Inside Job - A Culture of Dysfunction

This weeks blog will focus on my learning from the documentary 'Inside Job' by Charles Ferguson. What I like to do when watching something like this is identify a key theme of the documentary and then that is what I will talk about. The theme from this show was Culture.

The documentary went into detail about the dysfunctional behaviours of Wall Street and the Investment Banks in the US which led to the financial crisis (yes, again you have to hear about the crisis, sorry). These Wall Street bankers were selling sub-prime collateralised debt obligations (CDOs) to other institutions for their bonuses. This led to the collapse of Lehman Brothers and the need for Morgan Stanley to need bailing out.

What was really clear to see were people making terrible decisions and going for risky projects so that they could get their next bonus. This can be seen even after the financial crisis. For example, in 2012 RBS made a loss of £5bn and Lloyds a loss of £570m, but they both paid their top management bonuses of £607m and £375m. I just think that is absolutely ridiculous, how can you pay people bonuses for the losses they were making. Bloomberg made a nice quote that said that bonuses pre-2008 were incentivised for 'greed and risk'.

The second thing that was apparent was familiarity. You may ask why familiarity was a route cause of dysfunctional behaviour, but I think it is apparent. Familiarity between the CEO and Board, Leader of Country and Advisers or Investment Bank and Rating Agency (S&P, M, F) will create behaviours that will lead to bad decisions being made. I am currently doing a dissertation on audit quality and new regulation and I have found in my results that familiarity is one thing that reduces audit quality and this was another cause of the 2008 crisis. I don't think you can do a good job if you are supposed to be independent but also 'good mates' with the person who owns the company.

I am going to be an auditor after university (so exciting I know), so I have to be independent, I am sure subconsciously my opinions would change if my best friend owned to company rather than someone I did not know, I would place more 'trust' in what he said or did than a stranger. But it was clear to see in the documentary that people were not independent and making an ex-Goldman Sachs CEO Secretary of the Treasury helped benefit Goldman Sachs by $14bn in the bailout (yeah so independent right?).

Culture

Culture is so important in any firm, and is usually more of a reason why it is successful or a failure than any other in my opinion. Take Morgan Stanley for example, they had around 50,000 employees but a culture which was only looking for achievement of their next bonus which made them act so dysfunctional they were having cocaine and going to strip clubs every night.

Culture is important if you are wanting to undertake a merger or acquisition too. If I was a CEO and we found out that all the employees were really unproductive or taking high risks, this could cost us a lot of money and make the acquisition fail. But I think that it is so hard to actually think of how to measure the culture in a company unless you are there.

As a student and not having a full-time job before, I got the opportunity to undertake a placement. I could have tried to apply to a Big 4 accounting firm, but instead chose to go for Grant Thornton (who are number 5). The reason I did this was because I got told their 'culture' was a lot better (thank god is was a really great culture). But if the company has a horrible culture then I would have not succeeded in what I wanted there, and that would be the same with an acquisition.

Failures can be seen through recent history where companies have acquired others and have failed or had problems due to culture clashes:

• AOL - Time Warner
• Daimler - Chrysler

I think that a business leader in the organisation needs to set the tone for organisational culture. I believe this will help increase shareholder value by not putting it at risk, which would also be the case for a successful merger/acquisition as successful culture integration is said to be the most important factor for M&A success.


I just want to touch lastly as what my optimal culture I believe would be for a firm. I think a firm where you are recognised for things you do well, even a simple 'thank you' I found helped motivate me. Secondly, I think openness when explaining what I have done wrong, I hate when someone says 'oh, [this guy] said he didn't like you doing this', why didn't he just tell me? What is your optimal culture?