Category / Organisational Culture

Wise words for managers August 30, 2013 at 1:34 pm

From Michael Mauboussin:

The main point is to think critically about the activity you’re participating in and consider how much luck contributes to the outcome. In some realms it’s negligible, such as a running race. But in others, it’s huge. Once you understand luck’s role, you can understand how to approach the activity more thoughtfully, including how you develop skill and interpret results.

But I can tell you that our minds are horrible at understanding luck. So any mental model has to overcome our natural tendency to think causally—that is, that good outcomes are the result of good skill and bad outcomes reflect bad skill… the lower you are in an organization, the easier it is to measure your skill. That’s because basic functions are generally “algorithmic,” people are executing their jobs based on certain known principles. So outcomes are an accurate reflection of skill.

But as you move up in an organization, luck often plays a bigger role. For example, developing a strategy for a new product is no sure thing—luck can play a large role in shaping the strategy’s success or failure… So as people move up in organizations, it makes sense to pay more attention to the process of decision making than the outcomes alone.

Misunderstanding HR October 12, 2012 at 7:22 am

Rhymes With Cars & Girls suggests

the biggest free-lunch to be had in corporate America is to shutter all the “HR” departments and meanwhile cancel the contracts for the stupid keyword-matching resume-parsing software. Just let team leaders call up & hire directly all their friends and people they like – which is what ends up happening anyway. the biggest free-lunch to be had in corporate America is to shutter all the “HR” departments and meanwhile cancel the contracts for the stupid keyword-matching resume-parsing software. Just let team leaders call up & hire directly all their friends and people they like – which is what ends up happening anyway.

In my view this is to misunderstand the true role of HR in most businesses. It seems to me that HR exists firstly to provide useful cover when a ‘manager’ hires friends and people they like, and secondly to create a smokescreen of performance appraisal so that ‘managers’ can pay their staff what you want to and claim to have some kind of justification other than pure prejudice for it. Or perhaps I just an old cynic…

Culturally neutral risk reporting August 6, 2012 at 9:17 am

Last week, I mused a little on the cultural theory of risk and its consequences for financial risk management. Today I want to say something about risk reporting in that context. Specifically, I would suggest that one wants risk reporting that meets the needs and attitudes of all four cultural groups. That means

1. Individualists want ‘ordinary conditions’ risk reporting; things like 95% 1 day VAR. They will also focus much more on the P/L than on risk measures.

2. Egalitarians want to see different risks treated fairly, so they are a valuable resource in ensuring that the risk framework doesn’t give unfair advantages to some businesses. They will want to see a range of stress/scenario tests reflecting their belief in the fragility of ‘ordinary’ conditions.

3. Authoritarians want a strongly-policed and comprehensive limit framework, capital plans, and so on. For them it is all about risk-process-as-constraint. Focus your authoritarians on enforcement not design.

4. Fatalists are hard to please because they think (probably rightly) that no risk framework can avert disaster all of the time. However, giving them notional measures (if everything goes completely wrong we can still only lose x) and highly pessimistic stress tests helps. Their skepticism is a very valuable tool, and you want at least one prominent fatalist in any high level risk committee.

Construed this way, risk reporting can be a cross cultural communications tool. It needs to cater to all four attitudes if it is to be effective in that role. The key is to ensure that as one or other attitude becomes culturally dominant, the risk framework does not become too distorted.

The institutional consequences of the cultural theory of risk August 4, 2012 at 8:20 am

Yesterday, we outlined four attitudes which the Cultural Theory of Risk advances as a fundamental classification. Today, I want to look at what that classification suggests organizationally.

David Ingram suggests (1) that you find

Individualists in Sales/Underwriting/Trading. They tend to be paid with a high proportion of incentives or bonuses. They prefer to get paid for what value that they bring to the firm. They will frequently argue with the nit pickers and bean counters about how good the deals that they do will be for the company.

Fatalists in Operations and IT. Their priorities are frequently changed without their knowledge. Many firms tend to value the flexibility of Fatalists who do not expect things to stay steady and predictable anyway. Fatalists in a firm are quite happy with a job where they do not know in advance what they will be doing from day to day. You probably want a Fatalist on your help desk.

Egalitarians in Compliance, Internal Audit, ALM and some CFO and Legal functions.
Egalitarians will tend to keep to themselves within the firm and have few connections with the other areas. They tend to think that the company is going into decline, but that their department is run well and things would be much better if people just listened to their group more.

Authoritarians populate the risk management area and are commonly CFOs. When there is an Authoritarian CEO or powerful authoritarian senior administrative officer, the firm will usually have a very organized planning process with regular update to short and long-term plans. The emphasis of Authoritarians in management will be to set goals and measure progress against those goals.

Now, if we read this as a broad tendency rather than a prescription, I think he has a point. Certainly the CFOs I have known tend to be authoritarian (sometimes sufficiently so as to be to the detriment of their firms), and you certainly want someone who believes in fairness and the rule of law in compliance. Where I think Ingram goes wrong, though, is in a statement that he gives emphatically

Enterprise Risk Management is clearly an Authoritarian risk perception

It can be, but it does not need to be. Risk managment infrastructure should be a decision making aid, no more. At its best, it provides good information – quantitative and judgemental – which allows management to decide on which risks to take and which to hedge.

If objective risk measures are used in a purely authoritarian way, two things happen. First, the firm will miss out on opportunities that don’t look good according to the particularly risk framework. Individualists will see this, and some will leave in frustration. Second, other sneakier individualists will try to game the system. Sometimes they will succeed, and that can lead to disaster.

Firms with better risk management implicitly understand this. Their risk philosophy is a blend of egalitarian (let’s create a fair risk framework, including human decision judgement) and fatalist (how are those bastards trying to screw with me today?). Yes, sometimes you need an authoritarian to say ‘no, you can’t go over your risk limit’. But if that is all you have, you are in trouble; although perhaps slightly less trouble than if risk management is run by a bunch of fatalists (2). Risk management, as with so many other things, is better with if it has more cultural diversity.

(1) His discussion is based on insurers; I have adapated it slightly to be more bank-relevant.

(2) There is a school of thought that risk managers are simply short out of the money puts on the P/L, and that their aim in life is to be employed long enough to collect sufficient premium. This is an essentially fatalist view of the role (which is not entirely without basis).

Compulsory ethics training for bankers July 19, 2012 at 3:56 pm

A friend of mine has just pointed out that for a social worker to renew their license in the US, they have to have had at least 4 hours of ethics training in the past two years. Perhaps given recent Abacus/Libor/muni swaps/corporate swaps/… it should be a criteria for renewing your series 7 or FSA registration too. Luigi Zingales argues on Bloomberg that we need to improve the ethics training in business schools, and I agree, but ethics is not a learn once and forget thing; constant reinforcement is needed, especially if you are dealing with a group that may well include psychopaths.

Cultural engineering with mimes November 9, 2011 at 7:39 am

Aditya Chakrabortty tells a lovely story about how Antanas Mockus solved Bogota’s traffic problems:

Put yourself in the position of one of Colombia’s would-be tough guys. Dawdling obediently at a red signal is hardly going to enhance your credibility, while traffic policemen are figures of authority whom it is your right, nay, duty to menace.

What to do about the ensuing rush-hour chaos? Soon after taking office, Mockus decided to hire 420 mime artists, to stand at key junctions across the city centre. Now jay-walkers found themselves followed by clowns, imitating their movements. Similar mockery was dished out to reckless drivers.

This was ingenious: any Colombian machito trying to clock a face-painted mime artist would look ridiculous. So what happened? Within months, the proportion of pedestrians obeying traffic signals leapt from 26% to 75%.

As Chakrabortty says, Mockus spotted that the problem he was up against was cultural, and hence it required a cultural solution. This is a nice example of re-engineering behaviours.

In praise of weak leadership March 27, 2010 at 10:59 am

Oliver Burkeman in the Guardian quotes Alasdair MacIntyre:

One key reason why the presidents of large corporations do not control the United States is that they do not control their own corporations… When implied organisational skill and power are deployed and the desired effect follows, all that we have witnessed is the same kind of sequence as when a clergyman is fortunate enough to pray for rain just before the unpredicted end of a drought.

Broadly, I think that that is right. Even worse, when it isn’t right, the corporation is often a considerable risk because the CEO has the power to change the firm for the worse. Consider the two Greenbergs, Ace at Bear Stearns and Hank at AIG for example. They were both strong leaders, much more in control of their companies than is typical. And they were both in the hot seat when the seeds of disaster were sown. You only want a strong leader if you are really, really sure that that leader is never going to do anything silly. Typically a leader is only good for a while, and then does something damaging. At least if they are weak, that damage is likely to be easier to repair.

The importance of aligning revenue and product March 18, 2010 at 5:51 am

As a palate cleanser between stodgy doses of regulation and financial disaster tourism, I’d like to reference an interesting criticism I read recently of the advertiser led business model — Google’s business model.

The article is EMC vs. Google: There Should be No Competition by Rob Enderle on IT business edge. For me the key point is this one:

It isn’t really clear who Google’s customer actually is. Advertisers pay the bills …, but most of the products are focused on providing services to others… Harry Potter doesn’t fly in and create an enterprise offering. Someone is paying the bill to create it and that someone is going to want value. When you decouple revenue from the product, it becomes very difficult, and you can see this with Google, to stay focused on quality and customer satisfaction.

In one sense Google is a hugely successful company. It makes adverising-led free (or cheap) products work. But this is at a significant cost for the user in privacy and security. You get what you pay for. In the retail space, Google’s focus on selling advertising and providing an insecure but free service might make sense for some. But in the enterprise space, the argument is much less clear. Corporate IT might be moving to the cloud, but I doubt the Google model will have that much success there. At the end of the day, companies understand that if you are not the customer, the product is not designed for you, and it probably won’t meet your needs.

Why (some of) the successful don’t get it January 18, 2010 at 12:29 pm

Chris Atherton has an interesting explanation for Why experts are morons (which I have edited mildly to suit my purposes):

Below is a recipe for modest success … and for becoming a legitimate ‘expert’. (Quantities and ingredients may vary according to your needs and experience.)

  • You need to be bright-ish. Not supernova bright, just bright enough. (If you’re too bright in school, you’ll get bored; see next point.)
  • You need to be well-behaved. (If you don’t behave, you’ll be labelled disruptive and that will do exactly what you think it will to your chances of academic success. Yes, even if you are bored because lessons are too easy.)
  • It helps to crave everyone’s approval. (If you don’t care what your teachers or parents think, why would you try hard on subjects that don’t really interest you?)
  • Questioning authority probably isn’t in your nature. (Or if it is, it’s a very specific kind of critical thinking, like “hey, maybe nukes aren’t that great an idea, mmkay?”)
  • You are comfortable letting other people set goals for you (“You think I should go to university? Great!”)
  • You acquire a certain nerd-like pleasure (flow, if you like) from gnawing on very specific questions.
  • Your school years have conditioned you to understand that most people are mean, and best avoided.
  • Metaphorically or actually, you have let a thousand cups of tea go cold while you geek out on your chosen subject.

… okay, that much will get you through university and into a postgraduate programme. At this point, it will be particular helpful if you can screen out information about the world around you, because this will just distract and confuse you about the relevance of what you are doing. (Having a crisis of meaning is one of the fundamental stages of doing a Ph.D.)

Much the same argument applies to the associate stage at an investment bank, too, only the hours are worse.

So, where do we get to given that this treadmill is operating?

Chris says that the

side-effect of being an ‘expert’ is that if you’re not naturally inclined to cause trouble, question the system, or think critically about more than subject-matter problems then sometimes you end up saying really dumb stuff

This is essentially because you have rather less connection with `real life’ than most people, and share rather little context with them. Looking at the testimony of the bank chiefs to the Financial Crisis Commission Testimony, their actions on pay, the bonus tax, and so on, one is struck by how out of touch they are. But perhaps most experts, be they bankers or academics, are similarly disconnected. It’s a scary thought.

Update. The Epicurean Dealmaker has (what I hope he will not object to me characterising as) a similar if more eloquent take on the unusual nature of the men who run investment banks here.

In praise of ignorance November 5, 2009 at 8:29 am

In typically breathless style, Zero Hedge picks up a recent survey by reported Finextra.com of quantitative analysts:

A staggering two thirds of quantitative analysts think their supervisors do not understand the work they do

Now these numbers are likely to be distorted, firstly because the survey was done by a training provider, and secondly because there is a natural tendency for people to think that their boss knows nothing. Nevertheless, the fundamental proposition that the people who manage investment banks do not understand the details of quant trading is likely to be mostly true. It can hardly be a surprise that people who have been away from mathematics for thirty years, and trading desks for ten, are not in touch with the state of the art. What is more impressive is when the managers admit this. I once spoke to a very senior investment banker at a leading bank with regulators present: he frankly admitted that he had no idea how it all worked, but that he had people who worked for him did. He then explained the controls around the business: they were comprehensive and effective. Sometimes honesty and fear of the unknown produce a positive effect.

Fact as fiction, and other storytelling techiques July 31, 2009 at 7:03 am

One good way of telling the truth obliquely is to pretend that it is fiction. This was an established technique for ex-spys to spill the beans; and it works for bankers too. Humour is good here – it makes it clear that the author has enhanced the story for comic effect. Except that often they haven’t. The Epicurean Dealmaker is a master at this style: often he sounds as if he’s relaying a shaggy dog story over a martini in the Library Bar at the Laneborough, when he’s actually just giving you the inside track. This passage, though, is uncharacteristically straight. He’s talking about the perceived (and actual) success of Goldie:

360-Degree review systems, 24-hour response voice mail, and rotation of bankers through different departments only work when senior managers refuse to make exceptions to the rules. There are a nauseating number of investment banks which profess an undying commitment to teamwork and a dedicated focus on cultivating client relationships rather than chasing transactions. But these banks fall short time and time again because they do not enforce these principles. If Mr. Big Swinging Dick Managing Director who brings in a billion dollar IPO or a ten billion dollar merger throws a hissy fit and threatens to stomp out the door if he has to share credit, or a successful M&A banker refuses to manage a group in Capital Markets, or a Group Head inflates the review scores of all his subordinates to boost their pay and his power, senior management can either hold firm and preserve the culture, or they can cave. If they hold firm, everyone else at the bank hears about it, and they learn that the rules and the culture will be enforced. If they cave, everyone knows that too, and it’s off to the bad old races of “what’s in it for me.” Sadly, most investment bank executive teams cave.

Michael Lewis would have illustrated this story with a mildly amusing tale of bankerly bad behaviour. Other journalists would perhaps have tried to garner outrage before they had even finished making the point. But, being an insider, ED is smart enough to know that the sex, drugs and science fiction work best as garnishes for the real erudition.

The world’s least favourite airline July 15, 2009 at 11:41 pm

How BA feels to me

I’m still digesting the proposed changes to IAS 39 and to Basel 2 (you wait two years for major accounting and regulatory change then two of them come along at one), so for now I’ll just quote a delightful Luke Johnson column in the FT. I read it on a plane, and I agree with this wholeheartedly:

BA has become an institution run not for the benefit of its customers – who provide its revenue – but for its staff and pensioners. Its shareholders, meanwhile, have long been forgotten.

If a firm like BA isn’t a conviction short, I don’t know what is.

The psychogeography of investment banking May 26, 2009 at 6:56 am

I will ignore for a moment the fact that Epicurian Dealmaker does not make very accurate use of the term `psychogeography’ (see Mind Invaders for a reasonable if amusingly partial introduction), and answer his question. First he quotes Tolstoy, the important part being

A Russian is self-assured just because he knows nothing and does not want to know anything, since he does not believe that anything can be known.

The question is then

Naturally, I exclude the Russians from my analysis, because I am completely unaware of anyone currently operating in the financial sector who will admit to knowing nothing, much less take pride in it.

Your thoughts?

My thoughts are that many of the MDs I have ever met in M&A fit Tolstoy’s description admirably.

Two down, one to go April 29, 2009 at 7:33 am

Jacqui Smith, possibly the least competent Home Secretary since Henry Brooke (although there in Blunkett to consider for that title too, and that is pretty tough competition), has already announced that she will not be going ahead with a massive snoop project (although she wants the same functionality provided privately). The cancellation of the id card project is apparently being actively considered, and anyway the Tories have said that they will cancel them. And the Trident replacement may be on the block, along with a number of other large defense projects. This is all good.

It’s just a shame we are still stuck with this:

My money being spent

Yes, the grandiose, ultimately useless (or at least currently without a use) and hideously expensive Olympic building projects sail on regardless. Our shameless pandering to the IOC continues. As Simon Jenkins says, while the ­citizens starve, the precious ones are fed. Still, at least some of these cuts are better than none.

Payment for failure, German edition April 20, 2009 at 11:32 am

From Bloomberg:

Dresdner Bank AG, the unprofitable lender acquired by Commerzbank AG, was sued by the former head of capital markets at its investment banking unit over his severance pay… Dresdner in-house lawyer Matthias Woldter told the Labor Court that Neumann can’t seek the severance payment because his unit contributed 5.7 billion euros to the investment bank’s record 6.3-billion-euro loss last year.

“The losses were incurred especially at the unit Mr. Neumann headed,” Woldter said. “His duty was to care for its short-, medium- and long-term profitability. He significantly failed in bringing that about.”

Tanja Karhausen, Neumann’s lawyer, said that the payments were due independently of the 2008 results.

Bankers wonder why they are so widely disrespected. Law suits like this are part of the reason. Individually it may make sense for this guy to sue. But collectively he is just helping to put another nail in the coffin of the reputation of banking.

Expert advice February 21, 2009 at 10:05 am

From an interview with Philip Tetlock on CNN money about prediction:

The better forecasters were … self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

One might add that hedgehogs who are successful in the short term tend to get promoted fast too, as are forceful as well as (accidentally) right. Eventually these people will fail, but by then they may be in a position of considerable power.

See here for a further discussion from the Big Picture.

"Not read" and the management of psychopaths February 17, 2009 at 7:20 am

There is a story, probably just a rumour, that there used to be a man at the Bank of England who had a “not read” stamp. He would use it to stamp documents he wanted to be able to claim he had not seen before returning them to the sender.

The fact that this story is vaguely plausible is a big part of the problem with regulation. Epicurean Dealmaker suggests:

Staff the SEC, or whatever “Super Regulator” the government decides to deputize to oversee this mess, with a bunch of highly-paid, tough-as-nails, sonofabitch investment bankers. You will have to pay them millions, just like regular bankers. (You can tie their incentive pay to improvements in the value of securities held under TARP and TALF, if you like.) Pay them well, and investment bankers won’t be able to treat them like second-class citizens at the negotiating table. Pay them like bankers, and your regulators won’t hesitate to read Jamie Dimon or Lloyd Blankfein the riot act, because they won’t give a shit about getting a job from them later.

Trust me, these are the kind of people you will need on your team: highly educated, financially sophisticated, psychotically hard-working, experienced professionals who know or can figure out CDOs, SIVs, balance sheet leverage, and credit default derivatives just as easily as the idiots who created and trade this shit. Leading your enforcement and supervision teams you need a bunch of smooth, smart, plausible, grandiosely self-confident senior bankers who will not hesitate to tell Vikram Pandit to go fuck himself, his mother, and the cow she rode in on if he ever tries to fuck with the United States government, the US taxpayer, or the pizza delivery boy again. You know: psychopaths.

Of course he is right in that such people, properly empowered and paid, would indeed regulate quite well. They would get it in a way that most public servants don’t. The same argument applies to the tax authorities: if you staffed them with ex tax lawyers and investment bankers who got to keep 10% of everything they saved the taxpayer, you would collect an awful lot more tax and there would be many fewer tax avoidance schemes.

So it would work. But no government would ever have the courage to try it. You would have to fire a lot of the current senior regulators or tax collectors, and completely re-engineer the culture. Mr. “Not Read” wouldn’t last ten minutes in a psychopath-enabled regulator. Which is both the reason it should be done and the reason it won’t be.

Diversity January 27, 2009 at 8:26 am

Diversity is important, not just on grounds of fairness, but also because dissent is valuable. You want different views in an organisation, different perspectives. And you certainly don’t want the same culture informing all your decision makers.

In this context it is interesting to see two different storms blowing up. One against the Goldman Sachs -isation of the US Treasury. But the one I’m really interesting is the observation by Nick Cohen (here) amongst others that not only have governments of the left as well as the right been obescient to business, they have not even tolerated any non financiers in positions of power of the City. Think of people like Lady Vadera (why does the architect of PFI have _any_ place in a Labour government?), Mandelson (does judgement no long matter at all in a politician?) or Paul Myners. Is Vince Cable the only person in parliament who knows something about finance and isn’t in the pocket of the banks? Even bankers know that hedging can sometimes be a good idea – and a good hedge against coming up with bad policies is having a few people around with different points of view.

The value of the flip flop July 6, 2008 at 7:42 am

What do you call a Frenchman in sandals? Phillipe Phillop.

With that out of the way, we can get to the point. Long or Short Capital, a good financial satire site, has an occasional series of Quotes Entirely Relevant to Investing. Well here’s one, an entirely serious one, from an excellent article by Julian Baggini:

The trouble with most people is not that they lack the courage to stick to their guns, but they don’t have the greater bravery to change course. Consistency is a good thing, but not when it is understood as simply refusing to change your mind…To worry more about whether you’ve stuck with your views than about how they stack up now is to value loyalty to ideas more than fidelity to the truth.

Great traders have great ideas. But more than that, when they have an idea that does not work out, they take the trade off. They don’t invest too much in any particular idea — because they know that if it doesn’t work out, they need to be able to recognise that, learn the lesson and move on.

One more thought on pay… January 27, 2008 at 9:44 am

The columns of the FT have been reverberating with comments on banker’s pay recently (see here, here, here and here) with a predictably strident reaction from the blogosphere (see, if you must, here, here and here). One issue here that hasn’t received attention, though, is the wonderful effect of diversification for managers.

Suppose you are a junior trader with a budget of $5M and you get paid 10% of your excess P/L over $3M. Your bonus is therefore 10% x max(0, P/L – $3M). Suppose the average trader makes budget, just, and the SD of returns is $2M. Then while the average trader makes $200K, a bad or unlucky guy 2 SD from the mean makes 10% x max(0, 5M – 2 x 2M – 3M) = 0. Fair enough.

Note though that the trader owns a call, and you maximise the value of the call by increasing volatility. So the trader is incentivised to make their P/L volatility as large as possible.

Now consider the desk heads. Suppose each employs ten traders, so their budget is $50M. They too get paid on the same basis, so their bonus is 10% x max(0, P/L – $30M). The mean is $50M but the SD goes as the square root of the number of traders employed, so it is root ten times $2M or about $6M assuming zero correlation. Therefore while the average desk head takes home $2M every Christmas, a bad one 2 SD from the mean has a bonus of 10% x max(0, 50M – 2 x 6M – 30M) = $800K. So even a pretty bad (or unlucky) desk head makes money. Of course the zero correlation assumption is a stretch but note that the desk head owns a call on a basket, so they should maximise both volatility of the basket components and their correlation.

Finally consider the head of the business employing a thousand traders. By the same logic, their budget is $500M, and they get paid 10% x max(0, P/L – $300M). Their volatility though is only root thousand times $2M or $20M. So a really terrible manager four SDs from the mean still earns 10% x max(0, 500 – 4 x 20 – 300) = $12M. Very nice. Diversification works beautifully in executive pay, at least if you are one of the executives. Shareholders may have a different perspective.