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Hire at Your Own Risk

Newsletter • volume 2 • number 1

The financial world has recently been rocked by a series of events that underscore both the risks investors run in the marketplace and the risks management faces when making hiring decisions. Unfortunately, the same names ­ Robert Citron, Richard Jett, Charles Keating, and Richard Leeson ­ offer an object lesson in both arenas.

Citron is the former Orange County, California treasurer who bet that interest rates would continue to fall. When they didn't, the county went bankrupt, and investors lost $1.7 billion. Richard Jett of Kidder Peabody generated more than $350 million in fraudulent trading profits; his company was forced to declare a $210 million loss and was later sold off by General Electric.

A few years ago, the now-infamous Charles Keating was sentenced to prison for his role in a savings and loan scandal that brought banks to their knees and cost United States taxpayers billions of dollars. Finally, in the most recent financial debacle, twenty-three-year-old Nicholas Leeson lost $1 billion on futures trading which led to the collapse of the venerable London firm, Barings PLC.

In the past few months, analysts have tried to identify exactly what went wrong in these cases, and although opinions vary, almost everyone has pointed a finger at the increasingly sophisticated nature of computer-generated trading. At the same time, however, management ­ particularly at Barings ­ must also shoulder some of the blame. After all, Leeson was given nearly unlimited power and plenty of opportunities to use it.

But in the long run, the responsibility rests with the men themselves. For some reason, qualities that should have earmarked them for success ultimately led to their downfall. Decisiveness turned into bad judgment, ambition into greed, and self-confidence into arrogance. Determination became blind stubbornness.

The question that naturally arises is whether or not astute interviewers might have spotted potential trouble during the hiring process. At the very least, it seems evident that prospective employees should be judged not just on the basis of their individual qualifications, but also on how well they will fit into a particular corporate culture.

If, for instance, a loosely-structured organization operates in a volatile market with few organizational restraints, then it is imperative that employees have both integrity and sound judgment about risk. One good way to measure a risk profile in a candidate is to ask the question, "When you gamble, what do you do when you start to lose?" There are really only two possible answers: "Cut your losses and get out of the game (market)" or, "Double your bets and keep gambling until the game (market) turns."

Confronting individual candidates like Citron and Leeson with this kind of question might have helped reveal unexplored aspects of their characters. They both kept in the game and increased their bets. Clearly, in today's uncertain business climate, managers need to know more about prospective employees than their skill and education levels; incorporating character-revealing questions into interviews could make hiring less of a gamble.