The logic after bad business decisions

The way the Barclays Libor rate-setting scandal evolved in the UK reveals how wrong business decisions often lead to consequences that many business leaders find difficult to control. People in top positions of large organisations are often intoxicated by the power and the glory that goes with the senior executive roles they hold. They rarely realise when it is time to go and are often in denial when the rest of the world has a very clear opinion on who should carry the can when business decisions go wrong.

Loss of reputation is being acknowledged as one of the deadliest risks that bankers face- John Cassar White

The UK regulators fined Barclays a record £290 million after admitting its traders sought to manipulate the rates which underpin Libor contracts across the world. Barclays chairman Marcus Agius summed up the logic of what happens when things go seriously wrong in a business when he said that “the buck stops with me”. A respected business leader with an impeccable CV oozing professional success, he was quick to act to avoid his bank from being battered by the markets, shareholders and public opinion.

Agius’s decision was interpreted by many market commentators as being aimed to deflect attention and damage from the Barclays ‘charismatic’ chief executive Bob Diamond who initially defiantly brushed off any suggestion that he should resign. But shareholders’ pressure, as well as an adverse public and political opinion, finally became irresistible and Diamond had to resign just a day after his chairman quit. The anger and disgust of the great majority of ordinary people, who have seen banks (but not Barclays) rescued by taxpayers, could not be ignored by the shrewd British politicians who insisted that bank leaders should not be exempt from the natural consequences of mismanagement of bad judgment.

The Chancellor of the Exchequer, George Osborne, when informed of Diamond’s decision to resign said: “I hope it’s the first step towards a new culture of British banking.”

When politicians express such sensible opinions they find the support of the public. There is no place for prudery in regulators’ and politicians’ reactions. When banks need to be told that they must pull up their socks, this should be done.

Another interesting aspect of the way this saga evolved is the way that the UK regulator reacted. Lord Turner, chairman of the Financial Services Authority, said that the regulator was reviewing how wholesale markets are supervised following the scandal. He did not mince his words when he criticised the culture of “cynical entitlement” in the banks that has earned them the unenviable and sarcastic title of “masters of the world”. “There are no free lunches, and shoddy wholesale practice is not a victimless act, even in those cases where it is not defined as crime,” Turner said.

Following a brief period of denial, defiance and figure pointing, business leaders caught up in a difficult scenario of mismanagement, bad practices or poor judgment, often begrudgingly apologise publicly and promise a ‘root and branch’ reform while they try to hold on to their posts.

Those businesses with deep pockets then launch a glitzy public relations campaign to limit the damage to their franchise which is the most important issue for shareholders. But in countries where the media is still fairly independent – and not conditioned by the perverse relationships between the media, business and political leaders – the sentiments of financial markets and public opinion cannot be ignored forever.

Running a multinational like Barclays is no simple task. The chairman and the CEO are not expected to know every little detail of how their business is being managed. But when things go badly wrong at the operational level, the CEO has to carry the can, even if there is no indication of any criminal behaviour. Good risk management practices can help a business leader deal with unknown risks, but they can never guarantee a risk-free environment.

Many banks are good at measuring and managing market and credit risks. They are less effective in managing their operational risk – a risk that is often linked to human error of judgment. Loss of reputation is increasingly being acknowledged as one of the deadliest risks that bankers face, and often not even regulators are effective in identifying such risk.

The banking industry was behind the financial crisis that the western economies faced in the last few years. It is time for banks to put the customer first and revert to the arguably boring service ethos rather than promote the despicable ‘wild west culture’.

johncassarwhite@yahoo.com