Lutfey is a Visiting Professor-in-Practice (IDEAS – “Ranked #1 university-affiliated think-tank 2020”) at LSE, the London School of Economics and Political Science, where he also is aMember of Scientific Advisory Board at the LSE Systemic Risk Centre. At LSE he is also Co-investigator of the Inclusion Initiative, a Former member of the LSE Court of Governors & Investment Committee.He is also an Adjunct Professor at my alma mater, the National University of Singapore, where he also is part of the Advisory board of the Centre for Governance & Sustainability.
Furthermore, Lutfey is a Member of the Global Agenda Council or Global Future Council of the World Economic Forum. He is also a member of the Bretton Woods Committee and on several more boards. Previously Lutfey was the Global Head of Emerging Markets (FX, Rates & Credit) and Founding Head of the Knowledge Network at UBS, where he also was a Sustainability Council & Opinion Leader. Before that, Lutfey was the Head of FX Distribution & Corporate Risk Advisory for Asia-Pacific at Barclays Capital and Head of FX Structuring at Deutsche Bank.
In this episode we explore the realm of global risk management and then deep dive into a key ingredient in making financial firms more resilient: inclusion and diversity. Lutfey takes his impressive vita as a baseline to talk about the changing understanding of risk in the context of a global financial institution. We go into leadership and inclusion frameworks firms and leaders can apply to have a more stable setting for risk management. We talk about the short term cost and obstacles of inclusion and diversity, and why it’s worth the initial trouble due to the sustained long term benefits. Lutfey gives advice on what to possibly anchor your career on in the next decade, how to prepare for a global leadership role, and other great tips for professional improvement.
Links
https://www.lse.ac.uk/tii/assets/documents/Inclusion-In-Singapore.pdf
https://www.wucker.com/writing/the-gray-rhino/
https://www.linkedin.com/in/lutfeys/
https://www.johnkay.com/2020/02/12/radical-uncertainty/
https://www.goodreads.com/book/show/97030.Six_Thinking_Hats
https://www.lse.ac.uk/PBS/People/Dr-Grace-Lordan
http://eprints.lse.ac.uk/105189/
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Andy, Luke & Leo
EPISODE 76
[INTRODUCTION]
[00:00:04] ANNOUNCER: Welcome to The Wall Street Lab podcast, where we interview top financial professionals and deconstruct their practices to give you an insider look into the world of finance.
[00:00:24] AVH: Hello and welcome to another episode of The Wall Street Lab podcast. With me today is Lutfey Siddiqi. Lutfey is a visiting professor in practice at LSE, the London School of Economics and Political Science, where he also is a member of the Scientific Advisory Board at the LSE Systemic Risk Center. At LSE he is also co-investigator of the Inclusion Initiative. A former member of the LSE Court of Governors and Investment Committee. He is also an adjunct professor at my alma mater, the National University of Singapore, where he also is part of the Advisory Board of the Center for Governance and Sustainability. Furthermore, Lutfey is a member of the Global Future Council of the World Economic Forum. He is also a member of The Bretton Woods Committee and on several more boards and committees. Previously, Lutfey was the global head of emerging markets for ethics rates and credit, and Founding Head of the Knowledge Network at UBS where he also was a sustainability council and opinion leader. Before that, Lutfey was the head of FX Distribution and Corporate Risk Advisory for Asia-Pacific at Barclays Capital, and head of FX Structuring at Deutsche Bank.
[INTERVIEW]
[00:01:39] AVH: Lutfey, welcome to the show.
[00:01:42] LS: Thank you for having me, Andreas. Really good to be here.
[00:01:45] AVH: I feel like I’ve taken up most of the time just reading parts of your vita. Maybe we can start with where are you based right now? And I noticed in our previous conversation that you’re basically swapping between London and Singapore for the most time. So can you give us a bit more about your background?
[00:02:05] LS: Absolutely. All of us have our biases and our perspectives that are shaped by the journeys that we’ve taken. And my professional journey in investment banking started in London. I was in sales and trading, foreign exchange, fixed income, derivatives. Spent time in the west and in the east, so this concept of global and what does diversity and inclusion really mean in a global context is something close to my heart.
I’ve been involved in or have been around innovation throughout that time, whether it’s innovations in the electronic foreign exchange market or a business model transformation, as you have seen in UBS and several other firms after the global financial crisis. And of course innovation in a product sense as a derivative structure. And I’ve also had a foot in academia for at least 15 years now. And that’s where you and I met. You came to Singapore to do that master’s, the Risk Management Institute. That global perspective that you have as a result of that, there is a direct link between that and risk management capabilities.
And if I want to think about the single most important thread that cuts through my professional journey, it is risk and risk management and approach to framing, modeling and designing risk resilience. So that has really taken at least a two-decade journey through various staging posts. And I’d be very happy to talk through that and come to where we are today and what more needs to be done in the world of risk.
[00:03:43] AVH: Yes. I would exactly love to dive into that. As you said, master of financial engineering at the Risk Management Institute. So I’m really interested in risk and especially in a global sense. But maybe we could start. You have now such a long career in finance. And the experience of Deutsche Bank preceded mine by 16 years. So this treasure trove as experience. I reckon the answer is yes, but could you tell our audience and me a bit more about how your perspective on risk changed since 2000 around where you have been at Deutsche Bank? And then you had several crises to go through, and that must have left an impact, right?
[00:04:28] LS: Yeah. So let’s quickly mark a few milestones on the timeline. I started my career at around the time of the Asian financial crisis, immediately followed by Russia defaulting on their domestic bonds. And we used to have these total return swaps overlaid on top of those bonds. And one of the first tasks I was set. And there I was training to be a structure. Thinking I would deal with derivatives models. One of the first tasks I was set was to go and look at the physical documents, the confirmation documents, and check that the signatures of the counterparties were there and that they were the correct ones. Then you had the launch of the single currency, then the dot-com crisis. In the background, you had new accounting standards for financial instruments. Then you had the lead up to the subprime crisis, which in the beginning was referred to as the North Atlantic Crisis. Very quickly became a global financial crisis through liquidity channels. And then the European sovereign bond crisis with Greece and Southern Europe, capital controls in Cyprus. In the background, you had quantitative easing from the Fed, the ECG, the Bank of Japan. Then you had attempts to withdraw quantitative easing, so the taper tantrum of 2013. You had similar spikes of volatility in 2015 in China, in Switzerland. And of course today, or last year with the pandemic in March of 2020, we saw both a spike in volatility, but also extraordinary intervention by the monetary authorities. And then this year we have things like Dogecoin and your Reddit-driven retail investors. And you have the scandal of the losses around Archegos and so on. And of course outside of finance, you have the fourth industrial revolution, the resurgence of geopolitics, cybersecurity, fintech, yes, etc., etc. So that’s the backdrop. If you had to make a movie, that’s what was going on in the background. On the frontend, the question is how does that change our risk model?
[00:06:34] AVH: It’s really interesting. In my background, in my head, there was this relation to Colin Lancaster, the episode I did with a hedge fund trader that has been in the business similarly long. And he said that there’re been so many “black swan” events, like Nassim Taleb likes to call them, that you can’t just use the old risk models. And I think this might be a really good segue into we have so many more black swan events than we actually ever would have predicted. And maybe that’s the cue, maybe not. But please continue on explaining how your risk management perspective changed.
[00:07:11] LS: It’s certainly a great point. And they are black swan events because entirely of the mental construct that we had as we went into them. With hindsight, most of them are not really black swan. In fact, most of them would have been predictable with the probability of a hundred percent if the right framework was applied. And I would also recommend alongside black swan, you have the concept of the grey rhino. It’s a book by my friend, Michelle Walker, and that talks about risks that are very much visible, very much present, but people don’t respond to them until it starts charging. And once a rhino starts charging at you, it’s probably too late.
But coming back to the mental constructs that I think many of us had over the years, and certainly in my case how they changed, let’s do it this way. I started my career on the dealing room with Deutsche Bank being trained in econometrics. So that was the first approach I had. I believed in efficiency and solving for precise estimates of econometric parameters. And the model was nicely specified. And we knew that the model was not complete, but we felt that anything outside of the model could be taken care of. They’re not that important.
Next, you take it one step forward and you say, “Well, using prices from the derivatives market and extrapolating various curves, we can put a price on any definable risk and we can hedge away virtually any risk out there.” Over time you realize, “Well, actually the market variables are not all of it.” You need to consider non-market factors as well. So the documentations is the documentation. Enforceability of contracts, negotiating collateral terms, that became important.
And then what came more into our consciousness is this concept of endogenous risk. And the guys at the London School of Economic Systemic Risk Center do a lot of work on endogenous risk. And what that means is that if I am big enough, my own transactions in the market can move the market price. And so there is slippage in the market. And there is therefore a circularity between my action, the reaction of the market, and the action that I have to take on top of that.
Then you realize, “Well, actually this endogenous risk loop is amplified by regulations that were meant to make the system safer,” because the capital regulations, as you know, are there to limit the exposure that a bank can take based on the amount of capital that they have, which means that if for some reason that exposure is too big, they need to sell, and they all sell roughly at the same time. And that makes the system more pro-cyclical. So that takes you to thinking of risk more than just your risk on your trading book, or your firm’s risk, but to the risk as a system. And then you realize, “Well, the system is not just the financial system. It involves a lot more outside of finance.” I mentioned geopolitics being one, and now with artificial intelligence and potentially other sources of risk.
And then finally I think where we are today is – Certainly where I am today, and this is why I have a foot in the inclusion initiative in the London School of Economics, they do a lot of work with the department of behavioral science, is the modeling of conduct and trying to design incentives and think about corporate culture because it turns out that it’s actually behavior and action and interaction that is a lot more useful for risk than any elegant model, because those models, I now believe, we put an excessive importance on that can actually detract from what the risk factors are. And it’s this new rich approach to risk that we are now using to look at things like climate change, sustainability, ESG and so on so forth. It’s a much more of a multi-dimensional world with lots more metrics that cannot be captured by your reductionist measures of a sharp ratio or the assumption that distributions are normal and you just need to correct for fat tails here and there. The world is fundamentally more complex.
[00:11:28] AVH: I like that. I really think this is a very interesting viewpoint, because every model inherently is flawed, right? So it inherently doesn’t really recreate the real world perfectly. And it just reminded me of an entirely different sector of the economy, it’s like startups and reading, for example, Good to Great. It’s the most important thing to first get the people in place and then to get everything else in place. And please correct me if this is a completely different thing, but it can be the same in risk management, in the banks. If you have to right people in the right places, then it’s less likely to have misconduct, because I think a lot of the big financial frauds have been based by single people, by single individuals, right? Talking Bernie Madoff and those people, if you design a corporate culture in a way that this can be detected and then you can handle a crisis more effectively because you have the right people in the right places, in the right seats. Why is this? Am I completely off here?
[00:12:33] LS: No. I think you’re right to say that, first of all, the comment you made that some models are useful. And that is a famous dictum. Some models are useful. All models are wrong. Some models are useful. I think some models are dangerous because they pretend to be useful. When we know that a model is wrong, that’s fine. But when we don’t know that the model is dangerously wrong and is taking us in a direction of a false sense of security that it is by pointing us to value at risk and expected shortfall measures, it is perhaps taking us away from the fact that we’re just shifting risk around from one part of the distribution to another. Or that the same risk measure could be meaningful in a world where there are lots of players in the market that are individually small, but that risk measure is totally useless if there are a few dominant players in the market and they create extreme correlation amongst all the players. So some models are useful, but some models are downright dangerous.
And so the point about people is important. But also the point about process is important. It’s not enough to just say I think that if we had some good people in the seat, people who were ethically sound and morally upright, things would have been fine. I think it is possible for individuals to do the right thing. But a collective to do the wrong thing if the interaction creates a negative feedback loop. So you need processes and cultures to be deliberately designed that will fight some of the known biases. I mean, we know that there are certain biases. We know that if the chair of the meeting speaks first, then chances are that going to try and fall behind her or him as opposed to if the chair of the meeting really makes an effort to ask everyone for their views before he or she makes their views public. Or if you have a hiring process that is designed to scan the widest range, the most diverse candidates possible, that is obviously superior to just hoping that the hiring manager will be able to hire, to be able to scan the universe of candidates properly and then hire the most appropriate person. So there are some biases that we know that all of us are susceptible to, but you need to design around them.
To give you another example about process versus individuals, let’s say you have a culture in your bank where secrecy and confidentiality is absolutely paramount. So everyone’s trained to do their own thing. And you only focus on what you’re doing, which means that if there happens to be another desk not too far away from your desk, which is posting profits that are extremely high and it’s not obvious to you how that is possible given that the underlying variable that they trade in is not very volatile, you have no incentive or there is no company culture to walk across to their desk and ask, “Hey, how is it possible that you’re making so much money?” because confidentiality has been overemphasized in that culture. And so you need an explicit design of collaborative challenge across desks to bring out potential risk factors over there.
One last example, you could have a bank that is driven so tightly and heavily by rules and checklists, compliance template that you need to fill out at the end of every day that people could potentially park their brains at the door. So rather than ask some obvious questions, they might feel, “Well, I’ve ticked all the boxes. I’m going home now.” So you really need to go back to the fundamental question of, “Am I making the organization and the system more resilient? Or am I just taking individual actions and implementing individual policies that individually sound right, but as a whole, in the aggregate, they may not make the system more risky?”
[00:16:37] AVH: I like those examples. And I would like to take one step back and ask you, and you can take on this question however you want. I was thinking are there some principles to design this kind of risk framework? Or should there be – You talked about individual processes. Or should there be a process, a good process on how to approach risk? Should it start from a global level and then you kind of try to find individual processes that feed into this? Or is it better explained by those should be principles governing the corporate culture or a process? Can you talk a bit more about how people in the framework think about creating this?
[00:17:21] LS: That’s right. So there are increasingly written papers that you can refer to for bringing all of these together. But just off the top of my head if I had to think about the characteristics of such a framework, firstly, to realize and acknowledge that quantitative modelling of risk is only a small part of risk management. It’s not the dominant part. It is a small part. And so the value at risk numbers, or the delta numbers, the end-of-day exposure numbers, should be the beginning not the end of your assessment of the risk that you’re carrying.
Secondly, I think we need to get more and more comfortable with narrative descriptions of risk. So those are about what happens in this scenario when this and that happens? So if the risk factor we’re concerned about on a particular day is that North Korea might attack South Korea and a bank is reducing exposure to South Korea, does that make sense and leave risk exposure unchanged in all the other countries in north and East Asia? Does that make sense? Because chances are if that if you really have an attack, it’s going to have a detrimental effect in more than just one country. So you need to describe scenarios that are compound events and really talk through in storytelling style how the risk might play out.
Role play is also useful. We used to do that, for example, in the master’s that you did, right? So let’s talk about the interaction. You’re waiting for a collateral to arrive and that doesn’t arrive. Do you have the right to terminate the transaction? If not, what happens to the value at risk in those scenarios? So a richer way of conversing, there are certain biases as I just said that we should be mindful of. So the way you hold a risk committee meeting. Are we shouting at each other?
So I remember the days when a risk committee meeting would have the risk originator who would pretend that nothing could go wrong with a transaction. And you had the risk controller who would pretend that everything that could go wrong will go wrong with that transaction. And you would have almost like the British parliament, the prime minister and the leader of the opposition shouting across at each other. But you can have better ways of holding that meeting. You could use things like Edward de Bono’s Six Thinking Hats where everyone talks about the possibilities, everyone talks about the risks, everyone kicks the tires on one side of the issue at the same time. So the way you design your risk committee meeting would be important.
And then the last thing that comes to mind is if you’re a global bank and you have a conduct related issue, a scandal that happened in the U.K., for example, and for which the legal and compliance team in the U.K. was very much involved together with the local regulator. If because you have a culture of secrecy, and confidentiality, and data protection, all of that, and that’s important, don’t get me wrong. But there is a way to share information without breaching data secrecy. So if a couple of years later that exact same conduct issue materializes in Singapore, then I think that’s shameful because it happened because your compliance and legal and risk controllers were clearly not talking across borders. And those things I think need to be looked at. The board and the risk committee of the board has a much bigger role to play then just look at the dashboard of risk metrics that is put before them.
[00:21:02] AVH: Now you’ve come out very recently with a paper about inclusion and a framework of inclusion and policy in financial firms. And you mentioned before that people are not the end all but are a big, big part in the role. Can you dig a bit deeper into how the right inclusion framework maybe changes the risk management framework? Or how can it be a part of it? And what are the key takeaways from that learning?
[00:21:42] LS: I think you’re referring to a paper by Dr. Grace Lordan and myself. Grace Lordan is the Director of the Inclusion Initiative at the London School of Economics, and she kindly asked me to join her as a co-investigator. This particular report is about a study we did using Singapore as an example. Singapore is, as you know, a global financial hub, which is also a gateway into ASEAN and Southeast Asia. So it has a unique role of being interlocutor between global, regional and local. We did two things. We interviewed 35 senior, very senior leaders from the industry, to get their perspective on the current state of diversity and inclusion practices. And then we cross-referenced their responses with what we know from behavioral science to see if there are some lessons. And then ultimately if there’s a tool kit that can be used to improve inclusion practices within these organizations. Now why would you want to do that? Because diversity and inclusion, if it’s done correctly, is actually a good risk mitigant, and it strengthens your risk resilience capacity if it’s done correctly, and together with the other benefits of spotting revenue opportunities, triggering innovation and all of that. But there is a risk argument for diversity and inclusion.
And when we did that and we came up with a nine point inclusion framework, and it very conveniently has the acronym of inclusion. So INCLUSION. I’m not going to go through all of that. But it’s on the website. Very accessible. Very readable. I would point to I guess two or three things that I think really stand out. One is that leadership really matters. Inclusive leadership is a particular style and form of leadership that I think needs – It’s a specialism of its own. And people who get promoted as people leaders, as team leaders, need to be trained in inclusive leadership. A lot of the time people get promoted because of their technical expertise on the day job. And that is not sufficient if you’re leading a global team or a multicultural team.
The second thing is the multicultural layer is non-trivial. To give you an example, here in Singapore, people know that silence can mean different things in different cultures. So if you’re the chief risk officer trying to decide whether to extend credit to a corporation in North Asia, for example, and you need input from the country manager and you need input from the senior legal officer in the headquarters, the two of them will have different styles of engagement, maybe different proficiencies in English. And if one of them is not saying much and if you assume that that person is in full agreement, that is clearly not the right conclusion to draw. And unless you are attuned to this cultural dimension, you could end up with taking an incorrect decision in the risk committee meeting. Or if you have a conference call across time zones, you and I could be having a conversation. Again, a material decision needs to be taken. We could suffer from what’s called a communication illusion. I.e., we discuss amicably together. But your takeaway is very different from my takeaway. And so those takeaway messages really need to be over communicated.
And then sometimes you have intersections of the cultural layer and also gender bias. So we had a female executive who basically said in many of these meetings, “When I’m the only female member, if I know that the others have already reached a consensus, then it’s just easier for me to go along with it rather than challenge that decision.” So that becomes important. And then the third one I would highlight is the need to design deliberate processes to counter biases, one of the characteristics of behavioral science.
So first of all, for those of us trained in the more traditional areas of economics, and we like elegant solutions that are universally applicable, behavioral science, the first thing they say is that context matters. You cannot just take something that has been applicable in New York, and London, or Frankfurt and say immediately this is the way we’re going to apply it in Singapore, or Hong Kong, or Tokyo. So context matters. The other thing is they’re very good at identifying and labeling certain biases that we are all prone to. So one of those biases, to give you an example, is a confirmation bias. And this is a bias that we have to seek out evidence that confirms our gut instincts. So if you’re hiring and if you find someone that confirms your gut instinct for what you think is required for that role, chances are you will look for explanations to make that hire happen.
We have other biases about what type of person has historically held that role. For a long time people would tell trading is a man’s job. And should we have a woman in that seat? Those sort of biases, you can design to counter them in advance. And this is what with inclusive leadership training people are able to fight against. I mean, you could have a recruitment criteria that is more task-based as opposed to based on your credentials. Which university you went to and so on so forth?
Likewise, progression and promotions. Sometimes it’s just easier to give that promotion to someone who has been asking for it and badgering you about it on a daily basis. It’s just easier. And so do you have leaders who are able to fight that temptation and really do audits of how they take decisions? How they distribute opportunities to people? Is it done in an equitable manner or not? How do you get feedback from your people? Do you have 360 degree feedback mechanisms? Do you have appraisal processes that are circumspect your compensation processes? Do you over compensate individual performance as opposed to collaborative work? All of those things, you can design them into your processes to counter the biases.
[00:28:10] AVH: You mentioned that one way to – I want to go step by step through the three big topics you talked about and asked you for a couple more example. For example, inclusive leadership, what might be part of that training in inclusive leadership? What are some key points that people would learn and people would have to have down to “perfection” to be a really inclusive leader? And maybe with the caveat that nowadays we – You’ve led global teams before, right? And now with the Covid pandemic so many people work from home. And we’re doing this interview remotely, right? But in the future, you have more and more remote meetings. How can you be inclusive in this global and remote world that we are living in today?
[00:29:00] LS: Absolutely. That’s a very good point. In fact, before this paper, Dr. Grace Lordan did a quick summary of what she believes could be the factors to bear in mind when people are working from home in terms of reduced avenues of inclusion. So that’s available on the website if you’re interested.
Coming to this particular context, I think remote working and physical distance adds certain issues that go against the objective of inclusivity. For example, in groups, if you’re part of a group that you’re comfortable with and if you’re working from home, chances are you’re going to continue working with the people in your in group because the opportunities to bump into people who’s not from your in group in the cafeteria or in the pantry are less. So that is one possibility. The second one is if you haven’t had a chance to develop a relationship with your boss to the extent that the boss fully appreciates that each one of the team members is different and diverse, you might be thinking, “Do I have to be present in all the Zoom calls? Because if I’m not, then maybe the boss will think I’m not working hard enough. I’m lazing around or something.” So this is called presenteeism, right? So where you have to be present to demonstrate that you’re working. You have the virtual version of presentees and people might be concerned that I want to be part of that.
But from a risk point of view, I think the biggest question, the dilemma that banks have, is what to do with the increased operational risk of having people dispersed and distributed and working from home? There’s no question that there is a greater operational risk from having people work remotely, whether it’s conduct, whether it’s cyber attacks, potential vectors of attacks if people are spread out in that manner. And then from a conduct and supervision point of view, given that after the global financial crisis, regulators have made such a big deal. Probably rightly so, they made such a big deal about supervisory responsibilities. The senior manager regime in the U.K. makes it very clear that the supervisor has a lot of personal responsibility in making sure that their supervisees are doing the right things. So how do you deal with this extra layer at a time of distancing? Do you go down the rule of greater surveillance? Do you track your people more and you make sure that you’re completely on top of everything they do? Or do you rely on culture, and behavior, and engagement, and trust? These are two very different things. And probably the right answer is somewhere in the middle. But you’ve got to be careful, because trying to go somewhere in the middle, you end up with one or the other.
So for example, if you over emphasize surveillance, you may signal a lack of trust, which means that you destroy any kind of culture or positive progress towards collaborative culture that you might want in the team. So you’ve got to get that balance right. And it’s important to get that balance right. When I was reading the postmortem of a major risk event that happened this year in one of the banks, actually in several of the banks, but one of the banks published their postmortem of what happened. It is possible to argue the risk event would not have been as material if the teams were sitting together and interacting in real time as opposed to being dispersed in various places. So there is a relationship, it would seem, between risk and working from home. I’m not saying that it cannot be overcome or that there may not be positives. It’s just something we need to think about with some extra and some special attention.
[00:32:51] AVH: Yeah. I mean, the cyber security risk is kind of obvious, right? If I’m on my home Wi-Fi, which is far less protected than probably the corporate office Wi-Fi or the corporate Internet. But I found it interesting that to think beyond this, people may not be so quick to interact with each other because they are remote. People might attend to their families, “Well, actually something really bad is happening.” This kind of non-measurable risk is really interesting. And to jump into the second point you made about having the multicultural layer is not really trivial in those global meetings or even regional meetings, right? How can I make sure as a leader that I have those perspectives in place? Does this mean I should get to know the people on an individual basis better and better so I can know how they react? But that leaves me open to maybe somebody new joins a team or I have to make a cross-decision where people from a different department that I don’t know yet are in the meeting. Should I take as a leader a more global approach and say, “Well, I want to know about best all the cultures or most the cultures I’m working with.”
For example, in my master’s, there’s been I think seven different countries and did all very different approaches to speaking in class. Some cultures were really quiet. And the professors are, “Did they get it? Didn’t they not get it?” Because they didn’t talk. But they also quietly go about their ways. And what’s the best approach here?
[00:34:30] LS: Sure. Well, first of all, you mentioned measurable and non-measurable risk. And I’m beginning to think that all risk that is actually consequential and are of interest a non-measurable risk. And sometimes the measurable risks give us a false sense of security. Coming to what should inclusive leaders do given the extra complexities of multicultural teams? A lot is the short answer. Diversity is hard work. We shouldn’t pretend that you just put together a diverse group of people and that’s it, job done. To really extract the benefits of inclusion, it requires hard work. And actually there are some costs at least in the near term. And I’ve been part of teams that have been extremely diverse, cognitively diverse and diverse in all sorts of ways, and we hated each other in the first instance. And over time, with a bit of investment, we then became, I think, excellent teams. So you go through a J-curve where there is a cost at the start but you end up in a higher place as a team. And unless the leader knows that and is supportive of that journey, they could totally end up in the wrong place. It is about investing time and effort in knowing about the engagement styles of various members of the team. It is about spending time before a meeting. Consequential, the important meetings, to really think about how I’m going to benefit from the diversity of perspectives of all the attendees that are going to come into those meetings. Little things like how do members of the team actually look at team building exercises that I have planned for them?
To give you some really trivial example, but it came up in our interviews, someone said outdoor team building exercises in the afternoon sun in Singapore are absolutely not the right thing to do particularly because, allegedly, some women absolutely did not want to take part in them. So you end up with a small group of people who seem to enjoy that and they take part in it. Or you take, at a completely different level, I suppose, Davos, the World Economic Forum. They have this concept of a night cap. At 10pm, people meet up and it’s supposed to be people winding down and in a place of interaction. But it’s typically of the same setting, very loud music and you struggle to hear each other. And so you don’t really end up getting a diversity of people turning up to those. So little things like that, well-meaning, but have we taken into cognizant the various preferences to things which are a bit more serious?
So in many emerging markets, it turns out it has – It can turn out that if you’re a bank and if you’ve lent money to a local company, your ability to get that money back is much more dependent on the quality of your relationship that your relationship manager has been working on for some time than on the formal legal documentation that you have in place. So if that relationship is driven by lawyers in New York versus you’re giving a little bit more autonomy to the country manager in Brazil or Indonesia or wherever they might be located, you might end up with a better outcome in the end. So you do need to be circumspect about the cultural dimensions. And I personally have had the title of global head twice in my career, once fairly early on sitting in London. And global really just meant that I was able to push my products out to various parts of the world. It’s only the second time around when I had visibility on emerging markets locations around the world that I realized that global is multi-local. And you have to have both a top-down and bottom-up perspective to that, which most of us have had to learn the hard way. So these things are what you would want inclusive leaders to be trained on.
[00:38:50] AVH: The last part of your answer, I want to dig deeper into that. And I guess the top-down approach is as a global leader, given, right? You’re the global leader. You’re sitting in London or Singapore and you just tell people around the world what to do. But how do you get the bottom-up approach? Do you spend time in each of the locations that you’re leading? Do you make frequent trips there? Or is it more about an actual interest in the local culture, for example?
[00:39:19] LS: All of the above, but also making sure that the team that you are part of. So you could be a global leadership team. You could be a global executive committee. Make sure that on that team you have people who have had some direct experience outside of just the global headquarters. And, to me, it’s still quite staggering how even in this day and age you have people that get promoted to the role of global head, which in itself is fine if that person is able to get trained on some of the things that I just mentioned. But then you have the entire global leadership team made up of people that have never worked outside of the global hub, the global headquarters. And it happens perhaps more in finance than in a consumer goods company. So I imagine a place like Unilever would have more people rotating through the various locations before they become global heads. But in finance, it still tends to be the case that you could have a very senior role without having had that exposure. Again, coming back to designing your executive teams, when you have a diverse team leading a department, an organization, make sure that that diversity includes international exposure.
[00:40:41] AVH: I think this experience and international exposure is a good segue to the last part of this interview. And our listeners are mostly young professionals, mid-level professionals, and students, I want to have this last part in two segments. One, the first segment is what you mentioned in the beginning, right? How can I as a student, young professional make my CV, my intro into the industry a bit more attractive to hiring manager, to global financial companies? And then the second segue, and I’m previewing this, is how can I make sure how can I position myself for a global leadership role? And I will tell maybe a quick story about that when we come to it. But let’s start with early stage career tips. You said earlier you want to hire for actions, not for CV. But how can I combine this that I may be more attractive to companies that actually hire for diversity of thinking?
[00:41:49] LS: Sure. I think, first of all, the fact that we are in the middle of the mother of all disruptions, right? So I think the best characterization of the state we’re in right now is radical uncertainty, which is the title of the book by Mervyn King and John Kay that came out last year. And radical uncertainty is an appreciation of the fact that the range of things we don’t know is a lot greater than what we thought it was. And that’s why we need a fundamental rethink in the way we assess uncertainties around us.
So what that means – And the various drivers to that one of which is the fourth industrial revolution and the technology innovations that are all around us. One of the positives of that, I guess, is that it has created more of an even starting line between people with a lot of experience and people with not a lot of experience in the traditional way of doing things. You can crowd source this. You can Uberize that. And you can get an app for this. And you can use a cloud for that. So the tools are available to more people at a retail level, whereas in the past, they were only available to large organizations.
So the startup world or having a startup attitude within a large organization, those avenues of innovation, almost compensating for lack of length of experience, is clearly positive for people in the early stage of their careers. One thing that I’ve always kept in mind for myself, which I would recommend for others as well is to think about acquiring unusual combinations of skills. And think about what is it or what are the areas that people think are totally non-combinable. People used to say to me, “Oh, if you’re a technical econometric statistics geek, you cannot be in sales or relationship management.” Well, actually, no. It is possible to do that. Or that if you’re in statistics trained in maths, from a probabilistic point of view, you cannot do well in something that requires an accounting or a cash flow approach to things. Or if you’re hardcore into macroeconomics, you wouldn’t know your geoeconomics.
And now with sustainability and ESG becoming more onto the center stage, clearly, the range of things that are required is wider. And so look for those combinations that are unusual, because I think that’s where you get your competitive advantage. And then the last thing is expect there to be a lot more change and velocity of change than before. So the fourth industrial revolution impacted us in the last seven or eight years already in at least two waves.
So take the example of the radiologist in, let’s say, the Philippines, who was super supremely empowered when he or she was able to receive X-rays from doctors in America overnight on emails or through file transfer protocols and give his or her diagnosis, send it back, and earn an income that way from the Philippines. A few years later, now machine learning does better diagnosis than a lot of humans do. So that same radiologist who was empowered is probably now going the other direction in just a short space of time.
So if we expect that there will be change, but we have a few basic core principles that we keep as constant, then hopefully we’ll suffer from less motion sickness than otherwise we would if we had absolutely no constant or no principles to hold on to.
[00:45:30] AVH: I love the example of combining two things that shouldn’t work together. The reason why I did my masters in financial engineering was so I can become a better state of structured products because I wanted to understand it better. And I thought this is like cool things to combine. So totally second that. Now, I hope you have a couple more minutes to dive into this experience as a global leader. And now the preface that I did before in – I heard from many bankers that took a chance and went from the headquarters, mostly of German banks, into the world, into emerging markets that they said they don’t want to stay too long because they are a bit afraid that they would lose touch with, as you said, the head office where they get promoted. How can I make sure to try to get a global exposure to maybe lead a diverse global team? Because I’m obviously in a better place if I’ve spent several years in different places without losing the touch to the head office where actually the promotions are and the decisions of who becomes global leader mostly are taken.
[00:46:41] LS: It’s a very good question. And I think this was more of an issue in the past, probably less and less so now. But in my mind, it’s a no contest. I think if unless you have personal reasons why you’re unable to take a posting outside of a major center, it’s an opportunity that can only be positive. When I look back on my own career right at the start in the first couple of years, I remember, and my colleagues from those days, if they listen to the podcast, they’ll recognize the time when I think the entire foreign exchange sales team of Deutsche Bank in Zurich had left. And so they needed a couple of people from London to go in and just keep things going for a while. And I and a couple of others or one other were sent to Zurich to do that. And I was paranoid because it was very early on in my career that my friends back in London were learning way too much than me and I’m going to be forever left behind. But it helped that I had very little else to do after working hours. So I think I over did in making sure that I was learning and staying on top of what needed to be done.
And so maybe that over learning has actually helped me when I came back to London and I resumed a career on that track. Every single role that I’ve ended up doing since then was created for me. This is not something I had designed. It’s only now that I look back. Every single role that I ended up taking on did not exist before I took the role on. The role that I came to do in Singapore right at the start with Barclays did not exist. The rule I ended up doing at UBS, again, did not exist or did not exist in the form that it was when I took it on.
And so I think if you have that exploratory mindset – And, of course, I was very lucky with the bosses that I had. If you’re lucky enough that you have bosses that recognize that and if you have that exploratory mindset, I think having more and more of a global mindset, more and more of a global exposure, can only be positive. And you learn some lessons in the very hard way. And I made some terrible interpersonal mistakes when I came to Singapore first from London in a cocky young guy thinking he knows everything about everything and quickly realizing not the case. It is tremendously beneficial. And I think it’s a no-contest. If you have that opportunity, go out and be multi-local before you become global.
[00:49:14] AVH: I mean, that every role that you’ve been working on in the mid or late stages of your career has been created for you. It also speaks to what you said at the beginning of the career section to have a kind of startup entrepreneurial mindset. And as I love traveling, I can only recommend. If you don’t do it for the global leadership experience, just do it for the experience of living exposing yourself to a different culture and to – You will not only grow professionally, but also personally, so much by living and working in a different culture, in a different land, in a different country, in a different city. This is just an amazing experience.
Before we wrap up, do you have any last comments? Any last remarks, anything that you want to leave our audience with?
[00:50:03] LS: Yeah, I guess this decade is the decade of sustainability. And I mentioned having certain principles or certain constants to help us navigate the radical uncertainty that we’re in. If you’re looking for an anchor, sustainability is probably a good one right now. There’re just a lot of possibilities. A lot of the discourse on climate change is negative and gloom and doom and all of that. But I think there’s a constructive way of looking at it. There’re a lot of positive possibilities. So I would very much encourage people to look at it that way. If anyone wants to continue the conversation, I’m available on LinkedIn. Reach out to me. Or Twitter. And we can take it up there.
[00:50:47] AVH: Perfect. Lutfey, we will link to everything you said, to the books you mentioned, Grey Rhino, The Six Thinking Hats, your LinkedIn and Twitter profile. And with that, Lutfey, it was great to catch up again. And thank you so much for coming on the show and having those interesting perspectives on global risk management.
[00:51:05] LS: Thank you for having me again. Take care. Bye-bye.
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