Monthly Archives: September 2014

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2014-09-22 by: James Bone Categories: Risk Management Santander Bank’s Secret to Conquer the World – Simple, Prudent Risk Management

Chairman of Santander

Martin Vander Weyer The Spectator 20 September 2014

Four years ago, I wrote that I knew no dark rumors about Santander, the rising force in UK high street banking, but that history taught me banks which expand rapidly and globally ‘always come unstuck in the end… partly because the challenge of risk control across such vast portfolios becomes impossible… Banks that have been driven by one powerful personality also tend to lose management grip, and start finding skeletons in cupboards, as the big man comes to the end of his tenure.’ The big man in question was third-generation chairman Emilio Botín — who died in post last week, aged 79. Santander is now Europe’s largest financial group, but despite years of economic turmoil and real-estate bust in its Spanish home market, and despite my own forebodings, it still looks pretty strong. So what was Emilio’s secret?

The answer, I suspect, was a combination of simplicity, technology, and team spirit — three factors that have proved sadly deficient in many other big banks. Botín’s principles were those of the old-fashioned small-town banker he was born to be: ‘If you don’t know your customers very well, don’t lend them any money.’ But his bank’s computers were anything but old-fashioned — and Santander pulled out of buying a bundle of RBS branches largely because the systems put in by Fred Goodwin were so poor it was impossible to ensure ‘a seamless journey’ for customers. As for esprit de corps, one associate told me: ‘

Given all that, it makes more sense than it might otherwise have done for Emilio to be succeeded in the chair by his daughter Ana Patricia, who acquitted herself well as head of Santander UK and has long been in a position to study his methods. Meanwhile, I see the Barclays board has ignored my advice (I’m sensing a pattern here) to pick a no-nonsense female chairman in the mould of Ana Patricia: instead they have gone for a higher level of corporate correctness and appointed a no-nonsense Scotsman. He is John McFarlane — a veteran banker with ANZ, Standard Chartered and Citibank on his CV — and I hope his visa is in order.

After the vote

No-nonsense businesspeople will be very much what’s needed in the aftermath of the Scottish Catastrophe, as it will surely come to be known whichever way the vote has fallen. No nation, independent or semi-autonomous, can hope to prosper on the basis of the wild welfare promises of the SNP, unsupported by any plan to attract investment and stimulate growth. Only a resurgent private sector can drag Scotland out of the tax-and-spend peat bog into which this referendum has driven it deeper than ever — and that will take quite some grit on the part of entrepreneurs, given the fundamental hostility of both the SNP and Scottish Labour.

But grit —even granite ruthlessness — is a characteristic shared by the outstanding Scottish business builders of the past. Think of Dr William Jardine of Lochmaben, who became the great opium trader of Canton; or Dunfermline-born Andrew Carnegie, robber baron of 19th-century American steel; or Robert Fleming, Dundonian financier of American railroads. In more recent times I have personally encountered three who typify the breed: Sir Ian McGregor from Kinlochleven was the implacably tough National Coal Board boss who defeated the 1984 miners’ strike; Sir William Purves from Kelso (happily still with us) was a formidable chairman of the Hong Kong Bank; and Gordon Baxter was the hard-as-nails force behind the cosy image of his family’s soup and jam enterprise at Fochabers.

Today’s Scottish business role-model is Michelle Mone, Glaswegian inventor of the Ultimo push-up bra, who looks a lot friendlier than all those old-school chaps. But I suspect she’s just as tough a cookie — and she threatened to move her company to England in the event of a ‘yes’. That’s the other problem with Scottish business talent: so much of it, down the centuries, has been exercised outside Scotland. Who will now persuade the wealth creators to stay at home and pick up the bills?

Watch the oil price

One thing that might benefit Scotland, given predictions of falling North Sea revenues, is a rise in oil prices — which is what we’d normally expect at a time of Middle East mayhem. But to the surprise of some speculators the graph is currently pointing the other way: prices have fallen 15 per cent since mid-June, with West Texas Intermediate down to just above $90 a barrel at the beginning of this week. Why? Because US production is at a 28-year high, Libya is going strong and Iraqi production has not been as seriously disrupted by Islamic State insurgency as was feared. On the other side of the equation, Chinese industrial growth registered a mere 6.9 per cent in August, its weakest annualised rate since 2008, and western demand has slackened — not helped by European jitters over the outcome of the Scottish Catastrophe.

Meanwhile, the slothful sheikhs of Opec have not convened an emergency meeting because they say the trend is seasonal and the price will recover — but if they’re wrong and it goes on down, all sorts of consequences follow. Though the slump of 2008 saw lows of around $40, a level of $100-plus is now needed for most big oil companies to remain adequately profitable. US shale drillers consider $80 to $85 to be the ‘sweet spot’ at which capital is attracted into their sector, but many deep-water or otherwise inaccessible oil exploration projects only become viable at levels of $120 or more. A sustained phase of lower prices would switch off an awful lot of new drilling — and make us all that little bit more vulnerable to what happens next in the turbulent Islamic world.

This article first appeared in the print edition of The Spectator magazine, dated 20 September 2014

James Bone is a Behavioral Risk Consultant with more than 20 years of experience in senior risk management roles across a variety of complex industries.  Follow James at

2014-09-19 by: James Bone Categories: Risk Management The Hardest Risk to Avoid

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What is the hardest risk to avoid?  The risk you didn’t anticipate.  The answer may seem obvious, after the fact, however most firms seldom analyze why.  What is not so obvious are the decisions leading up to the risk event.  It is human nature to assume that we understand risk and will avoid it just in time.  Yet, time and again we are surprised.

Somewhere along the way a consultant categorized risks into awareness buckets of “Known”, “Known Unknowns” and “Unknown Unknowns”.  Unfortunately, categories of risk do not protect us from the effects of a risk occurrence.  Senior executives do not like surprises and, more importantly, expect risk professionals to detect and prevent them before they occur!

Let’s examine whether these events are really “Unknown Unknowns” or, quite simply, the avoidance of decision-making that could have minimized or contained the risk.  Cognitive research suggests that blind spots in decision-making account for up to 90% of large operational risks across all organizations.  Very few firms take the time to re-examine failed decisions fearing where the truth may lead.

More frequently than not an executive is often quoted as saying, “in hindsight we should have done X, Y, or Z”, once the extent of the damage has been revealed.   A huge amount of resources are spent to “correct” the problem and the inevitable blame is assigned with a vow to never repeat “that” mistake again.

What Can We Learn?

The failure to closely examine where decision-making led to blind spots is an opportunity lost to learn valuable lessons and to lead by example.  Mistakes are inevitable and most result in small errors of judgment with little impact.  Strategic errors of judgment may be costly but are extremely informative.  Even worse, when firms refuse to examine their decision-making processes they are doomed to repeat them resulting in potentially catastrophic results.

Some believe financial service firms exhibit this blindside.   After being bailed out during the “Great Recession” by the U.S. government the level of risk taking in markets has reached and may be exceeding new heights.  The opportunity to lead by example and reexamine bad behavior has been lost in the rush to gain market share and profit from increasingly risky new products.  Yet, financial service firms are not the only example!

Firms, large and small, have largely ignored warnings to build more robust Internet security to protect customer data.  Today, the news is littered with examples of security breaches in data security.   These public notices do not represent the magnitude of the problem since most of these breaches are not fully disclosed leading to millions of dollars in losses to hackers from around the world.

Decision risk may be the most costly risk of all!

Cognitive Risk Management: A more enlighten approach

Let’s be clear.  Risks cannot be completely avoided nor can we prevent firms from making a costly mistake.  It is equally important to shatter the myth, or expectation, of the risk professional having supernatural abilities to “see around corners” to detect and prevent risks before they happen.  We don’t live and work in protective bubbles built from risk frameworks, processes and internal controls.  Internal controls are important, but do not operate in a vacuum absent individual judgment.

Strong risk management is a derivative of good judgment.

An interesting observation should be noted here:  COSO Enterprise Risk, Basel I,II, & III, ISO 3000 and Federal Sentencing Guidelines all make reference to human behavior but none suggest effective approaches to address or detect deviations from expected behavior.  Regulatory agencies and external auditors note the importance of decision risk but remain silent on remedies for detecting, correcting and preventing change in [expected] management behavior.

The traditional tools in use today are not effective for mitigating the hardest risk to avoid. 

Today’s risk professional must consider looking to the behavioral sciences to address this most pervasive risk common to every organization.

Making decisions under uncertain conditions.

What makes this risk more complicated is that it is transitory in nature.  Meaning that, decision-making becomes more complicated as the certainty of outcomes become harder to predict.  In other words, how does flawed decision-making morph into bad behavior?

The intent is not to solve these problems but to suggest new approaches to detect these subtle changes and put processes in place to mitigate the impact of both behaviors.  Let’s call this a Behavior Risk Heat Map for now.  Collectively, these measures would provide a “gut check” for the Board and Senior Executives.  These measures need not be formally documented but could be the basis for a discussion to build consensus.

Considerations for building a Cognitive Risk Framework:

  • All humans use “heuristics and biases” to make decisions – understand where limits to intuition may lead to blind spots
  • Conventional wisdom leads to the illusion of understanding – do your homework thoroughly and accurately
  • The Halo Effect created by Group Think often leads to the Illusion of Consensus – disagree smartly
  • “Less is More” – Complex strategies and products are often fiction disguised as “The Next Big Thing” – Ask a 9-year old if they understand it.
  • “Jumping to Conclusions” should be reserved for competitive sports.  Run simulations before committing to a full implementation
  • And lastly, we all tend to seek short cuts and substitute “mediocre” for “better” solutions.  Don’t assume the easy answer is the correct one to pursue

Keep in mind that the hardest risk to avoid is the one that you did not anticipate so ask yourself ——-What Am I Missing?

It might make the difference between success and failure.

James Bone is a Behavioral Risk Consultant with more than 20 years of experience in senior risk management roles across a variety of complex industries.  Follow James at