Every week, millions tune in to see the reality TV battle that is The Biggest Loser. Each episode sees much sweating and panting during an extremely focused exercise and diet boot camp.
Interestingly, the first few pounds are lost with relative ease, but the winners only go on losing weight when they recognize and confront the underlying causes for their obesity, and they only maintain their new slim shapes when they make and maintain lifestyle changes.
This is extremely similar to the situation faced by financial organizations in the evolving and challenging post-crisis world. The credit crisis threw up a lot of pointed questions regarding risk appetite, remuneration of risk takers, risk monitoring and the speed at which exposures to risks can be assessed. These, in large degree, are symptoms, and of course symptoms can be addressed at the surface level.
There’s another question, though, that determines the ability to prevent these symptoms: Are financial institutions “learning organizations” that are capable of fundamental reprogramming (in terms of risk), and is this requirement recognized by the change managers at those firms?
An excellent (if abstract) example of this is NASA. In the terrific book Organizational Learning at NASA: The Challenger and the Columbia Accidents, Julianne G. Mahler demonstrates that the NASA organization failed to fundamentally change as a result of the Challenger accident. But in the wake of the Columbia disaster 17 years later, the organization did make changes to help ensure that risk is controlled and monitored so that it does not exceed the tolerance of the mission. This involved looking at internal communication and removing the barriers between siloed structures internally. Interestingly, this re-imagining of NASA took place in the glare of the spotlight, as the government and the public demanded to know that these risks were being monitored in an appropriate manner.
If we look at the financial sector in this context, it is reasonable to ask whether the firms in the center of the storm are looking at the symptoms or the underlying fault lines that led to those symptoms. Just like NASA, these firms are operating under public scrutiny, and they are being asked whether the same crisis would have a materially different impact if it occurred tomorrow. This is an entirely understandable reaction from the public sector, but it can lead to short-term remedies, for the focus is on answering the same questions that were so difficult to handle during the crisis, rather than re-imagining the internal culture so that the next set of, as yet unknown, questions are less likely to be asked.
Re-imagining the culture means looking at the reporting silos and the risk information that each firm receives and acts upon. It also means ensuring that the changes made go far beyond just a new report to reach into the very heart of how that reporting is provided, the language used, the relationship between the risk stakeholders and the risk takers, and the manner in which risk controllers communicate with each other, with the risk takers, and with management (CROs and above). Protecting fiefdoms and hiding methodologies will not achieve this cultural change.
So now is the time to choose whether to sweat down for the short-term “regulatory pass” or make the deeper lifestyle changes that will help avoid becoming a real world “biggest loser.”
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