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Back to Basics

July 30 2019

Ever since the financial crisis started there has been a plethora of explanations about why traders and bankers behaved as they did.  Some have been purely descriptive: what happened and when, allowing us to marvel at the folly of it all, at least in hindsight.  At the time these clever financiers were praised by pretty much everyone from Chancellors down. There were very few pointing out at the time that the Emperor had no clothes.

But increasingly there have been attempts to use the insights gleaned from other disciplines to explain why what happened in the way it did. The latest neuroscientific findings were used to describe the biology of boom and bust (The Hour Between Dog and Wolf, for instance). Behavioural economics has had its say, as has nudge theory. Rather than nudging people to behave well, all the payment and reward incentives nudged financiers into doing what suited them financially irrespective of the effect on the customer and no matter what the expressed good intentions of the firm were. Goodness! Whoever could have predicted that, without a theory to explain it.

Psychologists have had their say, of course, though only a cynic might wonder about how much actual knowledge about the realities of life in the financial sector they have. No matter: all could opine merrily on the importance of culture in finance and on all the wonderful insights that these disciplines could bring to those seeking to manage and regulate the financial sector.

And now the anthropologists have got in on the act, as in this article by Gillian Tett. In it she points out how anthropologists have tried to analyse the cultural patterns, the rituals and symbols, even the words people use in finance to understand what was going on under the surface. In truth, the insights brought by anthropologists (at least as described here) are pretty obvious rather than thought-provoking; the article does not need them to be worth reading.

What is interesting, though, is how commentators on finance and perhaps also regulators are, perhaps unconsciously, making the same mistake as many of those traders and bankers. They are over-complicating, coming up with all sorts of theories and hypotheses apparently grounded in science or other social studies, described and interpreted by experts, using technical language to describe common human behaviours. Just as too many traders developed over-complicated products which they only half-understood and managers kidded themselves into believing that they had found a foolproof solution to valuation or risk management or any of the other difficult tasks they had, so there is a risk of developing overly complex explanations for why so many people behaved so stupidly or worse. The risk is that the more complex the explanation, the more people feel that it is all too difficult really to do anything about it or that this is something best left to the culture specialists, psychologists and other “ologists“.

Keep it simple might be the motto. In the end, by whatever means the conclusions are reached, what everyone in finance needs to remember is this:-

  1. Trust is at the heart of finance.
  2. Everyone in a financial institution is, in one way or another, managing risk.  There is no such thing as a risk-free product or institution.  Or, indeed, individual.  Understanding the risk you are running and managing it properly is what every bank, every employee in a bank, every customer of a bank, every shareholder in a bank, every investor in a financial product and every regulator of a bank is doing.  Or ought to be doing.
  3. Understanding properly is hard work.  There is no magic bullet, algorithm, theory, process, spreadsheet, AI or killer piece of management information which will do it for you. Thinking is often required.
  4. There is no way of eliminating risk.  Mitigating and minimising it: yes.  Eliminating it: no.  If anyone says otherwise (and much of the financial crisis was caused as a result of clever people thinking they had done just this and learning, painfully, that they hadn’t) they’re a charlatan or worse.
  5. Human beings, even clever ones (particularly them, it sometimes seems) do not behave rationally around money. Money and emotions are bosom pals. As any decent novelist or lawyer dealing with divorces or wills will tell you.  The “animal spirits” Keynes described do not just apply to market participants but to all of us.
  6. Managing people, understanding them, motivating them, inspiring and leading them, teaching them, setting them a good example, setting them high expectations and making it clear what the boundaries are, what behaviour will not be accepted, what crosses the line, helping them get past their frailties, working effectively with them is hard work, the hardest work anyone ever has to do.  And by far the most valuable – and rewarding.
  7. Finance is there to serve others, not itself.  It is a means to an end and the moment it (and the people in it) start thinking of themselves as indispensable, as set apart from the society they are part of, as entitled to special consideration and immunity from challenge is the moment when hubris sets in.  Nemesis will surely follow.

 

Photo by Lesly Derksen on Unsplash

Financial Dramas

December 31 2018

2018 has been a year for anniversaries, September bringing forth a slew of articles about the financial crash 10 years on and a number of books by learned professors (to add to the ones already written about the fall of individual institutions) seeking to make sense of it all.  See, for instance, Adam Tooze’s “Crashed: How a Decade of Financial Crises Changed the World”.

But despite the colourful characters, scandalous activities and stories aplenty, it is curious that in the last decade novelists and playwrights have largely shied away from writing about the world of finance.  It is an odd omission.  19th century writers were much less shy: see William Thackeray’s Vanity Fair with its wonderfully sardonic and cynical and oh so apposite to our times take on a world where “everyone is striving for what is not worth having“.  Or Balzac with his tales of how money – having it, not having it, wanting more of it – corrodes personal relationships.  And not forgetting our very own Dickens, whose every novel is stuffed with characters for whom debt was an ever-present – and often malign – reality.  Mr Micawber stands as an object lesson to those who think that living beyond your means indefinitely is sustainable.

There have been a few attempts to make a drama out of a crisis: Caryl Churchill’s expletive-ridden “Serious Money”, written in 1987, just after an earlier stock market crash (and featuring the International Tin Council litigation, the very first case I was involved in as a junior solicitor) was one of the earliest.   Not a play likely to feature in the repertoire of amateur dramatic societies, given its colourful language.

A few years later “Capital City” was a TV series based on the lives and loves of City traders in the late 1980’s when Britain learnt to fall in love with making Loadsamoney, as much and as fast as possible and with precious few scruples about how it was done.  This was the era of the Guinness affair and Robert Maxwell and BCCI.  Enough larger than life characters and juicy stories and morality tales there for even the most mathematically challenged writer.  But even that great State of the Nation playwright, David Hare, whose plays in the 1990’s: “Pravda” (journalism), “Racing Demon” (the Church of England), “Murmuring Judges” (the law) and “The Absence of War” (the Labour Party) sought to take the moral temperature of contemporary Britain and its institutions, ignored the tumultuous changes in the world of finance and how they were changing British society more radically than even the most provocative newspaper or campaigning politician.

Lucy Prebble’s “Enron” in 2009 succeeded in London but failed in NY.  More recently, the BBC’s McMafia series focused on Russian money laundering.  John Lanchester’s 2012 novel, “Capital”, was set around the time of the 2008 crash but mainly showed the mysterious alchemy whereby ordinary London homes turned into money-making machines for those lucky enough to acquire them when they were, well, just houses. Sebastian Faulks’s “A Week in December” from 2009 had as one of its main characters someone rumoured to have been based on a well-known – and once successful – trader and featured a naive junior FSA regulator (the resemblance being purely coincidental in the latter case, one assumes).  But whatever the books’ other merits, the characterisation of the bankers, traders and regulators was cartoonish and one-dimensional.

Lanchester’s “Whoops: Why Everyone Owes Everyone and No One Can Pay” was a better attempt to understand the mysterious world of finance.  As was the US documentary “Inside Job”.  Maybe only Michael Lewis has been able to present the human stories present in the financial world in a way which feels like fiction.  Perhaps the dramatisation of real life events (“The Big Short” and Massini’s “The Lehman Trilogy”) is the only way to make sense of this world.  Perhaps.

It is too easy to think that no-one will understand – or care – about the technicalities and complexities and arcane language of modern finance, let alone about the people whose lives revolve around it.  A pity if so.  It is not the numbers which matter but the instincts, proclivities and emotions – what Keynes called “animal spirits” – which determine what people do.  There is little that is more emotional than people’s behaviour around money.

If the range of human behaviour on show in the run up to, during and after any financial scandal is not a subject for writers, it is hard to know what is.  All human life is there, after all.

 

Photo by Aaron Burden on Unsplash

Quis custodiet ipsos custodes?

October 16 2018

Some 5 years after the Parliamentary Commission’s withering report on banking culture, it is the House of Commons itself – its MPs, senior management and staff – who face their own brutal and shocking appraisal.  The disgraceful and, in some cases, criminal conduct by some of them and their collective failure to deal, legally or adequately or at all, with bullying and harassment of junior staff, particularly women, by senior staff and MPs is laid bare in this report by retired judge, Dame Laura Cox.

It would perhaps not have been politic of those bankers – quizzed by the Parliamentary Commission about their failure to raise concerns about the misbehaviour of fellow traders and bankers – to have pointed out to their inquisitors that the number of MPs who blew the whistle on fellow MPs who broke the expenses rules and, in some cases, committed fraud was the grand total of zero.  (It would though have been hugely enjoyable for fans of sanctimonious humbug.) Those in the financial sector who had to take the MPs’ justified criticisms can perhaps now enjoy a touch of schadenfreude when they read Cox describe the omertà that many MPs practice in respect of bad conduct by one of their number” and that “Members turn a blind eye to dishonourable behaviour by others”. 

But the report goes further.   Despite the 1995 Nolan Committee report  on Standards in Public Life making it clear that MPs had to display the highest standards and that “it is essential for public confidence that they they should be seen to do so”, it seems – and who could possibly have foreseen this? – that self-regulation doesn’t work.   The Cox report describes an entrenched culture “cascading from the top down, of deference, subservience, acquiescence and silence, in which bullying and sexual harassment have been able to thrive and have long been tolerated and concealed.”  Processes and policies, no matter what fluffy names they are given (Cox is particularly critical of the “Valuing Others” policy) are described as not fit for purpose and not even compliant with existing laws on harassment and discrimination, let alone best practice.  Investigations are inadequate and carried out by amateurs.  Confidentiality is not respected, staff are fearful and unsupported and retaliation – or threats of it – are common.

The report makes for grim reading.  Even grimmer in the two days since its publication has been the defensive reaction of MPs and senior staff at the Commons at the very idea of having to take action beyond the token.  The House of Commons may consider itself a special case though, as Cox acidly points out, while “Members of Parliament are elected representatives…their mandate does not entitle them to bully or harass those who are employed….to support and assist them.”

But this report has much from which every employer, from senior managers down, and not just HR Departments, can learn.  In an era of #MeToo, of younger generations being unwilling (rightly) to put up with boorish (at best) and criminal (at worst) behaviour in the workplace, when an unhappy employee can create unwelcome publicity and force companies to take action, all organisations can learn from the failures so forensically dissected in this report.   It is not just Parliament which is a stressful workplace.  All workplaces are likely to face these problems to a greater or lesser extent and it is no easy task trying to handle matters which can range from someone being insensitive and impolite, via bullying, leering, insulting remarks all the way to actions which may amount to serious crimes.

Three points in particular are worth highlighting:

  • “devotion to process and language rather than to real effectiveness” is a waste of time.  Procedures and rules are necessary but never sufficient.  They are merely proof of the importance with which the issue is viewed.  But the real test of whether you have the right policies in place is whether your employees trust you to investigate properly and act on findings, no matter who is involved.  Without that trust even the best written procedures are mere will 0′ the wisps.
  • Those at the top have to lead by example.  In yesterday’s radio interview  Dame Laura posited three questions which those at the top should ask themselves when having to manage cultural change:
    • “Do I understand that radical change is needed?”
    • “Can I deliver that change?
    • “Will staff have confidence that I can deliver that change?”  Answering that third question honestly requires a level of self-knowledge and courage that is not as common as it should be.
  • Codes of Conduct are a fancy way of reminding people that good manners, politeness and civility matter.  At their heart, good manners are about being kind to others (and kindness is a much underrated virtue).   Employees, managers, colleagues, the temporary and contracting staff who do the myriad tasks which keep a workplace going, however senior or junior, are human beings, not simply resources.  Politeness and thoughtfulness to those around us cost nothing, can help mitigate even the most stressful of jobs and are the bare minimum which should be expected of – and for – all staff.

And, finally, not for the first – and certainly not for the last – time, if a problem happens, don’t ignore it.  “This cycle of repeatedly reacting to crises only after they have developed into crises, and sometimes only after unwelcome publicity, is a perilous approach to adopt for any organisation, but it is completely hopeless for a place of work.”

As for the House of Commons, if it really is serious about changing its culture, it needs to realise – as others have – that this is the work of years, not weeks or months, and is a task which is never finished.

 

Photo by Gabriel Matula on Unsplash