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Bankers: The Human Dimension

by Tom O'Connor on November 2nd, 2009
Scene From Sidney Lumet's 12 Angry Men (1957)

The role of the dissenter ... in Sidney Lumet's 12 Angry Men (1957)

It is somewhat fitting, I suppose, that Shane Ross’s new book, The Bankers, tracing the near collapse of the Irish Banking system should arrive on the shelves just in time for Halloween.
Certainly, this bewitching tale of pin-striped wizardry makes for scary reading, complete with its cast of spooky characters and boardroom covens, running rings around shareholders and regulators, alike.
Failure in Governance
Ross’s account is a distinctly Irish take on a phenomenon already well exposed in earlier books about Bear Stearns, Lehmann’s Bros. and the City, respectively:
House of Cards, by William D. Cohan
A Colossal Failure of Common Sense, by Larry McDonald et al., and
Chasing Alpha, by Philip Auger.
In all cases, the common threads of hubris and greed abound, as average mortals get carried away with an irrational sense of their own invincibility – as with Ozymandias of old.
But how come all this seems to repeatedly happen in society & business, where well-intentioned governance and risk management systems appear so prone to failure?
Good Process Is Not Enough
Certainly, it would appear that it wasn’t for the want of sophisticated auditing & reporting structures that the banks came a cropper – as testified by the large number of pages in their annual reports given over each year to the discussion of risk management.
For the shareholders in the Irish banks, who are now nursing losses of over €50B in market capitalisation, these pages, while doubtless well-intentioned at the time of writing, today appear quite vacuous: for now we know that the various dimensions of risk that so concerned the various boards (credit, market, liquidity, operational, compliance, etc.) were really only peripheral in comparison to the risks of flawed judgment that lay latent within themselves.
Alignment Of Self-Interest
Moreover, we also now know that the financial self interest of those responsible proved a poor antidote: for instance, in the case of Anglo Irish alone, the board of directors had over €250 million of their own personal wealth completely wiped out (calculated from the stock price highpoint of 2007).
This surprising disconnect between judgment and self-interest is not unique to Ireland, of course. It has also been revealed in the wake of the US banking crisis, leading the former Federal Reserve Chairman, Alan Greenspan, to admit that :
“those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”
Independence Of Mind
Similarly, in the UK, Sir David Walker’s recent list of recommendations to the Treasury, while focussing mostly on how best to beef up boardroom structure & process, is equally noteworthy for the new emphasis he places on the behaviour & competencies of individual directors.
In this regard, Sir David stresses the need for directors to have ‘a combination of … experience and independence of mind’ so they may be ‘ready & able … to challenge and test proposals’.
A similar sentiment is expressed by the Financial Reporting Council (FRC) in their recent ‘Review of the effectiveness of the Combined Code’:
‘There is a recognition that the quality of corporate governance ultimately depends on behaviour not process’
Role Models To Emulate
But, of course, the nub of the matter is in this term ‘independence of mind’ – and how this can be preserved in the face of the natural tendencies to groupthink, fall prey to confirmation bias or fluctuate with our emotional state.
The Henry Fonda character in Sidney Lumet’s 12 Angry Men has long set the gold standard here, as the lone dissenting voice that manages, in the face of seemingly impossible odds, to save the other jurors from falsely condemning an innocent man to the electric chair.
Fonda’s silken skills, unfortunately, don’t easily translate from screen to real life: as evidenced by the experiences of Harry Markopolos and Brooksley Born, 2 well-publicised dissenters who found the financial sector a lot less inviting of their views.
Organisational Interventions
Training and coaching are obvious interventions; but only when customised to the group dynamic obtaining, taking due account of the personality types, emotional profiles and openness to diversity of all concerned.
Likewise, interview panels, assessment centres and other board selection processes need to reprioritise thinking, judging & decision-making as the No. 1 competency set in the screening of candidates.
In a word: never again, can we afford our bankers …. to be so loosely human.

2 Responses to “Bankers: The Human Dimension”

  1. […] their own shareholdings of €250m. I've been giving this a bit more thought on my blog titled Bankers: The Human Dimension. Tom […]

  2. Tim Hennesy says:

    Tom – how right you are. When the virtues of process are extolled, as most businesses tend to do these days, I always think of the Hygiene Inspection form you will typically see on the back of the door of the Gents Toilet in most establishments, which is initialled every hour by one of the staff. It doesn’t evoke confidence in me anyway that everything is and will be well maintained. Business is full of such forms which are often signed off just because the process calls for this and not necessarily because the underlying condition is sound.
    I am still baffled though that the historic conservatism of bankers, driven essentially by prudent self-interest, failed so dramatically in many countries. In the past banks probably needed to be regulated to protect the customers from the bankers but never to protect the bankers from themselves

    Regards,

    Tim
    ESB Networks..