Risk and behaviour

Every major disaster in the world financial markets dating back to the 1980s can be attributed to operational risk involving human error, deliberate or otherwise. Michelle Perry explains

Until the gaping holes in financial institutions - such as Barings bank caused by Nick Leeson, and a more current event, Societe Generale and Jerome Kerviel - were uncovered, management's ability to downplay the risks involved was extraordinarily myopic.

Significantly, however, these financial institutions could boast some of the most sophisticated risk management systems that could theoretically detect unusual blips in trading. So how in a world of so much control and order can such chaos in financial markets continue to happen?

What is becoming clearer is that, ultimately, it boils down to behaviour. Behaviours are lead indicators of risk. When an economy is booming and financial institutions are making so much money they could wipe out the world's debt in one instalment, behaviour alters significantly. You only have to witness the dramatic shift in the demeanour of banks' management currently to understand how behaviour changes and what its impact is on both companies individually and markets as a whole.

Given that effective, rigorous systems and procedures of risk management are in place in most of the largest institutions, huge financial failures continue to occur. Corporate experts have begun to investigate other areas of a business structure to understand how this happens and how risks can be mitigated.

A strategy that, personally, surprised me but seems to be sparking interest in the higher echelons of business is in understanding the psychology of business cultures. Applying techniques not typically associated with the cut-and-thrust of business to wake up boardrooms to the fact that employees are human beings with values, beliefs and behaviours that are both conscious and sub-conscious seems to be permeating a different mindset.

Naturally, it is too late to stop this crisis, but perhaps a more broad-minded outlook to doing business could put a halt to the next financial crisis.

At a meeting of an autonomous group of leading risk experts, called CRSA Forum, a rather quirky presentation was made on beliefs and internal perceptions to better understand the risks behind organisational behaviour. It revealed some rather uncorporate thinking on how a more integrated approach to risk can be achieved.

The Jung-Myers-Briggs personality approach has over the past decade or so become an accepted tool in the corporate world to assess personalities. What this new approach cited at the CRSA Forum does is take this a few steps further and asks boardrooms to look not just at the collective but also the individual in order to better engage staff and develop a culture to which everyone can relate and participate in. The aim being to be able to quicker pinpoint risks and nip them in the bud.

In the presenter's words: 'It's about getting people passionate about what they feel and aligning the business strategies to get to your goal.'

Recently asked to assess the culture at a leading FTSE company, one of the speakers said that although the business was making money and had all the systems and processes in place, the culture was poor with as much as 34% entropy. The values of staff and each of the board members were so out of kilter that they were verging on internal implosion. Risks at this stage of a culture breakdown are invisible and very real.

The big difficulty with this psychological approach is that today's organisations, either public or private, are so hung up on measuring performance indicators that this method does not offer any real tangible things to measure. Or better put, it is more difficult to measure things like staff contentedness, engagement or whether board and staff values are aligned.

It is not your usual approach to mitigating risk, but if tried and tested methods are not working, then why not try something new even if it is perhaps a little unconventional and, therefore, more challenging as it deals with personalities, values and beliefs rather than systems and processes.

Michelle Perry is a freelance business and finance journalist.