Next week marks the 8th anniversary of the Lehman collapse.
Thanks to the subsequent financial meltdown and its long-lasting consequences, the banking industry remains in a sorry state. Bank CEOs are still scratching their heads trying to identify the right business models that will lead them back to sustainably healthy RoEs. Weak economic growth, heavy regulation, low or non-existent NIMs, upstart fintech disruptors – the pressures are relentless. For many banks, simple survival is the overriding priority. Against this background, recent rumours of a merger between Deutsche Bank and Commerzbank are hardly surprising.
These strains on business models are well documented of course, and are understandably fully occupying the brightest brains on Wall St and elsewhere. But it’s not just business models that need fixing.
The real culprit of the financial crisis was of course culture. Culture in banking, to put it simply, rewarded greed. The combination of talented people, massive leverage and asymmetric information (banks knowing more/better than their clients) proved to be the headiest possible cocktail, and was an irresistible force driving behaviour and profits for decades. After working in investment banks for many years (and having been a client of investment banks before that), it became clear to me over two decades just how endemic this culture of greed really was. The more people were paid, the more they felt entitled to outsized compensation. The system rewarded greed.
The headlines have mainly been about excessive CEO compensation, rogue traders and LIBOR fixings. But anyone who worked in a front office environment would have borne witness to low-scale unethical behaviour every day. Sales people misleading clients to encourage them to do some business, traders pre-hedging expected flows, strategists coming up with trade recommendations of dubious value. Such was the pressure to produce and perform, all this was just seen as normal and acceptable business behaviour.
Of course the regulators have made it crystal clear in recent years that unethical behaviour at any level is totally unacceptable, and will face heavy consequences including potential imprisonment. Andrew Bailey, CEO of the FCA, set out in this speech a few months ago just how critical the question of culture in financial services is for regulators.
But can the industry wean itself off this culture of greed and still be profitable? Indeed do banks have the stomach and genuine desire to banish this culture of greed, at a time when bank stock prices and RoEs are so low?
Personally, I don’t believe that an ethical business culture and a profitable operation are somehow mutually exclusive. In my view, banking organisations which can prove demonstrably and sustainably to their clients – and regulators – that their culture enforces a “clients first” mentality will, over time, win market share from their competitors. A model of “outstanding client service” – understanding clients’ needs and servicing them brilliantly and relentlessly – is a winning proposition in any business. Pushing lucrative products at clients in the hope that some stick is not.
The returns to this “clients first” strategy might not be stratospheric like in the “glory days” of 15-20% RoEs, but that’s life, and that should not shy executives away from the pursuit of a totally ethical cultural model, consistent with a profitable operation.
How to define culture?
The problem with culture, as Andrew Bailey highlights, is that it is intangible. It is often said that culture comes from the top, but it exists at all levels of the organisation, and can be weak, strong, aligned or misaligned. Culture could be defined as the operating norms of an organisation, but what does that mean?
Culture is essentially about behaviour. When an employee makes a decision to act, he/she is guided by a set of rules – either explicit or implicit – which govern expected and acceptable behaviour. Those rules are usually wrapped up in annual objectives. In the past – for front office professionals – these were mainly profit-oriented: do this deal and you will generate X for the firm which implies Y for your bonus. The formulae varied, but the essential message was to make as much money as possible for the firm.
In my experience working in several investment banks (and having friends who have worked at the other main IBs), there was rarely any explicit description of a culture to guide employee behaviour. There was often a vision or mission statement – something that would inform clients and shareholders about general business aspirations. These, however, would usually be revised every few years to avoid them becoming somehow “stale” or less punchy than that of the bank next door. No doubt consultants made (and continue to make) a fortune advising on these mission statement makeovers.
Here are my thoughts on how to bring about effective and lasting cultural change.
Enter the Culture Statement
To avoid any doubt about the cultural aspirations of a firm, there should be a written culture statement. Crafted by the senior executives (not just the CEO), it should enshrine a core set of principles to guide behaviour and decision making. This is not something that should be handed off to consultants. If executives can’t identify the key principles to shape the correct behaviour of their people, they should not be running an organisation.
A culture statement, unlike a mission statement, should be inviolate and set in stone for as far as the eye can see. Why? Because correct principles of behaviour (like fairness, for example), have an eternal resonance, irrespective of the mood of the day. Behaviour which was ethical one thousand years ago is ethical today and will be ethical one thousand years hence. If the culture statement is thought to be open to revision, it is immediately less powerful as a force to direct behaviour.
Since any serious culture statement will be carved from granite – i.e., intended to last far longer than the authors and their successors – it is not something to rush out without deep consideration. It also needs to be simple and accessible, without jargon or abstract imagery. Any employee, any client, any regulator needs to be able to read a culture statement and be left in no doubt as to its clarity of purpose.
It also needs to be visible. A culture statement buried deep within a corporate website is pointless. A firm should have the moral courage to place it front and centre of all communication. A public declaration of intended principles of behaviour is a much more effective commitment than one hidden away from sight. This way, clients know exactly what to expect from the employees of a firm, and employees know exactly what is expected of them. The increased effectiveness of a public declaration of a commitment is in fact supported in studies of social influence (the effect being labelled by social psychologists as the Rule of Commitment).
Make Trust your cultural cornerstone
For a bank in search of a powerful cultural statement, one that demonstrably seeks to banish the culture of greed, there can be no better starting point than with trust.
Trust is a correct principle of behaviour and one that is the foundation of all effective, enduring and successful relationships, both personal and professional. Everyone knows what it is like to trust someone, and not to trust someone. The concept of trust is universally understood, with no room for misinterpretation. Trust is not easily won and yet is easily lost. Anyone who lies, misleads or deceives is breaking a trust.
The essence of good banking is trust. Placing trust in someone to look after your financial affairs is an enormous commitment, is rarely made lightly, and should not be a leap of faith. There are legions of stories of clients who have pulled business from a bank – either temporarily or permanently – because of a breach of trust. For an industry desperately in need of regaining the trust of the public, the crafting of culture statements centred on trust is an obvious starting point.
Trust of course ties in closely with integrity, honesty, accountability and responsibility. A culture statement enshrined in trust will draw heavily on these related principles of correct and ethical behaviour. All of these key words are simple and easily understood, but no less powerful for that.
To illustrate what a trust-oriented culture statement might look like, here’s an example which I have cobbled together (for free!):
“At Bank of New London, everything we do is centred around the principle of trust. We recognise that trust is a foundational aspect of any relationship, and that without it we cannot aspire to serve our clients. A decision to do business with Bank of New London is a decision to trust us, and every single one of our employees, to operate in the best interest of our clients, at all times, and on all occasions, without fail. We understand that the surest way to build long term relationships with our clients is via a total commitment to service centred on earning their trust.
Every employee is expected to behave with honesty and integrity, towards not just clients but also each other, our partners and our suppliers. Our recruitment and performance management policies are centred on building and enhancing our trust-centric culture. We will not tolerate any behaviour that is not aligned with our desire to earn that trust. We are all at Bank of New London accountable for our behaviour, and are responsible for supporting and encouraging those around us to adhere to the same high standards. Our commitment to securing and preserving our clients’ trust is permanent and total.”
That took me just ten minutes to mock up – it is simple, to the point and leaves no-one in doubt of what is expected of them. Imagine what a team of dedicated senior executives could achieve with a few months to master their own unique culture statement.
Implementing cultural change
We can easily now understand what an effective culture statement will start to look like. Any bank can craft a powerful and enduring culture statement based on trust and the related principles. If not already happening or done, this should be treated with more urgency than any discussion around strategy or business planning. The management guru Peter Drucker originated the phrase “Culture eats strategy for breakfast” and those words can have no more relevance for banking than they do today.
Whilst it should take weeks and more likely months to revise and hone the perfect culture statement, that is only the beginning of course. Then the really hard yards start – implementation.
Culture cannot be changed overnight. Leaders can’t influence the next quarterly, or even annual results by merely publishing the culture statement. In the long term, of course, culture will mean everything to results – great firms which survive challenging business cycles and dominate their industries all have great culture.
So the commitment to cultural change has to be made in the full knowledge that the impact on business results will probably be a long time coming. The key is for executives to see great culture not as an add-on, but a principal and critical vehicle for long term success. The commitment has to be there as if everything depends on it now. There has to be an urgency and resolve to implementing cultural change, every week, every month, every quarter, year in, year out. It has to be unrelenting.
In terms of reshaping business decisions around the culture statement, there are three essential aspects which, if implemented effectively, will go a long way to transforming the entire organisation in the right direction:
Once the culture statement has been agreed and published, it needs to be shared and reinforced relentlessly.
External marketing and branding needs to adapt to reflect the pre-eminence of the new cultural vision. Client facing teams need to be equipped with the tools to spread the message effectively.
Internal messaging needs to be delivered tirelessly, and with a religious zeal. Executives at all levels need to embrace and embody the new cultural ambition. Too often these kinds of “initiatives” are dropped, forgotten, or applied inconsistently throughout the organisation. Sceptical employees may initially think “Here we go again, more brainwashing”. So, there is a change management task to ensure that the message is delivered effectively, year in, year out, until total cultural change is complete.
All recruitment processes will have to be re-calibrated around the new culture statement. Technical skills are of course a critical minimum requirement and initial filter, but ultimately the hiring decision has to be around the character ethic of the individual. Do they embody the core principles in the culture statement? How can they demonstrate these behaviours, to the total satisfaction of the interviewers? Is there anything that raises a red flag?
Senior managers and HR should design together an interviewing system centred around a rigorous testing of these desired principles. This is not a simple task, but if done effectively, new employees will automatically strengthen firm culture in the desired direction. This process will weed out the hiring of ‘mates’ or ‘talented jerks’ who may promise good results but at the cost of good culture.
3) Performance management
Banks have classically concentrated rewards and promotion on employees who generate large revenues for the firm. With the implementation of regulatory caps on compensation, not to mention the collapse of industry profitability, compensation culture has changed dramatically. That said, compensation for front office employees is still heavily focused on performance and results rather than behaviours.
The easiest way to pull employees towards the desired culture is simply to measure and reward proper standards of behaviour, much more explicitly than has ever happened in the past. If objectives are framed in terms of the culture statement as well as budgets, behaviour will shift accordingly. Not easy to make this transition, and a big effort for managers, but who said it would be easy?
Employees who breach the principles of the culture statement should be in no doubt that they will be penalised. This is a tricky topic of course, but employees who step out of line have to face sanctions – loss of bonus, demotion or dismissal. Unless this happens – and is seen to happen – the commitment to a better culture will have a hollow ring to it.
Pulling it all together
Since these fundamental changes to core practices and behaviour will take some years to bear fruit, there is obviously the interim risk of lapses – bad eggs who commit a breach of trust and damage a client relationship or the firm’s reputation. No doubt some leaders would be averse to a public commitment to culture change precisely because this may come back to haunt them.
The bad news for bankers is that, if they want to be in the game, the rules have changed. There is no hiding any more and ever tighter regulatory scrutiny will only continue to uncover examples of unethical behaviours, malfeasance and malpractice.
There is no alternative. How can dragging your feet, or a half-hearted commitment, be any better than forging ahead with necessary change? That will only delay the eventual emergence of the new, better culture – while at the same time leaving your organisation open to further reputational risk.
And don’t forget, clients will reward those who get there first. Trust is a scarce commodity in the banking industry today. Those banks who reach that promised land the quickest and with the most visibility will have clients queuing around the block to give them business.