The coverage of the scandal in The New York Times, as shown in the excerpts below, highlights a risk culture that went too far:

While management depicts the 31-year-old Mr. Kerviel as a lone operator who spiraled out of control, interviews with current and former Société Générale employees suggest that he was also the product of an environment where risk taking was embraced, as long as it made money for the bank.

"You must take positions, even if you are not a proprietary trader," said this employee, who insisted on anonymity because he was not authorized to talk to the press. "During appraisals by bosses, they made it clear you were judged by how well you did your basic job, as well as how much money you made on prop trades."

Kinner Lakhani, an analyst with ABN Amro in London: said, "Unlike some of their peers, Soc Gen was not shy about taking proprietary trading risks. Perhaps such businesses grew faster than risk management could cope."

Risk taking is essential for all organizations to maintain a competitive edge, especially in finance. So by what criteria do risks become unacceptable, especially when they seem to be paying off?

There are clear warning signs that many organizations are not looking at with the same degree of discernment as they do certain antifraud controls.

The derivatives group started in the 1980s as a small team of highly trained and highly regarded engineers and mathematicians from the best schools. They quickly became known as "les moines-soldats," the soldier-monks. And as their importance inside the bank grew, their confidence, even arrogance, grew with it.

Like the devout and disciplined fighters they were named for -- the monks who fought in the Crusades -- the soldier-monks of Société Générale prided themselves on rising above the passions that moved the masses.

Similarly, Société Générale's soldier-monks believed that they could manage both the risk inherent in betting on the markets, through complex computer models, and the ardor of their regular traders, through controls.

Their hubris was having too much faith in their power to do either.

In the world of finance, the killer instincts of traders are often generously rewarded, and perhaps rightly so. Many organizations are hesitant to hold back these elite managers for fear that they will lose their edge, which can be worth millions, or even billions of dollars. So how should elite risk takers be managed so they don't become limp-wristed bureaucrats?

The key is to be on guard for arrogance.

ar•ro•gant (ăr'ə-gənt) adj.
Having or displaying a sense of overbearing self-worth or self-importance.

Marked by or arising from a feeling or assumption of one's superiority toward others: an arrogant contempt for the weak.

The organization must be on the alert for values that permit high risk individuals to turn inward and be overly self-focused. When it takes smart individuals with strong egos to successfully take risks, the organization must balance those egos with a strong push towards goals and objectives that are larger than the individual. The military creates an esprit de corps through values such as service. Sports teams create a sense of shared fate and success.

Many organizations, like Société Générale, create a mystique around elite management groups that can lead to a sense of entitlement. Rules required of mere mortals don't apply to these "masters of the universe." Just as successful coaches in professional sports know how to manage the egos of their superstars, executive leadership must devote time and energy to understanding how to instill a sense of accountability and responsibility to its elite teams.

Elite management teams may need special treatment. But their special treatment should include oversight and accountability appropriate to their mission. Just as a single fighter pilot warrants a large support team that is meticulous in its attention to detail, elite traders warrant compliance professionals that understand their mission and their role to provide guidelines worthy of the risk and reward.

The downfall of Société Générale's leadership is in not creating a compliance infrastructure that matched the style and personal values of its elite traders. The extensive internal controls that were in place were not aligned with the culture that their elite traders had created, leading to the imbalance that could lead to the downfall of one of France's most esteemed institutions.

DAVID GEBLER, J.D. is President of Working Values, Ltd., a business ethics training and consulting firm specializing in developing behavior-based change to support compliance objectives. 

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