Expert answer:Farrow Bank Failure
Solved by verified expert:For this assignment, read the case study, The 1920 Farrow’s Bank failure: a case of managerial hubris. This case is located below (see reference below). Hollow, M. (2014). The 1920 farrow’s bank failure: A case of managerial hubris? Journal of Management History, 20(2), 164- 178. Thomas Farrow had been evaluated as having been inflicted by managerial hubris at the time of the bank’s collapse in 1920. With this in mind, address the following questions, with thorough explanations and well-supported rationale. 1. How did corporate culture, leadership, power and motivation affect Thomas’ level of managerial hubris? 2. Relate managerial hubris to ethical decision making and the overall impact on the business environment. 3. Explain the pressures associated with ethical decision making at Farrows Bank. 4. Evaluate whether the level of managerial hubris would have been decreased if Farrow Bank had a truly ethical business culture. Could this have affected the final outcome of Farrow Bank? Explain your position. Your response should be a minimum of three double- spaced pages. References should include your required reading, case study reference plus a minimum of one additional credible reference. All sources used must be referenced; paraphrased and quoted material must have accompanying citations, and cited per APA guidelines.
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For this assignment, read the case study, The 1920 Farrow’s Bank failure: a case of managerial hubris.
This case is located below (see reference below).
Hollow, M. (2014). The 1920 farrow’s bank failure: A case of managerial hubris? Journal of
Management History, 20(2), 164178.
Thomas Farrow had been evaluated as having been inflicted by managerial hubris at the time of the
bank’s collapse in 1920.
With this in mind, address the following questions, with thorough explanations and well-supported
rationale.
1. How did corporate culture, leadership, power and motivation affect Thomas’ level of managerial
hubris?
2. Relate managerial hubris to ethical decision making and the overall impact on the business
environment.
3. Explain the pressures associated with ethical decision making at Farrows Bank.
4. Evaluate whether the level of managerial hubris would have been decreased if Farrow Bank had a
truly ethical business culture. Could this have affected the final outcome of Farrow Bank? Explain your
position.
Your response should be a minimum of three double- spaced pages. References should include your
required reading, case study reference plus a minimum of one additional credible reference. All
sources used must be referenced; paraphrased and quoted material must have accompanying
citations, and cited per APA guidelines.
The 1920 Farrow’s Bank failure: a case of managerial hubris?
Author: Hollow, Matthew
Publication info: Journal of Management History ; Bradford 20.2 (2014): 164-178.
ProQuest document link
Abstract:
Purpose – The aim of this paper is to evaluate the extent to which hubristic behaviour on the part of
Thomas Farrow contributed to the downfall of Farrow’s Bank in 1920. Design/methodology/approach The article traces the way in which Thomas Farrow’s behaviour changed over the course of his
managerial career using primary sources obtained from various British archives, including: court records,
witness statements, auditors’ reports, newspapers, journals, and personal letters. The article then
evaluates Farrow’s actions in relation to the criteria outlined in Petit and Bollaert’s “Framework for
diagnosing CEO hubris” so as to assess how far he can be said to have become afflicted by managerial
hubris. Findings – All the collected evidence points to the conclusion that Thomas Farrow had, by the
time of the Bank’s collapse in 1920, become afflicted by managerial hubris. This was reflected most
clearly in the fact that he increasingly came to view himself as being somehow above and beyond the
laws of the wider community. As a result, he felt little compunction about fraudulently writing-up the
Bank’s assets so as to cover the huge losses that his reckless investments had produced. Practical
implications – The Farrow’s Bank episode confirms that the probability of management hubris
materialising is enhanced when external control mechanisms are either lacking or inefficiently applied.
On top of this, the amateurish organizational set-up of the Bank also suggests that the likelihood of
hubris syndrome developing is enhanced when organizations themselves grant too much discretion to
their leaders. Originality/value – The paper breaks new ground by applying the latest management and
psychology theories on the subject of leadership hubris to the field of financial management. Its value
lies in the fact that it provides scholars and practitioners with an in-depth insight into how hubris
syndrome can develop in organizational settings.
Full text:
Introduction
Since being re-introduced back into academic debate by Ian Kershaw in 1998 with the publication of
part one of his two-part biography of Hitler ([23] Kershaw, 1998), the concept of leadership hubris – or
“hubris syndrome”, as it is sometimes known – has enjoyed something of a resurgence amongst both
historians and management academics. Used to describe the process by which those in positions of
great power become so overwhelmingly self-confident that they start to lose contact with reality (often
with disastrous consequences), it has been applied to everything from the over-evaluation of companies
by CEOs in corporate mergers ([21] Hiller and Hambrick, 2005) to the arrogance displayed by diplomats
during international peace-building missions ([32] Owen, 2006; [40] Richmond and Franks, 2007). More
recently, a growing body of literature has built-up looking at the extent to which the current post-2007
financial crises was brought about by the hubristic behaviour of bankers and technocratic elites in the
financial sector ([14] Engelen et al. , 2012; [36] Petit and Bollaert, 2012). This paper contributes to these
debates by providing an in-depth analysis of a past UK banking failure – the 1920 Farrow’s Bank failure with a particular focus on the extent to which hubristic behaviour on the part of the Bank’s manager
contributed to its downfall.
Although the literature on past bank failures and financial panics in Britain has increased enormously in
the wake of the 2007 financial crises ([6] Cassis, 2011; [39] Reinhart and Rogoff, 2009), there has up until
now been virtually nothing written about the origins and growth of Farrow’s Bank nor any real attempt
to analyse the factors involved in its failure in 1920. Such neglect is all the more remarkable given the
fact that the Farrow’s Bank failure came at a time when the British banking sector had, thanks chiefly to
increased levels of professionalisation and regulation, largely divested itself from the sort of amateurish
mismanagement that had been such a feature of the Victorian era ([29] Michie, 2003; [41] Robb, 2002).
This article begins to address some of these issues, looking both at the growth of the Bank and the
factors involved in its failure. Evidence is taken from a range of sources, including personal letters,
minute books, personal testimonies and company reports. Particular attention is given to looking at the
behaviour of the Bank’s manager – Thomas Farrow – in both the day-to-day running of the Bank and in
the aftermath of its failure, with the chief concern being to diagnose the extent to which he can be said
to have been afflicted by hubris syndrome.
The article unfolds in stages. In the first section, the current body of literature and research on
leadership hubris is analysed in more detail and a working model of the condition is outlined, complete
with a list of standard symptoms. This working model forms the checklist against which the behaviour
and actions of the Thomas Farrow’s are analysed and assessed. The article then moves on to look at
Farrow’s early career as a campaigner against usury and considers how this work inspired him to
subsequently establish Farrow’s Bank. Also analysed are the grandiose methods and language used by
Farrow to present himself and his Bank to the world. The next section then focuses on Farrow’s
(mis)management of the Bank, outlining how he covered-up the Bank’s huge trading losses by
fraudulently over-evaluating assets and drawing-up false balance sheets as well as looking at how it was
that a fraud of such scale was able to go undetected for so long. Indeed, in this section the concept of
managerial hubris is particularly useful as it helps to make sense of how someone who, publicly at least,
was so critical of unscrupulous banking behaviour could himself orchestrate a fraud of such magnitude.
Finally, in the last section the focus switches to the trial of Farrow and the Bank’s management. Making
use of both the evidence presented in court and the testimonies of those involved in the trial, it shows
how, even after his fraudulent activities had been uncovered, Farrow remained unapologetic for his
actions and refused to accept that he had done anything wrong. Moreover, it also shows how Farrow
continued to believe that his past sacrifices and personal successes not only entitled him to some sort of
special dispensation from the law, but also uniquely qualified him as the man most able to lead the Bank
out of trouble.
Hubris syndrome
Originating in ancient Greece, the term “hubris” was first used to describe those who displayed “wanton
insolence” or “arrogance” resulting from excessive pride or self-confidence ([4] Bergman, 1986).
Typically used to indicate a loss of contact with reality, the descent into hubris was often thought to
invite disaster (usually in the form of the Goddess Nemesis) and was considered one of the greatest
crimes in ancient Greek society ([18] Fisher, 2003). More recently, the term has been used to analyse
and make sense of the actions of contemporary heads of government, notably by Ian [23] Kershaw
(1998), Peter [3] Beinart (2010) and, in a much more physiological manner, by David [34] Owen (2012).
In this context, the term has been used to describe how certain leaders, when put in positions of
immense power, seem to become irrationally self-confident in their own abilities, increasingly reluctant
to listen to the advice of others and progressively more impulsive in their actions (see the following list).
According to [33] Owen (2008), such behavioural traits have been displayed by a number of dictators
and democratically-elected heads of state over the past 100 years[1] , often with harmful results for the
wider population. [35] Owen and Davies’s (2009) criteria for diagnosing hubris syndrome are as follows:
A narcissistic propensity to see their world primarily as an arena in which to exercise power and seek
glory.
A predisposition to take actions which seem likely to cast the individual in a good light.
A disproportionate concern with image and presentation.
A messianic manner of talking about current activities and a tendency to exaltation.
An identification with the nation, or organization, to the extent that the individual regards his/her
outlook and interests as identical.
A tendency to speak in the third person or use the royal “we”.
Excessive confidence in the individual’s own judgement and contempt for the advice or criticism of
others.
Exaggerated self-belief, bordering on a sense of omnipotence, in what they personally can achieve.
A belief that rather than being accountable to the mundane court of colleagues or public opinion, the
court to which they answer is: History or God.
An unshakeable belief that in that court they will be vindicated.
Loss of contact with reality; often associated with progressive isolation.
Restlessness, recklessness and impulsiveness.
A tendency to allow their “broad vision”, about the moral rectitude of a proposed course, to obviate the
need to consider practicality, cost or outcomes.
Hubristic incompetence, where things go wrong because too much self-confidence has led the leader
not to worry about the nuts-and-bolts of policy.
Similarly, the term “hubris” has also been used in recent years by a growing number of business and
management academics. The pioneer in this respect was Richard [42] Roll (1986), who first used the
term to describe how hubris-infected acquiring CEOs were, as a result of their tendency to over-valuate
assets, often responsible for the losses incurred by shareholders during mergers. In a similar vein, [19]
Haywood and Hambrick (1997) have argued that the post-acquisition performance of firms purchased
by hubristically-inclined CEOs tends to be worse than that of the firms purchased by non-hubristicallyinclined CEOs. More recently, [20] Hayward et al. (2006) have developed a “hubris theory of
entrepreneurship” to explain why, despite the high incidence of new venture failures, so many
entrepreneurs continue to want to establish new business ventures. Likewise, [26] Li and Tang (2010)
have shown that hubristic tendencies on the part of CEOs are likely to lead to higher levels of risk-taking
amongst manufacturing firms.
Yet, despite this increase in interest, the literature on leadership hubris has remained somewhat
splintered. One of the main problems is that often the concept of hubris is poorly defined. This is
especially true for much of the literature on hubris in the business and finance sectors. In particular,
there is often a tendency to switch between different terms and a general lack of clarity about what
exactly different academics mean when they refer to leadership hubris ([28] Maccoby, 2000). For
instance, in many studies on management decisions in the corporate finance sector there has been a
failure to differentiate between the concept of “overconfidence” – defined in the social and cognitive
psychology literature as “an overestimation of one’s own abilities and outcomes relating to one’s own
personal situation” ([25] Langer, 1975) – and that of “hubris”. Likewise, there has been relatively little
attempt in the management and corporate finance literature to differentiate leadership hubris from
what psychologists have termed “narcissistic personality disorder” (NPD) – defined in the 2000
Diagnostic and Statistical Manual of Mental Disorders as “a pervasive pattern of grandiosity (in fantasy
or behaviour), need for admiration, and lack of empathy” ([5] Bollaert and Petit, 2010)[2] .
In a bid to overcome these issues, [36] Petit and Bollaert (2012) have recently constructed a generic
model that provides a framework for diagnosing levels of hubris amongst CEOs and business leaders
(see Table I [Figure omitted. See Article Image.]). This is the model that will be adopted in this article and
used as the checklist against which Thomas Farrow’s actions will be assessed. The model itself is heavily
based on the one drawn-up by Owen and Davies in 2009 and identifies many of the same symptoms and
behavioural traits. Indeed, like [35] Owen and Davies’s (2009) model, Bollaert and Petit’s framework is
based on the premise that hubris syndrome is an acquired condition, in that it can only be triggered by
accession to a position of power. In this way, the condition of hubris syndrome is clearly differentiated
from other individual pathological personality disorders such as NPD or APD which are the result of
personal character traits. Where Bollaert and Petit’s framework differs from Owen and Davies’s,
however, is in its separation of attitudes and behaviours (both of which are important factors in cases of
leadership hubris). On top of this, Bollaert and Petit’s framework has also been explicitly produced in
order to diagnose hubris syndrome in the business environment, whereas Owen and Davies’s is very
much more centred on the political sphere. As such, it provides a concise and workable model against
which to diagnose the extent to which individual business leaders can be identified as suffering from
hubris syndrome.
Thomas Farrow and the emergence of Farrow’s bank
By the standards of the time, Thomas Farrow had a fairly comfortable and unremarkable middle-class
upbringing. Born just outside of Norwich in 1862, he moved to London in 1881 to take up the role of
confidential secretary to the Rt. Hon W.H. Smith, Leader of the House of Commons ([31] Ogan, 1937).
This was a role that he held until 1891 when, following Smith’s death, he became political secretary to
Mr Robert Yerburgh, the President of the Agricultural Banks Association and an MP for Chester [45] (
The Times , 1921a). Whilst it would be overstating things to try and suggest that, even at this stage of his
life, Thomas Farrow had some sort of innate predisposition to viewing himself as being somehow above
the laws of the land, it is clear that he was not afraid to voice his opinions. Indeed, despite lacking any
formal training in economics or finance, Farrow rapidly established himself as one of the more
outspoken critics of the British banking sector in and around Whitehall. Of particular concern to him was
the problem of usury and, what he perceived to be, the unwillingness of the banking sector to provide
for those of limited means. In 1895, he published his first book – The Moneylender Unmasked – and he
was later asked to give evidence before a government select committee on the subject of usury ([43]
Russell, 1897)[3] .
Yet, despite these relative successes, Farrow remained dissatisfied with the levels of financial protection
offered to those of small means and in 1901 he formed the Mutual Credit and Deposit Bank in Croydon.
This small-scale experiment proved successful and in 1904 he founded Farrow’s Bank (PRO, DPP 1/55).
Designed specifically for small savers, Farrow’s Bank differentiated itself from its competitors on the
market by offering 1.5 per cent interest (this later rose to 2.5 per cent) on current accounts which
maintained a minimum balance of £10 for at least six months (LRO, Misc. 1015). Generous repayment
terms were also offered to those looking to borrow small amounts of money, with Farrow claiming, in
somewhat extravagant terms, that his new institution represented “a death blow to usury” (PRO, DPP
1/55). Whether or not this was the case, Farrow’s Bank certainly proved popular and on 16 May 1907 it
was officially registered as a listed company with Farrow fulfilling the role of Chairman and Managing
Director.
Both in terms of its structure and the way in which it marketed itself, Farrow’s Bank was very much
following in the tradition of organisations such as the Birkbeck Bank and the Charing Cross Bank in that it
specifically sought to fill a gap in the market by catering to those who found it difficult to obtain
reasonable credit facilities from the large joint-stock clearing banks but still wanted an alternative to the
overtly-philanthropic, state-backed Post Office Savings Banks ([22] Johnson, 1985). Deposit accounts
with a guaranteed interest rate of at least 3 per cent could be opened from as little as 1 s. upwards and
facilities were available for the buying and selling of stocks and shares. On top of this, Farrow was also
highly innovative in terms of how he marketed his Bank. Specially produced Hebrew adverts were
produced for circulation in Jewish periodicals, whilst from 1907 onwards an in-house journal – the
Farrow’s Bank Gazette (hereafter FBG ) – was also produced and circulated to all customers ([2] Bankers’
Magazine, 1914, July, p. 88). Another innovative tactic introduced by Farrow was the establishment of a
specially designated “Bank for Women” at 263 Knightsbridge Road, London, which was “managed by
women for women” and featured “special banking facilities for lady clients” ([16] FBG, 1915 , July , p.
82).
On the surface, at least, Farrow’s Bank was an overwhelming success. By 1913, the Bank’s nominal
capital had been increased to £1,000,000 and shareholders were receiving regular dividends of upwards
of 6 per cent ([16] FBG, 1913 , August, pp. 115-7). Geographically too the Bank rapidly extended its
reach and by 1915 it had a network of 72 branches, including offices in Scotland, Wales and Ireland ([16]
FBG, 1915 , July, p. 82). Similarly, Farrow was keen to point to the fact that, according to the figures
published in official banking returns, Farrow’s Bank was ranked at the top of the table for all London and
Provincial Banks with respect to the proportion of capital and reserves to liabilities (claimed to be 32 per
cent in 1914). Even the outbreak and subsequent turmoil of the First World War failed to disrupt the
Bank’s growth, with the amount of money deposited increasing from £166,304 in 1908 to £2,033,419 by
1917 ([16] FBG, 1915 , July, p. 66). Indeed, right up to 1920 the Bank’s Annual Reports continued to
present hugely impressive figures, with the recorded assets swelling to £4,657,786 by September 1920
(see Table II [Figure omitted. See Article Image.]).
Significantly, as the size and prominence of the Bank increased so too did Farrow’s self-confidence and
ambition. Envisaging himself as being more than just a mere banker, he began to devote more and more
time to airing his views on matters of national policy and industrial legislation, using the pages of his
Bank’s in-house publications to sketch-out his ideas fo …
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