The recent drama at JP Morgan Chase has brought the subject of government regulation and oversight front and center again. The recklessness of the London Whale and his boss has rekindled fervor on both sides of the debate.
But neither regulation nor a laissez-faire approach has served very well. On one hand, there is no way to create an enforceable rule for every way anyone can find to game the system. Such a rule book would choke any business. But as long as there is nothing to balance the promise of a better bottom line, bonus or dividend, there will always be the siren song of big bucks and personal aggrandizement leading business people astray.
So how does a leader of a company of any size navigate between the Scylla of micro-management and Charybdis of unmanaged risk? One answer fosters a different approach to self regulation: a clear, ethically grounded and powerful culture.
All organizations have a culture. If you are going to have a culture in the organization you lead, don’t you want to choose it? And wouldn’t you want it to include a set of standards that protect the company from undue risk?
The danger with relying on culture for risk mitigation is in paying lip service rather than purposefully designing the culture you want to create and reinforcing it in every corner of the business. A cosmetic approach breeds more cynicism than enthusiasm. Here are some of the ways that culture is sustained and preserved that often get little attention in companies with a more cosmetic approach.
- Compensation. No culture, values statement or code of ethics can stand against a compensation plan or informal rewards system that encourages cutting corners or outright cheating. Compensation should reinforce cultural norms or be an agent for changing them. If it is out of sync, then compensation becomes a wink-wink, nod-nod way of saying that the values and culture are really only for the press and PR purposes.
- Recruiting. Most pre-hire screening is about technical skills and likeability. What would happen if interviewing put an equal emphasis on cultural fit and understanding of the role of culture in the organization? There will always be some people for whom employment with your firm is just a job. But if all new hires at the least did not dilute culture, the sustainability of performance would be reinforced with each new hire.
- Compliance and reporting. Every company of size has a formal process for dealing with escalating ethical violations from sexual harassment to stealing to crossing regulatory lines. And what happens to those people who raise their hands? Every company is different, but most often it is not a pretty picture – unless they go on to write a book. No company wants to be the subject of that book.
- Governance. If you really want to go after the prize sacred cow, how about re-examining the combined roles of CEO and board chairman? The U.S. is still the only country in the world where the combined role is common practice. Yes, it allows a CEO to move more quickly and avoid undue foot dragging from the board. But the very idea of a board is to provide an anchor to leeward, balancing a CEO’s enthusiasm with caution and a longer-term view of the business.
By the time you are reading this, Jamie Dimon will be back to his role as outspoken opponent of the kind of regulation meant to stop the behavior that created the brouhaha to begin with. But imagine what might have been if the culture at JP Morgan Chase was such that the potential upside of a risky trade was outweighed by the charter of the department in which the London Whale worked, which was, ironically, specifically to mitigate risk taken elsewhere in the bank.