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The leadership challenge — building a culture of diversity and inclusiveness
Written by Dharma Chandran
Monday, 07 June 2010 00:00
The leadership challenge — building a culture of diversity and inclusiveness
Written by Dharma Chandran
Monday, 07 June 2010 00:00
What role did the leadership (both the boards and senior executives) within financial institutions play in causing the global financial crisis (GFC)? Certainly, journalists, politicians, academics and even many business people have argued or admitted that leadership must be held accountable for the actions of those employed by the organisations they manage and govern. The leadership was either aware of and sanctioned the risks that these employees were taking on behalf of the institution’s shareholders, or were unaware but should have been aware given their role as the stewards of shareholders’ funds.
It has become clear in the aftermath of the GFC that many senior executives and board members were simply unaware of or did not have the technical expertise and/or experience to fully appreciate the risk profiles of their organisations. However, there have also been revelations of unacceptable (from the perspective of prevailing community standards) and even illegal behaviour which led to some of the lax underwriting decisions in the American and British housing markets. In order to better understand the aspects of leadership failure that contributed to these behaviours, it is important to first understand the role of leadership within an organisation.
Leadership typically undertakes the following activities:
• Developing a vision for and establishing the values of the organisation;
• Determining the mission and objectives consistent with the vision and values;
• Setting strategy and deciding on the investments required to achieve the mission and objectives;
• Obtaining the resources (financial and people) necessary for and monitoring the progress of strategy implementation; and
• Evaluating the return on investments that have been made and taking the actions necessary to ensure these returns meet with shareholders’ expectations.
In fulfilling the accountabilities described above, leaders exercise a significant influence on the culture (the collective values, beliefs, attitudes and behaviours) of their organisation. Some leaders make choices along the dimensions of vision, values, mission, objectives, strategy and investments that result in a homogeneous and exclusive or divisive workforce and organisational climate. Others make choices that lead to a diverse yet inclusive work environment. Participants within, journalists covering and academics who have studied the global financial services sector have observed that the sector was characterised by a relatively homogeneous and exclusive culture.
Workforces in the financial services sector, more than most, were male-dominated with divisions, departments and teams often consisting of people with similar educational backgrounds and demographic profiles, many of whom were recruited from the same past employers. The resulting culture was epitomised by the following characteristics:
• Extremely long working hours with physical health, family-life and mental/emotional well-being often sacrificed in the pursuit of success;
• Aggressive behaviour in the workplace which often spilled over into harassment and bullying;
• A focus on individual performance relative to peers (evidenced by the overuse of league tables) rather than team performance based on achievement against absolute targets; and
• An obsession with measuring success and achievement almost exclusively through the excessive compensation packages on offer.
Many banks in the US and Europe were traditionally led by senior executives from their corporate finance businesses (which earned fees primarily from advisory services pertaining to initial public offerings, mergers and acquisitions and so on). However, in the last two decades, these institutions began to generate a greater proportion of their profits from proprietary and client trading activities and therefore many of these organisations began to be led by executives from these businesses. The cultural attributes mentioned above were especially prevalent among the sales and trading staff in these financial markets business units.
In most financial institutions, there are a number of policies and principles in place that serve as checks and balances on excessive risk-taking. However, in organisations where the culture described above exists, many of these checks and balances are weakened or rendered ineffective. For example, many financial institutions have policies in place requiring staff to take compulsory annual leave of a minimum duration. In situations where the employees taking leave are in roles which routinely expose the financial institutions to credit, operational or market risk, this compulsory-leave policy enables the staff relieving in the role to review decisions or positions that have been taken for any breaches of risk management policy or regulations.
However, in cultures described above employees often do not take leave because of their excessive workloads or for fear of losing their roles to overly competitive peers. Many financial institutions also have “whistleblower” policies and mechanisms to ensure that employees speak up and expose breaches of policy and regulation when they uncover them. However, the effectiveness of these policies as a means of mitigating excessive risk-taking is eroded by cultures which are based on homogeneous workforces that emphasise conformity with the views of the group. This “group-think” undoubtedly led to the proliferation of collateralised debt obligations (CDOs) and credit default swaps (CDS) which spread globally the credit risk arising from the poor underwriting decisions in the US and UK housing markets, despite the inherently risky nature of these instruments.
Evaluating, recognising and rewarding performance based on the relative achievement of individual employees compared to their peers created a climate of internal competition that may have contributed to the poor credit underwriting decisions in the housing markets which precipitated the GFC.
So, how can the leaders of financial institutions ensure that they create a diverse and inclusive culture, especially for the future, to ensure that the climates within their organisations do not become conducive once again to the excessive risk-taking that led to the GFC? Conventional approaches to promoting diversity tend to focus on demographic quotas/targets including those for gender, age, race, religion and sexual orientation. These demographic segments serve as effective proxies to measuring the diversity of workforces but in themselves are insufficient. It is equally important for leaders to measure the culture of organisations on a regular basis (there are many tools available to do so) and to launch initiatives to redirect the culture in the event it departs from the diverse and inclusive environment that will promote long-term, sustainable success.
Hopefully, this article has clearly demonstrated the role that poor human resource (HR) policies and practices played in contributing to the GFC and will enable leaders and HR executives within the financial services sector to make the changes necessary to avoid a recurrence in the future.
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Dharma Chandran is a human capital partner and performance and reward leader with Ernst & Young Far East Area. This article appeared in Management@work, the monthly management pullout of The Edge Malaysia, Issue 809, Jun 7-13, 2010.
