Tuesday, 10 February 2009

Financial Crisis and Organisation Structure

Financial Failure and Systemic Enquiries

The House of Commons and the ‘near’ collapse of two British Banks

This morning the recently resigned chairmen and chief executive officers of the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) were grilled by members of the UK Parliament’s Treasury Committee. The four ex senior managers apologised for the turn of events and the fact that tax payers had to bail the banks out of the crises. The Committee’s Chairman stated that either the bank bosses were incompetent or systemic reasons were responsible for this turn of events. Since the track record of these senior managers were well known the first option was not credible, leaving the option of systemic failures as the main reason. Also, much was made of the fact that the two chairmen were not bankers at the time of their appointments and that of the main four UK banking institutions only the two under scrutiny had had the tax payers bailing them out.

Unfortunately there was nothing in the questions and the evidence given that suggested that either politicians or managers understood the nature of systemic failures. They all stated that the events could not have been anticipated; things happened too quickly and they could only recognise their errors with the benefit of hindsight. A strong line of questioning was along their apparent inability to assess the risks of the products they were selling; did they understand these risks? Where they up to the complexity of the products they were offering? What struck me were the difficulties that the Committee members had to articulate the necessary questions to unearth the systemic aspects underpinning the managers’ failures. Both politicians and policy-makers don’t have an adequate training to visualise the structural underpinnings of their decisions. It is not difficult to appreciate that their judgments are supported by far more resources than those of lay citizens but they seem to be more at ease talking about concrete events and situations than to scrutinize the structures supporting their judgments. It became clear that the RBS had significant banking activities in the USA, and worldwide they had more than 25000 employees outside the UK, yet no question was directed to establish the quality of their knowledge of the USA subsidiaries; how well had these subsidiaries recognised the depth and magnitude of the sub-prime lending problem? Were they receiving good quality information about the situation of sub-prime mortgages as the situation was unfolding in the USA? Did they have adequate capacity in Headquarters to monitor the performance of these companies? Did RBS have mechanisms to cross check their experts’ assessment of the evolution of the markets with the results reported by their subsidiaries? These and many more systemic questions could have been asked but they did not emerge at all.

The problem was not that the RBS’s Chairman was an ex-pharmaceutical industry boss; in systemic terms the problem was that he and the other people in the bank’s Board did not share a good model of the organisational structure they were responsible for. This structure was responsible for inadequate distributed risk assessments that finally underpinned their judgments. Unfortunately, they and we (tax payers) are paying for the consequences of these bad assessments. The Chairman and the CEO could not know the details of the businesses they were running; their better chance for success was to improve their judgments by using the bank’s thousands of the highly paid executives and employees to the best of their abilities. Hopefully the effect of these structures should be better than adding or cancelling the individual abilities of these people; indeed this is what organisation structures are for. Competent people, supported by effective structural mechanisms, should be responsible for submitting good policy options for the consideration of policy-makers. Of course risks can never be eliminated but they can be ameliorated, in this case, by the collective work of thousands sharing the benefits of an unlighted leadership that enables their communications to the best of the stakeholders’ interests (not to the benefit of their own interests!). From this proposition many questions emerge that could provide light about why things went wrong and how things can go better in the future. Somehow I’m suggesting that both MPs and senior managers have much to learn about this kind of systemic inquiry.


Anonymous said...

Systemic thinking would be necesary for managers of large organisation. I believe they used kind of business intelligence software, balanced scorecard...but question is- are there scorecards that shows not only the status but also the vulnerability of system. Please suggest if there are any.
Im am in small business, economics around me nearly to collapses, customers not buying...challenging. Could kybernetics approach help me at this situation ???

Raul Espejo said...

Dear Anonymous; please read my new blog Enterprise's Vulnerability