London Evening Standard The human risk for companies

Anthony Hilton, Evening Standard

22 April 2004

HE connection between Shell and the fund managers* swept up in the market-timing problems with mutual* funds in the US is not immediately apparent, but there is a common thread.

In both cases, and in most of the other affairs conveniently dubbed financial scandals, everybody who knows the people at the heart of them insists they were not acting for overt personal gain, nor setting out wilfully to deceive or behave with a lack of integrity.

Rather they were prisoners of circumstance - caught up in a system or processes where in the day-to-day hurly-burly of keeping a business on the rails they lost sight of what really mattered. This is compounded by regular pressure to reorganise and change, as in the Shell case, which alters working practices and brings staff changes which destroy corporate memory.

The umbrella issue which makes this relevant to the whole financial services industry is risk control. Every company and financial institution invests millions in such procedures specifically to avoid disasters and yet they keep happening.

Banks have rogue traders, insurance companies almost go bust, investors are sold split-capital trusts and precipice bonds*. It often seems as if the controls do not exist, and they certainly do not seem to prevent disaster. So what is going wrong?

People, that's what. The Financial Services Authority* used to be fond of saying that the common thread in all corporate catastrophes was a lack of proper control and its counter to this was senior management responsibility - by which it meant that whenever something went wrong in future, the top head had to expect to roll.

But the FSA failed to recognise the human dimension. This decrees that no matter how good a system or a process is, it is only as good as its people and over time there is an increasing risk of human failure - the result of pressure, ambition, laziness, stupidity, internal politics or simply of over familiarity - all of which lead people to lose their sense of perspective.

People do not set out to be dishonest or incompetent but when they are under huge pressure the checks and balances put in place to control their behaviour become merely a box-ticking exercise.

In this way all risk controls are corrupted and eroded over time, and that means until business finds a way to reinvent and reinvigorate its controls on a regular basis, corporate disasters will always be with us - as will the ritual hand-wringing that follows.

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