Barings Collapse

1. Describe a typical employee of BB&CO and BSL. How was Leesons

behavior driven by the BSL culture?
A typical employee of BB&CO & BSL generally has the following characteristics: profitdriven, efficient & independent/High autonomy in decision making
BB&Co came from public schools/Oxbridge whereas BSL employees came from every
kind of social and educational background as their main hiring criteria were personality,
self-assuredness and drive/desire to make money. Their drive to make money was fed
by the generous bonus scheme which allowed 50% of BSLs pretax profits to be paid out
as bonuses
BSL highly prioritises the idea of profit-making

Because of BSLs strong priority on profit-making, Leeson as an employee of BSL

was driven to align with that goal, driving him to resort to ways to meet BSLs
expectations
This shows that the conformation to BSL culture influences Leesons behavior
Leeson aims to be the top employee of a highly prestigious company (BSL) &
hence uses unethical ways to achieve his goal
Despite his unethical trading, Leesons trading is a major contributor to Barings
overall profits -> Leeson named Barings Superstar -> meet BSLs expectations
anyway

Barings controls were generally informal rather than procedurally rigorous.

They are able to trade and speculate without authorization, and hence without
checks in place, can incur huge losses before anyone notices and it is too late. With a
lack of supervision, he was able to seek funds to cover his activities which in turn
further compounded his losses.
In spite of this, they were regarded as effective. However, Barings' senior
management was not generally detail-oriented, and thus not prone to close supervision,
careful analysis and fast follow-up. As a result, they were not fully aware of the activities
far down in the organization, and far a-field from London.
Given the high autonomy given to Leeson, he was able to spearhead his own
transactions without authorities checking which led to his unethical actions at Barings.
As stated from Leesons biography, he saw loopholes in the organizational
reporting structure, the control mechanisms, and the companys information systems.
2. How did the formation of BIB add to the problem?
In November 1993, BSL was merged into BB&Co. in anticipation of a subsequent
initiative to form a Barings Investment Bank (BIB)
This led to various complications/conflicts because the two firms (BB&CO and BSL) had
markedly different organisational cultures. The merger was not easy and It was a
distraction right in the middle of Leesons tenure at BSL.
BSL was Barings own brokering subsidiary based in Asia, headed by Christopher Heath
and staffed by his team at Henderson Crosthwaite in May 1984. Under Heaths
leadership, an overtly aggressive culture was created at BSL, which would prove difficult
to assimilate even years after his departure in 1993. Large numbers of employees within
BFS were brought up in the brokering world under his wing and maintained many of his

views. This exacerbated the cultural gap between BB&Cos conservative world of
merchant banking and the more opportunistic environment of brokering.
3. What are the problems with Barings matrix management system and how
did they contribute to the collapse of the bank?
The Barings matrix management system was generally informal rather than
procedurally rigorous

Barings senior management was also not prone to regular supervision of their
employees & subordinates, careful analysis & follow-up -> they were not fully
aware of the activities far down in the organisation. Due to this, with different
people to report to, there was an oversight as to who was responsible in looking
after Leeson, and this lack of accountability and monitoring allowed him to have
the freedom in carrying out his activities. Also, with his two roles in the front office
and the back office, he was able to carry out unauthorized trading and was in a
position to be able to cover these trades.
For the other banks in other countries (Bank of England), regulatory authorities
were very poor as well -> they sent more than the acceptable sum of money over
to Singapore to Leeson
All the inadequate follow ups (both in Singapore & in England) to Leeson resulted
in him escaping the responsibilities of his faults -> cause the ballooning of the
debts (88888 account started off with a loss of $20 million to $200 million of
unsettled trades)
A matrix management system is one where there is a multiple command-andcontrol structure where an employee can have dual responsibilities and two
superiors.

4. In your opinion, what banks nowadays should do to avoid possible

Barings collapse among them?
Banks should include more holistic values instead of just focusing on profitmaking, for e.g. profit-making, ethics, reliability etc -> this would ingrain positive &
ethical work culture in banks & prevent unethical actions from arising
Also, banks should always have regulatory practices in place. In Barings, the
regulatory authorities were inefficient. There was no authorities that were
responsible in doing rounded background audits & checks on the trades
Separate duties in the bank. Leeson was in charge of the dealing desk and also
had control over the back office operations, allowing him to falsify stuff when
reporting, and skipping critical regulatory and compliance requirements.
Senior Management must also be tasked with the responsibility to overlook large
& important transactions, and most importantly be responsible for their
employees & subordinates. Must analyse & follow-up transactions
Hire Professional External Auditors to audit the accounts in depth. For Barings,
the auditors only asked Leeson for the balance sheet when checking the validity
of the accounts (including the 88888 account) this was not an in depth auditing
practice

They should have a clear command structure and identify the hierarchy of the
company so that everyone is clear who they have to report to, and for the higherups, they are clear who they are in charge of. This creates an environment of
responsibility and accountability.