by James Walker
The banking crisis remains among the most enduring corporate calamities of the 21st century so far, serving as a cautionary tale about the consequences of excessive risk taking and poor decisions. Yet there are many additional lessons which can be learned from the financial crash, ones which absolutely must remain at the forefront of our collective consciousness for generations to come.
Because the weaknesses exposed around accountability, leadership, organisational culture, oversight and decision making apply just as much in today’s world as they did then – remaining highly relevant to every business, regardless of size or sector.
Focus on behaviour not bureaucracy
The crisis unfolded despite the financial sector’s extensive governance frameworks, with all of its policies, procedures, committees and reporting structures. Issues arose, compounded and then imploded not because safeguards were missing, but because they were not influencing the decisions being made.
Just one instance of an overlooked or blatantly flouted policy or procedure can cause an isolated problem. But when this seeps into a company’s culture and becomes widespread practice, it is easy to see how the situation becomes an ‘accident waiting to happen’, which ultimately became the title of a report produced by the Parliamentary Commission on Banking Standards.
The HBOS failure review cited the risk function as a ‘cardinal area of weakness in the bank’, adding a lack of expertise and experience among Group Risk Directors meant high risk activities were not properly analysed or checked. Additional issues identified around board oversight and corporate culture further illustrate the point: good governance is not about how many policies you have; it is about the decisions those policies help people make.
Responsibility does not equal accountability
Across many organisations involved in the crisis, there were multiple senior figures with responsibility for specific activities. But this showcases another lesson: when responsibility is spread across several teams, committees or levels of management, there is a real risk that problems can be overlooked or passed between departments without ever being resolved.
By contrast, if leaders have clear accountability (and the associated authority and resources to act when required), then we see ownership of issues, and a much lower chance of them slipping through the net.
This is precisely why the Senior Managers and Certification Regime was introduced: to ensure clarity around personal and organisational responsibilities and reduce potential harm by creating a system where accountability was key. By recognising that responsibility does not equal accountability or ownership, all companies can start to build the sort of structure which ensures problems are identified, and then effectively and swiftly dealt with.
Longer-term risks must not be ignored
Celebrating financial performance is natural, especially within a banking setting – but a focus on short-term wins seemingly encouraged confidence in unsustainable business models. By measuring success through today’s revenue and growth, leaders can miss the longer-term risks and impact on future performance.
Good governance encourages questioning and challenge about what today’s wins might mean for tomorrow’s outlook – and any company can and should shift the focus towards performance measurements which incorporate employee retention, operational resilience, customer outcomes, and business model sustainability.
Never discourage challenge
When the FSA investigated the near collapse of the Royal Bank of Scotland, it concluded there were ‘likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions’. There was a robust governance structure in place, but the report found ‘substantive failures of Board effectiveness’.
If internal teams and external advisers are discouraged from asking questions or raising legitimate concerns, then conformity becomes the status quo. Going forward, the lack of critical voices may be seen as agreement, when in fact it is the company culture which has quashed any hope of effective challenge. This brings us to the lesson that effective governance requires psychological safety; if alternative perspectives will be dismissed without consideration, then major decisions are simply passed without ever having to stand up to scrutiny.
Complexity isn’t an excuse
Challenge only occurs in certain organisational cultures, and it is only truly effective if the challenger has enough information to comprehensively understand the decision in front of them. Risk can hide behind complexity, and we have seen examples of decision makers’ expertise being queried after the fact. Indeed, the Examiner’s Report into the collapse of Lehman Brothers quotes an internal email which described the board as lacking sophistication around the subprime market, adding Joseph Gregory (then President and COO) didn’t ‘want too much detail’.
While the complexity concern certainly applies in the financial sector, there are many other businesses where this is pertinent – especially in an era where more decision making is focused around the adoption of new technologies and artificial intelligence.
Governance must be undertaken with enough understanding for the recommendations of technical experts or external consultants to be challenged, with complex information presented in an accessible manner so risks, dependencies and consequences can be identified.
Governance must withstand pressure
The overarching theme which links all of these lessons together is that governance frameworks are all well and good during stable periods of strong performance or predictable conditions. But it is crucial that the structure can withstand unexpected pressure. This is exemplified by Northern Rock, whose ‘high-risk, reckless business strategy’ was identified by The Treasury Committee as contributing to the bank’s inability to cope with liquidity pressures when the international capital markets were frozen.
All businesses should regularly stress test their decision making and risk management processes, mapping out potential outcomes and evolving their governance arrangements as the company grows.
Businesses do not necessarily need additional rules, committees or layers of responsibility to avoid a disaster akin to the banking crisis. Instead, we must look beyond processes to assess whether people have the clarity, confidence to challenge and accountability needed to ensure governance policies which appear solid on paper stand up to the test when everything begins going wrong.
– James Walker is an independent board chair, non-executive director and Chartered Internal Auditor who has led internal audit teams at Credit Suisse and UBS. Currently he provides governance, risk and internal audit services through Lightning Oak, chairs the board of Nature Impact, is a Non-Executive Director and Chair of the Finance, Planning and Performance Committee at Avon and Wiltshire Mental Health Partnership NHS Trust, and advises the boards of Footstep AI and Fallon AI. James is a Fellow of the Association of Chartered Certified Accountants, Chartered Internal Auditor of the Chartered Institute of Internal Auditors, and a Chartered Member of the Chartered Institute for Securities and Investment.
