24th April 2005
Reflections
on Barings – Again!
The following Risk Watch article which was published in Cyprus Financial Mirror, 20-26 April 2005 refers to the recent discovery of £CY9.2m (approx. £11mGBP) missing from the pension fund of the Electrical Authority of Cyprus (EAC). Suphire, the pensions investment company appointed by EAC, is under investigation for fraud and its owner was arrested. The background to how Suphire came to be appointed and the level of checks, monitoring and control applied by EAC are also under investigation by the Cyprus Securities and Exchange Commission.
Suphire – failures of hindsight?
By Dr Alan Waring
So, there’s a black hole in the pension fund of EAC. Hang on a sec! Have we not seen this movie before somewhere? Was it not Mirror Group Newspapers quite a few years back? And then, did we not sit agog at other scandals such as BICC, Poly Peck and Barings in the 1990s and more recently Enron, Tyco and Parmalat? Forgive me, but I thought that we had all learned from these so that they could not recur so easily in other organisations. Corporate governance requirements and robust risk management systems were supposed to stop the rot. Clearly not. My old mate Prof Brian Toft refers to such cases as ‘disasters waiting to happen’ and ‘failures of managerial hindsight’ whereby organisations fail to learn from their own and others’ disasters and fail to reduce risks despite abundant forewarning.
So, where has it all gone wrong? Until the formal investigations are over, no one can say for sure about the Suphire case. However, I would hazard a guess that failures in human resource (HR) risk management are likely to be heavily implicated. In 1995-6, Prof Ian Glendon and I investigated how the thoughts, decisions, attitudes, behaviours, systems and culture of people within Barings brought about that organisation’s collapse. The following is a heavily abridged summary of what we found and presented at the Australia and New Zealand Academy of Management Conference in 1997 and in Risk Management Bulletin October 1998. A fuller account is given in chapter 11 of Managing Risk (1998 Waring A E and Glendon A I available from Thomson, ISBN 1-86152-167-7).
Four sets of factors are prime sources of HR risks:
Unfavourable Contexts
- Major change e.g. restructuring, rapid growth, outsourcing, mergers & acquisitions.
- Large financial responsibilities upon individuals.
- Ambiguous corporate ethics (e.g. bucking the system and senior staff awarding themselves ludicrously large bonuses were tolerated in Barings).
- Organisational culture (laissez-faire, macho, keeping face, gifted amateurism – all typified Barings).
- Antagonistic power relations (Barings Singapore typically ignored instructions from Barings Brothers London and their auditors).
- All five unfavourable contexts were evident in the Barings case. Individually, such contexts might have been survivable. In combination, they proved lethal.
Inadequate HR Management Systems
Selection and de-selection
Nick Leeson who was at the centre of the Barings
collapse had no prior trading experience and was appointed without checks
which
would have
revealed his
lie regarding an outstanding judgement for a bad debt.
He
was entrusted with both back and front office management without
adequate checks
on his activities
or integrity.
Competencies and training
There
was no real objective assessment of competencies or training needs, whether
on initial appointment or
for promotion.
It was ‘learn as you
go’. This led to severe shortages of qualified
back-office staff and, in turn, to an information gap
regarding what
Nick Leeson was
up to. Scepticism,
checking and investigation would have been second-nature
to qualified and experienced back-office staff.
Promotion and responsibility
How did the unqualified and inexperienced Nick Leeson
manage to reach his senior position in such a short
time and hold
onto it?
It is apparent
that
his promotion was part of a general pattern which
included his superiors.
Supervision and authority
The
Barings reporting structure was confused and fluid. Nick Leeson himself
stated in 1996: ‘…..my lines of communication with London were
so vague that nobody knew who I reported to…..[I was]….supposed
to report to four different people…..It was a bizarre structure and
one which allowed me to run my own show without anyone interfering’.
Rewards structure and policies
The
scale of bonus-related greed among directors and senior employees at
Barings was so staggering
that
for 1994 bonuses
amounted to £84mGBP
which was more than the declared pre-tax
profits of £83mGBP
and 3-4 times the normal level for this kind of banking.
Performance management
No reference to any commonly recognised form
of performance management system within
Barings has
been identifiable.
Inadequate Primary Task (Sub) Systems
Multiple key functions in front office (e.g. investments, sales) and back office (e.g. accounts) controlled by one person.
The standard anti-fraud practice of separating front and back-office functions was absent at Barings Securities Singapore. Leeson, by virtue of his commanding position over both functions, was thus able to inflate apparent trading fees and hid the fiction in a spurious 88888 ‘error account’.
Human Failings
Human error
A high level of errors was normal
in the daily records and accounts
at Barings
Singapore.
Trading errors
were commonly
covered by
creating fictitious deals
and recording them in error
accounts. This was how Leeson got started
on his infamous
88888
error account.
Indecision
Independent auditors from SIMEX
and Coopers & Lybrand reported in January
1995 that all was not well yet Barings senior managers responsible for Singapore
failed to act. ‘Command and control’ decisiveness
in the light of changing
situations and new information
is a vital
attribute
for senior
managers.
Stress reactions
It is clear that in the final
months and weeks before
the Barings collapse
Leeson
was under
such stress
that his
lifestyle and
behaviour degenerated
rapidly with binge drinking
and other symptomatic behaviour,
all of which
should have been
spotted by his superiors
and investigated. He
described
his position as feeling
like a drowning insect stuck in
resin,
clawing hopelessly
to pull
himself out.
Deviant behaviour e.g.
fraud, theft
Leeson became synonymous
with the term ‘rogue trader’. Spotting ‘rogues’ is
in fact quite difficult as many of the supposed characteristics of rogues
are shared by others who are decent, competent and law-abiding. The term ‘rogue’ also
suggests that only individuals
are at fault whereas, as
in Barings, the lack of
robust risk management
systems is clearly
a fundamental
cause.
© 2005 A E Waring
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