Carla I. Koen. Comparative International Management
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COMPARATIVE CORPORATE GOVERNANCE 301
market risk. Barings was thus not arbitraging between SIMEX and the Japanese
exchanges but taking open and very substantial positions, which were buried in
account ‘88888’.
Leeson set up account ‘88888’ in July 1992 – it was designated an error
account in the Barings Futures Singapore system, but as a Barings London client
account in SIMEX’s system. Abusing his position as head of the back office,
Leeson suppressed information on account ‘88888’. Barings London did not know
of its existence since Leeson had asked a systems consultant, Dr Edmund Wong,
to remove error account ‘88888’ from the daily reports BFS sent electronically to
London. This state of affairs existed from on or around 8 July 1992 until the col-
lapse of Barings on 26 February 1995. Information on account ‘88888’ was,
however, still contained in the margin file sent to London. Error accounts are set
up to accommodate trades that cannot be reconciled immediately. A compliance
officer investigates the trades, records them on the firm’s books and analyses
how they affect the firm’s market risk and profit and loss. Reports of error
accounts are normally sent to senior officers of the firm.
Barings’ management compounded their initial mistake of not segregating
Leeson’s duties by ignoring warnings that prolonging the status quo would be
dangerous. An internal auditor’s report in August 1994 concluded that his dual
responsibility for both the front and back offices was ‘an excessive concentration
of powers’. The report warned that there was a significant risk that the general
manager (Nick Leeson) could override the controls. The audit team re-
commended that Leeson be relieved of four duties: supervision of the back office
team, cheque signing and signing off SIMEX reconciliations and bank reconcilia-
tions. These recommendations were never implemented. At the local operational
level Simon Jones, who had responsibility for Barings’ operations in Singapore
and was a director of BFS, seems to have taken no significant steps to put the re-
commended segregetion of duties into effect; even though, in his management
response to the report, he had stated that, with immediate effect, Leeson would
cease to perform certain functions and that he [Jones] would ensure the adequate
supervision of all settlement and recording processes. Moreover, the director of
BFS and regional manager of the South Asian region failed to concern himself
with, or even to check, the implementation of the internal audit report.
Senior management at Barings were happy to enjoy the fruits of the ‘success’
of the Singapore branch, but were not keen on providing adequate resources to
ensure a sound risk-management system for a unit that, alone, ostensibly
accounted for one-fifth of its 1993 profits and almost half of its 1994 profits. The
CEO’s response to the internal auditor’s report, which called for a suitably experi-
enced person to run Singapore’s back office, was that there was not enough work
for a full-time treasury and risk manager even if the role incorporated some com-
pliance duties. No senior manager in London checked whether key internal audit
recommendations on the Singapore back office had been followed up.
The crux of the Barings collapse, then, lay in senior management’s careless
attitude to its derivative operations in Singapore. Every major report on managing
derivative risks has stressed the need for senior management to understand the
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risks of the business, to help articulate the firm’s risk appetite and to draft the
strategies and control procedures needed to achieve these objectives. Barings’
senior managers had a very superficial knowledge of derivatives and did not want
to probe too deeply into an area that was ‘bringing in the profits’. However, arbi-
traging the price differences between two futures contracts is a low-risk strategy.
How could it then generate such high profits if the central axiom of modern
finance theory is low risk–low return? And if such a risk, along with relatively
simple arbitrage, could yield so much profit, why were Barings’ better-capitalized
rivals (all with much larger proprietary trading teams) not pursuing the same
strategy? Two of Barings’ most senior derivatives staff, and Leeson’s bosses,
were not familiar with the operations of the SIMEX floor. They thought that the sig-
nificant and large profits were possible due to the competitive advantage that BFS
had, arising from its good inter-office communications and its large client order
flow. As the exchanges were open and competitive markets, this suggests a lack
of understanding of the nature of the business and the risks inherent in com-
bining agency and proprietary trading.
Questions
1. Identify and discuss the role of the UK’s system of management education in
the Barings’ story.
2. Would corporate governance institutions play a role in an explanation of the
case?
3. Is there a role for the human resource system of Barings in helping to under-
stand Leeson’s motivation?
Case: The Ahold Scandal
A
s the post-Enron wave of corporate scandals washed over America last
year, a common response in Europe was: it couldn’t happen here. Far from
having the world’s best-policed markets, the United States, many European
politicians claimed, suffered uniquely from a lethal combination of greedy and
overpaid bosses, conflicted auditors and investment bankers, reliance on
accounting rules not principles, and an obsession with quarterly profit numbers.
In America, as many as 1,200 companies have been forced to restate their
accounts in the past five years; in Europe the number is barely in double digits. So
it is outrageous, many Europeans now argue, that America is seeking to impose
the unwieldy Sarbanes-Oxley act, passed in the wake of Enron and WorldCom, on
European companies listed in New York.
As more sensible European regulators recognise, this smugness was never
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COMPARATIVE CORPORATE GOVERNANCE 303
justified: it is only necessary to recall scandals such as Vivendi, ABB, Elan and
EM.TV. But Europe’s claim of immunity from corporate sleaze has now been
blown out of the water by this week’s revelations that Royal Ahold of the
Netherlands, the world’s third-biggest food retailer, overstated its profits for
2001–02 by as much as $500m. Its chief executive and chief financial officer have
both quit.
It is true that Ahold’s accounting deficiencies mainly involved American sub-
sidiaries that it bought in a decade-long acquisition binge though they also
stretched to Argentina and Scandinavia. But the company’s Amsterdam-based
auditors, Deloitte & Touche, failed to pick the problems up in 2001, even though
worries about Ahold’s accounts were widely expressed in the markets for most of
last year. Ahold’s board, far from questioning the chief executive closely, tamely
extended his term for up to seven years as recently as last spring. The Dutch
market regulator admitted this week that it had no powers of discipline over faulty
auditing.
What about the relative numbers of restatements? Because America’s GAAP
accounting system relies on thousands of pages of rules, it is more vulnerable to
manipulation than Europe’s more principles-based approach. Wall Street’s
excesses of the 1990s were also more egregious than Europe’s. But given the
largely non-existent regulation of auditors and the poor corporate governance
prevalent in much of Europe, a more plausible conclusion is that Europe has had
fewer accounting scandals than America mainly because nobody has seriously
looked for them, not because they are not there.
This is not to say that Europe should adopt Sarbanes-Oxley in toto. That
hastily drafted law was designed for America’s very different system; it precludes
the two-tier boards that are common in Europe, for example. Many of the law’s
rules on managers and boards seem unduly intrusive even for America. But
statutory, independent regulation of auditors, as prescribed by Sarbanes-Oxley,
makes sense everywhere. So do rules to stop accounting firms doing consulting
work for audit clients; and it is also worth considering mandatory rotation of audi-
tors (Deloitte had audited Ahold for 15 years).
The case for independent regulation is the stronger because European Union
companies are due to adopt international accounting standards by 2005. It is little
use taking this welcome step towards tougher standards, which the Europeans
are urging on America in the interests of global harmonisation, if there is nobody
to oversee the rules. Yet the European Federation of Accountants admits that, in
six EU countries, there is in effect no enforcement at all.
Bad apples and oranges
After Enron and WorldCom were followed by the bankruptcy and criminal convic-
tion of Andersen, which had audited both companies, the remaining Big Four
hinted that Andersen had been an exceptional case: a rotten apple amid a barrel
of good ones. Andersen does seem to have been peculiarly culpable. Yet most of
the other firms have now also been tarnished by scandal in the past year or so:
KPMG over Xerox, PricewaterhouseCoopers over Tyco, Deloitte over Adelphia, for
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example. This litany means that statutory regulation of auditors is now essential
if investors are to regain their shattered confidence in the financial markets.
It is, in any event, pointless for politicians to crow about the merits of their respec-
tive systems. As companies such as Ahold go global, they run into countless
national regulators and supervisors – and it is the weakest link that is always
most likely to prove their (and their investors’) undoing. The right response is to
adopt the strongest, not the laxest, regimes possible. And that means both
enforcement of international accounting standards and tough regulation of
auditors.
15
Questions
1. What explains the occurrence of the Ahold scandal?
2. Should the Ahold case be seen as a failure of the (Dutch) two-tier board
system? Please explain your opinion of this issue.
3. The US$500 million overstatement was due primarily to Ahold’s US sub-
sidiaries. Would you, therefore, argue that Ahold is less a European problem
than yet another US accounting failure?
4. Would the Ahold scandal occur typically in ‘global’ corporations or could a
similar situation arise in companies operating in only one nation?
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Learning Objectives
By the end of this chapter you will be able to:
understand the origin of the main production models
explain the main differences between different production systems
critically assess the advantages and disadvantages of these models
reflect on the societal effect of production systems and production
management
link human resource management and corporate governance to modes of
production
understand the concept of fit in the context of production models and
production management
assess the possibilities of applying different production models within divergent
societal contexts
evaluate whether convergence is feasible in the domain of production systems
and management.
Chapter
7
Managing Resources:
Production
Management
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Chapter Outline
7.1 Introduction
7.2 Characteristics and Types of Production System
Taylorism, or scientific management (1890–1911)
Fordism, or mass production
Flexible production
Lean production
Case: Japanese Production Practices in China
Swedish Uddevallaism
7.3 Production Systems and the Societal Environment
Mass standardized societal systems of production
Societal systems of flexible production
The societal system of lean production
The German societal system of diversified quality production
The Swedish societal system and Uddevallaism
Short-termism and institutional inertia: the difficult transition in the USA
7.4 Conclusions
Study Questions
Further Reading
Case: Manufacturing Machine Tools in Germany and France
References
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7.1 Introduction
Many of you may wonder what a topic such as production management is doing in a textbook
on comparative international management. Indeed, in most, if not all, textbooks on inter-
national business and management, production management is conspicuous by its absence.
However, most of you will also have noticed that there are substantial differences in produc-
tion systems and methods of production management between countries. This suggests that
it may be interesting to explore how and why such variations in patterns of work organization
and control across societies develop and are reproduced over substantial periods.
While, previously, the superior efficiency of some production models was empha-
sized, it is now increasingly acknowledged that in order to be effective, there has to be
some degree of fit between the production system and the societal environment (see e.g.
Streeck, 1991). Hence there is, for instance, a large and successful population of medium-
sized investment goods engineering firms in Germany; more competitive in the UK and
France are either large batch producers or defence, electronics and specialized ‘high-tech’
manufacturers (Sorge and Maurice, 1990). In this respect, it has also been argued that
while Taylorism, or scientific-management, principles were once thought to represent the
only efficient way of structuring work activities, they are now seen as historically and
societally contingent patterns of work organization that depended on a number of cir-
cumstancial factors to become established in the USA, and that by no means dominated
industrial organization in Europe. It is also apparent that Fordist production systems have
had many variants and have not always proved as effective as some adherents claimed
(Whitley, 1999: 88). Similarly, more recent modes of production, such as Japanese
Toyotism, Swedish Uddevallaism and German diversified quality production – which are
explained below – developed in specific societal contexts and, when applied elsewhere, had
to be, and have been, adapted to the different societal circumstances.
Different production systems are characterized by contrasting ways of work organiz-
ation, organization structure, skill and knowledge requirements in jobs, methods of
educating and training employees of all kinds, working careers, remuneration systems
and industrial relations. The societal context in which production systems develop is able
to explain why some production systems are characterized by quite different patterns in
the fields just mentioned and contribute to maintaining them. It can be seen that such
patterns are specific to a certain society, prevailing without regard for different industrial
goals and contexts (nature of products, production technology, size of units, dependence,
regional location) (Sorge and Maurice, 1990: 142). Differences between US and German
skills and practices, and managerial identities, for instance, reflect variations in labour-
market institutions, and educational and industrial relations systems, as well as general
conceptions of professional expertise and status.
Drawing on societal differences, this chapter compares and contrasts the key differ-
ences in major production systems and management across four capitalist societies, and
suggests how we might explain the prevalence – or relative absence – of particular kinds
of production system, such as the ideal type of Toyotism and flexible production.
1
The
1
Obviously, there are many variants on each type of production system. For theoretical and explanatory pur-
poses, however, we focus here on ideal types against which diversity can be gauged.
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