Bev Cole, chair of ACCA UK’s Internal Audit Members' Network Panel, talks to Jonathan Ledwidge – one of the leading thinkers on diversity of thinking.
Jonathan was born in London in 1959 but grew up in Jamaica. He studied physics and chemistry at the University of the West Indies before joining PW and becoming a chartered accountant. He returned to London in 1986, earned an MBA from Cass Business School and has worked for a number of banks in the City, including Continental, CIBC and ABN AMRO. His roles have included internal audit, product control, risk management, business manager, people development and cultural change. He is the author of three books including Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation.
Bev: Later today you’re going to talk about whether diversity of thinking could help predict financial crises; does that mean you believe there was a lack of diversity of thinking in the mid noughties as we didn’t predict the financial meltdown?
Jonathan: It wasn’t just a lack of diversity of thinking – there was what I call a ‘fiendish orthodoxy’ where everyone (government, regulators, central bankers, business schools and banks) all thought the same thing, all acted in the same way and there was no independence of thought. At the end when it the crash came, they all turned to the bankers and said ‘you messed up’.
However, the reality is that this was a collective failure of many pillars of society, not just banks. Why?
Because there was a lot of money involved. Bankers were making money, governments were talking about a Goldilocks economy, central bankers were saying that inflation is down and everyone else was happy with their lot.
It was somewhat like after the fall of the Berlin Wall when some even opined that this was the end of history – only to later invade Iraq and mess everything up.
Another interesting point is that this lack of diversity in thinking and total commonality of thought is absolutely incredible given the amount of information and knowledge available in the modern era.
Bev: You talked about commonality of thought: how does this manifest itself, specifically in the boardroom?
Jonathan: What happens is – and I’ve worked in the banking industry for many, many years – when money is being made, people stop thinking. So when anybody asks the question why is this happening this way, have you thought about this, the answer is usually well we are making money – why are you questioning it?
Profits often mean that banks do not think objectively and when individual employees are given incentives not to think objectively on top of that, then it means that independent critical thinking goes out the window.
At the same time, if governments are benefiting – if they’re seeing that revenues are up and the next election is looming on the horizon and the economy is moving positively in their favour – then it means that they are not going to be thinking critically either.
Bev: Is diversity of thinking the biggest reason behind that or is it just one of the many factors? I’m thinking of things like hubris and hindsight bias.
Jonathan: Those are the by-products but really and truly if bankers, politicians and others had only stopped to look back at what had happened before, what was about to happen would have been immediately obvious.
Someone once said that you can tell that there’s a crash coming by how much champagne there is flowing in the City. Basically what we’re talking about here is an inability to think because all the players had their own incentives not to think.
Bev: When you are talking about diversity of thinking, what elements do you believe make up diversity of thinking, and which have the biggest impact and why?
Jonathan: I think the first element has to be strong independent thinking – it has to be about being able to break out of the bubble and seeing things for what they are. The second thing has to be to remove the incentives that ensure that people only think one way eg the trading room is making a profit therefore they must be right, therefore we must give them more latitude and so on and so forth until the elastic bank snaps.
Rewards and incentives are very important to encouraging the right behaviours.
Another thing that I think is important is how different elements of society, that is governments, central bankers, economists and regulators, all get drawn into thinking in exactly the same way.
There is a need for each of those players to effectively revert back to thinking and acting independently about their specific roles rather than just going with the flow. You could say that part of the problem is that enough people were brave enough to stand up and take an alternative view.
In effect all they had to do was look at history. History repeats itself all the time – all you have to do is to look at the patterns. For example with the 2008 financial crisis, people started talking about what happened in 1929 but they did not even have to look back that far. If they looked at what happened in the past 30-40 years - the LDC debt crisis, the junk bond crisis, the Japanese asset bubble, the dotcom bubble – they would have seen that the behaviour patterns were the same each and every time.
Ultimately what banks, finance and risk professionals have to do is look at diverse sources of information – not just VAR models or economic models like Modigliani-Miller – but the specific circumstances surrounding previous crises. It is amazing the story each of these tell and how, if properly studied they can induce the right sort of thinking.
What is important is that for every institution – not just banks – they revert to looking honestly at themselves and taking time for reflection.
Bev: Is the financial services industry particularly prone to falling into this trap (of lack of diversity of thinking)?
Jonathan: I would say that it is particularly prone to failing because of incentives and the reward structures. I remember sitting on a trading floor next to the economists. Economists are often there to provide advice to sales on what they should tell customers when certain market numbers come out.
So for example, economists will say that we expect the numbers in the labour market to show higher employment and therefore on the back of this, our customers should be buying these securities. The number comes out and it is the opposite of what the economists predicted, and I’ve sat there and witnessed this, the economist then turns the argument around and says ‘well, they should buy anyway because…’ and they just make up another argument as to why customers should be buying the securities from the bank.
Bev: That’s a clear example of confirmation bias where you take whatever information that backs up your view of the world.
Jonathan: It really is.
Bev: From my experience, one of the challenges we get in this field is that if you are in that bias situation, you’re in a nice cosy club. Everyone thinks the same, they come from the same background, they have the same social network, they probably socialise together – everything is supportive of that view. How do you get that to change?
Jonathan: It’s worse than that actually. I’m an outspoken person but what tends to happen in banks and larger organisations is that independent thinking gets squeezed out. The people who get promoted are the people that the manager wants to hear. Independent voices are not really welcome and you hear things like ‘that person isn’t a team player’ quite often and what that means is that person actually has some amount of critical thinking!
In some organisation, by the time you get to the top all you have is a bunch of yes men. I’m not saying that these people are stupid – all I’m saying is that squeezing out critical thinking is bad.
Bev: How do we get people to value that diversity of thinking?
Jonathan: There’s another aspect to that and it is all about watching what other firms are doing. Some of the firms that got into trouble wanted to ape something that Goldman Sachs was doing – they saw that Goldman Sachs was making a lot of money with sub-prime mortgages so they wanted to jump into the same market.
In reality, what you need are executives who have an ability to actually stand back and say 'this is the type of organization that we want to create'. Once they have decided that then they can start building the types of mission and values that will move organisations into a different path.
Bev: As auditors, if we could audit things like culture….
Jonathan: I’m glad you raised that. I recently wrote an article on the subject of ‘can you trust your auditor?’ and it wasn’t so much a question that auditors are dishonest but more a question that in all of these crises, how relevant is the audit of numbers and systems of governance and control today?
The reality is that values trump valuations and therefore we should really be thinking about how we evaluate an organisation’s values. Having worked in banks for so many years I can tell you that they have enough internal controls and procedures such that if you were to put them together they would go all the way to the moon and back. Yet these were not enough to stop the financial crisis.
One of the things I noticed about banks was their lack of diversity in respect of their mission, values and purpose. For example, if you take a company like Google, it says that its mission is to take all the information in the world and make it accessible. When I was writing Clearing the Bull, I looked at a number of banks and for the most part I was unable to tell one from the other. They all more or less had the same banal statements about hiring the best people, being nice to clients and caring about the community. None clearly stated the reason for their existence.
For me, having a mission is really, really important because when you have no mission that sets you apart, then that means that all you do is play ‘follow the leader’. It is therefore no wonder that so many banks ended up in the same situation and fell off the same cliff – they all thought in the same way.
That is how important having diversity of thinking is.
Elsewhere within this issue of the Internal Audit eBulletin our survey asks 'Is diversity of thinking encouraged in your organisation?’ Why not have your say now by returning to the cover page and entering your vote?
Watch Jonathan in clips of a speech from Clearing the Bull on YouTube:
Part 1 – Ending 30 years of banking failure
Part 2 – Why banks are still in trouble
Part 3 – How banks must change