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Breaking the bank (part 1)

How the idea of the ‘Core Group’ helps us understand the Barclays’ rate-fixing scandal

Much of the writing on Barclay’s rate-fixing scandal – which has forced the resignations of both the chief executive, Bob Diamond, and the chairman, Marcus Agius – focused on issues of culture, but without asking where culture inside organisations comes from or how it is set, other than maybe an over-simple idea that it comes ‘from the top’. Of course, some of the interest in culture was prompted by the ex-Chief Executive, Bob Diamond, in the BBC lecture he gave last year, which I imagine seemed like a good idea at the time. Andrew Rawnsley quoted a couple of lines in an article in the Observer earlier this month:

“Culture,” he [Diamond] said in a BBC lecture last year, “is difficult to define. But for me the evidence of culture is how people behave when no one is watching.”

So it seems a good idea to look at this through the lens of Art Kleiner’s neglected book, Who Really Matters: The Core Group.

The Core Group

Kleiner is one of best writers we have on business, and in Who Really Matters he set out to understand who sets the culture of a business and how. This post will mostly be built around some extracts.

When organizations fail, people tend to assume that their leaders are inept, overwhelmed, or corrupt. But suppose instead that all organizations are doing precisely what they’re supposed to be doing?

In starting with this question, Kleiner is drawing on one of the basic systems assumptions: that you should judge a system by what it does, and the outcomes it produces, rather than what it says it does.

He goes on to argue that “in every company, agency, institution, and enterprise, there is some Core Group of key people … Every organization is continually acting to fulfil the perceived needs and priorities of its Core Group”.

And he continues:

It’s because of Core Group dynamics that a depressing number of business corporations have evolved into organizations with one primary purpose: To extract wealth from all constituents … and give it essentially to the children and grandchildren of some of its senior executives.

Legitimacy, not authority

All organisations have a core group; they can’t function without one. But who gets to be a member of the Core Group, and how their needs and priorities are identified by others in the organization, is complex. Ît isn’t just the Board, for example, and it is certainly not the public positioning seen in the Annual Report. Kleiner argues that “The Core Group members are the center of the organization’s networks, and symbolic representatives of the organization’s direction. … Its power is derived not from authority but from legitimacy. Its influence is not always conscious, or even visibly apparent, but it is always present in the implementation of actual decisions.”

I’ll come back to some more of this later in the post and the next one, but you notice a number of things about Barclays when you view it through this lens.

Because (back to Art Kleiner again):

“The organization goes wherever its people perceive that the Core Group needs and wants to go. The organization becomes whatever its people perceive that the Core Group needs and wants it to become.. If a goal is perceived as irrelevant, no matter how worthy it is, no matter how ardently it is advocated, or even how stringently it is mandated by law or regulation”.

Breaking the rules

In the Barclays’ story, the critical point, in terms of culture, was the formation of Barclays Capital in 1996, which Diamond was hired to run. There’s a telling account of this by the former Chief Executive, Martin Taylor, in a recent piece in the Financial Times (linked here via the Australian Business Spectator: free, registration may be required). By his account Barclays Capital was a rogue trader from its earliest days, circumventing limits imposed by the Board in a number of ways that broke the bank’s rules. These irregularities were discovered when Russia defaulted on its debts in 1998.

BarCap turned out to have an exposure significantly beyond the country limit that had been established. It had falsely marked some Russian banking counterparties as Swiss or American, and had blasted through the [exposure] ceiling.

All international banks took losses on Russia in 1998, but Barclays’ experience was worse than most, entirely because of a failure to respect the internal control system. … We looked reckless, and our share price suffered serious damage. The traders were fired. Their leader maintained that he had known nothing about what was going on. He felt terrible. He loved Barclays. He offered to go.

Diamond wasn’t fired. Taylor concluded that BarCap would fall apart without him. “I deserve blame for being among the first to succumb to the myth of Diamond’s indispensability”, he writes in his article. Kleiner would say that Barclay Capital – or perhaps the idea that it represented of a global bank – meant that Diamond – who had joined the Executive Board of the bank in 1997 – had become a member of the Core Group.

Not wanting to know

As for Taylor, he realised, at least implicitly, that he had left it. Quite early in Who Really Matters?, Kleiner tells the story of Lothar, a man who realises that he’s fallen out of the Core Group during the course of a merger. One gets the same sense in Martin Taylor’s account of how he came to leave Barclays later in 1998 after the Russia debacle:

The board decided, unsurprisingly, that controls should be tightened up. That is what boards decide. I drew a different conclusion. … I decided that it was neither safe nor sensible to have trading businesses mixed up in a retail and commercial banking group. … [The Board] seemed not to want to know.

As the saying goes: I didn’t leave the company. The company left me.

The picture at the top of this post is from TheTradersWire.com, and it is used with thanks.

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