Saturday, June 12, 2010

I Really Planned On Being A Crook – Not!

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.




A few years ago RSD Solutions did a training session for a group composed of members of the front and back office operations of a multi-national bank.  The session was focused on ethics, and more particularly ethical debacles in the context of breakdowns between oversight between the front and back offices.  Needless to say the dynamics of the group was interesting.

As part of the session we did an examination of many of the well known trading debacles that had occurred up to that time – Barings, Soc. Gen. etc.  We examined roughly two dozen such situations.  It was a fascinating exercise.

One of our conclusions was that after examining all of the available public evidence, (we did not interview any of the related parties, nor did we seek out non-public information), was that each of the debacles and supposed ethical breaches started off really small.  In many, if not most cases, these debacles started with a small mistake.  That’s right, a mistake, and not a deliberate “testing” of the system to see how far it could be stretched (or skewed, or gamed).

In other words, our central conclusion was that most debacles were not necessarily a deliberate ethical attack or ethical breach, but instead something that happened quite unintentionally. 

A second conclusion was that each of these mistakes grew to a debacle for two reasons.  (1) the central individuals involved did not believe that a mistake would be tolerated, and (2) in order to cover up or correct their mistake they then (and only then) undertook actions that they knew were definitely not kosher.  Inevitably things snowballed from there.

We currently hear so much bemoaning the lack of ethics in the markets and in risk management.  The debacles of our time are always being brought forth.  The general population quite naturally assumes that everyone involved in finance is a crook.  I do not think that is true.  I believe (perhaps being very naive) that most individuals in finance are ethical and desire to be so on a continuous basis.

Perhaps it is time to think a bit more carefully before we put systems in place to curb ethical breaches.  Perhaps, counter-intuitively, fewer systems would be more appropriate!   Perhaps it is time for more faith in our fellow workers, rather than less faith.  Perhaps it is time to allow for more mistakes and more forgiveness, rather than less tolerance and less ability to accept mistakes in the context of which they were made.

Perhaps it is time to think, show empathy and understand in context, rather than systemize everything in the sake of rules, regulations and ethics.

Tuesday, June 8, 2010

Ethical Leadership

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.



The new Dean at my university (Dalhousie University in Halifax, Canada) is Peggy Cunningham.  We are all very excited about having Dr. Cunningham lead us as we build on some very exciting projects and some new themes in the Faculty of Management at Dalhousie.

One of the most exciting themes is that of Ethical Leadership.  Now if you are like me you probably rolled your eyes when you read that line about “ethical leadership”.  “Here we go”, you are thinking, “another school that is going to hop on the bandwagon by teaching students right from wrong!” 

Dr. Cunningham (Peggy as she likes to be called) is too smart and more importantly too wise for that.  Like me (see my previous blogs) I suspect she believes that right from wrong is not something that can be taught to someone who is past 6 years of age (although I have not discussed this specific point with her.)

Ethical leadership for Dr. Cunningham is leadership with (a) respect, (b) courage, and (c) empathy.  To me that is a very refreshing and encouraging way of looking at ethics and ethical leadership.

Let’s quickly examine this definition of ethical leadership in the context of the ethical issue of the day – namely Goldman Sachs and the Senate review that occurred recently.  Most of you have read the transcripts or seen part of the testimony of the Goldman executives before the review committee.  Probably more of you spent time trolling the various joke sites and e-mails making light of the hearings.

In any case, let’s examine these hearings in terms of ethical leadership.  Who was showing respect?  Was there any respect in any part of the incident (the Abacus transaction, or the review hearings)?  Was there respect shown by those who made fun of the hearings?  (In the interest of full disclosure I am certainly chuckling at the jokes that are still circulating around.)  Was there respect shown by either the executives of Goldman Sachs or by members of the review committee or by the various protesting groups?  Was there respect shown by the counterparties to the original transaction?

Who has demonstrated courage in this whole affair?  Is it the SEC who brought the charges (although we understand there was significant debate about whether or not they should, and there are suspicions that the charges may be politically motivated)?  Who is being courageous? 

Who has demonstrated empathy?  Surely to goodness you are not going to reply the Senate committee members as they empathize with the counterparties who lost on the transaction (the same counterparties that they would have been praising for being courageous for helping to grease the housing boom, or courageous for taking risks to finance profits etc. etc.).

The world of risk management is rife with opportunities where ethical leadership is called for. Think about situations that you have been involved in.  Are you demonstrating “ethical leadership”?  Are the principles of leadership with (a) respect, (b) courage and (c) empathy part of the social fabric of your organization?  Are they part of your personal make-up?

In an earlier blog I stated quite emphatically that I do not believe that ethics (teaching of right from wrong) can be taught to anyone over the age of six.  What I do believe is that ethical leadership can be inspired in people.  I also believe that most of us want to be inspired to be ethical leaders.  In this age of the cynical sound bite, ethical leadership just might become the new black.  I hope so.