Based on the below case study, (cite any references used).

• Describe at least three symptoms of groupthink that you note in the HBOS top management team and board of directors and provide examples to support your choices.
• Evaluate whether top management teams are more susceptible to groupthink or if managers at lower levels in an organization are more susceptible.
• Discuss the ethical implications of using a commission with ties to accounting firms to investigate other accounting firms.
• Explain at least two actions leaders can take to avoid groupthink.

Case Study 9.3Groupthink at the Top: The Collapse of HBOS It seemed like a merger made in financial heaven. In 2001, the Halifax Building Society of Britain merged with the Bank of Scotland to form HBOS. The union made a lot of sense. Halifax was a successful retail mortgage lender and Bank of Scotland had experience in corporate lending and treasury investments. Between them, the two well-respected institutions had 450 years of banking experience. Their combined assets of 30 billion pounds made HBOS one of the largest financial institutions in the United Kingdom. Yet, 7 years later, HBOS collapsed in one of the biggest bank failures in British history. The seeds of the bank's destruction were sown shortly after its formation. HBOS executives set out an aggressive growth strategy for HBOS based on increasing loan volume 17% to 20% a year. To reach this target, commercial loan officers had to target smaller, riskier borrowers. Financial regulators warned HBOS of the dangers of making such risky loans, but bank officers ignored their advice. When money loaned far outstripped deposits, the bank had to turn to outside underwriters for funds to make more loans. This made HBOS extremely vulnerable to downturns in the financial markets. When the mortgage crisis of 2007-2008 began, many borrowers defaulted and HBOS couldn't raise additional money to cover its losses. The British government forced HBOS to merge with the Lloyds banking group. However, government officials later had to inject 20.5 billion pounds into HBOS to keep it afloat. During the run up to the collapse, poor internal controls allowed managers at the HBOS Reading office to strip the assets of small businesses to fund trips, sex parties, and lavish gifts, generating a 240 million pound loss. A 2013 British Parliamentary review of the bank's collapse was titled "An Accident Waiting to Happen." Investigators condemned the bank's board and top managers, declaring, "The history of HBOS provides a manual of bad banking."1 Not only was the bank's growth strategy far too ambitious, the firm lacked adequate controls to estimate and control for risk. Loan officers were rewarded for reaching sales targets, not on the quality of their loans. Most of its board members had little or no expertise with risk management. Government regulators failed to carry out their responsibilities. Groupthink also played a significant role in the bank's demise. The top executive team, made up of bank chairman Dennis Stevenson, CEOs James Crosby and Andy Hornby, and commercial lending chief Peter Cummings, was supremely confident. In retrospect, their optimism appears delusional. In 2001, the chairman stated that any higher losses from making risky loans would be "more than compensated for by higher product margins."2 In 2006 and 2007, bank officers boldly proclaimed that the bank was adequately managing its risks and that they were more skilled than their competitors (this despite the fact that Cummings was the only senior official with significant banking knowledge and experience). As the global financial crisis loomed and other banks reduced their high-risk loan portfolios, HBOS loaned out even more money. Peter Cummings appeared to mock more prudent lenders, declaring,

The job of banks is to assess risk but in the last 18-24 months that's a job many banks seem to have forgotten....We never forgot. Our decision strength is assessing credit risk and assessing people. We're better at it....Some people look as if they are losing their nerve, beginning to panic even in today's testing property environment, not us.3

Top management at HBOS was quick to silence dissenters. Paul Moore, in charge of monitoring the bank's risk, recommended at one board meeting that HBOS reconsider its fast-growth strategy. His warning was ignored. The meeting minutes said instead that risk controls were adequate. When Moore demanded that the minutes be written to reflect his concerns, no changes were made. CEO Crosby fired him instead, replacing him with someone far less qualified. Board members rarely challenged the decisions of the top executive team and didn't engage in much substantive debate during board sessions.

Fallout from the HBOS collapse continues even though over a decade has passed. Both Stevenson and Crosby, who had been knighted, gave up their titles as Lords. They apologized for their role in the failure. Cummings was forced to pay 500,000 pounds in restitution and was banned from the financial industry. Britain's Financial Reporting Council (FRC) investigated accounting giant KPMG to determine if it was at fault for signing off on the bank's financial statements just prior to its collapse. The FRC cleared KPMG of any wrongdoing but admits it should have investigated sooner. Critics take issue with the FRC's conclusions, pointing out that the membership of the Financial Reporting Council is largely made up of former partners from KPMG and other major accounting firms. They have called for another inquiry. Lloyds stands accused of misleading investors and the public by not disclosing the Reading fraud losses before it took over HBOS. (The merger may not have occurred had it done so.) Parliament may launch an investigation to determine if there was a cover up.

As a result of the HBOS bail out and other banking scandals, a new law makes it a criminal offence for senior bank staff to engage in "reckless misconduct" which leads to bank failure. Those convicted of banking malpractice could face jail terms of up to 7 years.