The Next Risk: Too Big to Manage
Think of what happens when an individual, or group of individuals, set up a business. People demonstrating the "enlightened self interest" articulated by Adam Smith and David Ricardo, and brilliantly updated by Professor Milton Friedman in the 20th century, put up their own funds to undertake commerce which, they hope, benefits them in both monetary and non-monetary ways and as a bonus also benefits society.
It would be unthinkable that in such a business, the founders would do anything to jeopardize their company's reputation. That would scare off customers and hit their personal bottom line. And as they grew the company, they would take care to ensure that new hires more or less shared their vision of customer service and firm brand quality.
Now imagine that that same company has grown over many years, decades and even centuries into a global behemoth that employs upwards of 150,000 people. It's still doing the same thing – be it processing food, building cars or providing banking services – but now there is no one group of people, let alone one individual, that knows everything about what is going on in the firm, or whether new hires share any common vision or care for the company's reputation.
(Watch More: Robert Rubin on 'Too Big to Fail' Risk)
Welcome to too big to manage. Forget too big to fail, as this column has noted for a while now the real issue is too big to manage. The Board and executive management committee are so far removed from the reality of customer interaction, with layers of management in between and no-one with a genuine connection between their individual salary and the reputation of the company, that the company itself loses direction and focus. And there is nothing that senior executives can do about it without a bottom-up and top-down reform of employee attitudes and approach.
The wholesale financial markets in the era before globalization and electronic trading were mainly comprised of smaller companies and many were partnerships. The agents were also the owners. But irrespective of the governance structure, the firms themselves were manageable. It was less likely that senior managers would be unaware of what was taking place in their firm's name, whether this was in the head office or a far flung overseas location.
(More on CNBC.com: Best Corporate Management Practices)
The board and senior executives will always talk the talk, and emphasize the motherhood and apple pie of customer service and stakeholder engagement, but in reality for large firms they don't actually have a clue what is going on in the company's name. it becomes much easier for the one or two bad apples to infect the overall culture.
Is it ever more regulation we need? Or a realization that some companies are just too big to manage?
Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons Ltd 2012).