Final Report on Case Analysis:
“The Barings collapse: breakdowns in organizational culture and management”

Prepared by: Valeriya Yun ID: 201005032

SolBridge International School of Business, 2012 Introduction
How it is possible that one person became an important reason for the world-known financial institution collapse? But it is, and this guy is Nick Leeson who brought the Barings bank to bankruptcy with losses of $1.4 billion, even though here he played an antihero role we cannot deny his talent. This paper provides an analysis of the case, introduction of the whole picture depicted in the case, Nick Leeson activities and operations, and of course assessment of internal control and some other problems in their structure which also influenced the bank collapse. An analysis is followed by conclusion and final recommendations.
Barings Bank overview
Barings Bank was founded in 1762 and in the beginning of the 1980s still had a reputation as one of the oldest in England and world’s most pre-eminent financial institutions. During their long history they have already been on the edge but that time they were saved by the Bank of England. But in 1995 as a result of Nick Leeson activities, the Barings Bank collapsed.
In 1980s there was a vogue to buy or acquire stockbroking and jobbing firms and Barings Bank followed the tendency and bought Henderson Crosthwaite and built up the significant business BSL which had an operational independence of Barings Brothers & Co.
Nick Leeson. Internal control and other reasons
Now we are considering the 1989 as the crucial moment which became actually a starting point of the end, because this year Nick joined the BSL. Later in 1992 he was appointed for a post in Singapore in newly established Barings Futures (Singapore) Pte Limited (BFS) where he was in charge of the settlements and accounting departments.
Transferred to Singapore he got a lot of power and freedom where he actually started his speculations. In order to cover losses he created and used account #88888 for unauthorized speculations. We cannot deny the fact that he lead this institution to collapse but the number of questions are rising here. Can just one person be in charge, can we blame just Leeson? And who was his boss, who let this situation be?
Now let’s consider other supporting reasons. Corporate culture is an important point which implies compatibility among partners and employees, strategy and behavior inconsistency toward this strategy. For example, here it’s clearly seen that Leesondoesn’t fit Barings Bank’s culture even though he has all required technical and business skills, but he actually doesn’t care about the company he is working at, mostly he cares just about his personal growth and money by taking more risk than is authorized.The problem was that Bearing does not clearly define its culture. There was not a clear common culture or strategy across the whole business, there was just a littleinterdependency among regions. They didn’t establish the mechanism which could help to enforce and spread this culture.
Human resource department and motivation are two another issues in this case. To refresh the memory, employees came to this institution from every kind of educational and social background, they hired people with strong personality, self-assuredness and drive to make money. These qualities were estimated much more higher than the education, experience and management expertise. The drive to make as much money as possible was supported by monetary bonuses which allowed 50% of BSL’s pretax profits to be paid out as bonuses. But it’s a fact that money very often motivates people to the wrong behavior which may have consequences of unethical actions in order to get the next bonus.
The lack of communications and poor relations between some key players and regulators in UK, Japan and Singapore are also important issue which needed to be solved.
And now we are finally came to the most important reason of the Bearings Bank collapse which is also influenced the Leeson actions. The obvious thing here is the huge lack of internal control (managerial, financial, operational control): weak internal audit, reporting lines, segregation of duties, and confusion of managers.
In 1994 internal audit actually identified the weaknesses in the risk management structure and controls system which were seen within the BFS operations. But in response there was no reaction at all by Barings management.
The matrix-based managerial system is quite effective in many companies. But within the Barings Group, the operation of the matrix-based reporting system made responsibility for oversight of his activities ambiguous and ineffective in practice, as soon as he actually needed to report through a different management lines. And it actually seemed like nobody carried responsibility for monitoring Leeson’s activities in Singapore. But in fact, several managers were in charge to provide monitoring for his performance. Somehow we can call it like managerial confusion of responsibilities which resulted in poor control when each person thought that someone else was ultimately responsible for Leeson’s activities. But honestly speaking, they just didn’t do they job properly letting Leeson do whatever he wants.
Another point of internal control we are going to consider is a lack of segregation of duties or lack of separation between the back and front offices within BFS. Leeson, the general manager of the company was in charge for both sides of trading operation, and thus easily controlled it without any intervention. It was really convenient for him to conduct unauthorized trading and at the same time manipulate the number and details of the transactions he had engaged in, concealing them from Barings management. He used secret accounts to cover losses arising from unauthorized transactions.
According to the case, Barings Bank followed the low-risk or risk-avoidance strategy which by its own can’t bring high level profit. It seemed like managers just enjoyed high profit until it was too late whereas they needed to realize that the profit should have been relatively moderate. Simply speaking the management just failed to make relationship between risk and return. And from this point another important thing flows is the lack of information, as soon as the management didn’t understand what was going on so they couldn’t make a proper assessment.
Lessons from the case and recommendations
There are a lot of examples when financial institutions and not only suffer from insufficient internal control. But every situation is unique and from this case we have to take some useful lessons in order to avoid the repetition of Barings Bank story. I set up the list of recommendations but it would be better if we call them just steps that could have prevented Barings Bank from collapse. So they needed to build right motivation or incentive system aimed to efficiency of the company, different from monetary motivation. Develop and promote strong corporate culture. Because we know culture is really powerful control system. Management teams have to understand clearly the businesses they manage, because from the case we know that actually there were a lot of people on good positions with no experience in that particular field and without relevant background. Segregation of duties is another point we need to focus at because we need clearly distinct back and front office operations, because if like in the case one person in a charge of two divisions so this person can easily can go out of control. Relevant internal control is needed, internal audit and top management had to work together, identify significant weaknesses and resolve them as soon as possible.
Conclusion
In the end of analysis I’m just going to summarize the case and its consequences. So, Leeson reported false information for his managers which brought Barings Bank to collapse in order to cover his speculations, and it all happened because there was no monitoring provided from managers accounted to observe his operations. Lack of the internal control played the crucial role in the companies’ future life. Another thing is low-risk strategy which was the one and only for Barings Bank didn’t match the behavior and outcome they got. The lack of communications between regulators in different countries they have operated was another problem. Thus, Barings Bank collapsed but it wasn’t affected by one of those reasons it became the result of those problems combination. As a final statement I want to add that Leeson was convicted of fraud and sentenced for six and a half years, and Bearings example should have become a lesson for financial institutions all over the world. But you should keep in mind that every case is unique, every company has their own problems so we can’t prevent every failure.

References 1. The Barings Collapse (A): breakdowns in organizational culture and management 2. http://en.wikipedia.org/wiki/Barings_Bank, Wikipedia