Saturday, July 14, 2012

Management Owns the System -- Employees Own the Work

Who's accountable and who's responsible for the mistakes of employees? Largely, their managers.  Employees are accountable for their own work. Their managers are accountable for the system in which they work -- the systems, incentives, internal controls, etc. that make up the company's work processes. The most recent bizarre case of a work process failure is the JP Morgan trading loss of (estimates vary) somewhere between $4.4 billion and $9 billion. Can you imagine? Estimates in tenths of billions of dollars? Most of us would be happy with that roundoff error as net worth.

OK, here's the question posed as a survey on Yahoo Finance this week: "Do you think it's fair for companies to "claw back" payment from employees who lose money for the company?" Upon voting, I was astonished to discover that the voting was almost 2 to 1 "Yes" vs. "No".

Are you kidding me? Every company has ways its employees can lose money for the company. There's no successful company where employees aren't empowered enough to lose money. That's essential to making money, as well.  It's management's job to be sure the processes, approvals, and accountability measures are such that an employee can't lose more money than the company can afford. Of course those need to have enough latitude so the same employee can make money for the company, as well.

Had the question been something like "defraud the company", that's a whole different deal. Mistakes happen, and it's the company's work processes that prevent those from being overly expensive.

There's an old parable credited to Tom Watson, founder of IBM. Offered the resignation of an engineer who lost money on a risky venture for the company, Watson said, “You can’t be serious. We’ve just spent $10 million dollars educating you!”

Management owns the system. That includes work processes, information systems, quality checkpoints, approvals, etc. -- the way the company's supposed to run when things are going right and the corrective actions when things go wrong. Employees own the work -- adhering to the established work processes. Making, and sometimes losing, money accordingly.

So, when employees lose money for the company, it's on management's plate to decide whether that's within the boundaries set by the system or if a corrective action is needed to prevent that problem in the future.

Mistakes that cost billions (or millions) should have either of two consequences. If the result of fraud (which it's sounding more like the JP Morgan case may be), the employee ought to be not only fired, but also sued and perhaps also criminally prosecuted. The banking business has established a no-consequences culture on this front, and until fixed, we'll see more of the same behavior. If the result of a mistake, the company has to ask why its internal controls are so weak that a billion-dollar mistake could occur with no visibility along the way. That's a gaping hole in the system (owned by management) that needs to be plugged.

The next time a money-losing mistake happens in your company, ask, "What is wrong with our system of doing business that allowed this to happen, and does that need a corrective action?" Or, perhaps that money-losing mistake was within the bounds of the system of work, and, like Watson, you chalk it up to education.

If you're looking for consequences for the employee who don't adhere to established work processes, click here for a better idea than clawing back the cost. 

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Terry Weaver

Chief Executive Boards International
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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