henever a prominent firm fails as dramatically as Bear Stearns did recently,
it should make everyone wonder what caused the failure and ask themselves, ``Could
it happen at my firm?'' As HR professionals, you should also be wondering what role
HR played in the collapse. It's my contention that the failure of HR professionals
at Bear Stearns to move beyond the traditional business partner role to become true
business leaders was a primary cause for the firm's failure.
Following any major business collapse (some might even argue
after every minor one too), it's important for all involved to conduct a failure
analysis in order to determine the contributing factors at work. Obviously, market
forces could have played a role with Bear Stearns, but given that a majority of
its competitors have managed to avoid collapse, it is safe to assume that market
forces were not the cause. A second external factor to consider is predatory actions
by competing banks, but that doesn't seem to be a key contributor either at this
point. With market forces and predatory actions by competitors ruled out, attention
should turn inward.
The collapse at Bear Stearns was a companywide failure, not
that of a single business unit, so attention should focus primarily on factors that
span the organization. The failure wasn't caused by faulty computer equipment or
a software glitch, so technology isn't to blame. Bear Stearns enjoyed a fabulous
reputation, attracting some of the best investors and talent. The firm had been
profitable for over 80 years, so marketing and a shortage of resources were not
the cause.
The final internal factor to consider is failure of the firm's
employees and the people processes that governed them. In a quest for more profit,
Bear Stearns' employees took too many risks. When such failures arise, one must
blame not only the individuals involved, but also those who designed the management
systems—the processes and policies —that allowed the extraordinary risks to play
out.
In looking at possible management system contributors, the
first area of focus should be the performance management and performance measurement
systems. Bear Stearns dealt heavily in the extraordinarily risky field of financial
derivatives. Given the significant risk, HR had a fiduciary responsibility to monitor
employee performance even more precisely than would be expected at most firms.
The firm is also known for targeting candidates who had a
predisposition toward taking unnecessary risks, known internally as PSDs: individuals
who were poor, smart and had a deep desire to become rich. This type of hiring,
coupled with a reward system that provided major incentives for extraordinary return,
almost guarantees a disaster unless you have designed sufficient performance management
and performance measurement systems that monitor when employees stretch beyond the
boundaries of sanity. In the same light, if the hiring, compensation and training
systems don't automatically ``adjust'' as market conditions change (dictating the
need to take fewer risks), employees will continue to take risks based on historical
expectations.
Certainly there were financial processes and software that
played an important role in assessing financial risks, but it's important to remember
that 100 percent of those processes and limits were designed and set by people.
The fact is that other firms facing the same problems had employees and people management
processes that successfully adjusted to meet the changing business environment.
If you analyze similar failures at Enron and the French bank
Societe Generale (with $7 billion in losses by a single trader), you'll find similar
HR-process causes. Employees learn that it's OK to take extraordinary risks because
the employee training process, performance metrics and incentive systems drive them
in that direction. There is no effective counterbalance because the ethics, punishment
and whistle-blower systems are toothless—they have little actual effect on employee
behavior.
Given the scope of this failure and its contributing causes,
it's only logical that Bear Stearns chief human resource officer Pamela Kimmet and
her staff should share the criticism surrounding the firm's downfall. They are responsible
for maintaining shareholder value. Instead of being an effective business leader,
HR at Bear Stearns spent significant effort working on a companywide weight-loss
program and becoming certified in HR. Shame on them, and shame on you if you don't
learn a valuable lesson from their failure!
Workforce Management, April 21, 2008, p. 42
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