Sailing against Diamond's ignorance

FT.com

In his letter to Barclays staff the day before his resignation, Bob Diamond used the naval phrase "on my watch” in finally accepting responsibility for traders' behaviour during his tenure. Diamond had struggled with the meaning of the phrase but eventually grasped, or was told, what it meant: that the corollary of unquestioned authority is unquestioned responsibility.

It is a lesson that has long been learnt in other industries. After all, what would happen if employees of a London casino were found colluding to rig games for the benefit of the house, and particularly themselves? The police would arrive in force, the company would lose its operating licence and senior management would be excluded from the industry.

We know this because it has happened. Twice. In the 1960s, inept deregulation allowed casinos to develop uncontrolled. In response, a new Gaming Board was established, which shut most casinos down and imposed rigorous standards on those that remained. George Raft, who played the gangster pursuing Marilyn Monroe in Some Like It Hot before becoming a casino director, was barred from the UK.

But standards slipped again. The new operators were never caught cheating but they engaged in inappropriate marketing and appeared to have favoured some customers too assiduously. The licences of the largest operator, Ladbrokes, were revoked: that day the roulette wheels spun to a halt for the last time and the clubs shut their doors. Most later reopened, the assets sold to different companies and management. The Playboy Club replaced Victor Lownes, its colourful boss, with a recently retired Royal Navy commander-in-chief.

These crackdowns provoked predictable warnings of regulatory overkill: no one would invest in the industry again; London's tourism sector would be destroyed. Neither of these fears had substance. Las Vegas and Macau may be the glitziest gaming resorts, but the destination of serious gamblers today is London, where margins are slim but profits high and tables famously honest. One of the rules that keeps them that way is strict separation between the house and the punters: the bank's interests are differentiated from and disclosed to the players. Another is that senior management and the company are unequivocally responsible for the behaviour of their employees. Of course, any large organisation will sometimes make a hiring mistake, and rectify it quickly. But any systematic pattern of misbehaviour has the consequences experienced by Ladbrokes.

And by the Playboy Club: Admiral Sir John Treacher was called to the bridge too late and the good ship Playboy was wrecked on the same rocks as Ladbrokes. But the company that hired him knew what it was doing: the navy operates on a principle of strict liability in which the captain is accountable for everything on his ship, whether he knew about it or not, and therefore tries to know as much as possible. And London casinos are required to operate in a similar way.

Managers and politicians prefer to follow the maxim of TS Eliot's cat: "When they reach the scene of crime, Macavity's not there.” On that maxim, an officer is responsible only for things of which he can be shown to have direct personal knowledge: his incentive is therefore to have formal knowledge of as little as possible. That defines the difference between the culture of the tight ship and the chaos of the school playground, which echoes with the cry of "it wasn't me!”.

These contrasting concepts of management responsibility have profound effects. There is a world of difference between an organisation in which you are rewarded for telling management what it needs to know and one in which you are punished for telling management what it does not wish to hear.

Casinos attract greedy people with deficient ethics: the fear this engenders frames regulation, the obligations we impose on executives and the culture we expect from operating companies.

Perhaps banks should operate to standards as high as those of casinos. There are two main arguments for splitting the utility of retail banking from the trading casino. One is to stop croupiers gambling with house money; the other is the incompatibility of trading and banking cultures. The Vickers commission on UK banking reform addressed the first. It is time to turn to the second.

Copyright The Financial Times Limited 2012.