That management should know what's going on is so fundamental it's taken for granted. Yet, says Robert Heller, failure of control in this sense has been at the heart of most recent financial collapses.
Outraged critics have risen on a flood of righteous indignation over the extravaganza of mismanagement, or no management at all, revealed by the Bank of England's report on the Barings collapse. That monumental folly was self-righteously blamed on failure of a management element so fundamental that it's taken for granted: control.
That word isn't found much in best-selling texts by hot-gospelling gurus. Control, of course, dominates textbooks on management accounting, internal audits and related technical areas. That's control on only one narrow definition: recording and policing. Every board needs to know that movements of cash and goods are properly authorised and accounted for.
This is the province of the bean-counters, and is generally regarded as negative. In Search of Excellence, one of the few bestsellers to mention the C-word, strikes the typical note in advocating 'loose-tight controls.' Everything must be under efficient control at the house-keeping level. But above that comes strategic execution, where operational controls must not inhibit initiative. And still higher comes strategic formation, where excessive planning control can stifle creativity.
The tragedy is that Barings didn't completely fall at the first hurdle, the housekeeping level. Any system is prone to determined perversion, like the bottomless pit of account 88888 which concealed much of Nick Leeson's mad, doomed trading. But the Barings system threw up loud enough signals to alert any management: any management, that is, which hadn't lost control in another, deeper sense - understanding what's going on. Most financial collapses result from ignorance coupled with inaction in the teeth of mounting alarms.
Think only of Johnson Matthey Bankers, BCCI, the secondary banking crisis of the 1970s. These have aspects in common with each other and with Barings. All happened under the nose of the Bank of England, which was supposed to be monitoring and regulating - controlling, if you will - the collapsed institutions. Its apologists would claim that the Bank remained in control of the whole system. The City of London didn't collapse. That's cold comfort to those in the direct path of these localised hurricanes.
The Bank's critical failure lay, and probably still lies, in internal control: at the higher levels of information, strategy and execution. These cover the establishment of firm and intelligent purpose, the construction of effective systems for turning that purpose into action, the monitoring of results and the modification of the system when outcomes are at variance with the purpose. Quality experts know the sequence intimately: it's PDCA, the Shewhart cycle of Plan, Do, Check, Act.
Barings, in fact, destroyed itself through total failure of that cycle, from start to finish. The purpose or plan was to repeat the stupendous tide of profits that retreated when the Japanese warrants trade dried up. When Singapore appeared to be achieving that aim, the board was too overjoyed to investigate the true dynamics and mechanics of Leeson's trading. The checks operated belatedly, but the lags hardly mattered, because nobody acted on what the checking revealed.
The pattern is characteristic, not only in financial collapses, but in strategic failures. Top management sets its sights on some grand but imperfectly conceived objective, launches an incompetent plan of action, pours in cash rather than control when the action misfires, and ignores all the adverse evidence until the disaster strikes. Sony's invasion of Hollywood, which lost a stupefying $3.2 billion in five years, is a perfectly imperfect example.
In pursuit of a grand, but probably mistaken strategy, Sony paid $3.4 billion for its studios and took on $3.2 billion of debt. The wildly wrong plan of action, in Fortune's phrase, was 'Throw around a lot of money to hire a crack management team and build them a snazzy studio, and the best stars and directors would beat down their door.' The Bank of England's regulatory history is a less glamorous but convincing example of repeated breakdown of the PDCA cycle. Analyse the successive gross failures of control, and you find that disciplining financial institutions is very secondary to the Bank's grander plans for its place in the country and the world.
Small wonder that the actions taken have merely paved the way for the next emergency - with an astounding, embarrassing 17-point reform needed post-Barings. The argument for separating the bank's monetary and regulatory functions is thus a management case. It's an elementary principle of all those textbook controls which the embryo management accountants are studying. You separate discrete activities to obtain clear visibility and accountability.
Without that same principle, the great commercial and financial empires could never have achieved the taken-for-granted control that, by and large, works so regularly. Bud Schulhof, the American mastermind of Sony's miseries, is quoted as saying that 'we are in the phase that needs a more regularised style of management'. So is the Bank of England. If it doesn't come, there will be other Barings.