The Investor's Shelf — one book
The Dynamics of Organizational Collapse: The

The Dynamics of Organizational Collapse: The Case of Barings Bank

Helga Drummond
2008
T4 160 pages · about 2h 40m to read OL3272832Wgoodreads

Academic case study.

Summary

Helga Drummond, an organisational theorist, uses the Barings collapse as a case study in escalation of commitment, the process by which decision-makers continue investing in a failing course of action because they have already invested in it.

Her analysis applies to both Leeson and the bank. Leeson's initial concealment of a small loss committed him to further concealment, and each subsequent loss made abandoning the position more costly than doubling it. Barings' management, having committed to the Asian trading expansion and having received reported profits from it, had reasons to avoid examining the operation closely. Drummond argues that the standard explanation, which attributes the failure to inadequate controls, describes a symptom: controls existed on paper and were not enforced because enforcing them would have raised questions management preferred not to answer.

She draws on the organisational behaviour literature on escalation, on sensemaking and on the social construction of risk, and she uses documentary sources including the Bank of England report and the Singapore inquiry. The book is academic and written for organisational theorists rather than for practitioners. Its contribution is treating the collapse as a decision process rather than as a control failure, which changes what a reader should look for in their own organisation.

Key takeaways 7

  1. Escalation of commitment explains why concealing a small loss makes concealing a larger one the rational next step.
  2. Controls that exist on paper are not enforced when enforcement would raise questions management prefers not to answer.
  3. Reported profits from an operation give management a reason not to examine how they were produced.
  4. Drummond argues that attributing the collapse to inadequate controls describes a symptom rather than a cause.
  5. Ambiguity about who was responsible for supervising the Singapore operation was convenient for everyone involved.
  6. Organisations construct accounts of risk that make their existing commitments appear reasonable.
  7. Decision-makers deep in a failing course of action assess further investment against the sunk position rather than against alternatives.

Who should read it

Risk and governance professionals who want the Barings failure analysed as a decision process rather than as a control breakdown.

Where it sits in the reference 2

Companies
Philosophy

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