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Saturday, 30 June 2012

Bob Diamond - wilfully blind too?

Guess who said this: "Culture is difficult to define...But for me the evidence of culture is how people behave when no-one is watching". If you have followed the news this week (30/6/2012) you may guess it's Bob Diamond - the current CEO of Barclays and, importantly, former CEO of Barclays Capital - the highly successful investment arm of Barclays Bank.

Barclays have this week just come clean over an attempt by employees of Barclays Capital to illegally manipulate LIBOR (London Interbank Offered Rate), which is the interest rate at which banks lend to each other and that gives an indication of the financial strength they think each other has. Barclays aren't the only bank involved but the motivation for doing this is that the lower LIBOR is the more confidence the market in general has in them - so basically this action hid the weakness of the banks from shareholders and the financial markets and affected the products that you and I (normal customers) owned. It is criminal behaviour.

Many are calling for Bob Diamond's head. He was in charge at the time. His argument is that he had no knowledge about it and (do you recognise this argument from somewhere) it was the actions of some isolated rogue employees and it was more a failure of the control systems within his organisation, for which he apologises. He will appear before the Treasury committee this week to argue that he can't be blamed for it but I have a feeling that won't wash.

I have written here about the 'wilful blindness' (if there is knowledge that you could have had and should have had but chose not to have, you are still responsible) that allowed the Murdochs to encourage but not know about the criminal practices in their organisation and here about the unspoken culture that can be created in an organisation caused simply by senior managers putting pressure on their subordinates to 'deliver'.

When I was working in management consultancy I was told a story by a company that made refrigeration equipment for supermarkets. He alleged that during a negotiation with a supermarket buyer who was trying to force down the price he had warned the buyer that trying to meet their price would require the use of apprentice tradesmen and risk the equipment not being safe. The buyer said without a pause that with the money he was saving on it the supermarket could afford some compensation payments should the equipment collapse. I don't believe that buyer was told by his supermarket superiors to think in such a callous way, but I do believe a culture had been created that encouraged this type of thinking.

So, I predict that when this LIBOR issue is properly investigated we might hear the following story:

Bob Diamond presides over a meeting, sends an email, or has a conversation at the water cooler with his immediate subordinate. During this conversation he digs deep into the performance of that person's department and demands that they improve. This is actually good management, keeping your employees on their toes, and can produce good returns for shareholders.

It is then likely that the senior manager Diamond talks to has cascaded these instructions and this pressure down to their subordinates and through the organisation delivering above expectations is rewarded with bonuses, and underdelivering punished by either no bonus or at worst unemployment.

Now let's travel down to the other end of the organisation chart. You are young, ambitious, and know that untold riches are on offer if you can deliver the best results. So you do what you can to achieve that. At Barclays Capital, the organisation which perpetrated the manipulation of LIBOR, the employees are extremely clever (I've taken the assessment test they all sit and it's extremely hard!). At first, they may achieve this performance using legal means.

And so, up come the results to Diamond and he's able to report to the CEO and Chairman of Barclays (John Varley and Marcus Agius at the time) fantastic results. These are reported to the City. The problem is that if you report, say, a 10% growth in profits, you have to beat that the next year. Diamond would have told his subordinates that, and that would have been cascaded down.

At some point this is impossible to do legally. At some point those junior employees, under pressure to deliver, were having to find clever ways of doing so (hence LIBOR manipulation). Possibly, their managers knew how they were doing it, but as the results were reported up the chain, those it was being reported to were less and less interested in the how and more interested in the what. Eventually it gets to Diamond who has no interest at all in how it is being done. He may possibly have even said that to his subordinates if they tried to tell him.

So, it is possible Bob Diamond had no knowledge of what is going on. But it is also possible that he created and encouraged the culture in which people behaved criminally when  no one was watching and then was wilfully blind to how the results that led to his enormous bonuses were being achieved.

At some point (and given his resources it will probably go this far) a very high court in the land may have to decide whether that means he is as guilty as the 'rogue' employees he blames. What do you think?

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