UBS And Puerto Rican Bonds: Short-Term Profits Vs. Long-Term Reputation

Recent new stories recount how in 2011, UBS management pressured brokers to sell shares in Puerto Rican bond funds about which the brokers had serious misgivings. (For example, from Reuters, “Exclusive: Recording shows how UBS drove reluctant brokers to sell high-risk Puerto Rico funds”.)

The brokers had good reason to have misgivings. In fact, they prepared a list of 22 reasons why the funds were not suitable for their clients. But that did not matter to the UBS executives overseeing those brokers. He told them to sell the funds or “…go home, get a new job…” according to a secret recording of a sales meeting.

Of course, we know how this story goes. The brokers did their jobs—what they were paid to do—and sold the stinky bond funds to their clients. Their clients lost a lot of money. The UBS clients, (by then, former-clients) hired a lawyer and sued UBS. The executive left the company in a restructuring, and a whistleblower lawsuit was filed.

This kind of story, in different flavors, seems to play out often in the banking and financial services industries. I had personal experience with it in the late 1990s when most of the large accounting firms, and many large banks and law firms were selling tax shelters to wealthy clients. But variations occur in other industries as well. And of course, the basic story line was central to the subprime crisis and financial meltdown of 2008.

Despite ongoing cautionary tales, these stories will continue, and history will repeat, unless those at the top of companies take a leadership role in defining corporate culture. Part of that culture is listening to those in the trenches. The UBS brokers, for example, had the right idea: Don’t sell an inferior product to your customer. Another part of the culture is to stress quality over sales and profit goals. And, perhaps most difficult, embedding in the culture an overriding skepticism that places a higher value on the enterprise’s long-term reputation than its short-terms sales or profits.

None of this is easy to do, especially when the Street judges business leaders by the quarter, and executive compensation is heavily tied to share price. But ensuring a responsible corporate culture is the most important responsibility of those who live in the C-suite. Boards and investors need to be more demanding. Perhaps the message should be, build responsible cultures, “or go home, get a new job.”

 

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