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Decision Challenger

Two completely different news items from across the pond caught my attention last week.   The failure of RBS to conduct appropriate due diligence on the ABN Amro takeover was in the spotlight again.  It was announced that 17 former directors of RBS, including ex-CEO Fred Goodwin, are being sued by investors for £2.4 billion.  In another major story, recently discovered amateur footage of the 1986 Challenger Space Shuttle disaster was released for the first time.  Whilst on the surface these may appear as completely unrelated stories, both incidents are the result of organisations failing to apply appropriate governance.  Ensuring your company has the appropriate process in place when making big decisions is crucial.  You are only ever one poor decision away from catastrophe.

 

The Space Shuttle Challenger disaster occurred in Florida, United States on 28 January 1986, when the Space Shuttle Challenger disintegrated 73 seconds into its flight.  The disaster was instigated by a seal failure which caused a flame to leak from the rocket’s boosters.  The flame caused a massive failure to the shuttle's external tank triggering a huge fireball. The failure of the seal was due to the unusually cold temperatures on the morning of the launch.  The shuttle was destroyed and all seven crew members were killed.

 

This disaster resulted in a 32-month hiatus in the NASA shuttle program.  More significantly NASA and the government suffered from a major loss of reputation.  A Commission into the accident found that NASA's organisational culture and decision-making processes had been a key contributing factor to the accident.  NASA was under pressure to launch the shuttle because of an extensive flight schedule and, among other things, television ratings.  The key error was that even though senior managers had known that contractor Morton Thiokol's design of the boosters contained a potentially catastrophic flaw, they failed to address it properly. This led the Commission to conclude that the Challenger disaster was ‘an accident rooted in history’. 

 

Roger Boisjoly, a Morton Thiokol engineer who had warned about the effect of cold weather on the boosters, left his job at the company after the disaster.  He is now a regular speaker on workplace ethics.   He believes that a last minute meeting called by the Morton Thiokol managers, which resulted in a recommendation to NASA to launch, ‘constituted the unethical decision-making forum resulting from intense customer intimidation’.  In essence, Morton Thiokol’s management knew it was a risk to launch but based on pressure from NASA, gave the green light.  

 

Sound familiar?

 

Late last year the Financial Services Authority (FSA) completed its extensive review of what went wrong at RBS.  In the 452 page report it found that the level of due diligence conducted on the ABN Amro takeover was limited to just two lever arch files and a CD.  The pressure from Senior Executives to push forward with the acquisition meant that little was understood about the perilous financial state of ABN Amro.  The FSA also concluded that ‘the decision to make a bid of this scale on the basis of a limited due diligence entailed a degree of risk-taking that can reasonably be criticised as a gamble.’

 

Both events provide an excellent message to all organisations.  We all deal with different risks every day in our jobs, hopefully none that relate to human life.  While there are pressures coming from different areas, we need to understand how to deal with them.  In dealing with big decisions, you do need to ensure that you follow the correct process, and make the most informed decision — a decision not inappropriately influenced by external forces.  Challenge the decisions by leaders if you don’t agree with them. Complacency, ignorance and denial are all enemies of well-informed decision-making.

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Comments: (10)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 20 March, 2012, 12:22Be the first to give this comment the thumbs up 0 likes

These are situations where "you're damned if you do and damned if you don't". To the two examples cited by you, let me add the couple of shotgun mergers of banks (e.g. Wells Fargo + Wachovia) that literally happened over a weekend at the peak of the financial crisis 3-4 years ago.

Having been a part of one such forum that had to decide whether a Top 5 UK Bank should take a GO or NO GO decision on a highly visible payments program a few years ago, we knew that a GO decision could lead to a potential catastrophe but also that a NO GO decision would result in certain disaster for the top management. Had we applied the filters of "correct process", "most informed decision" and so on, NO GO would've been the logical decision. However, despite the odds, the forum decided on a GO decision. Somehow, things worked out fine in this case as they did with the aforementioned shotgun bank mergers.

While I don't discount the importance of these filters, they're not always practical, especially when it comes to time-critical projects. End-of-the-day luck does matter. This originally-Oriental concept seems to be gaining a lot of currency everywhere else in the world, if the over 200K Google Search results for "role of luck in business" are anything to go by.

A Finextra member
A Finextra member 20 March, 2012, 13:52Be the first to give this comment the thumbs up 0 likes

This is exactly the cavalier attitude that consumers, regulators and banks should not find acceptable. First off, luck isn't a sustainable business model. Banking isn't gambling. I don't know of anyone who believes that. Yes, some people can succeed in business with a bit of luck, but quality always wins out.

Secondly, most of the issues banks have with appropriate decision making relate to the fact that they don't have an agreed strategy.  Due to this they always have to make reactive decisions.

What led the bank to be in a position to make a merger/acquisition decision in two days? Rubbish planning and management.

If your strategy is to do a takeover, you have an intention, approach and price point agreed. If the price falls into your parameters - decision made. That is a better way to operate. If you don't have a takeover strategy, don't just decide at the last minute that a global collapse has made one of your competitors attractive.

 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 20 March, 2012, 14:46Be the first to give this comment the thumbs up 0 likes

After Lehman, the powers-that-be decided that the financial world just couldn't afford another Lehman and virtually forced one bank to acquire / merge with the other in my aforementioned shotgun-weekend-merger examples. All of this is public knowledge including the role of regulators in these events e.g. according to this USA Today story, "...many bank mergers are shotgun weddings performed by the Federal Deposit Insurance Corp." A little more connectedness with real word events of recent past would've prevented the irony of asking regulators to curb such attitudes.

It's in the very nature of luck that concepts like sustainability are simply not applicable to it - you just need it when you need it, not all the time!

A Finextra member
A Finextra member 20 March, 2012, 16:13Be the first to give this comment the thumbs up 0 likes

Because they happen, doesn't make it right.  The Lehman's failure and GFC was caused by poor decision making from banks in the first place.  Its a vicious circle. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 March, 2012, 08:27Be the first to give this comment the thumbs up 0 likes

Some have argued, quite convincingly IMHO, that before GFC most banks were playing "passing the parcel (of repackaged toxic assets)" and that, unfortunately, only Lehman and a couple of others were left holding the parcel when the music stopped. Which, to me, highlights the role played by luck. In my experience, in the real world, what serves self-interest is generally what happens. Even as we're debating about what's right versus what actually happens, banks have apparently recently latched on to other assets like education loan and insurance benefits transfer to create the next generation of first- and second-order derivatives. Only time will tell whether their decision to do so is right or wrong from a long term perspective but I don't think anyone will deny that they earn big fees for banks in the short term. 

A Finextra member
A Finextra member 21 March, 2012, 12:09Be the first to give this comment the thumbs up 0 likes

Interesting comment, and a major point that Nassim Nicholas Taleb makes in his writings.

<< While I don't discount the importance of these filters, they're not always practical, especially when it comes to time-critical projects. End-of-the-day luck does matter. This originally-Oriental concept seems to be gaining a lot of currency everywhere else in the world, if the over 200K Google Search results for "role of luck in business" are anything to go by. >>

WRT the shuttle disaster, there was a good discussion on slashdot (around the anniversary of the disaster) and the major consensus was that the engineers were ignored, and of course should not have been.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 March, 2012, 16:00Be the first to give this comment the thumbs up 0 likes

@ChristopherMcC: 

True that black swans written about by NNT present an extreme case of bad or good luck. But, in actual practice, we see differences between what's right and what happens in many more situations. Just to take the Challenger example, I'm not sure if "gasket acting up in cold weather" or "cold weather in Florida" qualify as black swan events. Whenever I see analysis of past decisions, I can't help being reminded of the saying "Hindsight is 20/20". 

Talking about leading authors, my comments related to self-interest are inspired by Michael Lewis. I always felt that rating agencies - not banks, regulators or homebuyers - were the only ones who could be charged with making bad decisions that led to the GFC. After reading "The Big Short", I was convinced. 

A Finextra member
A Finextra member 22 March, 2012, 20:07Be the first to give this comment the thumbs up 0 likes

Yes, the ratings agencies are to blame for a portion of the global financial crises, but no one can argue that RBS's decision to takeover ABN Amro was a bad decision.  Likewise NASA's decision to launch the Challenger. It had nothing to do with bad luck, black swan events or anything else.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 23 March, 2012, 17:57Be the first to give this comment the thumbs up 0 likes

Five years later and after one of the worst financial crisis - itself caused by black swan events - things might look different today but, when the RBS-ABN transaction happened, it had the overwhelming support of shareholders. Given that these are common folk and not vested interests, it's hard to accept that everyone thought it was a bad decision at the time. 

A Finextra member
A Finextra member 24 March, 2012, 16:59Be the first to give this comment the thumbs up 0 likes

Shareholder support was based on the board providing a misleading view of RBS's financial state to investors.  Hence the reason for the legal action.  The second reason was the relative ease of which RBS acquired NatWest.  This gave the board a cavalier attitude towards the ABN Amro takeover. 

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