Towards the end of the 1980s I was working as a IT analyst programmer in the well-appointed, subterranean offices of Barings Securities, in Tower Hill, on the Eastern edge of the City of London.
My computer was a large IBM box with a big red switch and a green-lettered VDU running MS-DOS and dBase relational database packages. This was before windows and WIMP, before mobile computing (unless you count the 13kg Compaq Portable); and before cellphones were really any use at all.
This was also the time that Ronald Reagan was squaring off against the USSR and the possibility of nuclear annihilation hung in the air like a smog of existential angst.
A few years later – after I had personally swapped the intriguing yet mildly depressing world of the trading floor for the more workaday concerns of physiology lectures and the dissection room – Nick Leeson brought down my previous employer, a 200 year-old pillar of the establishment, in spectacular fashion.
I can personally attest that Barings prized its reputation for corporate rectitude. It was a snooty place to work. And the clubbable culture at the bank partly explained the ineptitude and lack of corporate governance that allowed Leeson to rack-up losses in unsupervised futures trading totalling £827m.
A simple phrase
Around the same time, the existential angst caused by the madness of Mutually Assured Destruction, was beginning to abate.
START-I, the first negotiated reduction in the nuclear arsenal held by the two post-war superpowers, was instigated by Reagan, and signed by his successor George H W Bush in 1991. It came into force in November 1994, three months before the collapse of Barings.
For those of us born during the Cold War, the relief was noticeable. A semblance of sanity was seeping into the standoff between capitalism and communism; a dichotomy that had blighted international relations for a generation.
One of the principle phrases that resonated during these long negotiations was the English translation of the Russian proverb Доверяй, но проверяй
Trust, but verify
This simple phrase, used so effectively by the ‘great communicator’, captured clearly the tension and difficulty of negotiating with a longstanding enemy.
A complex failure
Aside from their proximity in time, these two separate events are related, not by their similarity, but by their antithesis to each other.
In its 1995 report on the collapse of Barings, the Board of Banking Supervision, wrote that:
“Management failed … to institute a proper system of internal controls” (14.1, p250)
And that:
“The failings of Barings were not a consequence of the complexity of the business, but were primarily a failure on the part of a number of individuals to do their jobs properly” (section 14.3, p250)
It also states, blankly:
“Nick Leeson was not properly supervised” (section 13.16, p234)
In simple terms, the bank trusted Leeson, but failed to verify his activity.
A clear lesson
This lesson is important to anyone who might purport to run businesses, of whatever size. In 2018, I personally trusted an individual to run the sales activity of my business for several months. At the end of that time, we had no sales — which might have been forgivable — but we found that he had lied. There had been no activity at all (unless you count staying in bed), despite the extensive excel sheets and exciting verbal reports.
All his ‘work’ was a fiction. By fraudulently misleading us about his activity, he cost the company dearly. The setback through loss of cash and the stunting of any momentum meant we were no longer first mover.
Looking back on this episode, the salutary lesson is clear. This debacle was fully my mistake — poor management on my part — just as the effect of Leeson’s crimes were the result of poor management by Barings.
A crucial balance
In the opening pages of his most recent book, Beyond Entrepreneurship 2.0, Jim Collins talks about his mentor Bill Lazier’s attitude to trust. Bill, an entrepreneur and savvy businessman for decades, who sadly died before the publication of the book he co-authored advises leaders that the default position should be to trust people. Collins says this makes for good business. It works out in the numbers. Bill’s ‘trust wager’ is a: “Hardheaded belief that there is more upside and less downside to an opening bid of trust than to an opening bid of mistrust.”
We all know from our own experience that trust from others in our own capabilities, our own worth, our own opinions … is part of the driving force that makes us want to be part of any team, any organisation. It is no leap to say that giving trust as a leader is crucial to motivation.
But the problem for any entrepreneur is that stories such about rogue traders and fraudulent salespeople will exacerbate our base-level of anxiety and make trust more difficult. Our entrepreneurial, startup businesses are fragile things that we have often coaxed from nothing.
Even if we know – like Bill Lazier – that too little trust will add too much control, stifle creativity and alienate good people, we also know that too much trust can lead to exploitation and disappointment, if not financial disaster.
Which is where our arms control negotiators can help us. Trust is crucial, and yet verification must be part of the deal. Finding the balance – the middle way – between the two is the challenge. For my part, I recognise that during my own ‘mini-Leeson moment’ that I could have done more to check on my own rogue trader.
More time spent on the detail, going through the meeting notes could have provided me with verification and an opportunity for support, coaching and development. The absence of evidence would have been more apparent. Undertaking some due diligence on the spreadsheets would have saved me a ton of money and a ton of time.
Like Barings – and unlike Reagan – I trusted, but did not verify.
