The Leeson Lesson: focus on character, not commission

“There is no silver bullet to protect against people like me” said Nick Leeson in our recent conversation.  This inadvertently confirmed one of my key observations: the biggest risk organisations face is when people inside the firm act in ways that can sink the strategy, sink the financials, and even sink the firm.

“Blind trust in the soundness of Nick Leeson’s moral compass sent the two hundred year old bank careening onto the rocks,” I wrote in It’s time for moral leadership with reference to Barings Bank.

So did he have a moral compass? To my great surprise he said he had never been asked that question until very recently, and proceeded to answer in terms of a “moral circle”—the 10 people around him on his immediate team. He reflected on how any ‘good intent’ in his actions was directed towards protecting them as much as possible as the cards came tumbling down. This suggested to me that he had not thought in great depth about the specifically moral aspect of his actions, while he appeared to have considerable clarity about the legal dimension.

“Behaviour exists along a continuum, with a good end and a bad end. And I’ve been at both, and probably now am somewhere near the middle.”  Although I don’t know him well enough to judge the accuracy of this statement, I would be surprised if he has stood at both ends (unless it’s a very short line).  I sensed rather that he was highlighting the range of behaviours between good and bad, and that there is a line separating the two.

Nick is a classic example of someone who measures rightness or wrongness by a set of rules. And he went ahead and broke them. He knew he was breaking the law, knew he would get found out, and knew he would go to jail, giving me the impression of a gambler who hopes all will come good on the next wager.

“I broke the law and had to suffer the consequences … I knew what I was doing and that I shouldn’t be doing it. … I caused the losses. There wasn’t a day I could not stop,” he said “but I kept going anyway.”

But in a perverse way Barings (at least from Nick’s perspective) were architects of their own demise.

The operating environment encouraged him because of the profits he was generating.  In the summer of 1994 Nick was responsible for 90% of the bank’s profit. Barings hired out Grand Central Station in New York to celebrate his success and laud his achievements, encouraging others to model themselves on him. Even while on holidays the firm asked him to come in and trade at night, enabling him to write up fictitious trades.

People with responsibility for audit and control lacked the ability to ask the right questions that would have blown everything wide open. Whenever they were unsure Nick was able to offer plausible sounding explanations. He noted that if everyone had gathered in the same room and compared answers he would have been discovered much earlier.

Driven by the twin demons of desire for success and an overwhelming fear of failure he made one bad decision after another, running ever faster to try and stay one step ahead of disaster, knowing full well the ship was heading for the rocks.

The intensity of living with a lie led to excessive drinking, and avoiding the office as much as possible.  All the signs were there for anyone who wanted to look beyond the headline profit numbers and ask why. “This is a story of incompetence and negligence,” he says, without detracting at all from his own wrongdoing.

But it is also a story of moral failure, at both an individual and an organisation level. The ‘continuum of human behaviour’ to which Nick referred includes both a legal and a moral dimension. The legal aspect tells us what is permissible, whilst the moral tells us what is proper.  Failing to abide by what is proper, by what is morally correct, almost always precedes failure to abide by what is permissible, exposing one to illegality.  And as Nick Leeson’s story shows, clever people can manipulate whatever checks and balances the firm puts in place.

The Leeson Lesson is to focus on character, not commission.