The term “tone at the top” is typically associated with a firm’s control environment. How would you characterize Société Générale’s tone at the top and what effect do you believe that had on oversight at the trading-desk level?

Question

What will be an ideal response?

Answer 1

Students’ responses will vary and should include a negative or weak view of the control environment.
Some of the factors in the case linked to control environment are listed below.
The bank’s leadership knew that controls were not as strong as they should have been, but they put
profits first.
In meetings with investors in recent days, Société Générale’s chief executive officer, Daniel
Bouton, has admitted his bank’s internal systems did not keep up with the pace of growth in the
derivatives business. “He told them while our derivatives business was going 130 miles an hour, risk control was only going 80,” according to one analyst who covers Société Générale but insisted on
anonymity.1
Leadership encouraged risk-taking bets as long as they were profitable.

Kinner Lakhani, an analyst with ABN Amro in London: said, “Unlike some of their peers,
Société Générale was not shy about taking proprietary trading risks. Perhaps such businesses grew
faster than risk management could cope.”
Within Société Générale’s corporate and investment bank, according to Mr. Lakhani, the

percentage of revenue from market-making and proprietary trading rose to about 35 percent by mid-
2007 from 29 percent in 2004.

“If this scam had been uncovered in November, when he [Kerviel] was still up, he would have
been fired but I suspect we would have heard very little about it,” The damage wrought by Mr. Kerviel
comes in the wake of two trends that reshaped Société Générale: the explosive growth of its derivatives
business and its use of its own money to make bets on the market, known as proprietary trading.1
Société Générale had a poor tone at the top and should have led auditors to increase the inherent risk of
the audit. Management had been known to encourage risk above that which should have been accepted.
Throughout Société Générale’s sprawling derivatives business, said one current employee
who used to work with Mr. Kerviel, traders were encouraged to make proprietary bets, even on
desks that specialized in what top executives called “plain vanilla products,” like the team where Mr.
Kerviel worked, Delta One. “You must take positions, even if you are not a proprietary trader,” said
this employee, who insisted on anonymity because he was not authorized to talk to the press. “During
appraisals by bosses, they made it clear you were judged by how well you did your basic job, as well as
how much money you made on prop trades.”2
This attitude of management prompted traders to take unnecessary risk, which was not part of their
job descriptions. This attitude bred competition between traders and traders began to bend and break
the rules, as Kerviel did, just to get ahead.
Bank leadership was slow to replace the manager of the Delta One trading desk, leaving the trading
desk with little effective control. Further, when a replacement manager was hired, he apparently was
inadequately trained as he did not carry out any detailed analyses of traders’ earnings or positions.
Other factors student’s responses may include:
à Management ignored red flags, both external (Eurex) and internal (75 alerts)
à When supervisors or risk-management officers found errors, Kerviel was allowed to “fix” them
without further investigation
à Another employee knew about it (Bakir) but didn’t report it—suggesting a lack of ethical leadership
and perhaps management’s tolerance for ignoring the rules.
In order to bolster controls after the discovery of the fraud, Société Générale has set up a dedicated

internal fraud investigation group of around 20 people that will be independent of the front- and back-
office operations. The security of its computer systems has also been enhanced, making it more difficult for

employees to borrow the logins and passwords of colleagues.