Many of the major disasters that afflict large corporations are not the result of economic causes but the consequences of really bad decisions made by individuals. From the London Interbank Offered Rate (LIBOR) scandal to fraud, insider trading and even the Global Financial Crisis (GFC), the root causes are people and the mistakes that they make.
The fact that humans are not very good at making decisions has been brought to our attention by behavioural psychologists, for example Daniel Kahneman, author of the bestselling book Thinking Fast and Slow. But why do people make bad decisions? Because we are human! We are all beset by biases and internal conflicts of which we are often unaware.
Neuroscientists have shown that we are innervate optimists, more often than not underestimating the risks in new ventures. And we are tribal, we tend to go along with the group, fearful of being ostracised for being out of line – so called groupthink.
Many of the disasters that have befallen the corporate world have resulted from a toxic combination of overconfidence, groupthink and an unhealthy belief that we can overcome any obstacles thrown at us, so-called ‘illusion of control’.
People change. The fresh-faced graduate recruit, who passes interviews with flying colours, turns into the senior manager jaded by years of corporate warfare and personal worries.
Research into white collar crime shows that the most likely criminal is in fact the guy (and it is most often a guy) in the corner office, respected by all but harbouring deep resentment against the world in general and the firm, in particular.
People decide to do something that is illegal, unethical or unacceptable, because in their minds they justify it. Leon Festinger, originator of cognitive dissonance theory writes, “Humans are not a rational animal, but a rationalizing one”. In other words, we lie to ourselves.
Risk management is a relatively new discipline in business and one of its emerging areas of concern is that of ‘people risk’ or the risk that people (at any level) can make bad decisions as a result of personal or group biases. This is also called ‘conduct risk’.
Risk managers are experts at identifying opportunities for bad decisions but they are not experts in people or culture, tending to be technical types more at home with spreadsheets than human interactions. However, risk managers are starting to embrace the concepts of behavioural science to understand how bad decisions are made. But they don’t know what to do with their findings.
Why does HR need to become involved? Because bad decisions are made by people, not organisations, and HR are experts in people. There is a growing need, therefore, for HR and risk management to talk to one another. Both have a lot to learn but together they can add real value to the corporations that they lead by helping to manage one of organisation’s greatest risks – people.
This article is an edited version. The full article was first published in the September 2015 issue of HRMonthly magazine as ‘We all make mistakes …’. AHRI members receive HRMonthly 11 times per year as part of their membership. Find out more about AHRI membership here.