This article deals with the matrix management model, especially when it is applied in global banks, and the challenges it imposes to the governance principles.
A very poor man once received at night the visit of a ghost, who told him that he could become immensely rich if he presented himself to his people as ‘the chosen one from heaven’. So he did. The ghost then chose other hundred men, who he nominated generals and put them to work for the chosen one. The ghost’s only condition was that the generals should solely report to him, i.e. the ghost. The chosen one became insanely rich; his generals conquered many tribes, cities and even regions, bringing vast treasures. The chosen one was very happy and had a good life until the day came that an invading army composed by the oppressed tribes defeated his armies, killing all generals. The chosen one was then taken to trial where he sworn that he was not really in charge for his armies but in fact a ghost who no one could see or hear. At the end of the trial the chosen one was sentenced to death due to his crimes. The hangman read his sentence saying: ‘Great chosen one, for once in your life you’ll be then entitled to determine something and it will be how you want to die”. Fable by unknown author.
It is usual in global financial institutions to find business lines set-ups with regional competence centers reporting into the head office. These set-ups are not restricted to the commercial areas but are also commonly found in support areas as e.g. IT and Finance.
The local executives of subsidiaries or branches of foreign banks know very well those structures, which are regularly communicated by the HR departments through organizational charts showing functional and hierarchical reporting lines (usually a dotted line is used to represent a functional reporting and a solid one represents a hierarchical relationship).
The complexity of managing global businesses as well as the great importance of creating a sound strategic alignment, be it business or support related, call for this kind of matrix management models worldwide. The shareholder does not want to lose control and business focus when dealing in a global scale, and an excess of autonomy of local executives could facilitate this.
Nonetheless the matrix management model ends up creating various challenges for the day-to-day management, including relevant risks, as we have seen in well-known examples of devastating frauds and operational errors, which happened in global banks.
Let us take one example: One bank that assumes risk positions in the monetary, derivatives and capital markets. The head of this business line (also carrying a legal binding responsibility) gets his annual targets from overseas. His variable income is decided in another continent. To make things more complex, imagine that this business is split into different ‘books’, each one catering for a specific market segment (e.g. the money market book, the options book, the fixed income book, etc.). There are cases where the head of a determined book does not functionally report into the local head of the business line but rather into the global head of the book. The remuneration incentive is quite strong, as we know. The executive’s tendency therefore is to prioritize the aspects, which will impact his remuneration. To better understand who is really in charge of a business, one should find out who is ‘paying’ salary and bonus (‘follow the money’). The described example shows how complex the alignment of interests can be.
The Brazilian Central Bank and other control bodies seek a controlled, prudent and well-managed business environment. It won’t be of any help if a bank tries to explain an adverse event with the conflicts of a matrix management model. The local statutory board members will answer for it.
Well, then how to ensure the existence of minimally acceptable control and governance conditions, if someone who reports into someone who in turn reports into the CEO does not really report into anyone local about his business?
Despite the difficulties there are possible control and governance mechanisms, which should be subject of negotiation with the head office and should deserve great attention of the local statutory boards, when dealing with matrix management models.
This subject should be taken very seriously for as theory says, one cannot delegate responsibility.