Investing in the latest HR systems and approaches is only half the story. If you don’t consider the totality of their impact on human behaviour, there can be damaging unintended consequences. Applying systems thinking from an employee’s perspective – considering how their behavioural outcomes are influenced by a combination of processes, policies, learning & development, rewards, leadership messaging and team leadership – can help you invest better in HR systems that are relevant for your employee base.
The message your employees are hearing is not always the one written in the compliance handbook
By our guest blogger Nadine Exter, Cognisus
In 2012 in the UK a 32-year old banker was convicted of fraud and jailed for having conducted unauthorised trading for his then-employer, Swiss bank UBS. He cost the bank £1.3 billion in losses, wiping £2.7 billion from the share price. Kweku Adoboli was one of a series of ‘rogue traders’ that plagued the UK financial sector especially between 2008 and 2014. He admitted his offences, but maintained that his employer encouraged risky behaviour both overtly and through HR and Control systems and processes UBS had put in place to manage employee behaviour:
“… I was encouraged by senior managers to ‘push the boundaries’ and ignore stated policies such as risk limits …” Adoboli said. “… not because I’m a rogue trader, not because I’m a fraudster, not because I’m a criminal, but because I went in pursuit of the goals set by our leadership … It’s a sackable offence to lose money … Compliance was a ‘tick-box exercise’ designed to give the impression that the bank was serious about rules and limits when the reality was it didn’t care as long as profits were made.”[i]
Adoboli maintained that the real message coming from senior managers at UBS during his time there was that it was fine to bend the official rules and ignore policies and processes to make a profit for the bank.
Since the 2008 global recession the finance sector globally has invested heavily in HR processes and practices, training, new leadership cohorts, outcomes-based values and purpose, and compliance and audit functions. The reason? To change behaviours and practices identified as contributing to the recession. Most of the major banks instigated systemic change programmes[ii] with HR a strategic partner tasked with embedding responsible and ethical values and behaviours into the employee base. In the UK, public-interest reviews were conducted on (e.g.) HSBC[iii], Lloyds TSB and the sector generally[iv] – with blunt conclusions on the failings of leadership, HR, culture, governance and oversight. Globally, governments reshaped the regulating bodies that monitored the sector, ringfenced retail banks from investments banks to protect public money, restricted incentives such as pay and bonuses (EU), and most recently in the UK new regulations on governance and personal responsibility[v] were introduced.
“We are determined to embed a culture of personal responsibility within the banking sector,” said Acting Chief Executive of the Financial Conduct Authority UK, Tracey McDermott[vi].
However, scandals are even now still hitting the finance sector: widespread corporate practices of rigging Libor rates[vii], miss-selling of products, more ‘rogue traders’, and approved manipulation of data speed for competitive advantage. Across the industry globally more bankers have been jailed, for misspending money on drugs/prostitutes (etc), defrauding friends and colleagues, and embezzling employer money[viii].
So why – since 2008 – have so many incidences of bad behaviour occurred?
The value of systems thinking in HR management
The discipline of management is very good at focusing on improving specific practice within HR or Finance or Operations – 6 years in academia exploring and helping best practice has shown me that. However, from an individual employee perspective ‘life at work’ is not experienced in that focused way: they don’t experience just HR systems or just Operations processes. An employee is usually influenced by the much broader organic ‘system’ and culture in which they work – systems theory in action[ix]. Those influences come from multiple directions and form a complex system of cues, rules, embedded norms, and personal and group values that collectively influence and ‘nudge’ overall behaviour and therefore outcomes. Not just the written-down HR and Compliance rules, processes, codes and procedures but – more powerfully – also those unwritten rules in how humans interact with and motivate each other. For example:
- Not just what leaders say, but also how they act and what initiatives they support.
- How we are tangibly rewarded, and what bonuses are based on.
- What is included in personal targets, and financial targets such as returns on investment and internal rates of return. Targets indicate the priority of importance – e.g. sales targets vs. customer and/or employee satisfaction.
- What is celebrated as a success, what is seen as a failure.
- How fairly recognition and status is distributed, how justly power and authority is used.
- How much every-day systems (such as expense forms) and processes (such as sign-off on promotions) help employees to be effective, and how much they hinder progress and lead people to working ‘around’ the systems in order to get things done.
- What investment is given to L&D, and the signal that sends of what skills are – or are not – valued.
- How much the shared corporate purpose is genuine, realistic, and lived – especially at the micro decision-making level.
If targets, leader’s success stories, internal communications, bonuses, and power is disproportionally ‘tilted’ towards those who drive financial return through a risky, often illegal approach, then is it a surprise that this is the behavioural outcome of so many employees? Is it a surprise that unintended consequences emerged in the finance sector – despite the (often expensive) HR systems, processes and policies banks had in place to manage behaviour and outcomes?
Barclays conducted a thorough review of how they became contributors to the 2008 financial crash, and bravely made the findings public (The Salz Review). The authors noted that despite the latest systems and processes, the HR function was weak (especially compared with income-generating functions) and Compliance/Audit were seen as irrelevant. There was no clear internal identity, with a fragmented group of employees at best simply disinterested in other departments. Risky bankers were celebrated and rewarded, given disproportionate power and position within the Group. Further, over 8 different sets of values existed across the group – making a mockery of what behaviour was expected. The result, the report authors concluded, was a broken culture and systems that unsurprisingly led to the behaviour that almost broke the bank.
However, Barclays was not an isolated example of an organisational culture gone wrong in the finance sector.
Behavioural outcomes: rational irrationalities
According to his friends, Kweku Adoboli was a “quiet, affable guy. An amateur photographer who loved music and cycling. Friends in his artsy circle hardly knew he was a banker, let alone one who’d be accused of losing UBS $2 billion in rogue trades … He was a great fan of beautiful things,” said Sanjhana Moon, a photographer who met Adoboli and gave him tips on his own art. “He was a very regular, kind, honest, generous guy.”[x]
His landlord described his former tenant as “a well-dressed and well-spoken quiet man who wasn’t the tidiest of people but was by no means a partier. He moved to Stepney [a relatively poor part of London], also not far from his office, where neighbors say he had a long-term girlfriend who was a nurse.”
“He certainly wasn’t one of those swaggering “wanker banker” types so mocked in London. He kept his career and personal life fairly separate,” said one friend who wished not to be named.
Notwithstanding the personal responsibility that each individual has to take for their behaviour, if the environment in which you are immersed – which forms your new norm – repeatedly encourages risky behaviour, is it a surprise that said risky behaviour occurs? Whether or not someone was already inclined to behave that way?
Adoboli spoke of personal and department targets that were focused only on financial return, backed by managers pressurising him to achieve them at all cost and recognised by leaders only when this was achieved. He spoke of risk systems in place that were treated widely as ‘tick-box exercise’ only. With a weak leadership development, unbalanced reward and promotion system and a weak Risk/Compliance department, the bank sent a very clear message to Adoboli that risk was justified if returns were high. Adoboli spoke of personal desire to contribute to UBS, and as in UBS that was seen as making money, this became his ‘norm’, his way of being a successful member of the organisation.
UBS denied they had a role in the behavioural outcomes of Adoboli, describing him as a lone greedy rogue trader. The Financial Services Authority disagreed. They fined the Swiss-based bank £29.7 million pounds after finding serious weaknesses in procedures, management systems and internal controls in the London branch of UBS.
„UBS failed to question the increasing revenue of the desk and failed to ensure that there was a corresponding increase in the controls in place over the desk,“ said Tracey McDermott, the FSA’s director at the time of enforcement and financial crime.
„As a result Adoboli, a relatively junior trader, was allowed to take vast and risky market positions, and UBS failed to manage the risks around that properly.“[xi]
Adoboli was released from jail in November 2015.
Please consider the totality of your impacts and systems from the individual employee’s perspective. A cultural diagnosis can help you understand unexpected behavioural outcomes and apply systems thinking to mitigate unintended consequences from your HR systems and approaches.
Nadine Exter (www.cogni-sus.com) is a specialist in enabling ethical and responsible organisational cultures. She is currently exploring the application of systems thinking with a leadership cohort of HR and sustainability professionals in the UK finance sector.
footnotes
[i] www.huffingtonpost.com/2012/10/31/ubs-rogue-trader-kweku-adoboli_n_2050644.html
[ii] E.g. www.theguardian.com/sustainable-business/barclays-transform-programme-culture-change-window-dressing
[iii] www.parliament.uk/business/committees/committees-a-z/joint-select/professional-standards-in-the-banking-industry/news/an-accident-waiting-to-happen-the-failure-of-hbos/
[iv] http://economia.icaew.com/news/february2014/lambert-publishes-proposals-for-bank-standards-body
[v] The Senior Managers Regime, active March 2016.
[vi] Financial Times. Friday February 5, 2016.
[vii] www.theguardian.com/business/2012/dec/19/libor-interbank-lending-rate-explained
[viii] E.g. www.huffingtonpost.co.uk/2013/11/27/banker-jailed_n_4348929.html
[ix] Systems thinking takes an interdisciplinary approach to understanding how things within a system (or organisation) influence each other and as a complete system. It is about discovering patterns and principles from, and applied to, a system or organisation. Systems can self-regulate, and self-correct, but only if the totality of influences is recognised.
[x] http://world.time.com/2011/09/15/the-ubs-rogue-trader-scandal-just-who-is-kweku-adoboli/
[xi] www.bbc.co.uk/news/business-20492017
