Thursday, November 3, 2011

MF Global and productive antagonism

MF Global’s collapse is sad and disturbing; sad because it represents an ambitious man’s failure, disturbing because it highlights the fragility of financial institutions. But I want to draw attention to one only lightly remarked upon feature of the story. It was noted that when Jon Corzine, the CEO of MF Global was at the investment bank Goldman Sachs, traders were held in check by a vigorous risk management division which assessed the overall riskiness of the firm’s book of business. The two groups, risk managers and traders, were antagonists but deliberately so.

There is an underlying principle of organization here. It is common today to praise organizations and groups whose members “bust silos” and break down barriers, all in the service of creating one great team. But as the Goldman Sachs case suggests, checks and balances and the resulting antagonism these create, are important to the success of the firm. Indeed, such productive antagonism can result in overall better performance. The trader who is constrained by the risk manager must be all the more creative as a trader to generate profits for the firm. The risk manager who checks creative traders must be all the more creative in developing controls and measures for monitoring traders. It is not unlike the way in which one person’s tennis game improves when he plays against a better player. The antagonism raises the level of his game.

One question is; what is the nature of the setting that can develop and contain this productive antagonism? The description of MF Global suggests that Jon Corzine was an oversized presence in the firm, that as an ex-Goldman Sachs partner he was given great latitude to develop and implement the firm’s trading strategy. In other words, he “was the firm.”  It is likely that his power diminished how psychologically authorized his subordinates felt. They were willing dependents on his judgment and had less reason to exercise their own. This suggests that the antagonism that facilitated Goldman Sach’s success was weakly expressed. The tension between risk and speculation was held and managed-- or not-- in Corzine’s mind. This tension was in turn held hostage to Corzine’s personal fantasies, for example to return to the power game after his election defeat in the New Jersey gubernatorial race.

If true, this suggests that owner or founder-dominated firms are less able to create the productive antagonism required for success. This may be one reason why a start-up firm’s venture-capital investors frequently replace its founder as the enterprise grows. The firm must “grow up” and become an institution. The firm cannot afford to be the projective outlet for the founder’s fantasies. You need an institutional framework to sustain productive antagonism and the resulting checks and balances.

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