What we can learn from the Rogue Trader

The name Nick Leeson will be instantly familiar to most people in finance – the man who bankrupted Barings, Britain’s oldest merchant bank with a series of highly risky trades, covering his tracks as he went.

Operating out of Singapore with almost no supervision, and Leeson entered into a series of increasingly leveraged ‘bets’ on the financial markets, hiding his losses in an obscure account.

Those losses – documented in the film ‘Rogue Trader’ – eventually reached £827 million, twice Barings’ trading capital, and the company went into liquidation.

You might think those lessons have been learned by the financial institutions – and on a regulatory level, hopefully they have.

But why were no checks made on Leeson’s psychological profile before entrusting him to such a responsible position? And once out there, why was his narcissistic behaviour – this was someone who apparently believed he could do no wrong – not monitored and flagged up to his superiors?

There are lessons here for everyone, including the family office. The Leeson story illustrates the importance of transparency in any financial institution, regardless of size, and the need to have checks in place not just on investment performance, but also personal behaviour. And we’re not necessarily talking about someone who is underperforming – it might just be that your best trader has your highest psychological risk profile.

By looking at the psychological profile of each individual, together with the overall office culture, it is possible to gain a much more accurate picture of how a family office works than by just focusing on financial results.

Let’s say there is a slew of poor investments and people lose a lot of money. It might be because they are overexposed to a particular asset class, but it might equally be because the person in charge has made some very poor decisions based on the fact that emotionally they hate China, for example. Or perhaps a macho office environment that praises big ticket deals but pillories those who admit to mistakes has led to a series of ever more risky bets – as with Leeson.

Rather than putting up their hand and saying ‘I need some help’, they try to cover it up, and keep doubling up, until at some point the whole thing gets so big they can’t cover it up any more.

If you had looked at the history of these people you would find they had probably got away with it multiple times in the past – they made a mistake, they did something irregular, they got around the issue and got away with it.

People like this have an internal psychological profile that makes them feel indestructible –that they can just keep going on, and they will keep getting away with it.

Such behaviour is only possible because the office culture and structure allow it to happen, which is why transparency is so important. There needs to be good communication between all groups in the office, and the culture created by the head of the family office is critical. As with every other member of staff, it’s important to understand the manager’s psychological profile. If they are upset in their family life, that will come out in their work life. If they meditate regularly and are able to reflect on their personal issues, they are more likely to recognise their mistakes and deal with them than a narcissist who struggles to accept that he or she might have significant flaws.

The office culture has to be one where employees at all levels are encouraged to open up and talk about they are doing – and discuss any problems they may have, without fear of it affecting their employment.

A great example of this approach can be found across the Atlantic with US train operator Amtrak. The industry had a serious problem with institutionalised alcoholism among staff, which came to a head in a serious rail accident. The federal government demanded that rail operators introduce a drug and alcohol policy, and Amtrak took the bold step, in conjunction with its workforce, of encouraging employees to open up about substance abuse.

They introduced Operation Red Block, whereby if someone feels they shouldn’t be at work because of drink or drugs they can phone a confidential help-line and take the day off without fear of being penalised – providing they agree to discuss their problems with a specially trained co-worker, who offers support and help.

It’s an example that any business working with risk would do well to follow. Running a family office is about much more than just being good at your job – it’s also about understanding human behaviour, and understanding that each individual’s psychological profile and experiences will have an impact on their performance, both positively and negatively.

When you understand all of that, you can create the right solution to the right problem.

sign up to our newsletter