The truth about Neil Armstrong, Barclays, LIBOR, risk & culture

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To go directly to the commentary paper, 'Regulation, risk & culture: will we never learn?', click here.

The report of the parliamentary Treasury Committee on LIBOR appeared a week after the death of American astronaut, Neil Armstrong.  The two events are strangely linked by their relevance to culture – but separated by a yawning gap in the quality of thinking brought to bear on the topic.

When Armstrong stepped on to the surface of the moon, he claimed it was “a giant leap for mankind.”  But the flag he planted was American.  Just after Neil Armstrong’s death in late August, President Obama said he “was among the greatest of American heroes – not just of his time, but of all time.”  Armstrong’s was a remarkable accomplishment, but it was not Armstrong’s alone; it belonged also to Dr Edwin “Buzz” Aldrin as well as command module pilot Michael Collins and to a generation of NASA astronauts, ground crew, engineers, physicists, technicians and other personnel. It was not one man or two men or three; it took many men and women many years and vast resources to make Neil Armstrong one of “the greatest American heroes”.  Those resources were applied not only for the good of science but also as a crucial step in the Cold War – in a space race that had emerged from the arms race that succeeded the Trinity test (pictured) and subsequent use of the atomic bomb by the Americans against two Japanese cities at the end of WWII. Armstrong's accomplishment occurred within a definite context.

Since the success of Apollo 11, the American space programme has had its share of failures and disasters.  In the quarter of a century since the first space shuttle disaster, its performance and failures have been analysed in detail from a range of disciplinary perspectives.  One that has emerged strongly is the role of culture.   Context is a critical element of risk-taking and culture.

The report of the Treasury Select Committee uses the word ‘culture’ a staggering 50 times; it was used 96 times in the record of Oral Evidence.  There was plenty of confusion in the way it was used by those giving evidence and in the Committee’s report.  Culture has appeared frequently in previous analyses of failure in different contexts, but few have been examined in the detail that has attended the losses of the space shuttles Challenger in 1986 and Columbia in 2003 (Armstrong was a member of the Rogers Commission examining the loss of Challenger).  When it comes to financial servies regulation, can we and will we learn the lessons of history?

Based on the evidence from the recent parliamentary Treasury Committee report on the LIBOR scandal and other industry bodies’ and regulators’ reports internationally, the answer would appear to be a resounding ‘No’.  There is little evidence that regulators or industry bodies or market participants have understood the nature of the regulatory challenge or have understood how to respond the calls for improving culture and risk culture.  Without a change of focus, considerably greater application of behavioural insight and a strong measure of analytic caution, behavioural regulation of financial services will not move forward in the way that Parliament, regulators, the media, executives, shareholders or consumers expect or intend.

This pessimistic conclusion argues for the need to address risk, behavioural control and culture from first principles in order to reach a regulatory ‘settlement’ that will improve compliance and the management of risk rather than simply adding cost and confusion.  If we are to avoid regulating in haste and repenting at leisure, there is much that financial regulators can and must learn from other sectors’ failures about the importance of organisations’ history and context, of their technical, control and administrative cultures and compliance and the limits of rule-making.

Financial services firms face a choice:

  • wait for the regulator and/or supervisor to act, however blunderingly, to mandate new forms of regulatory 'cultural imperialism' and live with the consequences; and/or
  • adopt whatever superficial but fashionable solutions emerge from the consulting sector; or,
  • invest in greater understanding of the utility and limits of cultural descriptions of organisational activity and the potential prescriptions that emerge from them.

Whether recharting the behavioural course of banks, responding to the rigours of Solvency II in insurers or refocusing asset managers in a lower-yield world, we believe the latter course is an urgent imperative facing all firms in the financial sector.

We have recently published our Autumn riskbriefing which examines the relationship between behaviour and culture in a context of the social, market and internal pressures facing an organization.  Seeking lessons to learn, we examine first the accomplishments of the US space programme, its subsequent failures and some of the conclusions from the analysis of those failures.  We place the US space programme in its context, which has changed materially since its inception.  Then we review the recent parliamentary report on manipulation of LIBOR and the mis-characterisation by the Treasury Committee, by regulators, supervisors, industry bodies and market participants of culture and risk culture.  So far, the portents are ominous.  Lessons have not been learned; they do not even appear to have been sought. Realism and humility are both in short supply.

You can access the riskbriefing paper Regulation, risk & culture: will we never learn? here.

You can also access a two-page summary of the paper here.