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July 2012
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When Money Looms Large: The Mindset of Financial Leadership

Posted by: Alex Linley

 

Much has been and will continue to be written about the factors that contributed to the financial crisis that started in 2007 – and with merit, since there is still much to be learned. The fallout from the financial crisis only continues, with Bob Diamond’s resignation today as CEO of Barclays following the LIBOR-fixing scandal.

 

With banks once again in the spotlight, I was reminded of an intriguing article in Consulting Psychology Journal, in which Byron Woollen examined the mind of the financial leader as it relates to investment risk.

 

In summary, Woollen argues that the complexity of managing huge investment risk creates psychological stress and tension. No surprise there, as any one of us knows from trying to balance our books at home as we juggle mortgage, credit cards, utility bills and childcare costs.

 

But Woollen takes this further, suggesting that the massive complexity and huge implications of the decisions that financial leaders face, cause this psychological tension to be impossible to bear. As a result, he goes on to say, with the wealth of the organisation that a financial leader controls, there is a belief that the resources the organisation already has will protect it from financial risk – perhaps the roots of the “too big to fail” assumption.

 

The problem comes when this belief – that the organisation is “too big to fail” and that the organisation has the wealth and resources to get out of whatever trouble might arise – causes financial leaders to develop unrealistic beliefs about the need for oversight, monitoring, checks and balances. From this false assumption, the control functions of financial leaders and their organisations are depleted, and the risks can multiply because they are not being appropriately identified, measured, managed or controlled.

 

The solution, Woollen suggests, is to ensure that financial leaders, and the Boards of which they are part, are properly equipped to pay attention to the conflicting forces at play in their work, to ensure that sufficient attention is given to the balance of control and risk against investment and return, and to ensure that people with the knowledge are entitled to speak “truth to power” right across the organisation.

 

With a government or judicial inquiry into banking culture now likely, it’s clear that these topics have a long way left to run.

 

Reference:

Woollen, B. (2011). Investment risk and the mind of the financial leader. Consulting Psychology Journal: Practice and Research, 63, 254-271.

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