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1. Analyze the major challanges USB faced in the last 5 years, in your opinion, what were the crucial factors in the banks downturn?
2. what are the main triggers to change the banks approach to communication and what is different today regarding the dealings and relationship to its share-and stakeholders?
3. How would you evaluate the constant replacement of the banks chairman and CEO?
4. in view of the future strategy of USB, what are your suggestions in order to regain trust and achive lasting effects?
UBS – Rebuilding Trust1
How the Board and Management Initiated Change through Corporate Communication
The ‘UBS Subprime Report’ of the Swiss Federal Banking Commission (SFBC) disclosed that that the major write downs of UBS were mainly caused by significant organizational weaknesses including an insufficient assessment of the relevant risk management processes. The scarce evaluation of potentially inherent risks related to the balance sheet growth, in combination with the over-confidence of the board and management regarding its risk management and control mechanisms, finally lead to a substantial value destruction. The report concluded as follows:2 “To summarize, the data information system used by UBS to assess the relevant risks must, with the benefit of hindsight, be considered insufficient. Although the systems generated a large volume of information, they were not adequate to indentify key factors that may have led to an earlier identification of the material risks associated with exposure to Subprime mortgages. In retrospect, the stress scenarios used by UBS proved far too optimistic. With the benefit of hindsight, the situation appears clear: the bank did not sufficiently manage, limit and control its Subprime mortgage exposure. This finding applies in varying degrees to each of the strategic, business and control processes employed by UBS. Despite the fact that no one could have foreseen the practical implications of the Subprime mortgage crisis and the speed at which it was to unfold, the bank remains responsible for the risk assessment failures from a supervisory perspective.” Fortunately for UBS, the Swiss Federation took over around USD 60 billion of then illiquid securities and other assorted assets. A special purpose vehicle (SPV) was constituted by the Swiss National Bank (SNB) to take over the illiquid assets “in order to provide the big bank with liquidity and restore the confidence that had been lost as a result of the crisis”.3 Consequently, UBS could announce CHF 6 billion of new capital through mandatory convertible notes in October 2008.4 In 2009, the SNB had to write down CHF 5 billion as a result of the “toxic paper of UBS”.5 In 2010, the stabilization fund’s overall risk was still USD 14.7 billion.6 As a result, for the Swiss Federation the ‘UBS affair’ has not come to an end yet.
The Continuing Loss of Reputation
The Subprime Crisis turned out to be not the only Achilles’ heel of UBS. On February 18, 2009 UBS had to pay USD 780 million in order to resolve investigations relating to its US cross-border business with private clients in the USA by entering into a Deferred Prosecution Agreement (DPA) with the US Department of Justice (DOJ) and a Consent Order with the US Securities and Exchange Commission (SEC). According to the DOJ, UBS was accused of helping thousands of wealthy US citizens to evade taxes by setting up specific offshore structures. In some 300 cases it could be proved that UBS staff not only helped American customers to set up offshore structures, but also accepted false declarations in US forms in order to aid their customers to fail to declare themselves and thus defrauded the Internal Revenue Service (IRS) and evaded US income tax.7 In addition, as part of the DPA and based on an order of the Swiss Financial Markets Supervisory Authority (FINMA) UBS was requested to reveal the names and dossiers of 4’450 of their clients. Besides the lodged objections of some of the US citizens to handover their data to US authorities, this also lead to a heated discussion regarding the actual purpose of bank client confidentiality in Switzerland, also referred to as bank secrecy.8 On July 19, 2010 the Swiss Federal Administrative Court finally set an authoritative precedent and dismissed the appeal of an American, who tried to prevent the handing over of her documents. The court argued that administrative assistance is binding for UBS client data, by reason that the interstate agreement between Switzerland and the US applies to law of nations and hence is superior to the Swiss federal constitution and national law.
4. Corporate Governance
Missing in Action UBS was once more under the spotlight and publicly criticized. As a consequence, the election of a new chairman of the board of directors was yet again announced at the annual general meeting on April 15, 2009. Kaspar Villiger, a politician affiliated to the Free Democratic Party (Liberals) and a former member of the Swiss Federal Council, was already the third elected chairman within the past three years. Only one year before, Peter Kurer was appointed as chairman. The lawyer, a former partner at law firm Homburger AG in Zürich and previously in charge as the Group General Counsel of UBS, declared his dismissal in 2009. In 2008, Marcel Ospel was forced to withdraw his candidacy for reelection to the board, amongst others due to the massive write downs. Marcel Ospel served as chairman of the UBS board from 2001 until 2008. There were also considerable changes within the UBS management. The restructuring took place both in the banks’ divisions and in the top management. From 2003 until 2006, Peter Wuffli was Group Chief Executive Officer (CEO), followed by Marcel Rohner in 2007. In 2008, the CEO position at UBS was taken over by Oswald J. Grübel. Within only three years, the bank largely reduced its personnel by over 20 percent, i.e., 18’943 people in full-time equivalents.
5. Resulting Consequences
Shareholders clearly demonstrated their disappointment as well. Within only two years, UBS experienced a downright fire sale. The share price dropped over 75% from its high at CHF 75.54 on February 9, 2007 to CHF 8.20 on March 3, 2009. Similarly to the fallen value of shares, UBS employees were demoralized. A culture of distrust and uncertainty prevailed. People in the company complained of being rather informed through the media than through internal communications. In addition, recriminations by the divisions where at the order of the day, for example accusations between the wealth management and the investment banking. Furthermore, many employees were not only accused by frustrated clients at the banks counter, but sometimes even faced resentments in their circle of friends. The intensified negative public discourse lead to a further decrease of public trust. At the annual general meeting of shareholders on April 23, 2008, Marcel Rohner stated: “As CEO, it is my duty to present and comment on last year's results to you, our valued shareholders. But a loss of 4 billion Swiss francs speaks for itself. It is a disastrous result, and it has eroded a great deal of trust.” Over and above, the discussion was reinforced by the remuneration system of UBS. The general public could not understand how a bank could make such giant losses and at the same time gratify top management with millions of Swiss francs. The local media cursed at UBS management to be a ‘bond of rip-off artists’ and public demonstrations took place in front of the banks’ headquarter in Zürich. Figure 3 illustrates the demonstration organized by the Jung Socialist Party in front of UBS headquarter in Zürich on October 23, 2008.
6. Chance in Corporate Communication
In search of authenticity and transparency, Peter Kurer acknowledged the following in the extraordinary general meeting on November 27, 2008: “Finally, in the letters, repeated criticism is leveled at our communication. We are accused of not providing enough transparency. Although we have always satisfied our legal disclosure obligations, it is true that we should have been even more transparent. There is no doubt about that […] Some letters have accused us of arrogance and say that we need to get off of our high horse. This, too, may have had an element of truth in it in the past – at all levels.” Only six month later, at the annual general meeting on April 15, 2009 the new group chief executive officer Oswald J. Grübel announced in his speech: “Our most important task is to rebuild our capital of trust. […] Trust is something that is quickly lost, while winning it back is a long and demanding process. We have to become dependable and reliable again and show you that we deserve your trust. This is what we are working on because the lost of your trust is something that pains our bank and our employees more than anything else.” Henceforward, not only a drastically cost-cutting program was put in place in order to become profitable again, but also top priority was given to corporate communication. This chance in communication is, amongst others, reflected in the UBS advertising campaigns. In the following the campaigns from 2008 until 2010 are illustrated. Advertising campaign of 2008 UBS launched its first global brand communications program with the introduction of the “You & Us” campaign in February 2004. Three TV executions were created: One focused on the overarching UBS brand, one on the Investment Banking division, and one on UBS Wealth Management. Similarly, multiple print ads were created, each focused either on the brand or a division. In June 2008, UBS expanded the “You & US” campaign in response to the financial crisis. The aim was to reassure its clients and prospect audiences by restating their commitment to relationships. It further intended to signal that ‘business is not usual’, which was underlined with sentences such as “The times are uncertain. The relationship isn’t.” or “The world changes. Our commitment doesn’t.” The ads featured a UBS advisor or banker, with expressions and gestures which conveyed a serious and energetic sense of commitment (Figure 4). In addition, UBS launched two television spots designed to communicate reassurance in the midst of financial turmoil in the markets. Advertising campaign of 2009 The “Manifesto” approach, a new execution of the brand campaign, was developed to signal change. It aimed at communicating the actions the company had taken as a result of the financial crisis and provided strong reasons-to-believe that UBS will remain one of the best capitalized banks in the world with their 140 years of experience. However, advertising activity was put on hold following the first quarter in light of market conditions. Figure 4 illustrates the print ad of the UBS advertising campaign 2008 on the left, and the one of 2009 on the right: Advertising campaign of 2010 The new theme of UBS 2010 global brand campaign is “We Will Not Rest”. The bank aims at encompassing the spirit in everything they do and intends to show again strong commitment to client relationships. The campaign was launched with traditional ads, TV spots, and also through new social media. An advertising video with CEO Oswald J. Grübel was even made available on youtube.com. The official text of the campaign refers to famous personalities such as boxer Muhammad Ali or the mountaineer Edmund Hillary and appears as follows: “We all have ambitions in life. Challenges we have set ourselves. Dreams we want to fulfill. And at UBS, we believe our clients have a better chance of achieving their financial goals with someone alongside them. Because we believe the loyal support and resolute determination of a trusted partner or advisor can make the difference. Just as it did for so many great achievers throughout history.”
7. Outlook: The Challenge of Achieving Lasting Effects
In October 2010 UBS published "Transparency report to the shareholders of UBS AG", which reviews what led to the large losses incurred during the financial market crisis and the problems that arose in the cross-border US wealth management business. The report detailed how the crisis came about and what UBS has done since to ensure that it does not repeat the mistakes it has made. In its review of the events related to the financial market crisis, UBS came to the conclusion that the growth strategy in the investment banking area, which was not planned in a sufficiently systematic manner, made a significant contribution to the large losses posted by the bank. The incentives in place at that time to generate revenues without taking appropriate consideration of the risks underpinned this strategy and facilitated losses. The same business was being conducted in various UBS business units, which in turn multiplied the risks. Capital raised on the market was passed on within the bank without the application of risk premiums, allowing the Investment Bank to refinance itself at favorable conditions and further build up its holdings of what turned out to be loss-making positions. There were no limits on the balance sheet and there was no uniform approach applied across the bank with regard to risk positions. Risk control was based too heavily on statistical models and the ratings of external agencies were rarely questioned. Despite warnings, the bank falsely believed that its financial products in relation to the US real estate market were valuable and sufficiently hedged against losses. The problems in the wealth management business are attributed in the report to the fact that, prior to initiation of the investigations by the U.S. authorities, there was no comprehensive or continuous assessment of the overall compliance risk profile of the U.S. cross-border wealth management business. While initiatives to improve compliance with the applicable internal rules and U.S. legal requirements were taken, such measures were implemented in a manner that was insufficiently rigorous, rapid or complete. There were also failures with regard to the training and instructions received by employees. In some cases, internal rules were not precise enough and expectations were not communicated clearly enough. Ultimately, the report concludes that UBS did not implement an effective system of supervisory and compliance controls necessary to convey a clear and consistent expectation that fully complied with applicable internal controls, and to ensure that any compliance failures were promptly detected and corrected. The report also weighs the arguments for and against initiating legal proceedings against former UBS managers, and concludes that no such steps should be taken. In August 2011, the bank provided an update on its plans to eliminate expenses of a total of approximately CHF 2 billion from annual costs by the end of 2013. The plans include savings associated with headcount reductions of approximately 3,500 units and further real estate rationalization. Of the expected 3,500 staff reductions, approximately 45% will come from the Investment Bank, 35% from Wealth Management & Swiss Bank, 10% from Global Asset Management and 10% from Wealth Management Americas. These numbers include Corporate Center headcount and charges allocated to the business divisions.
Ans 1. The major challenges faced by UBS in the last 5 years were the following:
Ans 2. The main triggers for change in the Bank's approach to communication was when UBS was charged by general public and stakeholders about " lack of transparency". This led UBS to bring about a report named "Transparency report to the shareholders of UBS AG". This resulted in different advertisements that tried to regain the lost trust with both the internal and external customers of the company. Supervisory process and Risk management was given due importance with a customer friendly attitude.
Ans 3. The constant replacement of the Bank's chairman and CEO hurt the morale of the employees. It sent a negative image to the shareholders as well. Frequent changes in CEO dents the decision making process and leads to policy paralysis. It creates a gap in the communication process as well. The shareholders look with suspicion while the customers are unsure whether to do business with such clients or not.
Ans 4. Suggestions for UBS in the future:
1. Analyze the major challanges USB faced in the last 5 years, in your opinion, what were the cru...
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