The mire that the Hin Leong organisation have got themselves into has turned the spotlight, yet again, on conduct in the commodity trading business.
The world of commodities is no stranger to instances of losses of heroic levels, going all the way back to Kloeckner in the late 1980’s and continuing through (amongst others) MG, Sumitomo, Enron, Amaranth, China Aviation etc., where bad conduct has been front and centre.
The causes to which the history of “blow-ups” is ascribed are plain to see in hindsight, even if lessons seem never to have been learned. Position sizes in many cases overrun risk appetite as scant attention is paid to limits that are relevant to the avoidance of “ruin” (Fink and Feduniak’s 1987 text “Futures Markets” sets out the theory of the possibility of ruin and is as relevant today, as it was then). Firms find themselves in unrecoverable positions consequent on fraud, on organisational failings or on leadership issues.
Fraud or other malevolent action is the hardest to mitigate. Often fuelled by greed and the allure of worldly goods, perpetrators rarely stop to “consider the lilies”. The “run with the fast guys” opportunity has been shown to be able to turn even the most sensible of heads.
Organisational imperfection is another source of unanticipated, often terminal, loss making. By its very nature, trading in fast markets requires individual traders to be able to turn on a sixpence and this requires significant latitude having been delegated to those on the market interface. If objectives are unclear, reporting lines blurred, operational and risk controls uncoordinated and people poorly trained, then issues are likely to arise.
Perhaps, though, the most common cause of calamitous situations comes from a failure of leadership. They say a fish rots from the head down. Too often it is the loud blowhard who makes it to the top and then rules by fear. Perhaps it should be unsurprising, but it is easy to observe instances where employees, fearful for their jobs, go along with the edicts of a dictator masquerading as a leader. Covering up becomes easier than “fessing up”, until it is too late.
Greed, incompetence and fear of a flawed leader then, are the cultures which result in conduct unbecoming.
Culture and conduct have, rightly, emerged at the forefront of good regulatory practice, most especially since the financial crisis of 2008+. The right culture begets the right conduct. Culture is very simply a way of doing things and there is a right way and a wrong way separated by a clear line.
The right culture is the preventative medicine to counter the tendency to human imperfection and it is expressed in good conduct – integrity, honesty, decency and humility (humility especially as the offset to the tendency for overbelief in one’s ability) represent a good start – and, along with a counterpoint of clear organisational objectives, clear lines of authority and responsibility, effective verification processes and controls (all regularly independently tested and renewed), the firm and the industry can invite the trust and respect of its employees, clients and wider stakeholders.
The right culture and conduct begin and end with leadership excellence. While there will always be bad actors to be weeded out and while no set of processes is completely watertight, these are the factors that will reduce the probability of financial embarrassment or even ruin.
The optimistic Scottish Enlightenment philosopher, Francis Hutcheson averred that people “delight in performing benevolent actions” (so clearly seen these days in the selfless actions of those on the COVID-19 frontline). Clearly, there is more than mere duty going on here. Imbuing the right culture should not be hard, given the proper focus, and it must lead to employees gaining greater satisfaction in their working lives. Succeeding in business without reverting to nefarious activities is the mark of the real winner and is a source of great pride.
More than ever, industry and big business operating in high value markets need to be trusted. A laser focus on the two C’s can only help.