the story of a man in a rowing boat trying to slow down an

The story of a man in a rowing boat trying to slow down an oil tanker

Paul Moore, Former Head of Regulatory Risk HBOS plc

9th February 2010

Professional Risk Managers International Association

MOORE, CARTERC VJ L & ASSOCIATES

MOORE, CARTERC VJ L & ASSOCIATES Advisers on risk , governance, regulation & business ethicsAdvisers on risk , governance, regulation & business ethics

BBC Newsnight clip 11th February 2009

A bit about me

A bit more about the whole story

The RiskMinds 2009 Risk Managers Survey key findings

Discussion – what have we learned and what should we

do about it?

Some final thoughts - if we have time

Advice to those who speak up to “group think” – people who

helped me

Personal observations on financial crisis

Agenda


Barrister & one of UK’s leading risk, governance & regulatory

specialists.

Over twenty four years experience in industry and professional

services

2007 - Today- Telecoms, Consultancy & Charity work.

2005 – 2006 - Head of Compliance EMEA Marsh Ltd

2002 - 2005 - Head of Group Regulatory Risk, HBOS

1995 – 2002 - Partner KPMG, London

1984 – 1994 – In house lawyer in financial services

Other – Joe Simpson, hang gliding, motorcycling, sailed across Pacific.

Risk management is not about not taking them!

F1 is less risky than angling!

A bit about me


Actually blew whistle twice – first time failed

Second time - Email to Danny Savage BBC News – 16th Sept 08

“I think that..the time may now have come when someone who has been

there / done it / and wears the T shirt (“I was a Senior Risk & Compliance

Officer who was fired for trying to slow down a bank”) speaks out again on

what has gone wrong in the financial system and what needs to be done to

make sure it does not happen again.”

Motivation was policy change not revenge or celebrity.

Money Programme – 30th October 2008 – rowing boat analogy.

A bit more about the HBOS story


I gave initial evidence to UK Treasury Select Committee 10th Feb

09.

Key extracts from my evidence:-

Sales culture markedly out of balance with control systems.

Cultural indisposition to challenge

Sub-prime risks obvious to anyone.

Underlying cause inadequate separation and balance of powers.

Process, framework and structure without the right culture will fail.

Emperor’s new clothes, lemmings and pied pipers!

Key points from my evidence


“...I certainly knew that the bank was going too fast (and told

them), had a cultural indisposition to challenge (and told

them) and was a serious risk to financial stability...(and told

them)

“I told the Board to slow down and ....that their sales culture

was significantly out of balance with their systems and

controls.”

“That ...very careful consideration should be given ...as to

exactly what level of sales growth is achievable, given current

capacity, without putting customers and colleagues at risk.”

I reported that the sales culture was out of balance


“..even non-bankers with no “credit risk management”

expertise...would have known that there must have been a

very high risk if you lend money to people who have no jobs,

no provable income and no assets....

You simply don’t need to be an economic rocket scientist or

mathematical financial risk management specialist to know

this. You just need common sense.

Sub-prime risks


In simple terms this crisis was caused....because there has

been a completely inadequate “separation” and “balance of

powers” between the executive and all those accountable for

overseeing their actions and “reining them in”

i.e. internal control functions such as finance, risk, compliance

and internal audit, non-executive Chairmen and Directors,

external auditors, The FSA, shareholders and politicians.

Inadequate separation and balance of powers


The most important point I made:-

“There is no doubt that you can have the best governance

processes in the world but if they are carried out in a culture

of greed, unethical behaviour and indisposition to challenge,

they will fail.

Process without the right culture will fail


To mix a few well known similes / metaphors / stories, the current

financial crisis is a bit like the story of the Emperor’s new clothes.

Anyone whose eyes were not blinded by money, power and pride

(Hubris) who really looked carefully knew there was something...

But sadly, no-one wanted or felt able to speak up for fear of

stepping out of line with the rest of the lemmings who were busy

organising themselves to run over the edge of the cliff behind the

pied piper CEOs and executive teams that were being paid so

much to play that tune and take them in that direction.

Emperor’s new clothes, lemmings & pied pipers!


Head of Risk in Halifax...verbatim:-

"Leadership and focus on risk matters has had no priority....Sales are regarded as

more important than anything else“

“risk management not seen as a core business imperative or competence....and you

know they are animals around here..”

“Whacker” (CF Dick Fuld, Lehman “Gorilla”)

Charles Dunstone - two stories

Reprimands by boss for raising cultural indisposition to challenge

Refusal to record proper minutes of Bd Mtg and tabling full report.

“Made redundant” by Crosby – on his own with no HR rep.

Replaced by sales manager appointed as Group Risk Director.....and

Some of the key evidence that supported my views


Courage - Never backs away from an opportunity to

demonstrate personal courage

Key behaviours

Taking courageous decisions even when they may result in criticism or

unpopularity

Standing up for beliefs in the face of opposition from colleagues

Saying what needs to be said when others are hold back from expressing real

feelings

Putting yourself on the line in taking responsibility for making tough decisions

Meeting colleagues in other work areas to talk openly and honestly about the

real issues

HBOS competence framework for top leaders?


10th Feb – London Evening Standard front page

“sunk?”


Evening Standard 10th Feb inside


Sir James Crosby resigned as Deputy Chair of FSA.

Crosby and FSA denied my allegations and relied on KPMG

report

Brown, Cameron, Osborne, Vincent Cable called for

investigation....

I stood firm, confident and calm. I did countless media

interviews.

FT story – “They would say that wouldn’t they?”

After vociferous denials by Crosby and FSA....Total silence!

But no investigation.

What happened next?


Daily Mail – 14th Feb 09


Sunday Telegraph main story – 15th Feb 09

Me with the whistle!

Sir James Crosby


Independent on Sunday – front page – 15 Feb 09


Failure of Management

”Bankers have made an astonishing mess of the financial system....

Banks have failed because those leading and managing them

failed.”

Failure of risk management

“The current crisis has exposed significant shortcomings in the

governance and risk management of regulated firms.”

Key conclusions of Treasury Select Committee / FSA


Failure of governance by non-executives

“[Banks’] corporate governance was often totally ineffective. The

evidence shows that many non-executive directors failed to act as an

effective check on, and challenge to, executive managers.” “..non-

executive directors have operated as members of a ‘cosy club’”

“...the necessary challenge was missing from governance structures, in

particular boards.... Evidence from the current crisis indicates that

some NEDs have struggled to fulfil their role of providing strong

independent oversight of the executive management.”

Failure of the supervisory system i.e. The FSA

But the FSA’s regulatory and supervisory approach, before the current

crisis ...was not with hindsight aggressive enough...

“[this] was ...also [a failure] of the supervisory system”

Key conclusions of Treasury Select Committee / FSA


615 responses.

Independently analysed by Cranfield

The responses come from around the globe number as follows:-

UK – 43%

US/ Canada – 10%

Mainland EU – 14%

Rest of the world – 17%

47% over 10 yrs experience; 30% senior managers.

Bankers 25%; asset managers 6.6%; insurance 11%;

combination 20%; other sector 22%.

RiskMinds 2009 Risk Managers Survey


Most important causes greed, remuneration, failures in risk

management

Majority saw the crisis coming well in advance.

The risks were reported but the executive prioritised sales.....

Because they were paid to.

Cultures inhibited effective challenge....(i.e. unethical cultures).....

Crisis not caused by global circumstances beyond anyone’s

control

Big majority held executive accountable; not regulators or

governments.

Not surprising as they said they saw the risks and reported them!

Key findings


Culture (ethics) is most important area for change.

Capability of non-exec, regulators & line managers in risk is very

low.

Focus for regulatory change should be:-

Global harmonisation, more prescription on credit and liquidity risk

More specific standards on effective risk management

Supervision of culture and ethics

Rigorous supervision of the effectiveness of internal risk management.

Higher calibre personnel in the regulators

Regulators should be accountable in law for their failures

There should have been a through enquiry to inform policy review.


The culture and values are the key – must be led from THE TOP

Openness, ethics and excellence not fear, blame and excessive pride.

Cultural disposition to challenge “group think” is key.

“Never confuse honest dissent with disloyal subversion” - Eisenhower

Introduce ethical decision making framework. Train everyone.

Each key document to contain - “Ethical considerations taken into

account”

Rigorously & independently check their culture & ethics regularly

Note “Self serving statements without corroboration bear no

weight”

Performance management system aligned to cultural requirement.

Key lessons from my story and survey


“Development is impossible without upright men and women,

without financiers and politicians whose consciences are finely

attuned to the requirements of the common good.

Both professional competence and moral consistency are

necessary.

When technology is allowed to take over, the result is confusion

between ends and means, such that the sole criterion for action

in business is thought to be the maximization of profit, in politics

the consolidation of power, and in science the findings of

research.”

An interesting observation on culture


The people dimension is more important than structure and

process:-

Much more competence, independence, integrity and diversity of non

execs.

Risk management and compliance needs to be professionalised

Its not about forms & technical knowledge; its about ethics and

excellence.

Higher calibre personnel advising on risk, compliance and internal audit.

Key non technical competencies are:-

Deep understanding of the business

Relationship management and influencing skills are key

Giving “confident & understandable advice & assurance”

The people dimension


Competencies for risk & compliance professionals

Client focus

Being passionately client focused in dealings with stakeholders

Technical excellence

Demonstrates technical excellence at all times in their own area of risk /

compliance specialism

Outstanding judgementUsing a fine-tuned balance of all aspects

of knowledge, experience and understanding to solve problems

Creativity

Exploring all options… thinking ‘out-of-the-box’; breaking new ground in

exercising judgement

Integrity and courage

Demonstrating personal courage, independence and honesty in exercising judgement and giving advice – leading a

culture of openness

Understanding the business

Developing a deep understanding of our clients’ businesses, the risks they

face and the needs of their stakeholders

Managing relationships

Establishing and maintaining relationships with clients so as to

become their ‘trusted adviser’

Giving advice and assurance

Providing clients with confident and understandable advice and assurance

which demonstrates a passionate dedication to technical excellence

Functional Profile Functional DNA


Leadership & Competence Framework

Facilitates discussions and identifies common ground and

differences to arrive at sustainable relationships

Uses questioning & clarifying techniques to understand views,

attitudes and requirements

Establishes trust by enabling others to express their emotions

and views and respects these

Negotiates purposeful agreements that meet the needs

of all stakeholders

Continuously checks expectations and purpose and

encourages ongoing participation to share the

responsibility for risk

Gains support for ideas from businesses & others by relating

the benefits directly to their interests and needs

Uses powers of persuasion rather than veto

Uses a broad range of risk management knowledge,

experience and tools to advise and assure the business

Links information, knowledge and experience to form ideas so that an

event, problem or issue is fully understood

Steps back from a situation to see the ‘bigger picture’

Helps others to develop broader thinking and to consider the wider consequences of their requests or

decisions

Proposes and evaluates alternative solutions and different ways of

solving a problem before making a decision

Encourages others to generate and evaluate options and to explore

different perspectives others have on these options

By comparing options generates new and creative solutions to meet

different situations

Is visible and credible and demonstrates value; is clear about

own position on issues and can clearly describe the services of the

department to its stakeholders

Inspires confidence in business colleagues and other stakeholders

that risk is being identified and managed effectively

Demonstrates broad and deep understanding about general

business issues and challenges

Digs deep to obtain information and understanding about the business and markets of our

clients

Identifies and gathers information about the clients’ people and stakeholders; their

perspectives, needs and expectations

Understands the risks and appropriateness of the control

framework within the businesses

Gathers information from a variety of internal and external and/or new sources and puts it

into context

Understands issues and exercises judgement having

regard to the businesses’ points of view

Understanding the business Managing relationships Giving advice and assurance


Points on structure, process & framework

If you want someone to do “A” pay them to do “A”.

A new lead non-executive accountable for “Oversight, Assurance

and Ethics”

Control functions to report formally to this non-exec.

An annual risk based, detailed programme of oversight and

assurance.

“Self serving statements without corroboration bear no weight”

Formal protections for risk, compliance & internal audit managers.

Better whistleblowing procedures for rest of staff see specific slide

Structure, process and framework


And, of course, the strategy must be aligned

Business models that focused on sales and growth to the exclusion

of controls i.e. risk management, governance and compliance will

lead to crisis.

And so.......................all elements must be aligned.

Strategy


PEOPLE•Skills

•Knowledge

•Competence

•Commitment

CULTURE•Vision

• Values / ethics

•Management style

•Operating principles

STRUCTURE•Architecture / framework

•Functional analysis

•Organisational design

•Processes and controls

STRATEGY•The road-map

•Broad objectives

•The overall context

Leadership

‘systems thinking’ – the key elements must align


“We only grow by taking risks, and the most difficult risk

of all is to be honest with ourselves and others. Rick

Warren

You get transformed by trouble” Rick Warren

“Well, If I lose my reputation, at least that will be one

less thing for me to worry about” Blessed Mother Theresa

“The truth will set you free” Jesus

Advice to those who speak up to “group think”


Our leaders are the high priests of Mammon & Me:-

Me, more, now. Lend, lend, lend; buy, buy, buy.

“Take the waiting out of the wanting”

“You’re worth it”

In this mess there is a message of Hope.

Money itself is not the problem. The love of money is the problem.

Move from GDP (GmeP!) to GQualityP (GyouP!)

Politics should not about left or right but about right or

wrong.

Private funding of political parties gives the rich and powerful

too much say.

Some personal observations on the financial crisis

the story of a man in a rowing boat trying to slow down an

Documents

head of risk

risk matters

serious risk

high risk

group risk director

head of group regulatory

uks leading risk

sales culture