White Paper on How Leadership Development Can Address Financial and Credit Crises

How Leadership Development Can Address Financial and Credit Crises [Dec 2007]

Executive Summary
The current credit market crisis reveals a basic problem in leadership development, that is, the lack of programs to develop business acumen, particularly for the executives who are charged with the responsibility for risk, and especially the quants. It is highlighting the vulnerabilities of executives in both financial services companies, and companies generally in assessing and predicting levels of market and systemic risk. This White Paper from Perth Leadership Institute shows the link between behavior and financial risk and how leadership development programs can incorporate mechanisms to address it.

The vast majority of leadership development programs are based on either or both personality and competency assessments and approaches. However in neither case does the approach have any direct link with financial and market risk and market outcome. Research shows conclusively that personality assessments are not correlated with leadership outcomes. This is why most financial services companies tend to hold these approaches in low esteem, since they do not address the central issues of financial risk assessment and prediction.

Traditional approaches do not attempt to assess or develop business acumen. They tend to equate technical expertise and academic intelligence with business acumen, a very basic error. They tend to focus on a high level of learned and book knowledge as against the intangibles of business acumen and real-world outcomes. As a result, leadership development programs, particularly but not only, in financial services companies have led to a divorce between market risk and executive behavior, as distinct from executive learning and credentials.

This paper draws together two strands which many leadership development professionals and business leaders might not have seen to be connected, namely market risk assessment/prediction and leadership development programs. The link is indeed a tight one. Modern scholarship and recent developments in behavioral finance are opening up new ways to think about this connection and how we can use this knowledge to actually alleviate the potential for future problems.

In order to address this problem, companies need to partly decentralize the organizational structure for managing risk and move from the current Boffin model of risk, in which a centralized, technical approach is adopted, to a partly decentralized model, which the White Paper terms the Rug Merchant Model, in which business acumen rather than business education or mathematical skills becomes the key qualification for being a member of this broader group that manages risk.

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