Leadership

Columbia Profs: Culture, Not Equations, Key to Managing Risk

By Jessica Stillman

Updated on: February 4, 2009 / 8:36 AM EST / MoneyWatch

The Find: Like anthropologists in the Amazon, two Columbia Business School professors spent years as flies on the wall at one Wall Street bank, observing the culture that allowed it to emerge unscathed from the current crisis.
The Source: Management professor Daniel Beunza and David Stark, chair of Columbia's Department of Sociology, writing on the Columbia Business School Public Offering blog.

The Takeaway: Risk modeling came in for plenty of criticism as the worldwide banking system ground to a halt, but despite the widespread failures, not every bank took a massive hit. Beunza and Stark observed the derivatives trading room at one such bank (it is unnamed in the study) for three years, learning how the bank managed to avoid the worst of the crisis. Their findings: forget elaborate equations, dealing with risk successfully was "a matter of culture, organizational design and leadership." On both an individual and an organizational level the bank insisted on a constant reevaluation of assumptions and an openness to contrary opinion, and this approach to discouraging hubris may be applicable to businesspeople involved in any high risk enterprise. How did the bank go about fostering enough doubt to inoculate itself against disaster?

"The bank hired people with a healthy dose of humility and an appreciation for the limits of their smarts. This often meant opting for older traders rather than younger hotshots."
"The architecture of the bank... was crucial. The open-plan trading room grouped different trading strategies in the same shared space. Each desk focused on a single model, developing a specialized expertise in certain aspect of the stocks.... the different desks then shared their insights with each other... This communication allowed traders to understand those aspects of the stock that lay outside their own models -- the unexpected "black swans" that can derail a trade."
"The bank made [sharing] possible with a culture that prized collaboration... it used objective bonuses rather than subjective ones to ensure that envy did not poison teamwork. It moved teams around the room to build the automatic trust that physical proximity engenders."
"The leadership of the trading room had the courage to punish uncooperative behavior... the manger ....would not tolerate the view, prominent among some, that if you're great at Excel, 'it's OK to be an asshole.' And he conveyed the message with decisive clarity by firing anti-social traders on the spot -- including some top producers."

If you'd like to get your hands on the full study, it's available here.

The Question: How does your company culture compare to the one the professor describes?

(Image of intrepid anthropologist by gbaku, CC 2.0)