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.