The Global Financial and Economic Crisis: Did HRD ...

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ADHXXX10.1177/1523422313508925Advances in Developing Human ResourcesMacKenzie et al.

Article

The Global Financial and Economic Crisis: Did HRD Play a Role?

Advances in Developing Human Resources 2014, Vol. 16(1) 34–53 © The Author(s) 2014 Reprints and permissions: sagepub.com/journalsPermissions.nav DOI: 10.1177/1523422313508925 adhr.sagepub.com

Clíodhna MacKenzie1, Thomas N. Garavan2, and Ronan Carbery2

Abstract The Problem. The Global Financial and Economic Crisis1 starting in 2007 and its resultant impact has called into question the contribution of Human Resource Development (HRD) strategies and practices to the crisis. With its primary focus on the development of human resources, it could be argued that HRD aligned itself too closely with the strategic goals of organizations, often times profit centric, and failed to provide leaders with the skills, knowledge, and values required to question the decisions made by organizations in the pursuit of profit goals and the development of a culture of risk taking. The Solution. Utilizing Cognitive Appraisal Theory (CAT), this article draws on the official reports and public inquiry hearings in the United States, United Kingdom, and Ireland into the financial crisis and finds that HRD strategies, practices, and processes are factors which may have contributed to a culture of excessive risk taking and ineffective decision making. We outline the implications for HRD theory and practice. The Stakeholders. The research findings inform a multiplicity of stakeholders including organizational behaviorists, social psychologists, government bodies, educational organizations, and scholars researching strategic HRD in organizations.

1University 2University

College Cork, Republic of Ireland of Limerick, Limerick, Republic of Ireland

Author Note: This article was subjected to a two-tier, blind review process that did not involve any of the contributing authors who are currently members of the editorial board. Corresponding Author: Clíodhna MacKenzie, School of Management and Marketing, University College Cork, Cork City, Republic of Ireland. Email: [email protected]

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Keywords strategic human resource development, human capital, cognitive appraisal theory, leadership, financial crisis

Introduction Proponents of strategic human resource development (SHRD) argue that it contributes to the achievement of organizational goals and helps to sustain long-term organizational success (Garavan, 2007). However, there can be a dark side to this contribution, one that results in Human Resource Development (HRD) not acting as the conscience of the organization where it provides counterbalance to the continuous striving for short-term performance and organizational success (MacKenzie, Garavan, & Carbery, 2011, 2012). Financial crises makes it clear that the pursuit of profit often comes at the expense of prudent decision making and the development of appropriate corporate governance structures which can have major deleterious implications for organizations. Furthermore, a variety of HRD and Human Resource Management (HRM) practices legitimized and institutionalized an organizational culture that facilitated excessive risk-taking behaviors, an unwillingness to challenge short-term decision making, and the emergence of collective narcissism (McDonald, 2009; Stiglitz, 2010). Official Government reports in the United States, United Kingdom, and Ireland highlight that these failures existed in banking and financial services organizations, as well as in organizations that had the responsibility to regulate them, and these failures contributed to the financial crisis (Financial Crisis Inquiry Commission [FCIC] Report, 2011; Honohan, 2010; Treasury Select Committee, 2009). These failures are ones that SHRD, as a set of strategies, practices, and processes, is designed to ameliorate or at least minimize. SHRD as a theoretical discipline and set of practices is concerned with developing both people and organizations to ensure that they achieve competitive advantage (McGuire, Garavan, O’Donnell, & Watson, 2007; O’Donnell et al., 2007). However, difficulties arise when SHRD becomes too focused on alignment, the pursuit of organizational goals, and a lack of focus on the needs of employees. This article utilizes the theoretical lens of Cognitive Appraisal Theory (CAT) of emotion (Krehbiel & Cropanzano, 2000; Roseman, Spindel, & Jose, 1990; Thoresen, Kaplan, Barsky, Warren, & de Chermont, 2003) to understand how SHRD practices and strategies potentially created the context in organizations where decision makers made cognitive appraisals that ultimately led to collective dysfunction. Social psychology-based theories provide an alternative perspective to economics-based HRD theories and provide an alternative lens through which to understand the contribution of SHRD. Economics-based theories posit that SHRD performs traditional economic/performance roles in organizations (Collins & Clark, 2003; Ghoshal, 2005; Helfat & Peteraf, 2003; Pandey & Chermack, 2008; Peterson, 2008). However, in doing so, they potentially end up “undermining their strategic value” (Greenwood, 2013, p. 361). It is argued here that SHRD did not intentionally contribute to this state of affairs; however, SHRD, through its pursuit of legitimacy and a position of influence in organizations, may have unintentionally contributed to collective dysfunction. Therefore, we utilize CAT to understand how SHRD contributed to the behavior of individuals in financial organizations which led to the financial crisis. Downloaded from adh.sagepub.com at University College Dublin on July 10, 2015

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Figure 1. Theoretical framework.

The article is structured as follows: We first outline the key theoretical foundations of CAT and its relevance in explaining the contribution of SHRD to the failure of financial organizations. We then explore the contribution of SHRD to the financial crisis through CAT.

Theoretical Background: CAT CAT argues that emotions are inextricably linked to judgments about positive/negative outcomes (Frijda, Kuipers, & ter Schure, 1989; Kiffin-Petersen, Murphy, & Soutar, 2012). Emotions are bi-products of both primary and secondary (cognitive) appraisals (Roseman et al., 1990) and individuals make outcome appraisals based on two criteria: valence and agency. These appraisals elicit an emotional response relative to the alignment of a goal or objective. Where individuals experience positive emotions, it can contribute to affective organizational commitment (Choi, Sung, Lee, & Cho, 2011; Herrbach, 2006; Thoresen et al., 2003) and as a consequence, these individuals may find it difficult to differentiate harmful from benign behaviors. We argue that SHRD contributed to a number of contextual conditions that impacted the cognitive appraisal processes of organizational decision makers and employees and impacted their emotional responses to problems and opportunities. Figure 1 proposes a framework to illuminate the contributions of SHRD that led to overly positive emotions and resulted in behaviors that contributed to organizational dysfunction. Our model consists of four components: (a) contextual factors impacting emotions, (b) cognitive appraisal, (c) emotional reaction, and (d) propensity for organizational dysfunction. We discuss each of these components in turn.

Contextual Factors Influencing Cognitive Appraisals Focus on alignment and performance. HRD policies, practices, and processes consist of a system of organizational-level interventions, decisions, and actions taken to develop


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human capital and contribute to organizational performance. HRD policy and practice should be aligned with organizational strategy and objectives. This system, if effectively designed, leads to both additive and synergistic outcomes. Despite arguments that people are the most valuable resource for the organization, human capital developers do not enjoy much by way of power and respect (Bierema, 2009) often seen as simply “supporting or dependent on” rather than driving the organizations goals, objectives, and success (Fenwick, 2005, p. 233). Paradoxically, the question arises: What happens when HRD does drive organizational goals and objectives? Peterson (2008) suggests that SHRD has the capability to “design and develop programs to support skills demanded by the business strategy” which might motivate employees towards “higher performance” (p. 93). While the benefit to HRD of this performance orientation will likely result in increased organizational legitimacy and credibility, HRD is exposed to risk asymmetry by focusing too much on performance as a measure of alignment with organizational goals. Where HRD strategies are asymmetrically aligned, there is an increased likelihood that both the motivational and situational state of employees will also become asymmetrically influenced. Consistent with the arguments of CAT, employees who perceive positive outcomes as a result of SHRD policies, practices, and processes are more likely to exhibit positive emotions which then increase their affective organizational commitment (Thoresen et al., 2003). The problem for SHRD is that while increased commitment to the organization can be viewed as a positive outcome, it may lead to extreme behaviors that many employees believe are legitimized given they align with HRD organizational goals and centered almost exclusively on firm performance and profit (Werbel & Balkin, 2010). Organizational and leadership capability. SHRD has a primary responsibility for the development of both organizational and leadership capability (Garavan, 2007; Peterson, 2008). This is achieved through the implementation of policies, practices, and processes such as organizational development interventions, learning organization models, mentoring, coaching, and multisource development programs (Garavan, Heraty, Rock, & Dalton, 2010). Leadership capability is considered a fundamental contributor to sustained competitive advantage (Barney, 1991; Lei & Slocum Jr., 2005; Teece, Pisano, & Shuen, 1997). It is arguable that not enough attention was focused on developing leadership capability to question strategies and plans and not simply “follow the crowd.” Many leaders in financial organizations found themselves subjected to pressures to be creative and be innovative and to focus on short-term outcomes (Barth, Caprio Jr., & Levine, 2012; Board, 2010; Stiglitz, 2010). They lacked the emotional resilience, critical judgment, and independence of decision making to resist these pressures or at least question them. Therefore, consistent with the arguments of CAT, the emphasis on short-term returns and financial innovation influenced how they appraised and rationalized outcomes to be more positive than was reasonable or appropriate. Given the dynamics of senior leadership teams, emotions can become contagious through conscious and unconscious emotional states and behavioral attitudes (Barsade, 2002). These processes resulted in too much focus on the end result, that is, profit and unsustainable growth leading to organizational cultures and climates detrimental to longer term organizational success. Downloaded from adh.sagepub.com at University College Dublin on July 10, 2015

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Organizational culture and climate. SHRD practices have a major contribution to make to the development of both culture and climate. Organizations consist of both a culture and climate which impact on how employees perceive events and the types of behaviors that are acceptable. Organizational climate reflects shared perception of policies, practices, and processes which influence employee behavior (Schein, 2004). Organizational climate is an important variable to consider when exploring employee behavior as an organization can have multiple simultaneous climates. These climates represent both a process perspective or day-to-day climate and a strategic climate which may be focused on economic/financial goals. Culture on the other hand reflects the shared basic assumptions values and beliefs (Schein, 2004) central to an organization and socialized to newcomers inculcated to think, act, and feel based on the organization’s history and how it dealt with external adaptation and internal integration (Wines & Hamilton, 2009; Zohar & Luria, 2004). Particular types of organizational cultures lead to collective feelings of empowerment, belonging, teamwork, and commitment to the organization (Barney, 1986; Kerr & Slocum Jr., 2005; McLean, 2005). Garavan (2007, p. 19) argued that the firm’s culture provides direction for the development and delivery of “integrated and coherent SHRD systems.” The delivery of these practices, however, often responds to, rather than influences organizational culture. Foote and Ruona (2008) have argued convincingly that the role culture plays in an organization is a critical dimension in driving behavior and delivering on organizational initiatives. Indeed, Foote and Ruona contend that culture is “dictated” (p. 305) by infrastructural factors such as processes and practices, codes of conduct, disciplinary process, and realistic objectives. Consistent with the arguments advanced by CAT, both culture and climate can elicit a positive emotional response that can improve organizational commitment and affective dispositions towards the organization. It also has the capacity to influence behavior that is deviant, counterproductive, unethical, and at times corrupt (Ashforth & Anand, 2003; Ashforth, Gioia, Robinson, & Trevino, 2008; Kish-Gephart, Harrison, & Treviño, 2010).

Cognitive Appraisals, Emotional Reactions, and Organizational Dysfunction Senior leadership and employees in financial organizations made overly positive cognitive appraisals of decision outcomes in the period prior to the financial crisis. In line with CAT, research has shown that emotional reactions tend to result from cognitive appraisals of an event (Butt & Choi, 2006; Gross & D’Ambrosio, 2004). Cognitive appraisals can be perceived as beneficial where they will result in desired or positive outcomes. Alternatively, cognitive appraisals could be perceived as detrimental where they result in negative outcomes. Organizational cultures and climates that reward certain types of economic/results-focused behavior have the potential to send out a “symbolic message” (Werbel & Balkin, 2010, p. 319) to other individuals that the behavior is not only acceptable but legitimate.


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In contrast, where HRD policies, practices, and processes contribute to a culture or climate that sends out messages that certain behaviors are unacceptable, then individuals will appraise the situation and potential outcome in a more negative manner and this may invoke emotions such as anger, frustration, and distress. The individual making a cognitive appraisal of the situation that may result in a negative outcome may perceive HRD policies, practices, and processes to be an impediment to the attainment of organizational goals and objectives. Organizational leaders may try to circumvent those policies and practices and engage in behavior that is counterproductive and dysfunctional (Stein & Pinto, 2011). These dysfunctional behaviors may include excessive risk taking, disregard for regulatory requirements, the use of models and work processes where outcomes are unknown or not sufficiently tested, and the pursuit of short-term objectives (Fligstein & Goldstein, 2010; Riaz, 2009; Stein, 2011).

Method The financial crisis has provided a unique opportunity to explore difficult-to-study sensitive organizational events such as crises, disasters, and failure. These sensitive organizational data were analyzed utilizing public inquiry transcripts and internal documentation providing a level of detail not otherwise available to management and organizational scholars (Gephart, 1993, p. 1466). The financial crisis is perhaps best described as an umbrella crisis that comprises a subprime crisis, liquidity crisis, sovereign debt crisis, and Eurozone crisis: essentially, the defining financial and economic crisis of our time. Our data span multiple countries (United States, United Kingdom, and Ireland) and reflects the crisis years since 2007.

Data Sources Primary U.S. data consisted of video/audio testimony provided by witnesses to both the FCIC (e.g. Financial Crisis Inquiry Commission, 2010a) and the U.S. Senate Permanent Subcommittee on Investigation (Senate Hearings, 2010). Primary U.K. data consisted of the House of Commons Treasury Select Committee (HCTC; 2009) oral hearing transcripts. The list of informants included banking and finance professionals, central bankers/Federal Reserve governors/regulators, government officials, academics, and quasi-regulatory (ratings agency) professionals. In total, 250+ hours of video/audio testimony were viewed and reviewed. The transcripts from the U.K. and U.S. public inquiries totaled 7,463 pages with approximately 2,500 pages of followup/supplementary evidential documents. In addition to the primary data mentioned here, we also reviewed relevant secondary data: official reports on the financial crisis, meeting minutes, memos, email correspondence between many of the institutional actors at the centre of the crisis as well as organizational goals, and strategy communications documents. While unable to gain access to interview transcripts from witnesses central to the Irish banking crisis, we analyzed the official Irish banking crisis reports (see Honohan, 2010; Nyberg, 2011; Regling & Watson, 2010).


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Data Analysis Deriving concepts and themes. Before importing our data into a computer-assisted qualitative data analysis (CAQDA) software package (NVivo), we employed a multi-step, multi-phase approach to analyzing it. Stage 1 focused on viewing the public inquiry hearings and downloading all the inquiry testimony transcripts and secondary sources of data such as official reports in PDF format. During this phase, we read without analysis or coding to get a feel for the content of the documents (Bryman & Bell, 2007). Following this, we analyzed the raw data; doing so allowed the highlighting of text we deemed important. In the initial phase, we viewed and re-reviewed available video and audio testimony from each of the public inquiries developing “field notes” to refer to during the concept/theme development. Stage 2 of the analysis consisted of a search for keywords associated with the dimensions of CAT. The key text searches included but were not limited to management/leadership failures, organizational culture, rewards/incentives, HRM/D strategy, emotions, anxiety, stress, decision making, dysfunction, pride, guilt, anger, fear, distress, organizational identity, irresponsible behavior, corporate irresponsibility. As we located these words during our text searches, we set about assigning preliminary broad theme categories and utilized the highlighting tool in NVivo to mark the text. Using NVivo, we retrieved a total of 1,280 quotes that matched our criteria. The dominant themes that emerged were coded in NVivo nodes and sub nodes with annotations assigned to signify their importance for later analysis. A number of preliminary themes emerged in line with CAT and HRD such as misaligned incentive, culture/climate issues, leadership failures, power structures, regulatory tension, intellectual asymmetries, behavioral issues, “dark side” dispositions, power playing, rewards and incentives failures, management failures, and organizational development failures. Stage 3 consisted of categorizing the organizational and institutional actors into 11 actor categories and coded accordingly, for example: Actor Type (Government), Actor Category (Regulatory), and Actor Country/Origin (U.S./U.K./Ireland). To minimize researcher bias, each of the authors reviewed the preliminary and secondary codes to ensure that researcher interpretation bias was minimized. The final phase came after each of the researchers had spent time reviewing the data. We deployed an iterative process (Miles & Huberman, 1994) between the video testimony, interview transcripts, our “field notes,” official reports, and the literature to confirm our secondorder codes.

Study Findings Contextual Factors The focus on alignment and performance. The notion that financial organizations were overfocused on alignment with business objectives and the achievement of organizational performance is one that is revealed in our analysis. The consequences of this over-alignment are revealed in the following indicative quotes:


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MacKenzie et al. Our members have told us that . . . the pursuit of sales, the intensifying pressures on staff through performance targets, combined with reductions in staffing levels, increased pressure for deposit-taking without any real regard for the needs of customers or their impact on staff—the situation is getting worse. (IBOA, 2011, p. 25) The only negative factors to consider were some amorphous concepts of reputational risk. In other words, the ratings agencies faced the age-old and pedestrian conflict between long-term product quality and short-term profits. They chose the latter. (FCIC Hearing, 2010b, p. 20) Bank management and boards generally gave in to this pressure [profit seeking], in the bigger banks more so than in the smaller ones. Strategies chosen included concentration on retaining market share, increasing earnings growth and protecting the banks’ franchise. (Nyberg, 2011, p. iv)

The overemphasis on alignment and performance can create an environment that limits the ability of groups such as boards of directors/governors to adequately assess enterprise risk resulting in market retention myopia. This contributed to cognitive appraisals that led to positive emotions concerning future success. Organizational and leadership capability. Our analysis revealed that organizational and leadership capacity issues were critical contextual factors influencing the financial crisis. This extract from the Senate Hearings in the United States reveals how leadership capability issues in Moody’s led to particular ratings: At Moody’s, the source of this conflict was the quest for market share. Managers of rating groups were expected by their supervisors to build, or at least maintain, market share. It was an unspoken understanding that loss of market share would cause a manager to lose his or her job. (Senate Hearings, 2010, p. 15)

Another example of leadership capability issues is revealed in this extract from the Office for Thrift Supervision in the United States: Like other bank regulators, OTS was supposed to serve as our first line of defense against unsafe and unsound banking practices, but OTS was a feeble regulator. Instead of policing the economic assault, OTS was more of a spectator on the side-lines, a watchdog with no bite, noting problems and making recommendations, but not acting to correct the flaws and the failures that it saw. At times, it even acted like a WaMu guard dog trying to keep the FDIC at bay. (U.S. Senate Report, 2010, p. 15)

Another example of leadership capability issues can be seen in Eric Kolchinsky’s email. He was one of Moody’s Managing Directors in charge of the business line that rated subprime-back collateralized debt obligations (CDOs) in this extract from the U.S. Senate’s legally obtained exhibits:


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Email from Moody’s Eric Kolchinsky 8/22/07 Subject: “Deal Management”: It would be helpful to have a policy framework communicated to the market on when S&P will apply new criteria in the model derived ratings to outstanding transactions and when it won’t . . . we are not being as transparent as we need to be. (Moody’s Town Hall Meeting, September 2007)

The scale of the leadership capability issues is clearly elucidated by the Chairman of the Financial Services Authority in the United Kingdom as he calls into question the intellectual and ideological apparatus which underscored much of the thinking in many banking institutions: It was believed and said by many influential authorities that the development of the model of securitised credit, structured credit, and credit derivatives . . . contributed to a “Great Moderation” in financial and economic risk. This turned out to be diametrically wrong. (Financial Services Authority, 2009, p. 5)

The focus on alignment was premised on the notion that senior leaders and employees possessed the knowledge and skills to make decisions that ensured the long-term survival of the organization. This misjudgment of the skills and capabilities is illustrated in the following exact: Management misjudged their capabilities and the capabilities of their elaborate riskmanagement systems, like VaR, to keep their institutions solvent . . . transparency diminished so much that firms were not prepared for the extraordinary, the so-called black swan event. (FCIC Hearing, 2010a, p. 124)

Organizational culture and climate. Our analysis revealed that both organizational culture and climate were particularly important contextual factors shaping the cognitive appraisal of leaders and employees in a multiplicity of organizations. The following extract from the U.K. Treasury Select Committee’s hearing into the U.K. banking crisis depicted a “locker room culture” at the board level at HBOS: In a written submission to us, Paul Moore, former Head of Group Regulatory Risk at HBOS, argued that HBOS had “a cultural indisposition to challenge” and that the task of “being a risk and compliance manager . . . felt a bit like being a man in a rowing boat trying to slow down an oil tanker” due to the prevalence of the sales culture in HBOS. (Treasury Select Committee, 2009, p. 434)

Although the “locker room culture” at board level in HBOS indicated an embedded appetite for risk and disregard for the impact of poor decision making, organizational climate issues which reflect the shared perceptions of the policies, practices, and processes that are legitimated within the organization was a much more insidious problem that extended beyond the banking institutions. As this extract from the U.S. Senate hearings indicates,


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MacKenzie et al. the small AIG unit that handled these transactions pushed its huge corporate parent to the brink because it operated “in a climate of opulent pay, lax oversight and blind faith in financial risk models. (Joint Treasury—FDIC Report on WaMu, April, 2010)

The prevailing climate evident prior to the initial credit crunch in early 2008 is highlighted in this extract by Regling and Watson (2010), independent consultants commissioned to provide a preliminary investigation of the Irish banking crisis: “There were strong incentives to fight for market share during prolonged credit and asset price booms—while cross-border funding markets provided ever more ample liquidity to do so” (p. 15).

Cognitive Appraisal Perceived detriment (sanction/reprimand). The cognitive appraisals made primarily by decision makers, and in some instances non-decision makers, reflected both their motivational state, that is, whether the individual perceived the situation as adverse (i.e., punishment likely) or appetitive (i.e., reward is likely) and their situational state, that is whether the motivational state is present. Appraising the situation as motive-consistent will produce a positive emotion whereas appraising the situation as motive-inconsistent will result in a negative emotion. Within banking organizations, the cognitive appraisals individuals engaged in proved challenging for some employees who knew they were engaging in practices that were questionable but did so because of peer pressure, power/authority structures, or fear of losing job security as the following extract highlights: I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave. (Greg Smith former Goldman Sachs Executive Director; Smith, 2012)

Perhaps a clear example of why individual regulators who oversaw banking institutions in Ireland, the United States, and United Kingdom were affected by cognitive appraisal of perceived detriment is summed up in this extract by Professor Patrick Honohan, Governor of the Central Bank of Ireland: [There was] an unwillingness by the CBFSAI to take on board sufficiently the real risk of a looming problem and act with sufficient decision and fort to head it off in time. “Rocking the boat” and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of a central bank in being prepared to “spoil the party” and withstand possible strong adverse public reaction. (Honohan, 2010, p. 16)

In these indicative extracts, we can see the motivational and situational cognitive appraisal some individuals engaged in when making their decisions. In these examples, individuals were faced with either the potential for reprimand or sanction, and, in the case of Greg Smith for Goldman Sachs, a moral appraisal. Downloaded from adh.sagepub.com at University College Dublin on July 10, 2015

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Perceived benefit (reward/incentive). While there is considerable debate on the role incentives played in the decision-making process, it is clearly a valance factor that influenced some of the more questionable decisions, including some now infamous ones as these extracts illuminate: The design of reward systems in the banks . . . meant there was a potential for bankers to be rewarded for taking undue short-term risks rather than taking a longer-term view. For instance, cash bonuses awarded on the immediate results of a transaction and paid out instantly meant individuals often paid little or no regard to the overall long-term consequences and future profitability of those transactions. (House of Commons Treasury Committee, 2009, p. 12) From our perspectives in the CDO group, we used ratings, just plain old ratings as determinants of the default probability of the underlying securities. We did have this discount purchase rule to sort of look at scenarios where prices were really showing something very different than ratings; but as I said before, the bankers had a lot of ways to get around that rule and they did. (FCIC Hearing, 2010b, p. 139)

Consistent with CAT, these extracts provide some evidence that cognitive appraisals of the individual place a significant emphasis on the motivational and situational state of the individuals making those decisions.

Emotional Reaction Negative emotions (fear/anger/guilt/distress). As CAT argues, cognitive appraisals consider motivational and situational variables in the decision-making process of the individual; however, the emotions that are invoked during this process provide insight into the emotional state of individuals faced with choices that are either consistent with their cognitive appraisal of the situation or inconsistent with the appraisal. The following extracts are indicative of emotional reaction at play: After 32 years working for the bank—almost 30 of those proud years—I wouldn’t admit in public now to working for them. I am so ashamed of my employer and the fact that no senior management has been held accountable. (Bank employee; IBOA, 2011, p. 24) OTS went further. It actually impeded FDIC’s examination efforts. It denied the FDIC examiner access to WaMu data, refused for several months to assign him space on site at the bank, and rejected his request to review bank loan files. When the FDIC urged OTS to lower WaMu’s rating, the OTS resisted. OTS fought this turf war at the same time the largest financial institution it was supposed to regulate was losing value, capital, and deposits. (U.S. Senate hearings, 2011, p. 7)

In the extracts above, we can see the emotional reaction of anger from a frontline bank employee when faced with a decision to engage in conversation with somebody outside of their working environment. It is clear in this instance that both contextual and associated cognitive appraisal led to a very negative emotional reaction (anger/


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distress) at being “associated” with working for “them.” In the U.S. Senate hearing exchange, what is particularly interesting is the ability of an individual (the director of the OTS) to display both positive emotions (pride in his working relationship with a bank under his supervision) and anger that a fellow regulator (with the FDIC) would propose how to approach serious liquidity and capital ratio issues. Positive emotions (pride/joy/happiness). There were some references to positive emotions such as pride for working for certain organizations in the data analyzed as the following indicative extracts highlight: I think that regulators in the future can do a very much better job than in the past in leaning against the winds of exuberance, and exuberance includes organizations being convinced that they are on a roll which is unstoppable . . . I think the fundamental issue here is rooted in human nature and institutional cultures. (Lord Turner; U.K. Hearings, 2009, p. 286) I joined Goldman Sachs in 1989 as an analyst after graduating from college. My intention was to stay for two years, and I ended up staying for nineteen. I would not have stayed if the people I worked with did not have high ethical standards. The culture at Goldman Sachs was one in which excellence and integrity were expected. (U.S. Senate Hearings, 2010, p. 12)

The utility of CAT to illuminate the emotional states that play a part in employee decision-making processes is of great importance. It highlights various decision-making triggers or antecedents which can be environmental, political, or related to a sense of identity or belonging to the organization.

Propensity for Organizational Dysfunction While the main features of CAT reflect Contextual Factors, Cognitive Appraisals, and Emotional Reactions to decision making, it is important to highlight the potential impact of these on the adoption of dysfunctional behaviors at a collective level. In the context of the financial crisis, contextual factors played a role in creating an environment which in turn influenced the cognitive appraisals of individuals, and these appraisals were myopically positive in that only reward/incentives were the outcomes considered. Taken together, contextual and cognitive appraisal factors skewed the emotional reaction of many decision makers in two ways: (a) the emotional response was legitimized by the contextual factors and (b) emotional response was institutionalized in the rewards/incentives reflective of the motivational and situational state. Combined, these factors when improperly aligned have the capacity to result in a collective propensity for organizational dysfunction as the following extracts highlight: It is true that the market is not pricing the subprime RMBS wipeout scenario. In my opinion this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while “real money” investors


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have neither the analytic tools nor the institutional framework to take action before the losses that one could anticipate based [on] the “news” available everywhere are actually realized. (U.S. Senate Report, 2010, p. 348) Consider the incentives created by these factors. The rating agencies could generate billions in revenue by rating instruments which few people understood. The lack of guidance from private and public users of ratings ensured that there’s little concern that anyone would question the methods used to rate the products. (FCIC Hearing, 2010b, p. 20) This pervasive pressure for consensus may explain why so many different parties in Ireland simultaneously were willing to adopt specific policies and accepted practices that later proved unsound . . . a number of banks essentially appear to have followed the example of peer banks in a “herding” fashion; there is little evidence of original critical analysis of the advantages and risks of the policies . . . a tendency to favour silo organization and submissiveness to superiors strengthened this effect, particularly among the public authorities. (Nyberg, 2011, p. iv)

As the extracts above highlight, the propensity for organizational dysfunction takes a number of forms from an organizationally accepted locker room culture, evident in the exchange between Senator Carl Levin and Daniel Sparks, to more nuanced “intellectual imbalances” highlighted in both the U.S. Senate Report and Financial Crisis Inquiry Commission, to an institutionalized form of collective thinking legitimized through fear of sanction or reprimand rather than an ability to critically analyze market conditions and make an objective decision based on those conditions. In the context of the financial crisis and banking organizations, one of the most evident forms of dysfunctional behavior is reflective of an organizational/institutional form of extreme narcissism. Extreme narcissistic behaviors include attributional egotism (blaming external factors for negative outcomes), sense of omnipotence (exaggerated pride in ones abilities), a sense of omniscience not based on fact (the presumption that the collective within the organization is all-knowing within its environment), and exhibit triumphant contempt (tendency to deride/castigate the “contrarians” who identify potential weaknesses in decision making; Brown, 1997; Stein, 2003, 2011; Stein & Pinto, 2011).

Discussion and Conclusion In this article, we utilized the theoretical lens of CAT to understand the possible contribution of SHRD in facilitating collective dysfunctional behaviors in financial organizations. The model presented in Figure 1 uses CAT to help illuminate how contextual factors, cognitive appraisal, and emotional reactions did, over time, lead to collective dysfunction. Our model consists of four components: (a) contextual factors impacting emotions, (b) cognitive appraisal, (c) emotional reaction, and (d) propensity for organizational dysfunction. In our model, contextual factors feed into the cognitive appraisals of individuals faced with decision making. Therefore, organizations, such as the banking organizations under investigation, that promote and legitimize lax governance and agency control mechanisms may signal to employees that there is no downside


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risk in making decisions and employees will subsequently make a positive cognitive appraisal of the decision. This in turn can create a positive emotional response and may validate an individual’s sense of identity or belonging to that organization, as we learned from our research. This sense of identity develops over an extended period of time and can reflect both organizational and/or professional identity affiliation. This cycle of dysfunction can become part of who the organization is and what it represents which can lead to a propensity for organizational dysfunction when it is socialized, legitimized and institutionalized. We suggest that excessive risk taking and poor decision-making behavior was less symptomatic of a “bonus culture” but may be explained by a socialized acceptance of dysfunctional cognitive appraisals. However, SHRD potentially contributed to the contextual conditions in which these cognitive appraisals flourished. MacKenzie et al. (2012, p. 2) argued that “aligning HRD strategy too closely with the organizational strategy in pursuit of sustained competitive advantage” was problematic due to unwittingly contributing to power asymmetries. This argument centered on the contention that HRD is both legitimacy-seeking in that it strives to be at the leadership table so as to influence business strategy (Peterson, 2008) but is also credibility-seeking in translating human capital into financial bottom-line figures (Fenwick, 2005; O’Donnell, McGuire, & Cross, 2006). In short, intellectual capital is a “resource to be exploited for the benefit of the organization’s owners and shareholders” (O’Donnell et al., 2006, p. 7). In the context of the financial crisis, the push to align with unrealistic organizational goals resulted in SHRD exacerbating the extent to which organizational cultures and climates communicated and reinforced that excessive risk-taking behaviors were appropriate. SHRD also failed to focus on developing the skills of leaders to ask questions and challenge the dominant logic of the market place and became too focused on alignment creation of a symbolic message in which the only objective was to increase market share and profitability. SHRD also failed to focus on alignment and neglected to develop the skills of employees to understand the consequences of their actions. HRD is expected to justify its role in the organization through various performance metrics; however, CAT potentially provides insights into the cognitive appraisal made by organizational decision makers that invoke emotions that contribute to behavioral intent. HRD plays a central role in the development of managers, leaders, and the organization; its practices are an integral component of the organization’s cultural infrastructure as Kuchinke (2010) succinctly notes: The character and culture of institutions and organizations are in no small amount shaped by HRD through strategic decisions related to workforce issues and through specific interventions such as workforce training, professional and leadership development, organizational change, and knowledge management. (p. 576)

Implications for HRD Practitioners While HRD practitioners have much to contribute to organizations and institutions through policies, practices, and processes, they must seek to balance the needs of


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human resources with economic imperatives and pressures. The first step is in recognizing the limitation in economics-based theories that underscore HRD. Consistent with the CAT model, we argue that SHRD’s alignment with organizational goals promoted growth and profitability and created conditions for an appetitive motivational state. This appetitive state combined with shared positive emotions that proved to be irrational in that they became normalized and institutionalized resulting in the widespread adoption of dysfunctional behaviors in the financial sector such as excessive risk taking, feelings of invulnerability, and the dismissal of contrarian opinions that challenged decision making. The utilization of CAT in the analysis of the decisionmaking behavior of banking institutions highlights narcissistic behaviors evident at a field level of analysis that warrants further investigation. The empirical data reveal that irrational and dysfunctional organizational behavior did not exist in a vacuum, nor was it confined to a single financial institution—it was behaviorally systemic, institutional legitimized, and cognitively embraced. Therefore, how does SHRD ensure that it does not over focus on its economic contribution and instead focuses on people and a more enlightened self-aware approach to balancing profits with social concerns. SHRD’s role in the wider HR architecture is focused on developing organizational culture and climate, building organizational management and leadership capacity, and managing organizational development (Gold, Holden, Iles, Stewart, & Beardwell, 2009). The HRD profession will continue to play a central role in support of the competitive strategy for many banking organizations in the future but we may now need to show more symmetry in our theoretical model. Warren Buffett (FCIC Hearing, 2010b, p. 264) once referred to securitized products as “instruments of mass destruction” but perhaps we, as developers of human capital, need to recognize that the people and organizations we develop also have the potential to contribute to dysfunctional behaviors and adverse outcomes. Understanding what drives behavior should be the new focus of HR orientations, policies and practices. As practitioners in a very turbulent economic environment, we must face these challenges with courage, conviction, and commitment to the organization’s most valuable asset. However, at the same time, we must balance these challenges with aligning SHRD objectives with organizational strategies that may—in extreme cases—threaten the organization’s very stability. This is no easy task. As scholars, we must challenge ourselves and develop our own theories about people, organizations and institutions. We need to move beyond economic centric theories that have historically allowed us to be perceived as legitimate and current among our academic peers and embrace the value of psychological and social-psychology theories that reflect human behavior, cognition and emotions—fundamental factors in human actions. The financial crisis signals a call to action for the profession: How we respond to that call will either see HRD scholarship and practice flourish in its newfound legitimacy or flounder in its inability to effectively impact how organizations pursue sustainable organizational results. Declaration of Conflicting Interests The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.


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MacKenzie et al. Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Note 1.

The Global Financial and Economic Crisis will be referred to as the financial crisis.

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MacKenzie et al. Author Biographies

Clíodhna MacKenzie is lecturer in the School of Management and Marketing, University College Cork, Ireland, and PhD candidate at the Kemmy Business School, University of Limerick. She has previously worked in international consulting in IT and Telecoms fields in the United States, Singapore, Thailand, and Europe. Her current research focuses on the concept of organizational narcissism. Her research interests include lending behavior in banking and finance, corporate governance, ethics, corporate social responsibility, human resource development, leadership development, and organizational development. She has published peerreviewed journal articles and book chapters. She is a member of University Forum for Human Resource Development (UFHRD) and the Irish Academy of Management. Thomas N. Garavan, EdD, is Research Professor-Leadership at Edinburgh Napier Business School. He has authored or co-authored 14 books and over 100 refereed journal papers and book chapters. Thomas is Editor-in-Chief of European Journal of Training and Development and Associate Editor of Personnel Review. He is a member of the editorial board of Human Resource Development Review, Advances in Developing Human Resources, Human Resource Management Journal, Human Resource Development International and Human Resource Development Quarterly. Ronan Carbery lectures in Human Resource Development and Human Resource Management at the University of Limerick, Ireland. He is a chartered member of CIPD Ireland (MCIPD) and is also a member of University Forum for Human Resource Development (UFHRD) and the Academy of Human Resource Development (AHRD). He is associate editor of the European Journal of Training and Development. His research interests include careers, career development, workplace learning, and participation in training and development and he has published peer-reviewed journals articles, books, and book chapters in these fields.
