Cover-ups laid bare

The revelation that Jimmy Savile, formerly a popular DJ and charity fundraiser, was an industrial grade paedophile has shocked the UK.

But more disturbing is the revelation that what must have been hundreds, perhaps thousands, knew or suspected his wrongdoing over periods said to be as long as decades - but did nothing.  Accusations of 'turning a blind eye' or inaction have so far been levelled at the BBC, three hospitals, the UK's Crown Prosecution Service and the police among others. 

Passive covering-up of important but unwelcome information is commonplace.   Ask yourself what unwelcome news wasn't promptly passed on up to your organisation's leadership over the years.  The reasons vary, but they are typically a combination of culture, power, incentives such as fear and a lack of leadership, particularly on ethos.  Groupthink, particularly among the organisation's leaders often contributes too.

Sadly Jimmy Savile isn't the only cover-up in the news.  It's alleged that a number of the UK's police forces have been involved in a massive cover-up following the 1989 Hillsborough Disaster in which 96 died.  It's so bad that the Independent Police Complaints Commission is investigating whether there was a concerted effort by two police forces to pervert the course of justice over more than 20 years. There are also investigations under way into whether the police should now be charged with manslaughter. 

If proven, this goes far beyond passive covering-up and raises the question why multiple police forces  set out systematically to cover up the truth.   If proven it would be  a small step for the IPCC to conclude that the police showed institutional dishnonesty that has a parallel in the institutional racism found in the Metropolitan Police following the Stephen Lawrence Inquiry.

Getting to the root of this kind of problem is difficult and can be painful.  Unresolved, it exposes the organisations concerned to one of the most potent destroyers of reputations - that the organisation comes to be seen as dishonest or dysfunctional. 

It will take courage to get to the root of these problems and leadership to solve them.  The question is whether leaders are up to the task.

Anthony Fitzsimmons
Reputability Partners LLP

Anthony Fitzsimmons is Chairman of Reputability LLP and author of “Rethinking Reputational Risk: How to Manage the Risks that can Ruin Your Business, Your Reputation and You”

Whale harpoons JP Morgan

Six billion dollars lost.... Why?

It all began, in April 2013, 2013, with JP Morgan's ebullient CEO Jamie Dimon dismissing the stories that hedge funds had reason to bet against JPM's 'London Whale' as a “tempest in a teapot.”  There can't be any doubt he believed what he said.

By 11 May, Dimon was calling a press conference to explain a $2 billion trading loss.  Again no doubt he believed it.

Two months later, its been announced that the losses are nearly $6 billion.  He must be hoping it is true.

Something is clearly preventing Dimon and his board from knowing what is really going on within the business.

As Justin King said, you can't make good decisions without good information.  Garbage information usually means garbage decisions however talented the board and management.

So here are some $64 billion questions for the Board.

• How much more of the information getting to JPM's board is garbage?  
• Which bits might be unreliable?
• How much information might be missing - and in what areas?
• How can we reliably find out?
• What might be causing us to have an information problem? 
• And while we are about it, do we fully understand everything that is going on at JPM? 

No-one should think this is just a JP Morgan problem.  'Roads to Ruin' demonstrates how defective information flows can bring down empires - it's a frequent cause of corporate disasters.  All boards should be asking themselves questions like these.

Anthony Fitzsimmons
Reputability
London
www.reputability.co.uk

Lessons from Barclays

According to Grant Woods, an FT letter-writer:

"The culture at Barclays, [in 2006/7 when he worked there] discouraged staff from raising concerns; in some instances, their loyalty and commitment were questioned, should they do so. There was also the unsaid threat that it could adversely affect any potential bonus or, worse, undermine their job security."

This describes a classic example of incentives, both cultural and financial, blocking the flow of important information to the top.  Underlying it is a failure of leadership on ethos and culture.  Incentives and failures like these are almost impossible for boards to uncover without outside help - the more so in large complex organisations. 

This single letter illustrates four of the seven key risks highlighted in 'Roads to Ruin' as a major cause of destruction of apparently solid businesses.  And it left NEDs without key infomation they needed to be able to supervise the business effectively.

No-one can make good decisions based on information fit for garbage.  Garbage in, garbage out applies as much in the best boardrooms as it does to computers.   Making decisions while living in a rose-tinted bubble is dangerous.

Anthony Fitzsimmons
Reputability, London
www.reputability.co.uk

Goldman Sucks?

It usually takes a crisis for the outside world to find out what is really going on inside a big corporation.  But on 14 March, the disillusioned Greg Smith, a middle ranking banker, left Goldman with a flourish - giving an insight into Goldman Sachs for the New York Times (also covered here in the FT).

Smith's point is simple.  Goldman's leaders may express good intentions in the shape of their Business Principles, but according to Smith, reality is different.

Internal incentives implicitly encourage Goldman teams to exploit the firm's clients to Goldman's benefit.  According to Smith, you become a leader at Goldman by:

• persuading clients to buy products that Goldman wants to be rid of; 
• getting clients, sophisticated or not, "to trade whatever will bring the biggest profit to Goldman"
• trading "any illiquid, opaque product with a three-letter acronym"

Reinforcing this picture, he reports that many leaders at Goldman apparently despise their clients:  "I have seen five different managing directors refer to their own clients as muppets, sometimes over internal email."

Making it clear that he does not accuse Goldman of anything illegal, Mr Smith concludes:

"It astounds me how little senior management gets a basic truth: If clients don't trust you, they will eventually stop doing business with you.  It doesn't matter how smart you are."

If Smith's narrative is right, Goldman is losing the moral compass that once inspired its alumni whilst its board claims good intentions but sets incentives driving amoral behavour.  If so, what does this say of Goldman's leaders?

The most obvious options are that they are, to use their own terminology, "muppets" who don't know what is going on in the Goldman engine room; or that they are somewhere between amoral and dishonest.  Neither is an attractive characterisation.

Survival for the long term becomes harder if people think you are untrustworthy or incompetent - the more so if you are untrustworthy or incompetent.  The toxic track record listed by Smith makes Goldman more vulnerable to a new crisis turning into a catastrophe.  And that's before thinking how angry, influential alumni, seeing their once valuable Goldman pedigrees transformed into an embarrassment, could seal Goldman's demise should they run into trouble in the future.

The question for clients is no longer "Can we do without Goldman?" It's become "Can we risk using Goldman?"  If clients (or their customers) think "Goldman Sucks", it could become as risky to hire Goldmans as it is for a retailer to sell products made with slave labour. 

Goldman is one crisis away from oblivion.  It could reform, but does it have the will to do it properly?  Their last attempt doesn't seem to have gone well.

Reputability Ltd
London
www.reputability.co.uk

Ethos and Leadership

The latest 'Index of Leadership Trust' survey by the ILM and Management Today makes worrying reading for those who recognise the importance of 'soft' risks.

"[H]alf the people surveyed thought that their organisation puts financial performance ahead of ethical considerations, and 48% and 44% say the same of their CEO and line manager."

One of the lessons from 'Roads to Ruin' is that ineffective leadership on ethos and culture is a major but unrecognised cause of corporate failure.

It doesn't only matter when the organisation is rotten at its core, as were Enron and the Independent Insurance Company.  It matters just as much when leaders have sound ethical ideas but fail to embed them throughout the organisation.  This seems seems to have been the problem at BP.  There, a disconnect on ethos and culture on safety between BP's aspirational board and the reality of its American operations led to a series of crises that came close to disaster for BP's shareholders.

Almost half the survey's respondents thought their leaders put profit before ethical considerations.  That probably means half the organisations surveyed had the same weakness.  Other results of the survey suggest that this type of weakness may be more prevelant in larger organisations.  Other findings from 'Roads to Ruin' suggest this is likely.

Many people see ethos as a nice-to-have.  The ILM puts it as a factor in earning trust of employees. Ed Milliband sees it as a way to divide the business world into "producers" and predators".  But 'Roads to Ruin' demonstrates that inadequate leadership on ethos and culture is an important example of a potentially catastrophic 'soft' risk.  It's hard to self-test on risks like these because of cognitive biases.  Self-testing can easily entrench dangerous self-delusions.

Risks related to ethos and culture may be soft by name, but 'Roads to Ruin' shows how easily they lead to disastrous consequences.  It's not just about dishonesty as discovered, too late, at Enron and Independent Insurance.  It's about effective leadership on ethos and culture - and how unrecognised incentives can derail the best intentions.  Ask BP's longstanding shareholders. 

Anthony Fitzsimmons


www.reputability.co.uk

 Anthony Fitzsimmons is Chairman of Reputability LLP and author of “Rethinking Reputational Risk: How to Manage the Risks that can Ruin Your Business, Your Reputation and You”

Chief Risk Officer becomes CEO

Congratulations to Amer Ahmed, the Chief Risk Officer of Allianz Re, the reinsurer, now appointed Chief Executive of his company.

This may be a better outcome than for RBS, the bank that lost CRO Nathan Bostock to a competitor. But promoting a CRO to CEO is not without risks.

It's not just a question of the incentives working on an ambitious CRO.  There is the question whether the new CRO can ever be in effective control of risks emanating from a predecessor so respected as to become CEO.

And there is a fundamental problem similar to but different from that of bank traders having back-office experence.  Jerome Kerviel's compliance team experience helped him to evade Soc Gen's risk controls; and UBS may have had the same problem with Kweku Adoboli.  Its a risky policy to allow risk people to acquire executive control.

The best solution remains persuading CROs that being CRO is a career destination.  Barclays Bank  seem to be having some success with Robert Le Blanc at a cost that is modest at least in in banking terms.

Anthony Fitzsimmons
www.reputability.co.uk

Musical Chairs

In March I wrote that Chief Risk Officers needed skills and intellegence to the level needed by CEOs - but that this would give Boards a challenge:  How do you keep the CRO in post for a decent length of time?

The problem is now illustrated by real life.  Nathan Bostok became CRO at RBS in March 2009, to sort out RBS' Augean Stables with their $380 billiion or so of toxic assets.

Having learned that Stephen Hester is not planning to leave his RBS CEO post any time soon, Bostok will be off to Lloyds Bank in the New Year, where he will be CEO of Wholsale Banking.  More stable cleaning will probably be involved, but the thrust of the new job is apparently to grow the wholesale banking business.  Further experience for a CEO job.  Well done Mr Bostock; but RBS loses his intimate knowledge of RBS' business after only 3 years in post.

A perpetual game of Musical Chairs - which will cause few losers among good CROs - will be bad for complex institutions.  They need CROs of great talent; but they also need continuity of leadership in risk management and risk strategy.    Achieving both will be an important challenge for Audit Committee Chairmen.

Channelling CRO ambition will be a part of the solution.

Anthony Fitzsimmons
www.reputability.co.uk