Case Study and Bank

Managerial Hubris: Case Study of Farrow Bank

Instances of leaders and managers portraying overconfidence as far as their managerial behavior is concerned are not rare. This excessive overconfidence is referred to as managerial hubris (Brown, 2006). The individual overwhelmingly believes they cannot wrong. In most part, this behavior emanates from a sustained period of success, which makes the individual unrealistically perceive themselves as somewhat prone to error. Hubristic behavior can be costly to an organization, sometimes even leading to downfall (Hollow, 2014). This was particularly true for Farrow Bank, a booming bank in the early 20th century. The bank collapsed in 1920, with managerial hubris on the part of its founder and CEO, Thomas Farrow, being the major contributing factor. Focusing on the failure, this case study explores the implications of managerial hubris on organizational success. The case study particularly pays attention to four issues: how corporate culture, leadership, power, and motivation drove Thomas' hubristic behavior; the relationship between managerial hubris and ethical decision-making; the pressures associated with ethical decision-making at the bank; as well as the extent to which managerial hubris may have been avoided.

As depicted in the case study, four factors contributed to Thomas' hubristic behavior: power, leadership, corporate culture, and motivation. As early as the age of 19, Thomas was already close to power (Hollow, 2014). He served as a confidential and political secretary to powerful politicians in the British government, notably Rt. Hon W.H. Smith (head of the lower legislature) and Robert Yerbugh (legislator for Chester and head of the Agricultural Banks Association). Thomas' position gave him the authority to criticize the UK banking sector despite not even having any background in economics or finance.

With widespread dissatisfaction with the prevailing banks, Thomas established Farrow Bank in 1904 with a view to providing a cheaper alternative for low income consumers (Hollow, 2014). The bank drastically became a success, and had established 72 branches across England, Wales, Scotland and Ireland. The bank became the top bank in the UK in terms of not only geographical presence, but also banking innovation, deposits, and assets. The phenomenal success of the bank added to Thomas' overconfidence. He became more ambitious and envisioned himself as not only a leader in banking, but also an influential voice in issues of national policy. In his speeches and publications, Thomas exhibited arrogance, often painting the bank as a divine as opposed to a commercial entity (Hollow, 2014).

By losing touch with reality, Thomas permitted a dangerous culture to flourish in the bank. In 1920, following an acquisition deal, it emerged that the bank's financial figures were misleading (Hollow, 2014). The bank had over the years disregarded standard accounting practices. More unfortunately, with his excessive confidence and concern for self-image, Thomas had long abandoned auditing the bank's financial statements, leaving the job exclusively to the chief accountant, who was not competent enough for the job. However, lack of stringent accounting was informed by the fact that the bank had been incorporated as a credit institution as opposed to a conventional bank. This meant less regulatory oversight. The problem of substandard accounting was further compounded by an organizational setup that permitted Thomas to manage the bank as he deemed fit. He hired unqualified individuals, he rarely engaged staff members, and board appointments were made based on personal relationships rather than competence. This reckless corporate culture indicates how Thomas lost touch with the "reality of bank management" (Hollow, 2014: 11).

The case of Thomas evidently illustrates how managerial hubris can hinder ethical decision-making in the business environment. Business leaders are generally expected to adhere to certain ethical standards. This is crucial for protecting the interests of the various stakeholders an organization serves, including customers, employees, shareholders, regulators, and the public at large. The ethical standards to which bank managers are held to are perhaps higher given the criticality of the banking system. Nonetheless, Thomas ignored the realities that come with banking. He showed little concern for accounting norms and permitted incompetent individuals to occupy critical positions in the bank. This inattention to ethics largely contributed to the collapse of the bank, clearly showing how managerial hubris can be dangerous to organizations.

It could, however, be argued that there were significant pressures associated with ethical decision-making at the bank. Throughout trial and conviction, Thomas maintained that he had established the bank primarily with the aim of helping small savers, and that his foremost concern was to safeguard the interests of the shareholders of the bank (Hollow, 2014). This assertion appears somewhat plausible. The bank was without a doubt a noble cause. It revolutionized the British banking system and broke the dominance of large banks, giving small savers a cheaper option for credit. Even so, this should not have necessarily provided room for laxity in financial accounting. He should have been more concerned with the day-to-day operations of the bank -- that would have been the ultimate benchmark for protecting the interests of the bank's customers and shareholders.