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Barclays (BARC) is no stranger to controversy and has been mired over the last decade in what seems like a relentless list of scandals. PPI, FX and LIBOR rigging are the most recent to bring the bank into disrepute and the company this morning added another to the long list. Barclays advised us that the bank and specifically CEO Jes Staley were under investigation by both the FCA and Prudential Regulation Authority (PRA) regarding the culture and controls in place regarding whistleblowing disclosures.
Barclays in its release advised the market that “members of the Board received an anonymous letter and a senior executive received another anonymous letter raising concerns about a senior employee who had been recruited by Barclays earlier that year”. The two letters also “raised concerns of a personal nature about [this] senior employee, Mr Staley’s knowledge of and role in dealing with those issues at a previous employer, and the appropriateness of the recruitment process followed on this occasion by Barclays.” These letters were to be formally dealt with under the bank’s whistleblowing policy and the compliance function became involved. The letters was also escalated to Jes Staley, CEO of Barclays.
It is worth noting that anonymous whistleblowing is generally not preferred by companies. It is often difficult, if not impossible to provide feedback or be able to seek further evidence to properly investigate the claims made. However, a good whistleblowing policy should encourage employees to make anonymous disclosures over remaining silent. Companies should therefore always respect anonymity of disclosures, to fail to do so runs the risk of being perceived as persecuting the discloser, which would naturally discourage further whistleblowing from the workforce.
In an effort to clean up the behaviour of the industry, the need for disclosure within the banking industry has been the recent focus of the FCA and RDA. New rules were released in 2015 which require firms to formalise certain procedures in their policies, including employing a whistleblowing champion, with the aim of increasing the acceptance of disclosure. The FCA at the time was quoted as stating “individuals working for financial institutions may be reluctant to speak out about wrongdoing for fear of suffering personally as a consequence. Mechanisms within firms to encourage people to voice concerns – by, for example, offering confidentiality to those speaking up – can provide comfort to whistleblowers”
Barclays admitted this morning though that it had failed to respect an anonymous disclosure, and had attempted to reveal who was behind the disclosures referred to above. The RNS suggests that CEO Staley personally attempted to do so, outside of established governance practises, which I assume means trying to deal with the matter individually, rather than allowing the compliance group take the lead. The wording of the release also suggests that Staley went to some lengths to unmask the discloser, he “requested that GIS [IT team] attempt to identify the author of the first letter following which GIS contacted and received assistance from a U.S. law enforcement agency in identifying its author… this attempt by GIS was unsuccessful in identifying the author and no further steps were taken to do so after that.”
The release includes no information on the merit of the claim or the procedures taken to investigate the claim. It appears though that CEO Staley completely disregarded company policy and potentially fell foul of the FCA rules too. It is stated by Barclays that Staley felt that “letters were an unfair personal attack on the senior employee” and with Staley personally named this no doubt motivated Staley in defending the claims to protect his own reputation and that of a close colleague. We don’t know the specifics of the case, but the wording could suggest the disclosure concerns an ex JP Morgan employee, where Jes Staley forged his successful career in banking. Staley has subsequently poached a number of former colleagues he worked with at JP Morgan to head up senior positions at Barclays.
I’m not suggesting for a moment that the disclosures had any merit, it could be a disgruntled employee who missed out on a top job filled by one of Staley’s former JP Morgan colleagues, but in my view this is irrelevant. I have worked in a similar large corporate environment and became privy to the various claims made by employees under the whistleblowing policy. All claims were investigated, but many were correctly concluded upon by senior management to be personal, speculative and unfounded, as indeed may (or may not) have been the case here. There were though a handful of disclosures that were extremely serious and this is what Barclays risk jeopardising going forward. I am not suggesting to give employees a carte blanche, which could lead to the misuse of the whistleblowing policy and drown out cases with merit. Employees who have deliberately disclosed false or unfounded claims should face the consequences, but only reasonable steps should be taken to identify any wrongdoing to protect the system.
Staley’s punishment for now is determined as “a formal written reprimand” and “a very significant compensation adjustment will be made to Mr Staley’s variable compensation award”. But is this enough? Jes Staley earned £4.2m in 2016 of which his annual bonus was £1.3m and thus reducing his bonus is unlikely to give any particular hardship. As CEO the buck stops with Staley and it his responsibility to promote the correct culture throughout the organisation, which starts at the very top. Stakeholders will be asking many questions this morning, amongst them; when the CEO is perceived to have conducted a witch hunt on one of the firm’s employees, then what example does this set to the organisation? Was there also a conflict of interest in Staley’s motivation to address the disclosure? Does a modest financial penalty really send the correct message? All Barclays employees received a video spelling out the bank’s policy on protecting whistleblowers last year (per the annual report), could it be perceived that it is ‘one rule for one and one for another’, indeed would a less senior employee have been sent packing?
There is no doubt Staley has succeeded in bringing more focus and discipline to the bank and he appears to be steering the company away from the rocks, which in a way makes this episode even more disappointing. Staley in a letter written to the firm’s employees this morning assured them that he felt he was protecting a member of his team against a ‘smear campaign’, but as commendable that loyalty is, he has almost certainly let personal feelings get in the way of his professional duty towards his employees at large. The board though is behind Staley and ‘has concluded, that Mr Staley honestly, but mistakenly, believed that it was permissible to identify the author of the letter.’ This in my view though remains a very serious lapse of judgement on the part of Staley. The improvement of the ethics and culture in banking has been the priority on the industry’s agenda over the past few years and this makes it at this time even more unforgivable to have made this error, irrespective of whether it was an ‘honest mistake’.
This incident also comes at a time when Barclays is still dealing with various litigations where foul play is alleged. The question that many will be asking is whether cases like this morning’s persuade employees to turn a blind eye to integrity issues. It is hard to believe at this time that Barclays will be able to improve the behaviour of its bankers when members of the board fail to lead by example. The last thing the board and the industry needs at this time is for the perception of only applying the rules when it suits senior management, i.e. the promotion of good governance and culture to the junior bankers, but failing to apply the rules when they put the board or their close allies at a disadvantage.
The board has jointly concluded with the company lawyers that Staley should retain his position, but it may take the FCA many more months to reach a conclusion on the seriousness of the matter. Mr Staley will though face his first challenge as early as next month, he is up for re-appointment at Barclays Annual General Meeting on 10 May 2017. At the moment I suspect shareholders will look beyond this ‘error’ and focus on otherwise good operational delivery, but failure to deliver in the future could make his position very difficult indeed.
This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.