Reining in Wall Street's Rainmakers

How excessively risk-taking corporate cultures and unbalanced reward practices have contributed to the current financial crisis

by Peter Cheese and Katherine LaVelle

Read through the news stories describing the collapse of some of the Wall Street investment banks and other financial institutions. You'll see a lot of the same words and phrases over and over again: "swashbuckling," "combustible," "detached," "a climate of opulent pay," "lax oversight," and "blind faith."

The words capture the perilous corporate culture that has been the norm at many of the firms caught up in the extraordinary crisis we are witnessing in the financial markets.

Financial service companies and the capital markets have grown enormously—and for the most part very successfully—because of the entrepreneurial and risk-taking culture of the players in it. In many cases, however, a significant imbalance has clearly grown between the behavior/reward system and the risks being taken. This imbalance has to be addressed as an important part of the wide range of measures and solutions being considered by regulators and the affected companies.

With the greatly increased complexity of financial instruments and models and the multilayered, so-called securitized assets that were traded, we are now living with the consequences of poor collective decision-making, a herd mentality that seemed to be about following the rainbow, and reward and accounting practices that excessively encouraged such behavior. Despite their state-of-the-market tools for portfolio management, risk management, and hedging, too many of these companies did not engender a culture of collaborative risk-sharing, of teamwork, of understanding and rewarding long-term as well as short-term success, and of training their people and aligning them with these principles.

Remember Enron?

For many years, these institutions have limited their focus on human resources and talent management primarily to finding the best or hungriest candidates, giving them virtual carte blanche, and rewarding their individual successes. Also, mark-to-market accounting principles allowed profits to be booked based on demand for the traded asset rather than on the long-term viability of what was underlying it. Financial service firms have used this approach to pay sizable bonuses based on the apparent short-term success of the assets, without a clear understanding of, or connection to, the long-term risks.

It's an old-fashioned view of talent management and an example of the free rein and high rewards to individuals that brought about the downfall of other high-profile companies in the past, such as Enron, Worldcom, and Barings. But there appeared to be little incentive to change while the profits flowed—until now.

So why the collective failure on such a large scale, and why did the firms apparently learn little from previous bonfires of the vanities? Culture and organizational behavior starts at the top and works down, and with the intense focus on and competition for top talent—the so-called rainmakers—the principal loyalty was too often to money. And if a team was pulling in the money, why would leaders question what was going on if the risky, sometimes incomprehensible, transactions meant big bonuses for them as well?

A Universal Challenge

Creating a corporate culture of collaborative risk-sharing and teamwork takes time and requires strong participation from senior management. The core values and principles need to be articulated and embedded in objectives and performance management, in learning programs, and in compensation and reward. Doing so is essential to drive the right behaviors and actions consistently.

Financial services companies are people businesses. To underpin good talent-management practices, there needs to be well-designed and consistent processes, including HR systems that integrate and provide a common base of support. In contrast with other fast-moving industries such as high tech and consumer goods, financial services does not typically represent best practices, and many companies still struggle with consolidating the various businesses they have acquired, resulting in a mixture of HR systems, policies, and processes.

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