• 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.
 
 
by Carmen Nobel

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 the senior editor of HBS Working Knowledge.

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