HR, the banking crisis and the dictatorship of the moment

The appointment of Neil Roden, former HR director of RBS, as a partner in PwC’s HR consulting practice provoked an angry two-post response from consultant and prolific management writer Paul Kearns. There seems to be some history between the two men but what really annoys Kearns is Roden’s complete denial of any responsibility for the bank’s catastrophic failure. He was, says Kearns, quite happy to accept HR awards when the bank was making huge profits and at least appearing to successfully integrate new acquisitions but, when it all went pear-shaped, it was nowt to do with the HR boss.

Paul, on the other hand, thinks HR practices, or the lack of them, played a significant role in the bank’s collapse:

What a difference a few good HR people, who understand the true value of human capital, could have made to this now state-owned bank.

The reason RBS went bust was because a sizeable chunk of their bankers were not managed well enough to stop them creating huge bad debts. RBS’s strategic ambition to become the ‘most admired bank’ was not matched by an ability to get the best value from its human capital. If that isn’t the job of an HR director then I don’t know what is.

This view, that better people management and stronger HR functions could have prevented, or at least mitigated, the financial crisis, has gained currency over the past few years. The trouble is, at best there is no evidence to support this view and at worst it betrays a complete lack of understanding about the systemic nature of the banking collapse.

Two of the best books on the financial crisis, Bethany McLean and Joe Nocera’s All The Devils Are Here and Gillian Tett’s Fool’s Gold, begin their stories right back in the early 1990s. There is a good reason for this. The processes which, in 2008, combined to create the perfect storm, had been building up for years. The subprime crisis and its fallout was the first scene of the last act.

Tett describes how a team at J P Morgan, who had played a leading role in creating CDOs, originally as a way of mitigating risk, were very nervous about applying them to the mortgage market. Eventually, due to market and investor pressure, they began to play too. Other banks were making a fortune out of mortgage-backed securities and the share prices of those who ignored this lucrative market were staring to suffer. J P Morgan was cautious about going into the market and, in the face of criticism and ridicule from some, bailed out when it believed that things were about to go bad. Even so, it still suffered substantial losses.

So even those people who had designed CDOs and were concerned about the risks found themselves propelled into the mortgage-backed securities market. When so many people were making so much money, swimming against the tide was difficult and potentially career-limiting. Those who warned and questioned were sidelined or sacked.

If seasoned banking professionals could not stem the tide, what hope would HR people have had. In many investment banks, HR was not politically well positioned but, even if it had been, persuading a room full of bankers to walk away from a profitable business model would have been damned near impossible.

Like many professions, HR people tend to see problems in terms of their own expertise. Business failure must, therefore, be caused by performance or behavioural issues. If only people were more effectively managed, companies would not go belly up. Like a man who is skilled with a hammer, we suggest banging in nails as the solution to every problem.

There is no evidence to suggest that RBS bankers were not managed well. In fact, it appears that they were totally aligned with the bank’s business strategy. Their job was to make as much money for the bank as they could. If the strategy was to do this by using instruments such as mortgage-backed securities, then they were doing what their managers wanted them to do.

The banking crisis was not caused by individuals in organisations behaving badly; it was caused by entire organisations behaving badly. Disciplining people, improving performance management, changing the recruitment criteria or redesigning the compensation scheme would not have changed this. For the most part, all these practices were supporting the needs of the business. They were encouraging people to do what the management wanted – make large amounts of money by trading in profitable financial products.

I have picked a number of fights with people over this issue, starting with Jon Ingham eighteen months ago. Last summer I had a similar exchange with John Blakey and Ian Day – the suggestion that coaches could have done something to stop the banking crisis being even more preposterous than the belief that banks’ HR functions could have done so.

Why does this annoy me so much? Firstly because the assertion is so clearly wrong but secondly because it betrays a naiveté that doesn’t do the HR profession any favours. By claiming that something as monumentally catastrophic as the financial crisis could have been prevented if the HR people in the banks had been better adds weight to the all-too-common assertion that HR people don’t really understand the financial world.

I can understand why Paul Kearns finds it irksome that Neil Roden absolves himself of all blame for what happened at RBS but, in truth, there probably wasn’t a lot he could have done. In an organisation and an industry hell-bent on a certain course of action, even the best HR director in the world would have struggled to make a dissenting voice heard. Furthermore, going against the dictatorship of the moment would have been extremely risky, as many found out to their cost. The suggestion that stronger and more strategic HR management could have stopped RBS or any other bank from its headlong rush to oblivion is the stuff of la la land.

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8 Responses to HR, the banking crisis and the dictatorship of the moment

  1. Kevin Ball says:

    All true: I think I even have joined you in one of those fights. Roden is still a git, ‘though.

  2. Pingback: HR, the banking crisis and the dictatorship of the moment - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  3. Paul Kearns says:

    “There is no evidence to suggest that RBS bankers were not managed well” – no of course not, they were managed brilliantly weren’t they – that is if you define “managed well” as making a bank crash and putting the country into hock for the next decade. I think maybe you’ve lost the plot somewhere Rick?

  4. Rick says:

    Paul – I wonder whether you read this piece fully before responding.

    What would good people management have looked like in this context then?

  5. Rick says:

    Paul, then you will have missed the point of what I was saying. The financial crisis was not caused by poor people management. It was caused by business strategies underpinned by assumptions that had been built up over years. These strategies were well executed but disastrous. The people management practices at the banks pretty much ensured that employees were aligned with the strategies. The problem was that the strategies were flawed.

    I will ask you the question again – how would good people management have prevented, or even mitigated the effects of, the banking crisis?

  6. garethmjones says:

    Absolutely spot on Rick. To suggest that HR/Neil had could have had influence on what you correctly identify as a business strategy is hopelessly naive and does nothing to enhance the reputation of HR. Complete tosh. Unless they own 51% of the shares in an organisation the HRD is never going to be able to do anything other than sit back and go with the flow. Even the role of the CEO is becoming more neutered through the power wielded by shareholders, financiers and analysts.

    Good people management? Don’t make me barf. This is about good BUSINESS management, ethics, morals – all the things that fall on deaf ears in the world of banking and big business – being tossed out the window in favour of the relentless pursuit of growth, profit, greed.

    And you are right to point out that that its root cause goes back a long way. The first scene in the last act is a perfect description. Another good book is The Number by Alex Berenson, which exposes the damage caused by our obsession with ‘the number’ – Earnings Per Share.

    In 2001 Corporate America shot itself in the foot and tried to blame it on some guy in a turban who sits in front of a camera all day talking about Jihad’s. But if you research it properly, it was a conveniently timed distraction hiding the cancer of poor business practice which was at the heart of the collapse in the markets back in 2001/2.

  7. Chris McCray says:

    During the second “Election Leadership Debate, Newsnight‘s Economics Editor, Paul Mason, tweeted this:

    Great sidestep around the concept of Glass-Steagall

    The Glass-Steagall Act was introduced in America in 1933 to combat the behaviour of the banking system that had lead to the Wall Street Crash of 1929. It was repealed in 1999. It was this loosening of the regulations of the American banking sector that lead (imho at least) to the ever-riskier lending of those banks, coupled with the combination of those debts into derivatives that were difficult to understand (such as Collateralised Debt Obligations that became headline news).

    The managers in those banks were doing what their shareholders and so their boards required – and keeping to what was permissible under US financial law – all, no doubt, with good HR practices behind them.

    One wonders if the Obama-Volcker Plan (which sounds like a Prog Rock band to me) will be the new Glass-Steagall and whether it will curb the behaviour of the banks.

    Their HR policies will still be aligned to the needs and aims of those banks – and within these new regulations. It’s the industry regulation that is the root of the problem – along with intertwined assets classes which are difficult to untangle and determine the true value of those asset classes.

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