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Delegation and Risk Management

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who controls what is going on? some practical and ethical problems of delegation more
wise leader
(Fred Goodwin)


rogue trader
(Nick Leeson)
When a bank delegates trading authority to a skilled individual or team, there is a considerable risk of abuse. Several banks have been seriously damaged by "rogue traders". But there are general issues of delegation and risk management involved, that go way beyond the trading floor, and apply in a wide range of organizations.

To explore some of the fantasies of delegation, we conduct a thought experiment. Fred Goodwin of RBS has a reputation as one of the most effective banking CEOs in the UK. How might he have dealt with one of the best known "rogue traders" in the banking world?

Fantasy >> Leaders Control People
Reality >> People Control Systems
Or Perhaps >> Systems Control Management

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Fantasy - Leaders Control People

veryard projects > risk > delegation > leaders

"Wise Leader"

(example Fred Goodwin)


"Rogue Trader"

(example Nick Leeson)
Knows and appreciates What Is Going On (WIGO).
  • panopticon - complete visibility of WIGO
  • accurate and powerful technological instruments - such as information systems
  • management by walking around (MBWA)
Appropriate and timely intervention
  • at the correct logical level (VSM)
  • indirect control by changing policies or management system
Bad behaviour - uncontrolled by head office
Deliberately obscures or distorts WIGO to obstruct or confuse head office control
Brought back under control by "wise leader".

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Reality - People Control Systems

veryard projects > risk > delegation > people



"Wise Leader" controls "Rogue Trader"
A controlling leader has three requirements
  • Monitoring instruments - reporting WIGO
  • Intervention instruments - altering WIGO by direct instruction or indiect policy
  • Feedback loop - confirming the effective of intervention on WIGO
Leader and Trader jointly control some trading system.
Both stakeholders need to monitor and control WIGO
  • unilateral intervention
  • collaborative intervention
For each stakeholder, the other stakeholders may be regarded as part of "the system", or as part of "the environment".
In most organizations, perhaps all, this is a complete fantasy. Of course, this isn't the whole truth either - but perhaps it gets a little closer.
more Stakeholders

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Or Perhaps - Systems Control Management

veryard projects > risk > delegation > systems

Monitoring Risk
Managing Risk
Tools for Risk Management

Risk profile

Risk is an aspect of WIGO in relation to some value system.

A large system (such as an enterprise) has an emergent risk profile, which changes over time.

Bearing limit

Each subsystem has a bearing limit, which represents the risk it is able to carry.

An event in the operational system (or elsewhere) may alter the risk profile, or take some part of the system beyond its bearing limit.

Preemptive controls

The risk system imposes policies on the operational system, thus inhibiting unauthorized changes to the risk profile.

Hedging controls

The risk system generates a set of prior transactions intended to maintain a planned balance of risks.

Reactive controls

The risk system responds dynamically to changes in the risk profile.

Modelling Tools

Risk identification and evaluation
System structure (e.g. VSM).
System dynamics.

Monitoring Tools

Information collection, storage, processing and dissemination.

Business Intelligence

  • Detecting known patterns of risk
  • Developing emerging patterns

Management Tools

Policy Management.

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Page updated November 18th, 2003
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