When viewed in light of this week’s readings, a front-page article in yesterday’s New York
Times that examined the internal discord at JPMorgan Chase—a company known for its risk
management skills—was remarkable in the sense that a group of well-seasoned executives’
failure to adhere to basic tenets of management resulted in a multibillion-dollar trading loss.
Many of the scientific management principles set forth by Henri Fayol and Frederick W.
Taylor—or rather, JPMorgan Chase’s violations of them—can be applied to the behind-the-
scenes chain of events that led to the company’s trading disaster.
Ina Drew, the senior banker who has been blamed for the mishap, had been frequently absent
from the office after contracting Lyme disease in 2010. Her absences allowed, as the article
states, “long-simmering internal divisions and clashing egos to come to the fore.”
Fayol recognized that individuals or groups who serve only themselves are harmful to the
interests of their fellow employees and the interest of the firm in general (Wren and Bedeian,
2009). At JPMorgan Chase, Drew’s deputy in New York was at odds with Achilles Macris, her
London deputy who was behind the losing bet. The mounting tensions among executives left
traders “feeling whipsawed.”
Fayol’s twelfth principle, stability of tenure of personnel, recognized the need for orderly
human-resource staffing and establishing provisions to ensure that a firm’s employees possessed
the requisite abilities for the work to be performed (Wren and Bedeian, 2009). One wonders
whether Drew had appointed competent staff to “run the shop” in her absence. At one point
Althea Duersten, the executive who oversaw North American trading, called one trader into
her office and told him that he would report to her instead of Macris. In early 2011, Irene
Tse, formerly of the hedge fund Duquesne Capital Management, took over for Duersten. As
a newcomer to the company, Tse was less equipped to go up against Macris, according to the
Times article.
Taylor stressed the importance of the human factor in scientific management. A JPMorgan Chase
trader reported that as a manager, Drew “enjoyed the confidence of her subordinates”; a former
senior executive described her as a “coolheaded and an excellent manager.” However, when
Drew returned from sick leave, she moved upstairs to an office among senior executives instead
of one floor above the trading desk. As a result, she became less hands-on with the trading book
than she had been in the past (Wren and Bedeian, 2009).
Drew is expected to resign from JPMorgan Chase. As public distrust of financial entities
continues to prevail, the lack of adhesion to management principles presented in this article
makes one wonder how a company with a reputation for managing risk could create a trading
loss of this magnitude and jeopardize client trust.
Link to New York Times article: http://www.nytimes.com/2012/05/20/business/discord-at-
jpmorgan-investment-office-blamed-in-huge-loss.html
Silver-Greenberg, J. & N. D. Schwartz (2012, May 19). Discord at key JPMorgan unit is faulted
in loss. New York Times, A1.
Wren, D. A. & Bedeian, A. G. (2009). (6th ed.). The Evolution of Management Thought.
Hoboken: John Wiley & Sons, Inc.
Interesting post, and a timely one at that. With the problem of Tse's short tenure at the company being a factor in working with Macris, it got me wondering about the time it takes an employee to "ramp up" and be able to contribute. Does it vary with the level of the employee (i.e. executives can jump right in, rank-and-file take years)? I wonder if there are better ways for organizations to ease this transition, particularly in industries where freelancers jump between organizations more rapidly than ever before.
ReplyDeleteVery interesting post, Christina. It seems that, because of her absence, Drew was not successful in any of Fayol's 5 elements of management: planning, organizing, command, coordination, and control. It is amazing that a simple move upstairs can have dire unintended side effects for an organization.
ReplyDeleteAfter reading this NYT article, do you think this crisis could have been avoided? Are there any simple changes you would have implemented?
Fayol’s ideas on participative management came to mind upon first reading of the Times article. He suggested that all department heads should contribute their experiences and recognize the responsibility inherent in executing an action plan. Participative management would ensure that no resource was neglected and promote managerial interest in a firm’s future success (Wren and Bedeian, 2009).
DeleteUnity, continuity, flexibility and precision are characteristics of a good action plan and would facilitate the efficient use of a firm’s resources (Wren and Bedeian, 2009). Personnel issues aside, I think that JPMorgan could have avoided the situation described in the article if an effective action plan were in place prior to Drew's leave of absence.
I have long wondered how a flatter organizational structure would impact a large bank like JP Morgan Chase. In moving Drew physically distanced herself from the other staff. It would seem in this case it was shown that slowing the network definitely has a negative effect, but does anyone know of an example of a investment bank implementing a network-based or similar flat organizational structure?
ReplyDeleteChristina:
ReplyDeleteI really enjoyed your post, which I found to be an excellent and well-written contribution to the class discussion. Please consider my criticisms a bit of academic exercise aimed at your chosen article -- not at you.
Still, I thought it would be fun to play devil's advocate by suggesting that we've made an unfair punching bag of Ms. Drew. Let's review what the New York Times article tells us about her:
-Drew had an outstanding record of performance at JPMorgan Chase;
-Drew had earned the respect and trust of her colleagues;
-Drew had proved herself in crisis situations;
-Drew had a knack for getting normally incompatible people to work together;
-Drew had good instincts;
If we could say that JPMorgan made risky bets that originated in a department run by a bad manager named Ina Drew, this would be an open and shut case. In reality, JPMorgan made risky bets that originated in a department run by an excellent businesswoman who was not adequately supported in a time of medical crisis. There were other C-suite executives at JPMorgan who received reports of the trading floor activities. And while I agree that something so seemingly innocuous as an executive sitting away from her subordinates on another floor can have far-reaching and unforeseen consequences, we should remember that some of the most egregious risky bets were made by Drew's deputy in far-away London.
If we wanted to defend Drew in this manner as having exhibited Fayol's elements up to the time of her medical crisis, where could we place the blame instead? Should we assign blame to her superior, who received trade reporting in Drew's absence and could have performed or delegated Drew's responsibilities? Or do we blame Drew's subordinates (all high-level executives/managers) for running amok and taking risks while she was on leave?
Hi Leslie,
DeleteThank you for your insight. It was interesting to me that the traders cited in this article all spoke on condition of anonymity. It is understandable that they would want to protect their jobs, but I, like you, tried to play devil's advocate in my interpretation of this article, because neither Drew nor many of the key players blamed for the financial mishap had a chance to tell their sides of the story. With that in mind, I tried to look at this article from a communications management point of view as an example of how, in this age of corporate transparency and the immediacy of social media, internal discord can eaaily be made public.