by René Rupert and John Denton

The world’s banks, previously thought to have well balanced risk portfolios, access to excellent information, and the world’s leading financial professionals to manage those risks, have been caught by the subprime crisis to the tune hundreds of billions of dollars.

How can the smart professionals leading and advising these banks be caught out so spectacularly?

Finding 1: Culture and mindset can prevent knowledge sharing

The first piece of evidence we examined was the report published by NASA after theColumbia disaster in 2003. In this case, smart professionals had failed too, and the report of the Columbia Accident Investigation Board http://caib.nasa.gov/ (CAIB) explains why: organisational culture and consequent mental attitudes prevented players from sharing knowledge properly.

Finding 2: There is no effective language for expressing mindset

We have observed that, as with perfumes, there is no proper language for articulating mindsets. As a result, it is very difficult to discuss mindset, or to learn from other’s experience. NASA's findings following Columbia could not be transferred to investment banking. The absence of an effective language for expressing mental attitudes (mindsets) means that their subsequent integrating into decision making is highly problematic.

Nevertheless, mindset builds from psychological dimensions and impacts financial performance. It is a KPI.

In order to stay in control of performance based on knowledge sharing, one must monitor mindset.

If managers don’t know where mindset is, how should they know that knowledge is properly shared?

Finding 3: Culture is a long way removed from value creation. Mindset is close

Culture and behaviour patterns can be mapped but cannot be clearly linked to value creation. Bestselling writer-researchers Jim Collins and Jerry Porras have written that visionary companies create a strong “cult-like” culture. In contrast, Harvard Business Schoolprofessors John Kotter and Jim Heskett conclude that there is no relationship between the strength of a culture and performance. Caught in that maze of conflicting opinions, managers trust various gurus and estimate that it is not in their capacity to look further. Many managers don’t see that monitoring culture is too far upstream from the key spot where mindset leads to action, and thus where value is created.

Finding 4: Solutions must address fundamental causes

Behaviour is the symptom, whereas mindset is the cause. Symptom driven decision making is highly misleading as Columbia Investigation’s experts found: the corrective action taken after the Challenger disaster had been symptom driven, but turned out to be wrong. In order to impact value creation, one must address the very source of value - its fundamental causes.

Finding 5: Disasters can result from the failure to share knowledge

It is remarkable to notice the similarity between the credit crunch and Shuttle disasters: the knowledge to prevent these was available but its sharing failed. The process of losing control is well understood and described, but being unformulated, it is not transferable and repeats itself, as predicted by John Kenneth Galbraith. This is how most corporate disasters including U.K.’s mad cow outbreak, Canadian Red Cross blood contamination, Merck’s Vioxx, the wreckage of the Erika, Bhopal and many more could develop. 2010: Gulf Oil Rig Disaster.

Finding 6: Inappropriate (too much or too little) knowledge sharing can be caused by inappropriate mindset

Mindset impacts the quality of human interactions: inappropriate mindset causes unproductive knowledge sharing, and thus value dissipation. Disasters are a visible part of this undermining process. Symptoms are high project failure rate, reduced innovation, overlaps, and unnecessary repeats. Mindset explains Leibenstein’s X-efficiency factor that reflects latent underperformance; vastly different yields were observed by Leibenstein in two almost identical plants in England and Germany. In the 1960s, the German plant of Ford was producing 40% more cars with 22% less labour.

Mindset, a key indicator to read the future

The indicator “mindset” enables anticipating and mitigating the process of latent value dissipation, hence giving weight to mindset monitoring in the knowledge economy. The classification of all management activities according to their impact on mindset enables us to build action plans that recover a significant part of the value currently dissipated.

At Rupert Consulting, the key question we consider is “how can the human factor be integrated into the strategy?” We have validated key dimensions that enable mapping of mindset and the cost of failing to address it. The resulting mindset indicator applies in industry and in organizations lacking financial indicators including education, research laboratories and public administration.

We make mindset-driven decision making possible, hence mindset (trust, autonomy at work) become manageable. This is fully in line with the needs of sustainability in the knowledge economy, in which mindset now plays the major role.