The Collapse Of Barings

1. What do you think have caused the collapse of Barings?

Different elements are at the root of Barings’ collapse. Those elements deal with four fundamental Organizational Behavior frameworks/concepts: “congruence model”, “coaching the alpha male”, “motivation” and “corporate culture”.

Congruence model

The Barings’ case is a perfect example of the consequences that incongruence, or lack of alignment between strategy and the four organizational building blocks (critical tasks and work flows, formal organizational arrangements, people and culture) can have on a company’s performance.

Formal organization and Culture. Barings apparently has a risk-averse culture and it’s perceived as a financial institution of the highest standing. In spite of this culture, Leeson earns incredibly high bonuses even though he is clearly not risk adverse. He is not disciplined after one drunken incident. He is made head of trading, but at the same time he is retained as head of future and options settlements. Leeson is not questioned too closely about what he was doing even though his requests of money from the London office are huge. Senior manager set up control systems to manage risks when it’s too late (“Why interfere with such a profitable trader?”).

People and Critical Tasks. Peter Norris, although skilled and intelligent, doesn’t have enough experience of the business that he has to manage. Senior managers don’t seem to understand well the future markets. Although Leeson is not qualified to trade, he soon is in control of a team. Leeson doesn’t even use a simple model for pricing the volatility of the market.

Tasks and Formal organization. Managing reporting lines are complex. Leeson is both the head of trading and the head of future and options settlement. Organizations usually get what they measure and reward. For this reason and organization’s formal reward, measurement and control system must be consistent with its critical tasks. At Barings, it is said that risk avoidance is a must, however people like Leeson are rewarded highly not only with money but also with public praise.

People and Culture. Nick Leeson does not fit with Barings’ culture even though he has technical and business skills. He takes more risk than is authorized. He doesn’t care about being part of the company; he only cares about money and to be a “star”. Moreover, he constantly behaves unethically.

Coaching the Alpha male

Bearings totally fails to “coach” Leeson. Leeson shows some of the Alpha male characteristics. He is impatient and wants his promotion at any cost.