Bearing Blame

By Dr. Sullivan

Apr. 17, 2008

Whenever a prominent firm fails as dramatically as Bear Stearns did recently, it should make everyone wonder what caused the failure and ask themselves, “Could it happen at my firm?” As HR professionals, you should also be wondering what role HR played in the collapse. It’s my contention that the failure of HR professionals at Bear Stearns to move beyond the traditional business partner role to become true business leaders was a primary cause for the firm’s failure.

    Following any major business collapse (some might even argue after every minor one too), it’s important for all involved to conduct a failure analysis in order to determine the contributing factors at work. Obviously, market forces could have played a role with Bear Stearns, but given that a majority of its competitors have managed to avoid collapse, it is safe to assume that market forces were not the cause. A second external factor to consider is predatory actions by competing banks, but that doesn’t seem to be a key contributor either at this point. With market forces and predatory actions by competitors ruled out, attention should turn inward.

    The collapse at Bear Stearns was a companywide failure, not that of a single business unit, so attention should focus primarily on factors that span the organization. The failure wasn’t caused by faulty computer equipment or a software glitch, so technology isn’t to blame. Bear Stearns enjoyed a fabulous reputation, attracting some of the best investors and talent. The firm had been profitable for over 80 years, so marketing and a shortage of resources were not the cause.

    The final internal factor to consider is failure of the firm’s employees and the people processes that governed them. In a quest for more profit, Bear Stearns’ employees took too many risks. When such failures arise, one must blame not only the individuals involved, but also those who designed the management systems—the processes and policies —that allowed the extraordinary risks to play out.

    In looking at possible management system contributors, the first area of focus should be the performance management and performance measurement systems. Bear Stearns dealt heavily in the extraordinarily risky field of financial derivatives. Given the significant risk, HR had a fiduciary responsibility to monitor employee performance even more precisely than would be expected at most firms.

    The firm is also known for targeting candidates who had a predisposition toward taking unnecessary risks, known internally as PSDs: individuals who were poor, smart and had a deep desire to become rich. This type of hiring, coupled with a reward system that provided major incentives for extraordinary return, almost guarantees a disaster unless you have designed sufficient performance management and performance measurement systems that monitor when employees stretch beyond the boundaries of sanity. In the same light, if the hiring, compensation and training systems don’t automatically “adjust” as market conditions change (dictating the need to take fewer risks), employees will continue to take risks based on historical expectations.

    Certainly there were financial processes and software that played an important role in assessing financial risks, but it’s important to remember that 100 percent of those processes and limits were designed and set by people. The fact is that other firms facing the same problems had employees and people management processes that successfully adjusted to meet the changing business environment.

    If you analyze similar failures at Enron and the French bank Societe Generale (with $7 billion in losses by a single trader), you’ll find similar HR-process causes. Employees learn that it’s OK to take extraordinary risks because the employee training process, performance metrics and incentive systems drive them in that direction. There is no effective counterbalance because the ethics, punishment and whistle-blower systems are toothless—they have little actual effect on employee behavior.

    Given the scope of this failure and its contributing causes, it’s only logical that Bear Stearns chief human resource officer Pamela Kimmet and her staff should share the criticism surrounding the firm’s downfall. They are responsible for maintaining shareholder value. Instead of being an effective business leader, HR at Bear Stearns spent significant effort working on a companywide weight-loss program and becoming certified in HR. Shame on them, and shame on you if you don’t learn a valuable lesson from their failure!

Workforce Management, April 21, 2008, p. 42Subscribe Now!

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