Tuesday 9 April 2013

HBOS, Bad Decisions and Fear

The Banking Standards Commission report into the collapse of HBOS (http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/144/14402.htm#evidence) serves as a dire warning about managerial hubris. As Douglas Fraser commented today (http://www.bbc.co.uk/news/uk-scotland-scotland-business-22037950) there were some stonkingly bad decisions taken which steadily led the  bank to require taxpayers (many of whom had invested their money in the bank once already!) to bail it out. For some reason, it appears that a culture of bad decision-making emerged in HBOS: each gubernatorial move only served to smash another hole in the hull of the ship.

How could this happen? How can bad decisions become endemic? What does this tell us about governance structures and leadership? What can be done to prevent it?

There are some initial theories which might present themselves. For example, it wasn't just one person making decisions - it was a group of people. The decision-making process happened between the individuals concerned. What we don't know is whether they believed they were doing a good job, despite mounting losses. But we can speculate - especially given the fact that there was apparently a culture of self-congratulation at the top. One person on their own might find an individual failure resulting from a decision they had taken to be painful. This might cause them to reflect and change course. However, if the decision was the product of a small group of people, then whatever negative feelings each of them might harbour, no single individual need take responsibility (and need not feel too bad), and since each individual wishes to maintain their position, and sees maintaining a positive outlook as essential to that, each member of the group will reinforce a false positive perspective thus avoiding any deep reflection on the failure of any particular decision.

But there will be people in the organisation who have a clearer picture of what is happening. These people will typically be in the lower ranks of the organisation, who are more in touch with things on the ground. They will moan and worry. But increasingly, they are unlikely to be heard. This is because the self-reinforcing positive dynamic at the top becomes increasingly allergic to criticism. Indeed, criticism is seen as dissent, and dealt with through the disciplinary procedures at the disposal of the directors. The bad decisions are driven by shared fears amongst the board. Yet the fear is absent - it is never acknowledged because to do so would threaten each individual. Each disaster increases fear, which in turn increases the probability of more disasters.

Where does the allergy to criticism come from? The buried fears of the directors know the straight-jacket they are fitting themselves with even if they can't explicitly determine it. They know that poor decisions in the past are responsible for a pattern of failure. Yet as the failure gets bigger, so does the self-preserving instinct for maintaining a positive spirit at the top. Anything which threatens that (like criticism) must be dealt with severely. But the lie of the 'original sin' just keeps on getting bigger - a bit like the dead body in Ionesco's play "Amédée".

How can it be stopped? The positive feedback loop in governance communication needs to be broken in order for fears to be made explicit. A public inquiry does this nicely - but frankly, that's after the horse has bolted and the stable's fallen down. Before this stage occurs, it is hard to see how this kind of structure can be avoided. I think, however, there is a way. Teaching and learning are all about dealing with fear...

Good teaching never threatens, but invites. A pathological board is like a class of naughty children. There are interventions that good teachers can make to gradually open up the communications. What it really does is deal with the fear. It may be also that technologies can play a role. They break down barriers between people - and that is another way of dealing with pathological commuication dynamics. In order to achieve this, those who understand the dynamics of the situation need to organise themselves carefully. As things creak under the mounting failures, there are cracks in the walls where it is possible to make an intervention.

What is required is listening.

Managerialism has given us many governance structures in public and private institutions that look like the HBOS board. It would be unsurprising to see the same dynamics play out. But failures threaten peoples jobs and the economy at large. Dealing with the potential pathologies of this kind of group decision-making may be an urgent requirement if we are not to see many more institutional failures come before Parliamentary Select Committees. 

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