Wednesday, 4 November 2009

It's Management, Stupid!

I have always believed that banking has been stocked with poor managers - I don't mean retail banking but the stuff where they make the profits and blow them. Regularly.

This is not a new phenomenon. Indeed, Gordon Brown has always labelled the Conservatives as 'Boom and Bust' merchants and that description was largely attributed to their cycles driven by investment banks making big profits and then blowing them in relatively short order. Nicholas Taleb contests that banks only ever really make money out of loans, mortgages and other products to businesses and people - all the other profits they make they surrender.

While the above statements are not entirely accurate, banking is one of the few industries where an incredible focus goes on making money with money to lavish huge rewards and then as busts come, they simply surrender the profits, make a ton of backroom people redundant and then carry on as if nothing has happened. Why would you run a business to do that?

This particular cycle, although a massive crisis around the world that has taken more then just surrendering profits to resolve, is not different. At the core of it is not just the bonus culture, it is not even the derivative type products that can be so destructive, it is not even that the financial system has its own in-built self-destruct or that many of the products are for banks alone to play with - all of which are highly toxic when mixed together. Nope, you can survive all these things so long as you have decent management - and that has always been what was missing.

If we drove our car recklessly and crashed it as a result, we would tend to learn our lesson and so not do it again. But there are those in life who actually thrive on the risk of crashes and love the sensation of speed. Normally, such people would try their hand at racing cars and exercise their urge at purpose made circuits where their activities are well managed and the dangers are minimised. But there are those who insist on continuing their hobby on our roads - they are a huge danger not just to themselves but to us all. Their activities can damage our cars or even hurt us. In extreme, they can kill.

In all cases, these people can, at some point, do it again. Unless, that is, we make them drive slower. We can put cameras and signs up, put bumps in the road or more traffic lights but ultimately if they want to speed, they will. The only real way to slow them down is to make their cars slower.

This analogy is like management. Managers will be reckless if left in an environment where there are few controls, all of which can be ignored if not enforced rigorously. Even the threat of transgression fuels the urge. Not until the business is modified so it cannot do the dangerous things, will managers stop doing them. In banking, this is precisely the issue. They are driving fast cars on our roads and they can kill. Unless we make them modify their cars, they will kill just as they have done in the last year.

The heart of the issue is not the free availability of fuel (money), it is not the way they transact business (the roads), it is not they way they drive (their bonus culture) - it is the cars they use. Give them lesser cars and they can only drive slower.

This will take a different type of manager.

The management of banks, having suffered their reprimands having caused untold damage have clambered straight back in and they are driving just as, or even faster than, before.

Henry Mintzberg, Professor of Management at McGill University, has an interview in this month's Director Magazine. It augments exactly the point I make.

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