing that he would receive a lengthy prison sentence from the Sfear-ingapore authorities. His hope was that he would be returned to London to face trial and possibly a lighter sentence. However, the Serious Fraud Office seemed to be reluctant to press charges against Leeson and eventually in November 1995 he returned to Singapore. In December 1995 Leeson pleaded guilty to two counts of deceiving the Barings’ auditors and cheating SIMEX. He was sentenced to six and a half years in jail, the sentence being backdated to March 1995 when he had been arrested in Germany awaiting extradi-tion. He was released early for good behaviour in 1999 and then he returned to the UK.
In Singapore, Baring Futures’ books had been audited by the local firm of Deloitte and Touche. In London, Coopers and Lybrand audited the London books of Baring Futures. KPMG, who were appointed as liq-uidators following the collapse of Barings, started proceedings against Deloitte and Touche (Singapore). In 2003 the High Court in London found that officers of Barings Bank, rather than Deloitte and Touche (Singapore), were responsible for the failure to detect fraudulent trading by Nick Leeson. The High Court decision in 2003 required Deloitte to pay just
£1.5m in damages as a result of negligence on relatively technical counts.
This was a tiny fraction of the £131m damages originally sought by Barings. The litigation was finally concluded4in April 2004 at the Court of Appeal in London, when KPMG and Deloitte reached a settlement.
DISCUSSION
It is interesting to speculate why Leeson allowed his unauthorized trading activities to continue for so long. By his own account he suspected that it was only a matter of time before he was found out, which in some ways would be a relief for him. But he was perhaps surprised by the success of his own deceptions and his explanations to the Barings staff and auditors. The Kobe earthquake in January 1995 and its impact on the Nikkei index cannot be seen as a main cause of Leeson’s and Barings’ problems, although no doubt it accelerated the collapse of the bank. It does not seem that Leeson intended to enrich himself massively as a result of his dealings. Shortly after the Barings crash, Leeson was referred to by Eddie George, Governor of the Bank of England, as a ‘rogue trader’ and this phrase captured the public’s attention. However, the phrase was possibly an attempt to signal that one person, Nick Leeson, should shoulder the blame for what had happened.
It is somewhat curious that the Bank of England was taken completely by surprise by the final collapse of Barings. Doubts have been expressed as to how effective the Bank of England Report was and Rawnsley (1996: 205) argues that ‘The Bank of England . . . let itself off too lightly in its own analy-sis of the collapse. While the Board of Banking Supervision’s report was liberal in its blame, spreading it lavishly around Barings management and its auditors as well as Leeson, the Bank itself came off relatively unscathed’.
Gapper and Denton (1996) seem to agree and state that the Bank of England had avoided a rigorous inquiry by having the collapse investigated by the Board of Banking Supervision. Eddie George (Governor of the Bank of England) and Brian Quinn (Executive Director of the Bank of England) were both members of the Board of Banking Supervision. But Eddie George had argued that the inquiry would be fair because he and Quinn would not take part in drawing up conclusions about the Bank of England.
Table 11.1 Barings: key events
1989 Nick Leeson joins Barings
1992 Baring Securities set up futures operation in Singapore; Leeson is appointed general manager of Baring Futures (Singapore); Leeson hides some contracts in error account 88888; Leeson is authorized to act as a trader at SIMEX
1993 Leeson’s losses on account 88888 increase, although he clears the account to zero by July; but losses on account increase again during second half of year
1994 Losses on account 88888 continue to climb; Leeson claims £50 million debt is owed from Spear, Leeds and Kellogg (December); Leeson begins to forge supporting documentation
January 1995 Earthquake hits Kobe, Japan and Nikkei 225 falls; Leeson increases his trading activities in an attempt to recoup his losses
February 1995 Leeson leaves Singapore (23 February); UK news media report Barings’
financial problems (26 February); Barings ceases trading (27 February) March 1995 Leeson arrested in Germany
July 1995 Board of Banking Supervision in London reports on Barings collapse December 1995 Leeson sentenced to six and a half years in jail in Singapore
Discussion questions
1 How would you apportion blame for Barings’ collapse among Nick Leeson, the senior management, the auditors and the regulatory authori-ties?
2 Discuss the basic internal control failures referred to in the Bank of England report.
3 What lessons do you believe can be learned from Barings’ collapse?
4 Does the Barings saga make it more likely or less likely that these events could be repeated?
5 Is it reasonable to suggest ‘corporate greed’ as an explanation for Barings’
collapse?
6 Which stakeholders were most badly affected by the collapse of Barings?
REFERENCES
Board of Banking Supervision (1995) Inquiry into the Circumstances of the Collapse of Barings. London: HMSO.
Gapper, J. and Denton, N. (1996) All That Glitters: The Fall of Barings. London: Hamish Hamilton.
Leeson, N. with Whitley, E. (1997) Rogue Trader. London: Warner Books.
Rawnsley, J. (1996) Going for Broke: Nick Leeson and the Collapse of Barings Bank.
London: HarperCollins.
NOTES
1 Gapper and Denton, 1996: 305.
2 Gapper and Denton, 1996: 336.
3 Gapper and Denton, 1996: 336.
4 Financial Times, 23 April 2004: 5.
Shell
TWELVE
Shell or Royal Dutch/Shell has a fascinating history. The company popu-larly known as ‘Shell’, more correctly referred to as the Royal Dutch/Shell Group,1 can trace its origins back to early nineteenth-century London where Marcus Samuel opened a shop to sell seashells to natural-history enthusiasts.2The venture developed into an import–export business and in the 1890s Marcus’s son began exporting lighting and heating oil to the Far East. The Shell Transport and Trading Company was formed in 1897. At about the same time a Dutch competitor, the Royal Dutch company, was developing oil fields in Asia. A merger of the two organizations in 1907 led to the formation of the Royal Dutch/Shell Group of companies.
Royal Dutch/Shell continued to develop in the twentieth century and has proved to be one of the most enduring and successful global corpora-tions. Whereas other companies which were at one time household names have now been relegated to the lower divisions of the corporate league table, Royal Dutch/Shell has for decades maintained a position among the top handful of leading global corporations. Also of interest is the stability of the group in terms of its company names and operations, which have remained focused on the energy industry, though the group has acted to innovate when necessary, for instance in the development of natural gas as an alternative energy source. The shell brand name and logo seem to sym-bolize the stability of the group and the pecten symbol is more or less unchanged from the early twentieth century.
The Royal Dutch/Shell Group sees itself mainly as an energy group and employs 119,000 people in 145 countries.3Its main activities are explo-ration and production of gas and power, oil products and chemicals.
During the 1990s it received adverse publicity as a result of environmen-tal concerns, first from its operations in Nigeria and then from its North Sea operations. Shell had intended to sink the Brent Spar oil platform in the North Sea, but the intervention of Greenpeace raised public concern about possible pollution from dumping the oil platform, despite the fact that Shell had received UK government approval to do this. Eventually in 1998 Shell arranged to have the oil platform broken up in Norway.4
Unlike some other cases in this book, Shell is not, nor is it likely to be, in danger of corporate collapse. The focus of this case concerns Shell’s booking of oil and gas reserves, which first came to public attention in early 2004. Undoubtedly this was a serious matter for the company, and for Sir Philip Watts, chairman of the committee of managing directors, and Walter van de Vijver, head of exploration and production, who both resigned on 3 March 2004. Then in April 2004, Judy Boynton, chief financial officer, was asked to resign. But in order to understand how these events came about, it is useful to look at the structure of the group.
GROUP STRUCTURE
The overall group has two parent companies: Royal Dutch Petroleum Company (based in the Netherlands) and Shell Transport and Trading Company plc (based in the United Kingdom). Royal Dutch Petroleum rep-resents a 60 per cent interest in the group and Shell Transport and Trading represents an interest of 40 per cent. The two parent companies are not directly involved in commercial operations themselves but receive income in the form of dividends from other units in the group. The income from the companies in the group is split, with Royal Dutch Petroleum taking 60 per cent and Shell Transport and Trading taking 40 per cent.
Beneath the parent companies – and jointly owned by them – are the two group holding companies, Shell Petroleum NV (based in the Netherlands) and Shell Petroleum Company Limited (based in the United Kingdom). These two group holding companies hold all the group interests in the service and operating companies. One of the most important com-mittees in the group is known as the Committee of Managing Directors. In 2004 this body was headed by Jeroen van der Veer, who succeeded Sir Philip Watts on 3 March 2004 as chairman of the Committee of Managing Directors. The next most important person in the organization in 2004 was Malcolm Brinded, vice-chairman of the Committee of Managing Directors, who succeeded Walter van de Vijver on 3 March 2004 as chief executive of exploration and production.
The board structures are somewhat different for the two parent com-panies, due to the different influences of Dutch company law and practice as against UK company law and practice.5Royal Dutch Petroleum has a two-tier structure in which the supervisory function is intended to empha-size the strategic direction of the group, while the management function is identified more closely with day-to-day operations. The supervisory board – six directors plus the chairman, at that time Aad Jacobs – controls the overall direction of the organization, is responsible for ensuring that appropriate systems are in place and oversees the work of the management board, which, as its name implies, is responsible for managing the business and providing financial and management information to the supervisory board. There is a clear de jure hierarchy, with the supervisory board above
the board of management, which at this time consisted of two men: Jeroen van der Veer, President of Royal Dutch, and Rob Routs, Managing Director of Royal Dutch and Group Managing Director.
The board structure for Shell Transport and Trading is quite different and follows the normal practice for UK companies, which is a unitary board. The members or directors of Shell Transport and Trading are either executive directors or non-executive directors. It is not, strictly speaking, wholly accurate to say that the non-executive directors – in Shell’s case, Lord Oxburgh, the chairman, and eight others – are the equivalent of the supervisory board on the Dutch side. But in practice, the role of the non-executive directors is to ensure that the overall strategy of the business is appropriate and to take on a large degree of responsibility in relation to matters such as audit, nomination of new directors and remuneration of directors. The executive director – Shell Transport and Trading had only one, Malcolm Brinded, the Managing Director – is responsible for day-to-day operations. Although attempts are made to distinguish between
‘strategic’ and ‘tactical’ decisions, in practice these areas are often blurred.
For instance, pricing policy could have implications for the overall direc-tion of the group, if it were aggressive and allowed the company to enter new markets, and therefore could be viewed as ‘strategic’. On the other hand some pricing policy decisions, perhaps merely responding to cost increases, would not be regarded as ‘strategic’ but instead ‘tactical’ and capable of being left to the management board or executive directors.
From what has been said, it can be seen that the parent company boards for Royal Dutch Petroleum and Shell Transport and Trading have nineteen members, but only three ‘executive directors’, namely Jeroen van der Veer and Rob Routs (Royal Dutch) and Malcolm Brinded (Shell).