By Neil Patrick
Poor governance allows bad leadership choices. And bad leadership choices risk the destruction of a whole business.
This week has seen the conviction of former Co-Operative Bank Chairman Paul Flowers for possession of class A drugs. Specifically, cocaine, crystal meth and ketamine. The mass media has had a field day with the story, but the scandal isn’t the part of the story I am most interested in.
The most intriguing question for me is how was it that Paul Flowers, who had no experience in banking was ever appointed at all?
This drugs scandal is just the latest in a long series of misjudgements which beggar belief for a man who rose to hold such a senior position.
Here’s an extract from the Wikipedia entry about Paul Flowers:
Soon after the filming of Flowers’ purchase of non-medicinal drugs was released to the media, it was revealed that, while deputy head of Social Services at Rochdale Council, Flowers had known about the activities of paedophiles at a residential boys' school, but had neither informed parents nor taken measures to close the school, was responsible for rejecting allegations of child sex abuse by the late Cyril Smith, and that, in 2011, while working at Bradford Council, "Inappropriate but not illegal adult content was found on a council computer handed in by Councillor Flowers for servicing. This was put to him and he resigned immediately."
Several newspapers reported allegations that he communicated with rent boys using his work email account while he was in charge of the Co-operative Bank, and was convicted of carrying out a sex act in a public toilet. After the bank lost £700m in the first half of 2013, and a £1.5 billion hole in the bank's finances was discovered by the new Chief Executive Euan Sutherland in May 2013, Flowers resigned in June 2013.
At the root of this crisis is bad governance and weak HR
How can it be that a person with such a background was appointed to lead an institution whose core ethos is supposedly based on fairness, transparency and good ethics?
He was voted in unanimously by his peers, but also was judged by the FCA to be a fit and suitable person to be a non-executive director of a bank.
According to some of his former colleagues, the former Reverend Flowers allegedly got the job because he did well in psychometric tests, despite lacking the financial knowledge of other candidates for the job.
Rodney Baker-Bates had experience of banking but lost out to Flowers because of the tests. A review of the bank’s governance decided leadership was more important than financial knowledge.
So Baker-Bates became one of Flowers’ deputies alongside David Davies, both appointed to keep an eye on the chairman and provide financial expertise.
When questioned, they told the Treasury Select Committee that they were ignored, and both said they would quit the board after the lender voted to buy 632 branches from Lloyds in 2012.
Baker-Bates said, “I set out to convince the board that the Lloyds branch acquisition was a giant step too far, and it was over-laid on another major error, Project Unity - which was intended to bring bank and group leadership together.”
How can it be that Paul Flowers passed the psychometric tests?
The most reliable form of psychometric testing, the five factor model (FFM) quantifies the extent of each of these personal characteristics:
- Openness: intellectually curious, prefer variety and novelty, active imagination
- Conscientiousness: dependable, prudent, methodical, achievement striving
- Extraversion: sociable, talkative, excitement-seeking, warm
- Agreeableness: sympathetic to others, cooperative, trusting
- Neuroticism: emotionally unstable, anxious, irritable, impulsive
If such tests were applied properly and evaluated correctly in the case of Paul Flowers, then why was he ever appointed? Someone, somewhere either got this wrong, or was overridden, with disastrous consequences.
What does the future hold for the Co-operative Bank?
Last year the Co-op Bank had to be rescued after it was left with a £1.5bn capital shortfall, with many of its troubles stemming from the merger with the Britannia building society in 2009.
Despite this bailout, the cumulative impact of this mismanagement means the capital position of the bank remains precarious:
This week we learned that the Co-op Bank will pay four of its largest hedge fund and institutional investors nearly £2m to support its £400m capital raising effort to ensure the deal goes through without a hitch.
A failure in this capital raising attempt could potentially bring about the collapse or at least drastic restructuring of the entire organisation.
If the Co-op Bank were for some reason not to be able to raise the money, the Prudential Regulation Authority could put the lender through a wind up process that would likely see it split into a “good bank” and a “bad bank”, with the continuing operations handed to another major lender and the toxic assets put into run off.
So it’s been a tough week for the social media team at The Co-op Bank. And their customers are not impressed with the situation either:
As I have contacts with institutional depositors at the Co-operative Bank, I spoke with them about this today and learned that they are pulling millions out of the Bank as a precaution against its possible collapse. Such a collapse would be a sad end to a once ethical and genuinely different type of bank.
And it can all be traced back to poor governance and leadership selection processes. This isn't the first and it won't be the last example of why proper governance is critical to large businesses. But it is perhaps the best example yet of the catastrophic damage that can be done through the incorrect use of psychometric profiling.
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