A recent discussion in the Complexity in Organisations group on LinkedIn drew attention to comments made in June 2010 by the then head of the Financial Services Authority, Hector Sants. In a speech to members of the Chartered Institute for Securities and Investment (reported here), he expressed his view that regulators should have their brief extended to include oversight of the cultures of those organizations that were subject to their regulation. According to Sants,
"Unacceptable culture within firms was a major contributor to the financial crisis and so regulators should play a greater role in judging how culture drives firms' behaviour and impacts on society as a whole, according to the chief executive of the Financial Services Authority (FSA)."
He made great play on the need for prudence in managers' decision-making, before concluding that,
"Determining an ethical framework is for society as a whole, not an unelected regulatory agency. However, it is, I believe, our role to police behaviour and expect firms to have the right culture which facilitates the delivery of the outcomes we expect."
For Sants’s prescription to make sense, though, the following statements would need to be true:
- The “prudence” or otherwise of a manager's decision is obvious at the instant that the decision is made.
- There is a direct causal link between managers' decisions and “societal outcomes”.
- “Culture” is the product of a manager's intentions (i.e. something that they can design, build, and change at will).
- There is a direct causal link between an “unacceptable culture” and the “outcomes [that] that drives”.
So do these stack up?
- regulators and others who sit in judgement on other people’s decision-making do so post-event - in full knowledge of the ‘outcomes’ that have arisen and, equally significantly, of how these have been construed by influential others (such as politicians, the press, and other commentators);
- rather than being the result of managerial design, what we think of as organizational culture emerges from the ongoing sense-making-cum-action-taking interactions of people throughout 'the organization' – and beyond it (including the regulators);
- in the complex reality of organization, the links between specific decisions and organizational ‘outcomes’ (let alone “societal outcomes”) are untraceable – even after the event; and
- “firms” don’t make decisions, people do. And they are enabled and constrained in this by their interactions (real and imagined, conscious and unconscious, formal and informal, etc.) with everyone else.
If regulators consider themselves to be capable of intervening “to ensure decisions made by firms deliver the outcomes society expects,” perhaps it would be better for them to take up the roles of those managers directly, rather than acting as after-the-fact commentators and judges of other people's actions. They could then bring their superior insights and complexity-defying capabilities to bear at the outset and avoid all of the failures that have occurred in the past (see Note).
Better still, they might begin by recognizing that it was much more likely to have been the failure of people to understand and take seriously the complex social dynamics of real-world organizations – including their own - that was the major contributor to the financial crisis. And that this condition still applies to the plethora of other 'regulatory failures' that continue to dominate the headlines - whether in Banking, Health and Social Services, Education, or whatever.
NOTE: I included this point before finding out that (now Sir) Hector Sants actually joined Barclays in January 2013 as Head of Compliance but had to leave some 10 months later due to the stress of the role. Thankfully, he’s since recovered. And, amongst other things, he is now chairing the Archbishop of Canterbury's Task Group on Credit Unions. Perhaps, though, this episode serves to highlight the point I was making.
The FSA has also since been replaced by two separate agencies, the Financial Conduct Authority (FCA) and - surprise, surprise - the Prudential Regulation Authority (PRA)!