Two decades ago, British bank HBOS was the darling of management consultants because of what was then perceived as inspirational leadership by the bank’s senior executives. The bank grew rapidly and hubris quickly set it as executives played God with borrowing customers who had found themselves in difficulties.
A recently leaked investigative report written in 2013 by a Lloyds Bank official shows how wrong most people are when they judge performance with headline figures without delving deeper into the culture of an organisation.
Sound governance is not mandatory only for businesses but applies to other non-profit organisations and indeed for public administration.
According to this report, HBOS top officials covered up a £1 billion fraud that saw bank officials forcing distressed clients into bankruptcy. Directors including then chief executive Andy Hornby knew criminal staff at the lender’s Reading branch were wrecking companies for a profit, the internal report found. Some of the top brass of the bank ended up in jail but the real victims of this colossal fraud are still suffering.
One of the victims was whisteblower Paul Moore who was the only senior UK banking employee to speak out publicly about the toxic corporate culture of HBOS. He lost his job and has been unable to secure another job since. But his contribution to sanitising corporate culture has been enormous. Speaking at the Annual Trustee Exchange Conference in London in 2016 he appealed to organisations to focus on people and culture and not on process.
Moore told the audience of charity trustees and CEOs from various organisations that: “If your organisation does not have a culture in which people speak truth to power, no system or process of governance or compliance will work.” He also warned against letting the process of governance triumph over the purpose.
Controls that look impressive on paper but do not prevent abuse of power
Many business and political leaders try to bluff their way through the maze of increasing regulation by putting in place various controls that look impressive on paper but do not prevent abuse of power by those in charge of important processes. Moore graphically described his experience of this fake commitment to good governance when he said that “HBOS at the time had a non-executive board, a head of risk, a risk committee, and internal audit function, backed up externally by statutory auditors, regulators and politicians. Yet none of these were able to balance the power of the executive.”
Many crooked leaders create a semblance of controls by promoting a structure of policies, forms and committees that give false assurance that everything is under control. Of course, good processes that are reviewed regularly are important but they will not work if the process of governance triumphs over the purpose.
It is not all that difficult to audit an organisation’s culture. One needs to understand the inner and outer dynamics that drive decision-making in an organisation. Moore advises business and non-profit organisations leaders not to make the auditing of the culture of their organisation too sophisticated but to act fast and make sure that organisation leaders understand what makes their organisation tick.
An interesting point raised by Moore is the ideal personality type for the person best suited to a risk-management role. Such a person must certainly not be one obsessed with avoiding risk completely. The ideal personality “Was as much about anthropology and psychology as technical competence and experience of making and implementing process.”
Good corporate governance will continue to feature prominently in the agenda of most organisations as public opinion will demand answers and accountability whenever failures occurs as they will inevitably do from time to time. Directors have the difficult task of preserving their independence of thought and action irrespective of shareholders’ or political pressure.
Regulators of important industries like financial services will need to move away from the box-ticking procedures to determine whether the culture of specific organisations is indeed conducive to good governance.
Internal auditors should overcome the fear of retribution when they speak openly about abuse of power by senior executives in their organisation. External auditors need to focus more on evidence of benign or toxic cultural elements in their audit of firms going beyond what is statutorily defined as their accounting and disclosure obligations to shareholders and investors.
The political world may prove the most challenging for auditors of corporate culture. Electoral exigencies make short-term planning endemic in the lifetime of a political administration. Winning the next election will always be a top priority for shortsighted political leaders.
johncassarwhite@yahoo.com