21 Nov 2011  Executive Education

The New Challenge of Leading Financial Firms

Running a financial organization, never easy to begin with, has quickly become one of the most difficult leadership challenges that an executive can undertake, requiring mastery of talent management, change management, and ethics. An interview with Professor Boris Groysberg, who teaches a new HBS Executive Education program on the subject with Professor Paul M. Healy. Key concepts include:

  • Leading a financial firm is very different from leading any other kind of institution, requiring deep skills in a multitude of areas.
  • Financial firms make expensive bets on top talent, but often make hiring decisions without enough deliberation.
  • Risk management, strategy for growth, and competing in emerging markets are especially critical for financial firms to get right.

 

A worldwide economic crisis. Intense scrutiny from board members, customers, and government regulators. Expanding global markets. Public protests aimed squarely at your industry.

Running a financial institution, never easy to begin with, has quickly become one of the most difficult leadership challenges that an executive can undertake, requiring mastery of talent management, change management, and ethics.

"The business today is much more complex than ten or twenty years ago"
—Paul M. Healy

"The business today is much more complex than ten or twenty years ago," said Harvard Business School Professor Paul M. Healy in a recent interview. "The firms in the business have much more complexity in the types of the risks they are managing, in the types of diversity of the businesses they are in, in terms of how global they are."

Realizing that the headaches and rewards of these leaders are somewhat singular to their field, Healy and colleague Boris Groysberg have created an HBS Executive Education program called Leadership in Financial Organizations. Combining a mix of case studies, lectures, and interactive exercises, the program is designed for high-level managers or executives at banks, insurance companies, asset management or private equity firms, or hedge funds. Groysberg and Healy will teach the program in England, in India, in China, and on the HBS Boston campus throughout 2012 and 2013.

"Leading a financial institution is very different from leading any other kind of institution," says Groysberg. "If you become a leader in a manufacturing company, for example, all you're basically going to have to do is manage. When you become a leader in a major financial institution, you must do several major things and do them really well. If you're a trader, for example, you have to trade, you have to lead, and you have to manage. You have three jobs."

One way leadership of a financial firm differs from others is in the emphasis that must be placed in recruiting and retaining talent.

"It always fascinates me how an investment banker who has spent months and months and months analyzing a particular deal between two companies can spend only a few minutes making a hiring decision for his team, when the firm is sometimes paying millions of dollars in guaranteed compensation," Groysberg says.

Hiring and managing

Talent acquisition, development, and retention is a key topic for financial firms that Groysberg raises in his new book, Chasing Stars: the fact that stars often suffer a decrease in performance when they move from one firm to another. Too often, managers fail to consider that a top performer's success may have been due in large part to the culture of the previous organization; hence, the type of person who thrived at Goldman Sachs might flounder at Credit Suisse.

But there's a broader reason for performance declines: banks often don't spend much time on training and development, a symptom of a general culture of impatience in the financial world.

"Hiring is not an event. It's a process"
—Boris Groysberg

"Hiring is not an event," Groysberg says. "It's a process. When that person arrives Monday at eight o'clock, it's just the beginning, but companies often spend zero time in integrating talented people. It used to be that we'd let people take some time to learn the culture of a new organization, but it's not like that anymore. Our expectations are immediate: 'We've paid you a lot of money, and you've been here an hour already! Are you doing something useful yet?' If the twentieth century was a learning century, then the twenty-first century is a performance century."

In considering whether job performance is a matter of each person's innate natural ability or a matter of how well a company trains its new employees, CEOs often place too much weight on the former, Groysberg argues. "Even the best and the brightest can benefit from a nurturing environment," he says. "You can turn a talented person into a superstar if you combine nature and nurture."

That said, he adds, in the program there will be much discussion on compensation: short term versus long term, fixed versus variable, and how to disperse compensation fairly among the firm.

Growth strategies, risk management, and globalization

Other issues of importance to the leader of modern-day financial organizations to be discussed in the program include:

Growth strategy. One key question financial leaders must decide is whether it is better to grow the organization organically or via mergers and acquisitions. "I think people would be surprised by the batting averages of most institutions," Groysberg says. "So, so many acquisitions are not successful."

Risk management. Even a cursory reading of recent headlines shows how vulnerable financial firms can be in this interrelated world, making risk management strategies crucial to success. "We'll spend time talking about leading through crises and about what we have learned from recent events," Groysberg says. "We'll look at how we can deal with it if we have to go through another crisis. Considering what's happening in Europe, it's a good time to start doing that."

Globalization. Financial leaders must realize the increasing importance of doing business not only in New York, London, and Tokyo, but in the emerging markets of India, China, and Brazil as well. "I think many companies are realizing that their track record of going outside their home country isn't great, because, to be completely honest, not that many of them have inclusive cultures. It might make sense for someone who works in London, for instance, to attend our program in Mumbai. It will let them be in a different environment and build different relationships."

About the author

Carmen Nobel is senior editor of HBS Working Knowledge.

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Comments

    • Chirag Swamy
    • Manager Pre-Sales, Animika Studios

    I believe that one of the biggest challenges that Financial institutions face today is a 'trust deficit'. A leader should ideally look at regaining public confidence for his firm and this can be achieved through concentrated, innovative marketing and advertising efforts. The bad PR that they have constantly been subjected to since 2008 needs to be reversed at the earliest.

     
     
     
    • Zulkani SAHIN
    • after sale manager, PSA Peugeot Citoren

    I think that a very important factor among many is to obtain a cohesion from peers to indicate them the direction to take (vision, goal). What makes the difference is the way how people in an organization have been involved and felt essantial in the strategy will create a strong spirit to go forward, even in very difficult situation.

     
     
     
    • Anonymous

    Leaders have to fight in many fronts. To cite a few: Financial services are becoming complex and more regulated. Integration of major economies is adding exchange risk considerably. Provison requirements are increasing due to International Banking norms.

     
     
     
    • Anonymous

    Indeed, modern financial institutions have become impatient organisations and the industry's employment practices are clear evidence of this impatience as mentioned in your article.

    Perhaps the fast-moving and ever-demanding environment of financial markets have influenced the industry through time. In your view, what is your thought on solving the imbalance between expectation and results (that may be the cause of impatience) in the industry?

     
     
     
    • Anonymous

    I agree that hiring and staff development is a critical process in financial organisations. A close analysis really confirms that the difference between firms is not so much its assets but its staff.

     
     
     
    • Ravi Parsi
    • Director, Kantech Engineers Pvt. Ltd.

    The present is very complicated world with greater integration of cultures, different styles of managing, different needs to be fulfilled and different regulators getting in the cross hairs of everybody in the management of organisations especially for financial firms and future will become even more complicated.

    So the need for financial firm is more to depend upon to do what it knows to do and encourage the leaders & their teams to stick to there own knitting. This will mean sometime your quarterly numbers will not be what the stock market wants!!!

    This is the very great challenge in managing financial organisation to remove the focus from quarterly numbers to its main reason for existing in the financial world.

    The complicated world will throw up newer ways of doing looking very attractive to make money in a difficult world. The challenge here is not to pressure the teams to take un-calculated risks without understanding the nature to new ways of doing. This is again possible if the focus is not on Joneses making spectacular quarterly numbers by employing to newer ways of doing but to support & encourage the team to learn and consider risks before taking the plunge and supporting them if they make mistakes!!!

    A very difficult job indeed!!!!

     
     
     
    • shantha
    • Director/Lecturer, Agape International

    One of the greatest challenges is the management of emerging risks in a new business paradigm. Some financial institutions, especially in emerging economies, still consider traditional borrowing and lending as their business. For example, identity fraud and hacking have become major risk factors and thus our risk models should also change accordingly. Large investments in "managing new risks" is likely to increase the cost to income ration further.

     
     
     
    • Suhas Bindu
    • Consultant, NA

    In my opinion, the most important challenge is to prioritize and focus on the business objectives.As a matter of fact, the firms must stay away from the greed of the business and lucrative opportunties without proper exercize. Working on too many fronts in the financial world of random behaviour could hit the firm at a later stage

     
     
     
    • Johanna Lubahn
    • Managing Director, Cohen Brown Management Group

    I agree with the complexity of managing and leading financial institutions as I work globally in this industry. The other challenges are finding the best practices, keeping them consistent in all areas and fast tracking changes that need to be implemented. Not easy when at the top of the structure but doable as evidenced by some CEO's who understand the power of their people, know how to engage them and motivate them around the vision

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    The level of responsibility cast on financial companies is very high as they deal directly with the money of their customers. They have to possess exemplary acumen to ensure their acceptability by acting cleanly. Their misdemeanours come to the fore fast and they cannot live through dubious means for long. Responsibility is also cast on them on choosing right borrowers who have got to repay come what may. We need performing assets only and bad debts would come as sharp killers. This holds generally for other organisations too but since a financial firm - a bank for instance - lends its depositors' money, it is to be ensured that the deposits are not frittered away for these have u8ltimately to be repayed. Strong integrity would deliver proper results to financial companies.

     
     
     
    • Anonymous

    The industry has not been lead too fully understand the "threat" of its competition and with insufficient "risk management" processes. Before we can "fix" it the hard truth about the situation needs to be understood and told. We must return to the basics and teach this next generation the true valule of how to evelate and underwrite risk.

     
     
     
    • Dr.Banshi Lal Srivastava
    • Ex GM Bankof Baroda & Currently Dean Management, L.N. Group of Institutes,Mumbai

    Regular Simulation of Stress Testing (based on very well defined and tough parameters taking care of risk aspects ) by any financial institution especially when the global scenario turns merkier is most important. With sudden change in the external environment and incumbent impact becomes capable of spoiling fortune of any robust financial compainy. Secod comes 'value systems' which is inculcated by the Leader of the organisation. If both these aspects are there all other becomes subsidiary and could be retrofitted automatically. In developing economies like India if banks could survive the onslaught of 2008 global melt down it is only beause strong prudential norms and compliance. Many privately financial companies meet dooms when they loose their value system and becomes greedy. This is exacerbated equally by greedy clients looking forward astronomical higher returns not possible under given economic conditions ..

     
     
     
    • Mashooque Ali
    • student, karachi university sindh pakistan

    sir ur essay is according current situation of world/globilization.....nice sir thanx