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Posted by Rebecca Ashmore on Monday, September 18, 2017

A Conversation with Alex Rickard


 

In this conversation, Alex Rickard, management consultant, board-advisory specialist, and former hr director at towry, a leading british wealth manager, discusses her interest in the emergent notion of behavioural risk, how it can affect business performance, and how it can be properly managed.

HK: Where did your interest in the notion of ‘behavioural risk’ in businesses originate?

AR: The importance of this issue has become apparent to me over time. Whilst at my previous firm, the FCA announced they were going to come and do thematic reviews of our ‘culture’. As a precursor to the examination, I set about understanding and defining what our culture was. An external consultant helped us by doing a independent review that was very useful, in that you think you know the answers to these questions as a senior person within a firm, and you actually only hear some of the story. The review by the external consultant gave back a huge amount of data which proved absolutely fascinating, and enabled me to understand what worked well and what needed addressing. It enabled me to articulate that ‘behavioural risk’ exists within organisations, and the main risk is that bad or poor behaviour can be very destructive to organisations. Additionally, underpromoting positive behavior can also be an opportunity missed. There is supporting evidence of this everywhere you look, and that has further stimulated my interest. For example, you could credibly say that retail banking ‘culture’ last decade had departed away from those organisations' original purpose. In behavioural terms, they had moved from helping customers to save, and providing sensible lending and investment advice, to “what can we sell people?” And before we knew it, banks were sales-focused organisations; people were being paid on the basis of their success in sales.

HK: Right, so banks are no longer the simple conduit between savers and borrowers, they are something else entirely. Also, the LIBOR scandal has emerged, whereby banks have forgotten their purpose on a whole different level. The consequences have been utterly devastating, in terms of society’s trust in the banking system. And these changes don't happen over time, they are gradual. Certain behaviours gradually become more and more acceptable at management level, and then before you know it executives are being praised for the latest shortcut because it is making the firm more money. These people get paid well for doing so, and their behavior becomes self-reinforcing and is copied by others. Before you know it you have entrenched negative behaviours that are positively encouraged.

Cross-fertilisation might then occur when executives move between organisations, taking those techniques with them. Before you know it, the issue has spread.

AR: Exactly. And this is all on the watch of the boards and the executive teams of those businesses, so the buck stops with them. You have to have good governance at all levels, starting with the board. Attention needs to be paid to risks and controls around these two issues. The chairman of that board needs to maintain an independence, and have the courage to hold people to account. Look at the recent issues in the automobile industry. Somewhere along the way, it has become acceptable for individuals, or people in increasingly powerful positions, to say what matters it is the outcome of our negative behavior, which is increased profits, and not the environment, or public trust.

HK: And yet, underpinning the very existence of such companies – banks, vehicle manufacturers – are the customers who are buying the company's products, right? It is a confused and corrupted mindset.

AR: Well, behavioural risks don't emerge straightaway. They take a while. The major governing body overseeing global football is another major example. There doesn't seem to have been anybody in place to ask the tough questions. Globally there are lots of different stakeholders involved, but nobody actually auditing their operations and decision-making processes. Some sponsors have been taking them to task in light of recent events, and have withdrawn funding, but most have simply sat back and waited for the outcome. A cartel mentality has prevailed, to an extent.

HK: You saw the same thing in banking, where the failures ultimately lay with the boards of these organisations and the ineffectiveness of the committees focusing on controls, for various reasons, from cronyism to incompetence, even at the chairperson-level. So behavioural risk can perhaps stem from a lack of expertise in a given field.

Incompetence and ignorance can be very damaging. Diversity of gender, race, and age, on boards, or lack thereof, can also play a role. Boards that represent too much commonality of opinion can ignore or unwittingly create risks.

Indeed, the world is changing rapidly, and you could argue that younger voices should definitely play a bigger role on corporate boards.

AR: Yes, you need a lot of experience, but you need some smart, fresh, common sense questioning of how things are currently done and how they have been done in the past. There is potentially a lot of value there. In respect to behavioural risk, the chair of the risk committee can also play a key role, by adding ‘behaviour’ to the risk register, so that it can be discussed properly and considered, and issues can be escalated if necessary. This means you need to have a mechanism in place to identify behavioural risks around the business: both poor behaviours and good behaviours, as in, what is being done well, and how can that be secured and encouraged. That dialogue needs to be initiated, and at the moment it doesn't happen anywhere, in a specific way, as far as I can tell. Also, I have worked on a number of M&A deals, and you are supposed to look closely at both the numbers and the people involved. Some acquirers will just look at the finances and forget the nuances, forget the people.

HK: Right, so you can have lots of different behaviours that need monitoring – behaviour in selling, behaviour in accounting, behaviour in use of company property, behaviour in corporate development. It would seem as though boards need to itemise what behaviours are necessary to make their businesses operate successfully, and risks involved. Behavioural economics is a prominent field at present. This comes back to the same thing doesn’t it?

AR: Yes, because it's easy to look at numbers and assess whether they represent success or failure, growth or contraction. It's far harder to assess behaviour as success- or failure-causing. A lot of appraisal systems can be formulaic – “hit these numbers, regardless of method or behaviour, and you’ll get a bonus.” If your appraisal system is built on the behaviours that are set out as integral to the success of the business – let's call them values – If those things become part of the DNA of the business, it becomes far easier to assess and reward staff, and to define success in this context. On the flip side, if someone is struggling, the remediation, coaching and improvement process become far easier. The parameters for improvement can be made very clear. This is what the FCA wants to see – the broadening of the behavioural message. And this is tricky. The culture issue turns some people on, but turns some off, so it's important that the message lands right, otherwise it gets ignored, and that is increasingly not an option.

HK: We have gone from the pre-crisis culture where sales are everything, to post-crisis regulatory avalanche, and the ramifications for the finance industry, for the car industry, for the retail industry, in the form of the Tesco accounting scandal. All manner of industries and discloses are now under the microscope – look at the Parliamentary expenses scandal, phone hacking in tabloid journalism, organized religion. Many institutions are being fundamentally rethought.

AR: Exactly. And it all goes back to behaviour, in each case – behaviour that would have been unthinkable initially, but which creeps in gradually and spreads.

HK: It's widespread, and very damaging, isn't it? It's amazing how these things can be totally accepted behaviour, until exposed, and suddenly they are out in the open and hugely scandalous.

AR: Sometimes it is difficult to avoid as well. There has been a lot of banker-bashing lately, but if you are a person who joins one of these companies and are told, this is how it is done, then that is what you do. It has to be the responsibility of the board to set the right principles, and cast the right shadow.

HK: I suspect we will enter a rebuild phase, so as to get the core behaviours right in each case, based on past lessons. That said, I have spoken to people recently in the financial crime and cyber security fields, and current governance training, e.g. quick-fire training and simplistic questionnaires, seem formulaic given the ambiguities of the issues. I believe it's called the 'sheep-dip' approach. What's your view on how this can become a bit more sophisticated?

AR: Well the ‘tick-box’ approach isn't ideal, I agree. It is a challenge when you've got tens of thousands of employees: how do you get the message to everyone? Where I have seen it most successfully undertaken is when you set a dilemma. It's about bringing it to life. If you could pose a virtual dilemma to employees, then put them through a scenario so they could see the outcome of their decision, employees will then seriously consider the outcome of their decisions. You are instilling an ethic of care into the decision-making process so that staff think about outcomes, rather than following a process to make a sale. I use a tool called ‘moral DNA’ in assessing organisational culture, which looks at how decisions are being made. Often I go into organisations and ask the board, ‘how do your people make decisions?’ They often don’t really know. By thinking about this question more deeply, people can understand better what they are doing and why they're doing it. By discussing the issue, you get to the right answer through discussion. This facilitates the diversity of thought and discussion which you are looking for in the modern business.

HK: This all relates to the conflict between empirical numbers which have historically defined business success, and behaviours that propagate civilised society, isn’t it? They don't always coexist harmoniously.

AR: Indeed. Without getting too deep, it’s an existential business issue. If you start thinking that the purpose of your business is to make money, you stop thinking about the true purpose of your business. If you can focus on your true purpose, guess what? You will make money anyway, because people will pay you for your services. If you kept your true purpose in mind with every decision you made, I would argue that it would make a huge difference to the manner in which your company operated, and ultimately to your numbers.

HK: Perhaps what you need is a shift in shareholder attitudes, whereby what they really want is to invest in businesses which are securing future cash flows by providing societally beneficial services in a demonstrably honourable way. 

AR: That’s right, and it is happening. I actually work with a business called Tomorrow's Company, which has recently formulated an ‘integrated reporting’ approach. This is being championed by the Chartered Institute of Management Accountants. The idea is that calculating the valuation of your business, alongside the numbers, the talent you employ and their behaviours are assessed, on the basis that without them, you don't have a business.

HK: It's a big issue. The parameters seem vague, and it's yet another thing for boards to have to get their heads around.

AR: If you ask customers of any business what they value about the businesses they associate with, you will always get honesty. Accordingly, I think boards sometimes need someone who will tell them things they don't always want to hear. The UK Corporate Governance Code actually says boards have responsibility for looking at the behaviours and culture of the business and for reporting on it. This only applies to PLCs at the moment, but will probably broaden out to private companies in terms of best practice. Are we thinking about the outcomes for our customers in every decision we make? Are we truly thinking about the outcomes for our other stakeholders? It's a different space, a different set of factors to be measured. Businesses are struggling to get their methods right on this, but they must.

HK: Yes, they're not there yet are they? Then you need to factor in the positive contributions of the original, of the individual, of the mavericks. When you are trying to control behavioural risk by getting everyone to behave in the same way, are you going to stifle creativity and ingenuity? The creativity that some argue is necessary for growth?

AR: My sense is you aren't, because if you have stated your values clearly, the only way you will then stifle creativity is if you impose too much process around enforcement. If processes and procedures become rules and regulations as opposed to guidance, you get formulaic responses. That, in turn, can create behavioural risk, because complacency over outcomes can ultimately hurt your numbers and damage your reputation at the same time. 

HK: An interesting time for advisers on behavioural risk, in that case. Alex, thank you very much for your time.

 

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