For the world’s largest banks, the top five lessons learned from the Global Financial Crisis were:
- Liquidity is king (90%);
- Institutionalise a risk culture (73%);
- Stay attuned to industry dynamics (60%);
- Don’t forget the people factor (40%);
- Prepare for the unexpected (35%).
An overwhelming majority (90%) cited an over-reliance on short-term funding, that growth was “king” and that liquidity was just not factored into the equation. Nearly three quarters (73%) of respondents considered it essential to institutionalise a risk culture… that goes beyond a narrow compliance focus. And over half (60%) of the respondents expressed the view that their organisation had been lulled into complacency by the benign market environment and the flow of new product offerings. A view expressed by a significant number (40%) of respondents was their underestimation of the importance of the human factor in managing risk, that human judgement, insight and experience should be more highly valued and utilised. And finally, 35% expressed the view that the banking industry as a whole had adopted a reactive, compliance-driven approach, rather than a forward-looking stance to risk management.
Equally applicable to business, non-profit and government organisations, these lessons bear repeating. They should echo in our ears because I suspect that many organisations have found themselves learning the same lessons!
Of particular interest to me is the failure of the banking industry across the board to prudently factor uncertainty intomanagement strategy, process and decision-making. Uncertainty is about being unsettled or in doubt, dependent upon chance. But until recently the prevailing ethos of business and government has been that of control, that compliance is evidence of control – all is well. Indeed, if you dared to challenge the assumptions underpinning control through compliance, you faced being ostracised – sent to Coventry. But as the largest, seemingly untouchable and impregnable organisations continue to falter, management’s and indeed society’s reliance upon current compliance and control processes needs to be questioned.
Compliance & Control
Compliance-based control frameworks are based upon policy and procedure, and the assumption, maybe even presumption, that the recipient of compliance information (….? Yes/No) is capable of accurately interpreting this information – that they have a full understanding of the environment and the circumstance of the respondent. Let’s attempt to put the above into context. Suppose, for example that an employee’s bonus is tied to performance, which is not uncommon. Further suppose that in response to market pressure management is demanding greater productivity i.e. more output with less input in shorter timeframes. Sound familiar. And to complete our picture, the employee’s reality that the only way that management’s expectations can be met is by short cutting procedure – by not doing something that is expected to be done, that should be done.
Failure to meet performance KPIs will prejudice the bonuses of both management and employees. So long as nothing untoward happens and expectations continue to be met, both management and employee have a vested interest in maintaining the status quo because bonuses are dependent upon it. Employees tell management what they want to hear and management do not inquire because they don’t want to know. The illusion is complete and the attribution made, all is well because the controls are working as evidenced by our compliance assessments. Our belief in compliance and control goes beyond today’s activities to the achievement of future objectives based upon what we have done in the past – a fallacy which has left armies decimated and nations all but bankrupt.
A modern version of Hamlet’s soliloquy might read:
To know or not to know that is the choice
Whether it’s nobler in life to take on the chin
The slings and arrows of outrageous chance
Or take up arms against the sea of uncertainty
And by seeking, lighten it. To die – to live.
I am not sure that Shakespeare would approve of my re-arrangement of his immortal words, but it does put much into perspective.
There is a Choice
Organisations have the choice, to know or not to know what is going on internal and external to their establishments. Internally, to engage with their people, to value their insight and judgment or to ignore them and prefer instead to use rule and procedure based upon the past encapsulated in control and compliance frameworks or computer software. Neither compliance and control frameworks nor computer software are of themselves capable of articulating a potential future, of formulating a strategy that embraces such a future. Yet until the crunch, that has been the belief of many. We can continue to take on the chin the consequences of compliance and control as circumstances unfold before us in a seemingly random manner or we can choose to seek out uncertainty, to attempt to shine light on what may or may not be and in doing so increase our awareness and also our preparedness. The question then is, can we encapsulate this awareness in a compliance and control framework. The short answer is no. Awareness is often tacit in nature, remaining uncodified until an event or circumstance facilitates its recognition and then codification. The banking industry have done this in their own way by recognising the importance of the people factor, something they had ignored for too long to their detriment.
Banks, we will die – be unable to survive if we fail to up our game and acknowledge the uncertainty, in which both risk and opportunity can be found. To live, we should embrace uncertainty – not be fearful of it because in uncertainty is the opportunity of our future.
The Black Swan
In a book entitled The Black Swan , the author Nassim Nicholas Taleb tells the story of how before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed then completely confirmed by empirical evidence. Yet, as those of us living in Australasia know, black swans do exist – in abundance. The people of the Old World had no reason to even consider the possibility that black swans could exist, just as before the advent of the crunch people had little cause to question the ethos of compliance and control. But now there is a reason.
We can choose a mindset limited by the past or learn a new one – unlimited by embracing uncertainty. I conclude with a quote from Taleb.
How can we know the future, given knowledge of the past; or, more generally, how can we figure out the properties of the (infinite) unknown based on the (finite) known?
Dr John S. Bircham
August 5th 2009