Barclays falls back on the rogue trader fallacy

After his bank was found guilty of illegally manipulating Libor rates, Barclays CEO Bob Diamond said he was “sorry that some people acted in a manner not consistent with our culture and values”.

Once again, we are being asked to believe the myth of the rogue trader. It’s a convenient way of individualising what is actually a systemic problem. The likes of Nick Leeson,
Jérôme Kerviel and Fabrice Touree, we are told, are bad apples who do things no-one else in the bank would dream of. News International tried the same line over phone hacking until the pretence collapsed under the weight of evidence.

But, as I’ve said before, there is no such thing as a rogue operator. Yes, there are people who steal from their companies and customers but that’s not what we are talking about here. The ‘rogue’ operator is someone who behaves illegally to achieve the goals the employer has set. If the pressure to make the numbers, and the reward for doing so, is high, then it’s not difficult to see how a ‘do whatever it takes’ attitude can encourage people to bend the rules. It’s then a short step from bending them to breaking them.

The suggestion that this behaviour is counter-cultural goes against everything we know about the way organisations work. Organisations influence and contain employee behaviour through a set of cultural norms. These norms are reinforced by the leaders and by various systems of reward and punishment. For this reason, employees rarely operate outside them. Countercultural behaviour is usually spotted quickly and discouraged. If it persists it is usually punished.

We like to talk about employee autonomy but, in practice, there are very few organisations where executives give their staff objectives but have no interest in how they go about achieving them. They might not understand the finer detail but most bosses know more or less how their people do their jobs. The more demanding the environment, the more likely the boss is to be monitoring the team. In such an environment, the suggestion that counter-cultural behaviour can go on for years is fanciful.

Rogue traders are products of their corporate cultures. At some level, the culture tacitly approves of what they do. Those manipulating markets, conspiring against clients or hacking phones might be regarded as slightly dodgy rascals but managers either turn a blind eye or, more astutely, avoid asking the questions that would mean they had to admit to knowing what was going on. The rascals are doing what it takes to make the numbers so say no more.

Former Barclays CEO Martin Taylor told the BBC that the deception was systemic and looks like a deliberate strategy that had been going on for years. This behaviour could not have persisted for so long if the culture had not supported it in some way. It may be that Bob Diamond didn’t know anything about the Libor manipulation but to claim that it ran counter to the bank’s culture and values is naive. Rogue traders don’t come from nowhere; they are moulded by the prevailing norms in their organisations. They just amplify the worst characteristics of the cultures that breed them.

Update: Just seen this quote from a 2011 BBC business lecture:

Culture is difficult to define, I think it’s even more difficult to mandate – but for me the evidence of culture is how people behave when no-one is watching.

It’s from Bob Diamond.

Update 2: A fascinating piece from Frances Coppola on the systemic failure at Barclays and the attempt to blame the whole thing on junior ‘rogue traders’:

This is a major failure of internal control akin to those we see in virtually all “rogue trader” events. And Diamond is in fact treating this as a “rogue trader” event. The junior staff actually involved in the rate fixing are being sacked. But the senior management responsible for the internal control failure that made it possible for these people to influence rates inappropriately, are they being sacked too? Doesn’t look like it.

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12 Responses to Barclays falls back on the rogue trader fallacy

  1. Pingback: Barclays falls back on the rogue trader fallacy - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Vince Lammas says:

    Hi Rick,

    You said similar things about phone hacking and press intrusion and were shown to be absolutely correct through later revelations in inquiries and where there have been arrests for attempts to cover up what was happening. You also said in an earlier post that “culture eats strategy” and it’s cases like this that prove the point.

    We might see more of this at other banks as the FSA investigations continue. This could be a bigger hole below the water-line than earlier mis-judgements unless banking is seen as simply too important for the UK for the authorities to take serious action against the industry.

    Blaming “a rogue” or suggesting this is a failure in the compliance arrangements is simply ridiculous. If it is true that “culture is what we do when we think nobody is looking”, these kinds of behaviours tell a damning story.

    Mark Berman (ex-lawyer for the SEC), on Newsnight yesterday, talked about a failure of leadership and a systemic breakdown in management and supervision at Barclays.

    If we want people to accept there is fairness and justice in business, private sector business leaders should be held to account for their failure of management and leadership. “Heads must roll” surely can’t be a principle that only applies to people who are under the direct influence of politicians.

    Vince

  3. chris says:

    Yes, but how possible is it for individual CEOs to affect corporate culture? What tools have they got? How long would it take?
    Could it be that bankers, regardless of their CEO, are predisposed to act badly because of the abundance effect?:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1157085
    What power do CEOs have to counteract this?

    • Vince Lammas says:

      @chris
      There’s no doubt that actually “managing” culture is pretty hard – but difficulty is no excuse for apathy. It might be argued that the CEO cant know everything that goes on in their organisation … but they should know broadly how it operates and whether the culture, supervision and systems of control are working in a way that is satisfactory.

      There are plenty of approaches and techniques available for the senior leadership of any organisation to “set the tone”, engage people to get buy-in, encourage, recognise and reward positive behaviours while discouraging and punishing negative behaviours.

      If bankers are predisposed to act badly, the leadership team are responsible for managing and supervising the organisation to modify the environment in a way so as to influence that behaviour. If abundance through the reward systems are part of the problem – these should be changed!

    • Rick says:

      Chris & Vince

      I think this is a really interesting question and one I have mused on from time to time.

      The answer from the organisational change industry will be that leaders set behaviour and, to a large extent that is true. But where you have deeply entrenched attitudes throughout an industry, how easy is it to change them in a single company, even with a CEO’s power?

      It happens in sectors other than banking too. The times I’ve heard people say “That’s just how people are in this industry.”

      It’s almost as if the industry creates its own weather system and anyone trying to change it is pissing into the prevailing wind!

      I may do a post on this as I think it’s a fascinating question.

      • B.O. Locks says:

        I do not accept that a culture is outside the control of the CEO and the Board, however entrenched attitudes may be. The non-execs appoint and recruit the execs. So the non-execs can choose to recruit so-called talent on ethical as well as on technical criteria.

        The execs are responsible for the day to day management of their respective functions. The execs too can hire and fire their senior subordinates and so this subordinate layer of management is likely to reflect the values of their seniors (the execs). And so it goes on throughout the organisation. Cascading, I believe, is the buzz word

        The non-execs are appointed by the shareholders and so non-exec tenure is ultimately under the control of the shareholders. Whether this is an adequate system of accountability may be moot.

        Directors at the top of an organisation are usually extremely well remunerated and, moreover, they have almost god-like power within their organisations. If they cannot sort out the culture, ethos and practices with the organisations they control then they are either consciously complicit or are incompetent. Either way, they should be sacked.

        The German model, where there is a supervisory board of non-execs jointly elected by shareholders and employees to monitor exec performance, may overcome the problems of information asymmetry that may be inherent in having a single board of directors a la UK regulation.

      • Vince Lammas says:

        I certainly agree an industry can have a “pervasive culture” that is very challenging to shift and there may be significant power-blocks, entrenched attitudes and self-interested parties that have a major influence on an organisation and how it works when they think nobody is looking.

        This is a topic I have talked about with close colleagues working in the NHS, where the different groups of people and interests pose some complex challenges for managers and clinicians in equal measure. With highly permeable boundaries within geographic areas and huge amounts of external networking, there are both positive and negative aspects about the culture that transcends any one organisation.

        I can imagine that city firms exhibit some of the same factors and symptoms as those I am thinking of in the health sector and there may need to be an industry-wide adjustment to the new environment which only breaking traditional and casino banking apart will deliver.

        In all that context however, there is no doubt the behaviour and focus of the senior leadership team is the single biggest influence on organisational culture and the CEO needs to consider how to influence behaviour to ensure people “do the right thing” – ethically, morally, legally, professionally and financially.

        Despite what some people might suggest, even the CEO is rarely all-powerful and the idea they “control” every aspect of an organisation is simply over-simplistic. In fact it’s the very point that some of the negative cultural issues are systemic/endemic that means even the most skilled leader might need a significant period of concerted effort to turn around the way an entire organisation functions.

  4. B.O. Locks says:

    Very interesting.

    I am amidst the long process of jettisoning my current account with Barclays. I made the decision to sack Barclays as my banker following a conversation with their fraud department concerning a transaction on my account that I suspected to be fraudulent. All I can say is that I felt I was talking to a spiv. Certainly his ethical standards fell far short of the standards I apply to myself in my business dealings. In business, honesty and ethics should be everything, in my view.

    I believe the attitude of the spiv I spoke to is representative of the Bank. It cannot be an accident that Barclays recruited him. The spiv’s values also accorded with those I have encountered by talking to other City workers on Twitter. I too, therefore, believe this most recent incident of reported dishonesty is systemic.

  5. A key question is whether this behaviour, and the systemic failure it indicates, is specific to banking. While contempt for the customer, the law and wider society can be found in many industries, I think there are grounds to believe that banking has a unique form and culture that makes such failures not merely more likely but inevitable.

    There is truth in the observation that bankers have to be fabulously well-paid because otherwise they would simply steal the money. Half-inching gold bullion, a la the Lavendar Hill Mob, is no longer the preferred method. The creation of electronic money, and its vast multiplication through derivatives, has created a phantom store of wealth that exceeds global GDP many times over. As has been noted by many before now, this is a fictional commodity, a fact made clear by the BoE through QE.

    The ever-lengthening chain between traders and end-customers, where securitisation means the real world thing represented by the money is for all practical purposes unknown, has led to an industry where the “worker” is wholly alienated from the “product”. Ironically, this has freed bankers of moral restraint, rather than led them into anxiety and antagonism (unless the cocaine, Bollinger and Spearmint Rhino’s season ticket are symptoms of this).

    The resulting paradox is that bankers have little respect for money, other than in terms of what they can personally buy. It is hardly surprising then that they should seek to manipulate the “market”. It appears to exist solely for their own benefit.

  6. B.O. Locks says:

    HMRC, that much maligned organisation, has created an extremely effective document for changing culture. It’s called the P45. Once employees, senior managers, and directors have seen its effects they quickly fall into line with cultural changes introduced by a new CEO. There is no need to get too intellectual about changing dishonest or anti-public interest behaviour.

  7. There’s a very interesting article by Will Davies on gaming the system and ethical failure, re Barclays, here … http://potlatch.typepad.com/weblog/2012/06/the-barclays-scandal-made-in-chicago.html.

  8. Tyler Murphy says:

    This new scandal is just one more reason why the public are so mistrusting of Barclays and other financial and banking corporations. Blaming one or two insiders is ludicrous and, as these comments attest, you’ll no doubt be proved right eventually.

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