It is commonly acknowledged that a primary cause of the last financial crisis was the poor culture and values within the banking industry—superstar bosses with big egos, greed and the failure to challenge management have all been identified as having played a major role. This assertion has been supported with reference to the likes of Fred Goodwin of RBS, Dick Fuld of Lehman Brothers and Stan O’Neal of Merrill Lynch who have all been named in Time magazine’s list of 25 People to Blame for the Financial Crisis.
If personal skills and attributes were indeed a major cause of the financial crisis then we must conclude that the failure of HR was as much to blame as the failure of traditional risk management.
Therefore the crucial question is this; where was HR during the financial crisis?
Every year, banks, as well as other organisations, spend millions if not billions on HR; much of it going to training employees and managers in order that they may develop the personal skill sets and values necessary for a well functioning business environment. Organisations spend even more money on engagement questionnaires which they use to evaluate the extent to which their employees are committed and motivated to do their best.
A very major objective of all this personal development and questioning is to ensure that the lines of communication between employees and managers are open. However, for the lines of communications to be truly open it requires that all involved, irrespective of their title or seniority, have the ability to listen as well as express their opinions on all manner of issues.
Yet, Stan O’Neal was able to single-handedly alter the culture of Merrill Lynch from one which was generally risk averse to one which was aggressively risk taking. Dick Fuld created a climate of fear within his organisation such that one ex-Lehman employee noted:
Even within the firm, Fuld’s visits to the trading floor were rare events. So he was shut off from independent sources of information, from challenging questions and from up-to-date views from the front line of Lehman’s daily battle in the markets…
Standing in his way by showing aversion to risk could be fatal to your career…
The goal, he would tell subordinates, was to be ‘number one in the industry by 2012’, no matter what the cost.
Not to be outdone, Fred Goodwin was accused of megalomania by some shareholders—and that was even before his ambitious and ill-fated takeover of ABN AMRO.
The fact that Messrs Goodwin, Fuld and O’Neal were able to impose their personal will on their organisations and subvert all forms of traditional checks and balances; credit risk, market risk, finance and audit provides some very important lessons.
The first lesson is that human risk and organisational culture are twin sides of the same coin—culture drives human risk.
The second lesson is that the management of human risk and the organisational culture that underpins it are more important than the management of other traditional forms of risk. This of course calls into question the overemphasis on legislation and regulation that has followed the financial crisis.
The final lesson is that if organisations truly want to manage risk then they should start by placing human risks at the very top of their list. This will most certainly require a change in the nature and function of HR.
The question is this; what role will HR play in the management of human risk going forward?
It is quite likely that HR departments within the industry have not fully thought that one through.
Still, others might point to corporate governance as providing all the checks and balances necessary for ensuring that the mistakes of the past are not repeated but this is misguided.
In reality, corporate governance in of itself provides no guarantees that the lines of communications to senior management are open and/or that they allow for the freedom of expression. Banks in particular, are known for their Groupthink—if for no other reason than salaries and bonuses are so often dependent on not rocking the boat.
The problems at JP Morgan are a prime example of how human risks interfere with corporate governance and subvert risk management. The trader that incurred the US$ 6.2 billion in losses, Bruno Iksil aka the “London Whale” had initially wanted to report his trading losses when they were US$500 million.
Iksil’s managers on the other hand were determined to mask the losses presumably until they could recover the position—their reasoning was that if they reported a US$500 million loss then “there would be consequences”—as quoted by one Bloomberg article.
As such, it would be fair to say that JP Morgan’s final loss of US$6.2 billion was more due to human risk failures than market risk failures. At this juncture it would be more than useful to remind ourselves of Deming’s assertion of the need to “drive out fear” in order to improve any process.
To fear is after all human and banks and other organisations must rethink their approach.
I look forward to further feedback on this issue, what I have seen so far has been great but please don’t forget to do the poll below.
Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).