The truth about Neil Armstrong, Barclays, LIBOR, risk & culture

To go directly to the commentary paper, ‘Regulation, risk & culture: will we never learn?’, click here.

The report of the parliamentary Treasury Committee on LIBOR appeared a week after the death of American astronaut, Neil Armstrong.  The two events are strangely linked by their relevance to culture – but separated by a yawning gap in the quality of thinking brought to bear on the topic.

When Armstrong stepped on to the surface of the moon, he claimed it was “a giant leap for mankind.”  But the flag he planted was American.  Just after Neil Armstrong’s death in late August, President Obama said he “was among the greatest of American heroes – not just of his time, but of all time.”  Armstrong’s was a remarkable accomplishment, but it was not Armstrong’s alone; it belonged also to Dr Edwin “Buzz” Aldrin as well as command module pilot Michael Collins and to a generation of NASA astronauts, ground crew, engineers, physicists, technicians and other personnel. It was not one man or two men or three; it took many men and women many years and vast resources to make Neil Armstrong one of “the greatest American heroes”.  Those resources were applied not only for the good of science but also as a crucial step in the Cold War – in a space race that had emerged from the arms race that succeeded the Trinity test (pictured) and subsequent use of the atomic bomb by the Americans against two Japanese cities at the end of WWII. Armstrong’s accomplishment occurred within a definite context.

Since the success of Apollo 11, the American space programme has had its share of failures and disasters.  In the quarter of a century since the first space shuttle disaster, its performance and failures have been analysed in detail from a range of disciplinary perspectives.  One that has emerged strongly is the role of culture.   Context is a critical element of risk-taking and culture.

The report of the Treasury Select Committee uses the word ‘culture’ a staggering 50 times; it was used 96 times in the record of Oral Evidence.  There was plenty of confusion in the way it was used by those giving evidence and in the Committee’s report.  Culture has appeared frequently in previous analyses of failure in different contexts, but few have been examined in the detail that has attended the losses of the space shuttles Challenger in 1986 and Columbia in 2003 (Armstrong was a member of the Rogers Commission examining the loss of Challenger).  When it comes to financial servies regulation, can we and will we learn the lessons of history?

Based on the evidence from the recent parliamentary Treasury Committee report on the LIBOR scandal and other industry bodies’ and regulators’ reports internationally, the answer would appear to be a resounding ‘No’.  There is little evidence that regulators or industry bodies or market participants have understood the nature of the regulatory challenge or have understood how to respond the calls for improving culture and risk culture.  Without a change of focus, considerably greater application of behavioural insight and a strong measure of analytic caution, behavioural regulation of financial services will not move forward in the way that Parliament, regulators, the media, executives, shareholders or consumers expect or intend.

This pessimistic conclusion argues for the need to address risk, behavioural control and culture from first principles in order to reach a regulatory ‘settlement’ that will improve compliance and the management of risk rather than simply adding cost and confusion.  If we are to avoid regulating in haste and repenting at leisure, there is much that financial regulators can and must learn from other sectors’ failures about the importance of organisations’ history and context, of their technical, control and administrative cultures and compliance and the limits of rule-making.

Financial services firms face a choice:

  • wait for the regulator and/or supervisor to act, however blunderingly, to mandate new forms of regulatory ‘cultural imperialism’ and live with the consequences; and/or
  • adopt whatever superficial but fashionable solutions emerge from the consulting sector; or,
  • invest in greater understanding of the utility and limits of cultural descriptions of organisational activity and the potential prescriptions that emerge from them.

Whether recharting the behavioural course of banks, responding to the rigours of Solvency II in insurers or refocusing asset managers in a lower-yield world, we believe the latter course is an urgent imperative facing all firms in the financial sector.

We have recently published our Autumn riskbriefing which examines the relationship between behaviour and culture in a context of the social, market and internal pressures facing an organization.  Seeking lessons to learn, we examine first the accomplishments of the US space programme, its subsequent failures and some of the conclusions from the analysis of those failures.  We place the US space programme in its context, which has changed materially since its inception.  Then we review the recent parliamentary report on manipulation of LIBOR and the mis-characterisation by the Treasury Committee, by regulators, supervisors, industry bodies and market participants of culture and risk culture.  So far, the portents are ominous.  Lessons have not been learned; they do not even appear to have been sought. Realism and humility are both in short supply.

You can access the riskbriefing paper Regulation, risk & culture: will we never learn? here.

You can also access a two-page summary of the paper here.

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One thought on “The truth about Neil Armstrong, Barclays, LIBOR, risk & culture

  1. Sadly but true this story. I was thinking of the frog who is set in a pan with water. The frog is feeling fine and the pan with the frog is placed on the gas. The fire is lit and slowly the water is becoming warmer. The frog is feeling comfortable when the water is slightly warming up. The frog is sitting comfortably in the pan. He still is as gradually the water is becoming warmer and warmer. After a while the water is boiling but the frog still doesn’t make any attempt to jump out of the pan and finally get’s cooked and dies.

    Is this what’s happening here as well. Feeling comfortable in a group with people sharing the same interest. One sees something happening and there’s no reaction from co-fellow workers. He or she might think, perhaps after a slight wandering or after ringing the bell but not getting any answers, well “what the hack”. And the start is here. First warning, no great consequences, lack of overseeing larger implications, and the first alarm is being ignored.

    The next step is thriving on the preliminary one, and just like the frog gradually things grow form bad to worse until in the final event there is no frog at all. The scandal is there. The word culture could be easily replaced with the word water in the story of the frog. It is the culture in which we feel comfortable, at ease. And when something’s happening it’s also the culture and some name it “the tone at the top” in case of a company.

    What could be the answer to prevent these cases happening? Think of the frog who is placed in a pan with boiling water. The frog would immediately jump out of the pan. So with a fresh look at the Libor or other anomalies, would there be a need for physical warning’s that directly signal’s or alert’s people to take immediate action? Or is a paper rule with sanctioning a effective? I’m exaggerating the example of physical warning, but the question still remains the same. When and under which circumstances do people act to prevent or act upon distortions like Libor.

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