The following is the fourth in a series of articles on bank risk culture. The previous articles can be accessed here or by clicking the HOME tab on the blog.
Thus far in this series on bank risk culture we are beginning to understand that there is really no such thing as a separate bank or organisational risk culture and that cultural change cannot be invoked by merely adding more rules and regulations.
We also began to explore the idea that an organisation’s culture is the totality of the human experiences within and around it, and it those experiences that determine the how and why of the organisation’s business, the nature of its products and services and its impact on the wider community.
Bankers have always considered themselves a breed apart and have generally been reluctant to learn from other industries. However, given the series of financial crisis in the past thirty years it is imperative that we learn lessons from organisations that have been more financially stable.
Therefore, in this article we will explore how one organisation, Toyota, developed a culture of business that by definition reduced and avoided risks while creating a superior product. We will then compare and contrast how Toyota’s experiences have distinct lessons for today’s banks. I promise it will amaze you.
The Toyota Revolution
Thus we journey back to post-war Detroit where the world came to see the wonder that was mass production; one that had enabled the United States to become the arsenal of democracy and win World War II. All were impressed, except for a couple of visitors from Japan— Eiji Toyoda and Taiichi Ohno of the Toyota Motor Company.
The fact that Toyoda and Ohno came from a country that had been almost totally destroyed by the “wonder” of mass production made it even more remarkable that they returned to Japan believing that what they saw was a waste of both human and investment capital. They responded by creating their own system which they called the Toyota Production System—it became known to the rest of the world as Lean Production.
By the 1970s, Toyota and the other Japanese manufacturers who copied their approach were posing a serious challenge to car manufacturers in both Europe and the US and both groups argued for import quotas on Japanese cars.
Why were the Japanese cars so competitive? They were cheaper, more fuel efficient, far more reliable and offered way more in terms of customised options.
How was this miracle of manufacturing achieved? How could western auto manufacturers be made to look so uncompetitive by an industry that in their estimation was no more than an upstart?
Whole books have been written about Lean Production but I will briefly summarise the main elements before comparing and contrasting it with what happens in banks today.
The Miracle of Lean Production
The TPS is a human ecosystem specifically designed to reduce risk at every step. It does this by ensuring that all human elements are incorporated into the production system in such a manner that they are able to give of their best. It was and still remains revolutionary.
Customer needs and their direct feedback were integrated into the manufacturing process—the result was that the system only produced the products that customers wanted. Traditional mass production emphasised production driven demand thereby increasing the risk of high inventory levels and unwanted cars.
At Toyota, suppliers were integrated into the both planning and the continuous improvement processes in order to make the most of their specialist knowledge. As a result, the company’s cars were designed with less inherent defects. In mass production suppliers were simply the people who were given tenders and ordered to meet a specified standard.
Managers at Toyota devolved as much responsibility as possible to their employees. In turn, the employees did not join a union and were given cast iron guarantees in respect of their pay and conditions. The organisational structure was made as flat as possible.
Employees were trained such that they were only 2 categories of very high skilled workers on the plant floor. Each employee was capable of a multitude of tasks and this enabled them to work in highly integrated teams, with each team controlling its own workflows and engaging in continuous improvement.
The status of managers and employees at Toyota were in stark contrast to the failed UK auto manufacturing model. Management and employee relations were poor, the workforce was highly unionised and there were more than 200 different categories of workers on the plant floor.
In a case study of the benefits of Lean Production on the environment—yes Lean is also more environmentally friendly—the US Environmental Protection Agency or EPA noted on its website that:
In 1994, GM and Toyota formed a joint venture called the New United Motor Manufacturing Inc. (NUMMI) to pioneer implementation of lean methods at an automotive manufacturing plant in the U.S. Compared to a conventional GM plant, NUMMI was able to cut assembly hours per car from 31 to 19 and assembly defects per 100 cars from 135 to 45.
Lean manufacturing has increasingly being adapted by other auto manufacturers and in an article entitled How Automotive Quality Control Works, Jamie Page Deaton notes:
Still, despite the incredible advances in automotive quality control, the most important component in building a quality car is the human touch. As a result, many car makers try to build a corporate culture where every single employee is responsible for quality. If they see a problem with a product, employees are encouraged to come forward so the company can make it right.
Comparisons between Lean Production and banking
It is obvious from the description of Lean Production that risk management is not a separate exercise but integrated into the organisation’s culture. It is just part of the how and why all human elements; customers, suppliers, managers and employees combine and integrate to do business and deliver a quality product at reduced risk and with fewer defects.
We only have to look at what unfolded before, during and after the financial crisis to see how the model adopted by the banking industry is so diametrically opposed to the Lean model, in that the former appears to be specifically designed to guarantee failure.
Before the crisis, customers were granted mortgages, including the infamous ninja loans with crippling interest rate triggers, by unscrupulous brokers. These loans passed through the banking system and onto investors by way of securitisation. During and after the crisis; investors lost millions, banks failed and hundreds of thousands of people had their mortgages foreclosed.
Just imagine how different things could have been if we had a culture of banking that was based on the mutual self-interests of banks, their customers and their suppliers. This is why banks don’t really need more legislation, more regulation, more governance and more controls but a cultural transformation that is more responsive to their human environment.
Banks also desperately need a cultural transformation in the relationship between managers and employees. In a dynamic and complex environment a Board cannot exercise effective control with layers of Vice Presidents, Senior Vice Presidents, Executive Vice Presidents, Senior Executive Vice Presidents, Directors, Managing Directors and Executive Directors between them and their employees.
Instead, what bank Boards are getting from such structures is enforced conformity and Groupthink—especially when bonuses are dependent on saying the right thing. Such an environment is hardly conducive to reducing or avoiding risks.
Further, having worked in external audit, internal audit, SOX, product control, risk and as a business manager to global division heads in a number of major banks, I have lost count of the number of encounters I have had with employees in the process chain who have no clue as to what the person to the right or the left of them is doing.
This is clearly not the highly skilled and highly integrated continuous improvement and risk reduction culture of Lean and it explains why banks suffer so many nasty surprises.
So why did Toyota run into problems and what does it mean for banks?
When Toyota ran into problems because of some its cars accelerating out of control and causing serious accidents and even deaths, CEO Akio Toyoda, a member of the company’s founding family, was in no doubt as to what caused the problem. He stated:
“We pursued growth over the speed at which we were able to develop our people and our organization”.
Toyoda did not say that enterprise risk management was poor or that quality control was bad. He did not say that the company should have done a better job at implementing the ISO 9000 standard. He did not even blame Toyota’s suppliers. He focused instead on the fact that the organisation had expanded beyond the limits of its ability to sustain its culture.
This is why Too Big To Fail or TBTF also often means Too Big To Manage or TBTM as so many of these institutions have expanded beyond their ability to develop a coherent and cohesive culture.
Now that we have a better understanding of how human and cultural approaches to reducing and avoiding risks are far superior to wholly control driven approaches, we can now perform a comprehensive analysis of how human failings caused the last financial crisis. Such an analysis will also expose the inadequacies of the legislative and regulatory responses to the crisis.
However, we must first look at the very vexed question of leadership and the culture of leadership that gives rise to failure. This we will do in the next article.
Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).