Human Risk: A Time Bomb in Risk Management

The time bomb of risk management

Companies show boundless ingenuity in putting control systems in place. But these systems are often powerless when it comes to controlling human risks.

Most executives have still not realised that, despite all their efforts to manage risk, there is one huge risk that escapes them: the human being who snaps. HSBC has just had bitter experience of this with an employee who passed confidential data to the French government. Despite the sophistication of the risk management that a bank the size of HSBC may have put in place, it was an employee who not only made it stumble, but also created a diplomatic crisis between the French and Swiss governments while shaking the sacrosanct principle of banking secrecy to its foundations. Not bad for one man! UBS, during the subprime crisis, also fell victim to the lack of foresight of just a few managers. Apart from having forced the Swiss government to capitulate before the American tax authorities, UBS fared worse than HSBC, having come close to bankruptcy. Barings Bank, for its part, actually had to be sold for the symbolic sum of one pound following the excesses of a single trader. Lehman Brothers did not even have that chance, since the actions of a handful of employees simply led it into bankruptcy. The list of companies victimised by their employee(s) is of course much longer but, not to overdo a good thing, we shall stop there.

The common denominator in all these horror stories is indeed the employee who goes off the rails. This raises the question of how companies can protect themselves against human risk. Companies, with banks leading the way, show boundless ingenuity in putting control systems in place to prevent misconduct. Even if these “systems” make it possible to avoid certain problems, they are powerless to control every risk and particularly human risks. Since it is difficult to anticipate every textbook case, these “systems” are generally reactive, relying on past experience, whereas employees’ creativity is always one step ahead. In addition to poisoning everyone’s life through the constraints they impose, these “systems” have another major drawback: they implicitly send a message that employees do not much appreciate: “if management is putting a control system in place, it is because it does not trust them!” Since the powerlessness of “systems” is established, and despite the fact that they look very appealing, solutions must be sought elsewhere.

Without going into all the factors that cause one or more employees to snap, there is one antidote that deserves our full attention: employee commitment. The risk of problems is in fact considerably reduced when committed employees are vigilant, ask questions, draw their managers’ attention to problems, propose solutions, and so on. Employee commitment acts as an extraordinary safeguard, probably far more effective in reducing human risk than all the “systems” designed to prevent people from going off the rails. Yet the level of employee commitment is hugely influenced by conflict management, which itself depends directly on how justice is administered within companies. Employees’ sense of injustice stems from the perception generated day after day by multiple managerial situations such as a failure to respect certain values, a lack of fairness in decision-making, not feeling recognised or even simply listened to, and so on. To be convinced of this, one need only read Robert Sutton’s book The No Asshole Rule, which shows the perverse effects of badly managed conflict situations. The real problem is that the exercise of justice is organisations’ Achilles heel. All employees know that they cannot turn to Human Resources (HR) staff to resolve conflicts fairly, quite simply because HR, being answerable themselves, cannot intervene independently and objectively. The same applies to the line managers of the employees concerned, who are in the same position as HR: stakeholders who cannot decide in complete independence. Since poorly resolved conflicts and situations of injustice are the breeding ground for disengagement and/or misconduct, it is imperative to defuse these time bombs.

That is what Pictet Bank has done. Starting from the observation that human beings constitute the least controlled risk, Pictet’s partners put in place a mechanism aimed at preventing, as far as possible, the risk of having an employee who snaps. To do so, they hired Europe’s first internal arbitrator, Yasmine Jhabvala, and entrusted her with the task of ruling on conflicts in complete objectivity. The approach was so original that Ms Jhabvala probably had to “invent her profession” and define an operating framework that would assure all parties concerned of the integrity of her judgement. Clearly, the path must have been strewn with obstacles, because the existence of an arbitrator with unlimited powers of investigation and the power to decide amounts, by definition, to limiting the power of certain decision-makers. Despite the initial tension one can imagine, inevitably generated by what must have appeared to be a countervailing power, Ms Jhabvala therefore succeeded in establishing her credibility through her impartiality. The most remarkable thing, seen from the outside, is the quiet strength of Pictet’s partners, who also knew how to withstand the probable, indeed inevitable, “attacks” of those who may have been “unmasked” by the arbitrator.

Nearly four years ago now, the HR world watched, with interest but also with a certain incredulity and even irony, the creation of this new profession within the company. One may now suppose that, through the continuation of her role over these years, Yasmine Jhabvala’s practice has demonstrated, at Pictet, both the relevance and the effectiveness of her function. In her company, and since she is still there, she must by now certainly have acquired the legitimacy and recognition required to work serenely. Favouring the long term, Pictet’s partners thus had the foresight to dare to innovate by putting in place this arbitration mechanism, unique in Europe. Quite apart from reducing human risk, the bank derives obvious competitive advantages from it: it has in fact been shown that employees’ opinion of their company matters more than customers’ opinion in positively influencing turnover. Thus, by ensuring fairness and justice within its institution, Pictet serves its clients better thanks to the stronger commitment of its employees. The mere fact of knowing that Pictet employees run less risk of snapping than those of other banks that attach less importance to their employees’ well-being is, in itself, a huge incentive to prefer Pictet. We should not forget that clients also turn to Swiss banks so they can sleep soundly. What could be more reassuring than knowing that conflicts are managed fairly and that employees, feeling secure, are therefore more committed and loyal?

It is high time that other companies, and not only other banks, like Pictet, took the bull by the horns in order to clear the minefield made up of present or future conflicts that are poorly managed. Yet conflicts are necessarily badly managed as long as there is no independent body that decides without bias, outside the courts or employment tribunals, which are called upon only for conflicts serious enough to warrant it, but not for those that demotivate employees or risk tarnishing companies’ reputations. As long as the independence of internal justice is not ensured, companies will remain vulnerable. Only arrogant leaders can claim that this cannot happen in their company. In contrast with the foresight shown by Pictet’s partners, the arrogance displayed by the leaders of UBS or Lehman Brothers before their fall is obvious proof of this.

The problem is that even if clear-sighted leaders recognise the existence of a real risk, that does not mean they will have the courage required to step off the beaten track. They may well continue to succumb to the temptation to adopt an ostrich policy, praying that problems arise after their reign or that others set the example, as though Pictet’s were not enough... But are leaders who lack courage still legitimate to lead?

To paraphrase the Latin saying, Si vis pacem, para iustitiam (if you want peace, prepare justice)...