HR the voice of reason as risk management from space comes to a bank near you

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What do Astronauts and Bankers have in common? Not that much as it turns out. That won’t stop us hearing a lot about space as financial services firms reach for new ways to manage risk. NASA’s Risk Manager does the speaking circuit here in Australia. Don’t get me wrong, I’ve been educated by a small person who is now a teenager about every space fact on the planet, but it does make me think critically about taking what has worked from one sector and applying to another. Everyone is interested in the best way to improve their risk management practices - especially when it comes to non-financial risk, but I’m reminded of the old mistake of copying the neighbour’s strategy by going in and taking what’s in their medicine cabinet - not a good idea if you don’t have the same heart condition.

The idea is simple and compelling - NASA does a very risky thing, it’s doesn’t go wrong that often, they must be good at risk management, let’s learn from them. Not so fast. Let’s look at two important areas where banking and financial services is different and be ready to influence the risk function and leadership teams.

The workforce

NASA’s basic requirement is a bachelor’s degree in engineering, biological science, physical science, computer science or mathematics followed by three years of experience. It’s a relief to know that I won’t make it with degrees in Archaeology specifically on the no list and human resources, commerce and management not even getting a mention - phew! Individuals from these professions share a scientific tradition of problem solving with testing and evidence - it’s part of the organisational culture due to their clear and consistent recruitment standards. One factor in Macquarie being able to address the behaviours of their wealth planners was their consistency in recruitment, the firm’s strong history in stockbroking and their clear standards of performance. Now publicly available thanks to the Royal Commission, it makes for an interesting illustration of the importance of high educational standards. We all know someone who didn’t make it through Macquarie’s psych testing and a long way from some of the retail banking hiring standards describing the 30% percentile of aptitude testing being OK and if lower seek manager approval! So that’s reason number one why a risk management approach that works for NASA is unlikely to be successful in banking. The people on staff don’t share the same mindset from their education (it’s called pre-professional identity if you want to get fancy) and there is a much wider variability of analytical thinking, verbal reasoning and numerical reasoning.

NON-Financial Risk

Jeevan Perera one of the creators of NASA’s risk framework, is was quoted in the AFR link above as saying that four key risks are “basically the same across all organisations”. These four are financial, schedule, safety and technical. The Royal Commission exposed the importance of non-financial risk - capability (can people do the job) conduct (do they do the job the right way) and accountability design - people, statements and maps from BEAR. By the nature of their tight hiring process, NASA has already managed some of these risks very well - everyone has a degree and I’d image very good marks in that degree. Documentation, rules and procedures would be expected, respected and any deviance quickly corrected by the culture. The government didn’t need to introduce BEAR to it’s space agency. It would have been unthinkable for such a science orientated organisation to not have clear accountabilities. The alternative would be to look to sectors where community expectations and a non-scientific, degree qualified workforce have had to grapple with non-financial risk. I’ve been taking a closer look at the industries that have a large information imbalance between consumer and product manufacturer and where the community has clear expectations. Banks are very large employers and they can’t practically insist that everyone have a banking degree, so I’m also looking at organisations where their workforce has a wide educational background - from straight out of school to the occasional rocket scientist.

Implications for HR

HR can play an important role in defining and monitoring non-financial risk. It isn’t easy to pull this information together but there has been work done over many years on different types of risk, especially conduct risk in financial services, repetitional risk and human capital risk. Negligent hiring is a key area of human capital risk, next comes turnover resulting in the loss of organisational knowledge and the imperfect induction of new hires, then complacency about behaviours required that leads to only doing the right thing when you are being watched (think brokers who don’t document every piece of client advice) and good old fashioned fraud. Furnham and Taylor’s excellent book on the Dark Side of Behaviour - understanding and avoiding employees leaving, thieving and deceiving is an important knowledge area for HR. Combine this with a good understanding of organisational citizenship behaviours and you can really make a contribution in a meeting. We can be the experts in this area and with with the risk function to implement the letter and the sprit of the Royal Commission recommendations.

HR specialists each have a role to play. Recruitment is looking at the raw material into the system, learning and development aligns the competencies and capabilities (don’t mix them up, they are not the same thing!) to both the strategic plan and the risk framework and remuneration makes sure the right behaviours are being rewarded and the bad ones punished. Finally HR leadership need to be proactive in seeking out and creating conversations about the risk framework and the non-financial risks that fall in HR’s patch. It’s a game of self - directed learning and influence - many will be surprised that HR can make a contribution in this area. It’s a long way from the personnel admin function of the past and a good step forward to the strategic contribution we can be making.