February 25, 2020

‘Baring’ Down

By txtsmarter-No Comment

25 years on since the demise of Baring Brothers, my former colleague Nick Leeson has been making capital around that anniversary. And who can blame him? He was still a relatively young man when he came out of prison, and the prospect of his earning a living in the industry from which most of his experience came was bleak. Promoting his business ventures off the back of that anniversary might be opportunistic but seems reasonable to me. 

Nick was the first of the rogue traders, like many of the rest that followed he went to prison for his sins. His position at the top of the league table of losses has long since been usurped but I believe I’m right in saying that he holds the unique position of having bankrupted his employer.

After this passage of time, have the lessons really been learned? There’s been several books, a few investigations and a film. There’s no real point in delving into history after all this time, but there are some areas where I feel that the lessons have not been genuinely learned, as follows:

Whistleblowing – if someone goes to the trouble of raising a concern, take it seriously. Yes it might be trivial, frivolous or vindictive, but nonetheless investigate independently with an objective mind. What are the risks, perceived or otherwise? What’s the worst that could happen? Don’t get fobbed off with assurances from someone with a vested interest. Document the findings, and make sure they are safely recorded for posterity – you never know when you might need to dig them out.

Squabbles – differences of opinion between senior staff can be healthy, but can rapidly become unhealthy if they are allowed to fester and escalate. If a relationship between two managers has broken down to the extent that it affects the quality and effectiveness of the execution of their duties, don’t sweep it under the carpet – deal with it. Whether they have to shake hands and agree to differ, get split up or – if worst come to worst – be dispensed with, grasp the nettle. Remember that ignoring this kind of issue could see your firm suffer or even disappear.

Audit – if external or internal audits throw up an issue of conflict of interests, don’t minimise or marginalise. Investigate – again independently with an objective mind. Don’t accept assurances that risk mitigation is in place, whoever gives the assurance. The ultimate goal must be to eliminate the risk by removing the conflict. Don’t accept that this can’t be done, as there will be those who say that dealing with the issue might affect profitability – remember that not dealing with it might affect viability. The terms of reference of every audit should include the necessity to identify all conflicts of interest, however apparently trivial.

Systems – make sure that the business case for every business operation includes adequate provision for the implementation and use of decent systems. If a start-up operation relies on lightweight systems during a proving period, ensure that robust systems are put in place once the decision to proceed has been taken. Don’t allow papering over of cracks, or the use of sticking plasters. Mitigating inadequate systems with swathes of additional temporary staff must be a very short term option, with a drop-dead date by which proper systems must be installed or the business operation paused or shut down. Make sure all systems are the subject of regular, rigorous audit with any material risks highlighted to chief executive and chairman.

Regulation – don’t just comply for the sake of it, see regulation as the opportunity for a self-imposed health-check. Regulators will use the output of compliance to form an opinion as to whether you are running a fit and proper organisation, so why not do the same yourself? Use compliance as a tool to assess whether your operations could become more streamlined or cost-efficient. Can you improve profitability or better manage risk?

These might seem like obvious points, but had Baring’s senior management addressed any one of them better than they did, the likelihood of Nick’s actions taking the bank down would have been greatly reduced. Addressing them all would have reduced that risk to virtually zero.

Hugh Cumberland
Director: UK and EMEA
He can be reached at hugh dot cumberland at txtsmarter dot com

#intelligentcompliance #txtsmarter

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