thenextwave

Breaking the bank (part 2)

Posted in banks, business, finance, organisational by Andrew Curry on 16 July, 2012

The Barclays story is an example of what happens when an organisation’s ‘Core Group’ turns malign

In my last post I wrote about how Art Kleiner’s idea of the Core Group helped us to understand Barclay’s recent history. In this post I am going to develop this idea. If Bob Diamond survived in his position despite his division breaching the rules in 1998 because he’d become a member of the Core Group, we still need to understand why. In the rest of this post I am going to go further into the history.

Patterns of behaviour

There is an important clue in Barclays’ more recent history. When John Varley stepped down as Chief Executive in 2010, the bank chose to appoint Diamond as Chief Executive in the face of warnings about what that said about the bank’s culture. Similar alarm bells were ringing, as seen in the exchanges with the Financial Services Authority (the letters are here), about the bank’s “pattern of behaviour”. The list includes the Protium deal and the ‘extreme tax avoidance‘ scheme that fell foul of the Treasury earlier this year, and others. The rap sheet is here.

My former colleague Patrick Harris works with companies to identify ‘guiding principles’, the rules of thumb that make it possible for staff to understand, quickly and viscerally, the values of the company they work for. In his work, his intention is to help then ‘do the right thing’ for customers, or suppliers, or colleagues, rather than having to leaf through a rule book.

Misguided principles

Patrick does this work because he wants companies to work better. But what if a company’s implicit guiding principles are not benign? Reading Martin Taylor’s account, quoted in my earlier post, and knowing what we know about Barclays’ history over the past 15 years, it is possible to imagine that Barclay’s guiding principles included, “It’s OK to break the rules, as long as you can justify it to the business”. And that one of the reasons it took Diamond so long to resign after the LIBOR scandal was revealed – nudging the chairman out of the door first – was that it took him a while to realise that the world outside the business didn’t see things that way.

Another guiding principle seems to have been, “Helping out your colleagues is more important than respecting the integrity of the banking system or looking after the interests of your customers”. Or again: “The regulators are out to get you” (certainly a driving force in the lengths the bank went to to avoid a British government bail-out in 2008).

Questions of culture

When Diamond became Chief Executive, the FSA expressed concern (the whole exchange is politely British) about “setting the right culture”. In his BBC lecture, given in November last year, just after the quote about culture I mentioned in the previous post, Bob Diamond says a bit more on tone and culture. It’s worth quoting this in full:

Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity. But it’s not just about how we behave towards our customers and clients. It’s also about how we work together with our colleagues, because if you have to deliver for customers with 150,000 colleagues around the world, as we do, you better be able to work as a team.

I used to work in radio and television as a producer, and when you do that work you listen, carefully, to what people say. One of the things I learnt is that people’s syntax always gives them away. Notice that Diamond says, “Our culture must be…”. And there’s a shuffle between ‘customers and clients’ and ‘colleagues': “If you have to deliver for customers…”. In case this seems obscure, other people in Diamond’s place might have said “Our culture is….” and that “When you deliver for customers…”

Global seduction

So why did Barclays’ culture change? The best explanation seems to be that the Board was seduced by the idea of becoming a global investment bank, and Barclays Capital, and Bob Diamond, were seen as the agents which would deliver this. And, of course, they did, partly through the acquisition of Lehman Brothers assets after the collapse of the American bank. In the process Barclays Capital become the dominant institution within Barclays, and its traders – not just Diamond – the dominant members of the Core Group, in the same way that the marketing department provides the Core Group of a consumer packaged goods company such as Proctor and Gamble.

Because of this, by 2010, when John Varley stepped down as Chief Executive, there was no alternative to Bob Diamond as his replacement, despite his lack of direct retail banking experience, and despite the signals it sent out about Barclays. And the co-head of Barclays Capital, Jerry del Missier, now resigned, became Chief Operating Officer of the bank despite having little operational experience.

Of course, bankers should have learnt by now that ruin is only two steps along the road from hubris: look at the way in which Andy Hornby wrecked the Halifax and Fred Goodwin destroyed the Royal Bank of Scotland. But perhaps they are blind to this because the step in between involves senior executives amassing huge amounts of personal wealth in salaries and bonuses.

Authority and responsibility

But while the ‘blind eye’ culture of the trading floor may be good at generating rewards for bankers, it is not good for the integrity of the organisation. The economist John Kay, a sharp critic of the culture of Britain’s banking system, has written about this:

In his letter to Barclays staff the day before his resignation, Bob Diamond used the naval phrase “on my watch” in finally accepting responsibility for traders’ behaviour during his tenure. Mr Diamond had struggled with the meaning of the phrase but eventually grasped, or was told, what it meant: that the corollary of unquestioned authority is unquestioned responsibility. …

Managers and politicians prefer to follow the maxim of T.S. Eliot’s cat: “When they reach the scene of crime, Macavity’s not there.” On that maxim, an officer is responsible only for things of which he can be shown to have direct personal knowledge: his incentive is therefore to have formal knowledge of as little as possible. … There is a world of difference between an organisation in which you are rewarded for telling management what it needs to know and one in which you are punished for telling management what it does not wish to hear.

In a second article, where he links scandals at Barclays, BP, GSK, and RBS, he makes a broader point about the gap between corporate rationality and public expectations:

We are not interested in whether these companies made good or bad calculations. We are interested in what these incidents tell us about the values of the companies concerned.

As an aside, it is this concern about values which leads Polly Toynbee to suggest that Barclays Board members are purged from public life, on both sides of the Atlantic; the corruption of the Barclay’s Core Group corrupts other Core Groups un the process.

Shocking the system

So what do we learn from this? The key for me is Kleiner’s hypothetical question at the top of Part 1 of this post: “Suppose instead that all organizations are doing precisely what they’re supposed to be doing?” Organisations deliver what their Core Group wants them to deliver, and people in organisations internalise a whole set of expectations about what the Core Group wants or doesn’t want. The only way to change that is to change the Core Group. The question at Barclays is whether the LIBOR scandal and the senior resignations are enough of a shock to create a new Core Group. As a citizen, as someone interested in the integrity of business culture, I hope so; just as I fear it still might not be.

The reworking of the Barclays logo at the top of this post is from The Lakelander’s View blog. It is used with thanks.

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One Response

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  1. Phi Asset Managers said, on 16 July, 2012 at 12:52 pm

    Reblogged this on Phi Asset Managers.


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