Talent Management Column

HR Lessons from Investment Banking

HR Lessons from Investment Banking | Human Resource Executive Online Extraordinarily callous and inept management, combined with huge rewards for success and incentives for hiding failure, are some of the typical attitudes exhibited by financial institutions, many of which have been collapsing. HR leaders should understand the dynamics of such meltdowns in order to avoid such a fate in their own organizations.

Monday, September 15, 2008
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As I write this, the future of Lehman Brothers, the 4th largest investment bank in the United States, is hazy, having just filed for bankruptcy after being unable to find a financial savior. This veritable company, started in 1844 in Montgomery, Ala., is one of the main players in the world of investment banking.

Investment banks play a central role in the operation of the economy because they are the agents for corporations and for governments in raising money through issuing securities, advising and assisting on mergers and acquisitions, and generally acting as playmakers in the world of high finance. Lehman Brothers' crisis follows months after the collapse of Bear Stearns, another venerable investment bank founded in 1923.

Earlier in the week, the U.S. government announced the takeover of the two major mortgage loan and loan guarantee companies, Freddie Mac and Fannie Mae, private companies created by Congress to help manage the mortgage industry.

Before that, we saw the collapse of a number of private-mortgage companies, Countrywide Financial being the largest, and the near meltdown of other investment banks like Merrill Lynch. And shortly before the current crop of failures was the spectacular collapse of the Long-Term Capital Management hedge fund and the $7.2 billion dollar loss at Societe Generale, the 3rd largest investment bank in the Euro Zone.  

James Davis, an analyst at Oliver Wyman who studied the current financial situation, notes that "We haven't seen anything as bad as this in the 30-year period we looked at."

This collection of failures matters for HR leaders because they all were caused by management failures.

In every case, the problems were driven by individuals and groups of individuals who took on risks that the organization as a whole would never have approved of and covered up losses that would have made their own performance look worse.

Some of this behavior went so far as to be illegal. In most cases, though, it was just remarkably imprudent.

Why did it happen, and why didn't the actors get caught, or at least stopped, before the companies collapsed?

This is the interesting part for me as a professor at a school that feeds much of the talent into the financial world, especially the investment banks.

There is a common view about the role of management that is highly prevalent in these institutions. That view of management, to put it bluntly, is that there is nothing much to it. All you need to do is hire smart people and give them huge rewards if they meet individual performance targets. That's it. 

Almost every year in our new M.B.A. class, there would be a group of students who had just spent a few years in investment banks, and their view would be that organizational culture was irrelevant, structuring good job design was unnecessary, issues like work/life balance were for wimps.

More generally, understanding psychology and group dynamics didn't matter. Just give people big financial incentives and get out of their way. It wasn't just the youngsters who felt this way. In executive classes, the participants who roll their eyes when the topic of managing people comes up are invariably investment bankers.

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One of the more interesting things I get to do when teaching M.B.A.s is to read their first-year papers, where they describe and analyze the way they were managed in their last jobs. What I saw in many of the finance jobs, especially in the investment-banking positions, was extraordinarily callous and inept management: Feedback on jobs was extremely rare, formal appraisals were even more unusual and junior analysts were in the office 90 hours a week (much of it waiting around for assignments) with no thought to work/life balance because there was no discipline or management to work assignments.

All of the problems were smoothed over by bonus money, lots and lots of it, based on individual performance.

These huge rewards create enormous pressure to hit the performance targets that drive those rewards. Taking risks to achieve one's individual targets, even if it puts others or the organization as a whole in danger, seems acceptable, and covering up failures becomes the norm.

Little attention or oversight from supervisors, an organizational culture of individualism and little collaboration or teamwork means that there is nothing to bridle that pressure for individual performance.

It is no coincidence that the only major financial company to come out of this period unscathed is Goldman Sachs, also the company known for paying the most attention to teamwork, for maintaining a healthy organizational culture based on positive values and, more generally, for taking the management of people seriously.

If there is anything good that comes out of the crushing failures of these investment institutions, it should be to question seriously the notion that rewards for individual performance are a substitute for good employee management. 

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at the Wharton School of Business.

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