Banging the Cultural Drum for Banks

 

Banging the Cultural Drum for Banks

Banging the Cultural Drum for Banks

Culture – the total of the inherited ideas, beliefs, values, and knowledge, which constitute the shared bases of social action (Collins English Dictionary) 

Ethics – the moral value of human conduct and of the rules and principles that ought to govern it |(Collins English dictionary)

“The epitome of the multifarious cultural and ethical failures at the bank include the fact its investment banking arm, now due to be largely shut down, was only able to thrive by cheating, and that the arm, now called Markets and Investment Banking (M&IB), continued to rig various benchmarks, swindling investors and counterparties, for years after the bailout.” Ian Fraser – describing one aspect of his book “Shredded: Inside RBS The Bank That Broke Britain”


 

Just last week, Cass Business School and New City Agenda issued: A Report on the Culture of British Retail Banking . It is a useful analysis of the banking failures but, for once, centred on culture at the banks. As such, it deserves attention.

In a previous note my focus was on how the banks had got themselves into a grand mess because they rushed into a culture that was short-term and focused more on individuals working for the banks than their customers.

The Cass / NCA report is a useful attempt to understand the cultural problems of the banks and what needs to be done to change those problems. It seems churlish of me to sound a note of concern with the analysis bearing in mind how much I have written on the need but, despite the work that has gone into the study, I do find some serious gaps in the assumptions, the recommendations and the risks.

 

  1. Society

 

One concern is that the study suggests banks (particularly the larger ones) are similar to any other large companies – like those in the oil sector (to which reference is made concerning culture change) – and should therefore be treated like those in other sectors. Unfortunately, banking is unlike any other sector.

 

  • No other sector creates money;
  • No other sector holds the rest of the economy to ransom through its systemic economic risk;
  • No other sector is so intertwined with economies and governments.

 

For these reasons, the thought that banks have to be allowed to take care of themselves (which is a crucial assumption of the report) contains dangers that the report does not examine. While banks are intimately involved with other organisations in both private and public sectors, the report does not seem to share a view that wider society has a stake in them. The fact that general taxpayers are paying off the burden of their recent misdeeds is a real and proper concern. It is not just “customers” (a key focus of the report) that feel the problem of poor investment in IT or bad service – it is also all those affected by huge government deficits and cut-backs that have been the result of the banking induced crisis. I don’t see this recognition.

 

What this means is that banks cannot just be left alone to reflect on their cultures. There does need to be a societal involvement in the cultural thinking that shows banks understand what they are there for – which is different to most industries. This culture is not just about being sustainable or not creating “externalities” (like oil companies should be focused on – e.g. pollution) but on the central role that banks play in society and the huge risks that they provide. This short note is not the place to examine the role that banks should perform (although I have touched on that before – https://jeffkaye.wordpress.com/2012/02/05/banks-and-time-travel/) but their national and economic roles and their inherent risks have to be important aspects of their culture.

 

  1. Ethics

 

The mention of ethics in the banking system is a touchy one. Ethical codes are often there to be abused (viz. FIFA) but the banks perform such a key role in society that they should not be allowed to differ in how they develop ethics codes and they should be regulated around ethical behavior.

 

The word “ethics” appears fleetingly in the Cass / New City Agenda report. Yet, it should be the basis upon which culture is developed. It is via an ethical approach to its customers and wider society that banks need to be based. The report focuses on how banking culture has been “Sales” led (even excessively so) but this would not have happened if banking culture and banking leaders had been ethical in their approach.

 

  1. Accountability

 

Again, the report states that the banks operated a “Sales Culture” – and was excessive in that direction. Of course, all businesses have to operate a sales culture to a degree or they go out of business. But, the extreme form of “sales culture” that operated was enabled by top management.

 

It can be stated reasonably that banks operated (and still operate) without a culture of accountability. Another crucial organisational mandate that appears to be missing from the analysis in the report is this one – individuals within the banks seemed to be accountable to themselves or to just small groups. The businesses did not seem to have areas of key accountability for such fundamental mistakes and still do not. Any successful business or organisational culture requires accountability – culture is driven from the top so that it must be clear that “the top” has to be clearly accountable for major deviations.

 

This accountability has to be within the Board, Board Committees, Regulators and Auditors. The culture has to be clear that accountability is embedded within it.

 

  1. Governance

 

This is linked to accountability, of course, but Governance has to include the oversight of business culture – which is itself wrapped within the overall purpose of the organization. Governance is, by law, the responsibility of the Board acting on behalf of shareholders. However, in the case of large banks – and this becomes a crucial requirement – societal governance should also be required. A bank’s board, when deemed to be large enough, should include Directors who are there to judge whether the bank is meeting its societal objectives – a privately owned, market-driven business but with key societal objectives. This is, therefore, linked to both accountability and societal inclusion. Having The Banking Standards Review Council under the auspices of Sir Richard Lambert is fine but this Council is likely to be dominated by the banks – indeed, Sir Richard is looking to the banks and building societies for members – a bit like the police governing the police. The BSRC (if it is to work at all) needs outside members who are not influenced overmuch by the banking fraternity.

 

  1. International Norms

 

Another problem for the banks (and the report) is that we now live in a global economy. As in the period leading up to the disasters of 2007/8, our banks did not act alone but were in a group of western banks throughout Europe and the USA that played the same game. Next time, the centre of the storm may be elsewhere.

 

This requires some real thought being given to how British banking will (if it adopts sustainable cultures) not be persuaded to ditch their ethics if others go haywire as in 2007/8. This requires international banking to be based on the same footing. It may require a set of ethical baselines such as the one that EITI (The Extractive Industry Transparency Initiative) has developed for that industry.

 

  1. Sustainability

 

Covering all of the above is the need to banks to be properly sustainable – and the report does focus on ridding the industry of its short-termism. However, this is, again, for both the industry and for society to develop a sustainable path – as banks are often too big to be left to themselves and have shown a distinct lack of ability to judge what will make them sustainable.

 

  1. Risk and pay

 

The final issue I believe has been de-focused is that bankers pay themselves when they do well and just lose bonuses when they don’t. Assuming they work within the law, why are bankers paid as entrepreneurs on the upside but as staff on the downside?

 

If pay is to be maintained on the upside, then so does the opposite apply. Entrepreneurs are risk animals that bet their own money to reap fortunes if they succeed. A major flaw in our economies is how the financial sector and managers within it (to a reduced extent the same in other sectors) have captured the winnings from those with “skin in the game” – which used to be the shareholders.

 

The latter suffer the risk of loss on the downside, bankers do not. This should be changed.

 

21st Century Banking Culture

 

Society, Ethics, Accountability and Governance appear to be the basis for any banking system in the global economy of the 21st Century. While the report is highly practical and research based, leaders within the UK (not just bankers) should be developing the strategies for the future based on a society that will perform and that we want to be part of.

 

Banking is too important to be left to just practical considerations. Real leadership is required and unless societal, ethical, accountability and governance concerns are fully embedded into banking culture, the same problems will arise time and again.

Banking on Politicians?

I have just read two books that should be read by anyone interested in the huge banking and financial problems that face us:

The Finance Curse by Nicholas Shaxson and John Christensen;

Just Money by Ann Pettifor

Both attack the finance industry and my brief comments on the two books are as follows:

The Finance Curse: Shaxson and Christensen compare the Finance Curse to the Resource Curse that afflicts so many resource-rich, economically-poor nations. The Finance Curse is a more complex story and as difficult to resolve. It is analysed well even if the suggestions about to solve the Finance Curse could have done with more time and resolve. This is a highly important subject that two knowledgeable writers focus on with passion. Clearly, one book will not solve the problem that has taken root over several hundred years but the world is waking up (slowly) to the issue and this book assists that wakening process.

Just Money: Focuses on how Keynes’ monetary policies have been overtaken and forgotten and how modern-day rogue banking is fleecing (as rentiers) business people and society at large.
It is a convincing account of the rentier landlords of money, the new robber barons who have put a cost to the trust that money was invented for.
If right, Ann Pettifor’s future is bleak as her need for political change is mired by the lack of ability of politicians and even business people to understand the problem – the same misunderstanding is apparent in economics. This suggests that, if she is right in her analysis and prescription, no-one will change anything – even after the terrors of the 2007 banking crash. Add to this the positions that bankers and ex-bankers hold in the Establishment and the likely future is more money being absorbed by the banking system and its “owners”.

Financialisation

The overt Financialisation of our economies have progressed to a degree that is now untenable. I wrote about this in my earlier posting in 2012: The Financialist-Political Complex where I likened the supremacy of the banking fraternity to the Military-Industrial Complex identified by Eisenhower after WWII as the key danger to society.

If that danger has been heeded and (maybe) reduced, the new danger to all of us that want to enrich society (and that includes real entrepreneurs) is banking and finance.

In my earlier posting I included the following quote from Tom Armistead:

Banks need to be returned to their primary purpose, which is to serve the real economy, as financial intermediaries between those who work, save and invest, and those who need funds to create new means of production, or to buy a home, or a car.

Yet, Ed Miliband today focuses on a break-up of ownership of bank branches as the answer – as if retail banking of this type was the problem. Ann Pettifor must be screaming at the wrong attack on the wrong enemy – it is the internationalism of banking and the rentier progress of the international banks; Nick Shaxson must be amazed at the simple-minded attitudes of politicians that go for quick sound bites rather than tackle the core issues – how massive banking centres like in the UK damage our economy.

We cannot bank on politicians clearly – they don’t understand. So, the question is who does? While I may not grasp all of the issues myself and while I may not agree with all the remedies that Messrs Pettifor, Shaxson and Christensen propose (and I propose different ones in my earlier post- like a Foreign Corrupt Practices Act for banking), I am sane enough (I think) to grasp the intensity of the problem and to see that our politicians seem either not to have a clue or to be in hock to the bankers (a point I made in that earlier post).

Either way, the two books show the problems starkly but maybe we need a bunch of NGO’s and radical economists (at least as radical as Keynes) to help understanding and an economic overturn of the new rentiers that are destabilising our economies and leading to vast wealth (in money terms) going to fewer people at the top and the destruction of the middle classes.

Schools get fleeced – and we all watch

The Bureau of Investigative Journalism recently published an article (http://www.thebureauinvestigates.com/2012/09/25/schools-fleeced-by-it-scammers/comment-page-1/#comment-9117) following the exposure on Panorama (BBC 1) that schools in the UK had been “fleeced” by IT companies (“scammers”). The article and Panorama drew attention to schools which are burdened by the need to run themselves as businesses and are often ill-equipped to do so when set against the complicated requirements of funding, procurement, suppliers and the like.

 

The BIJ summed up the problem with the thought that the FMSiS (Financial Management Standard in Schools) had been wrongly abolished and that the Government should think again. It was abolished after it had become a paper ticking exercise as reported by the Government in 2010 in their White Paper – “The Importance of Teaching” – http://www.education.gov.uk/inthenews/inthenews/a0067711/government-announces-end-of-complex-school-financial-reporting-tool.

 

The BIJ article missed the fact that most of the schemes that Panorama reported on were entered into while the FMSiS was in place!

 

Why is Finance so hard for non-profits (public and private sector)?

 

This does not just happen in Schools – it happens wherever greater knowledge is brought to bear.

 

So, the banks have run out of control and, five years’ later, we remain stunned that the financial regulators did not see this coming – or even understand the huge range of sub-prime schemes, poor management controls, over-leveraging, bad morality, lack of risk aversion, inability for banks to fail, dislike of customers and similar.

 

In the same way, companies like Enron fooled their highly paid auditors (some of whom connived with them) – we never learned much from that or from the countless, other financial scams that have been served up on unsuspecting publics since at least the south Sea Bubble in 1720 and for thousands of years before.

 

But, we expect more from public sector and the third sector organisations that supposedly guard our taxes and donations. What makes it so hard for them to adequately ensure that the financial and support arms of those organisations are able to be a good as all those they work with?

 

Where the incentives are

 

Of course, much has been written about how the wealth potential of banks suck in those with the highest intelligence and motivation (and maybe those with the lowest ethics) and that the regulators are filled with those who cannot compete – maybe those who failed to make it in banking themselves.

 

Enron was full of highly motivated and driven people who bought into a scheme (or schemes) and worked like fury to implement their scam / scheme. The manipulation of an energy market was not understood by the regulators and auditors just as auditors and clients failed to understand how Bernie Madoff was making such returns on their “investments”.

 

In a money-driven economy, which has created tremendous wealth for society, there are, at the margins and even more in the centre, incentives provided to people that lure those who are massively motivated and driven to participate – to work 24 hours a day, to spend their time working up schemes to make money and their companies profitable. Business is a money-driven part of the economy in a way that the non-profit sectors (be they public or private sector) are not. The latter are full of people driven (and maybe just as motivated) by other things – a passion for human rights, for education, for people, for society – but not for the thing that drives those they may meet at the interface of private sector and the non-profits.

 

As Galbraith wrote in The Affluent Society, public goods are always at a disadvantage in a market-driven economy and the crucial problems always exist at the interface between the two.  I tackled this is a previous post – https://jeffkaye.wordpress.com/wp-admin/post.php?post=192&action=edit – and the inability of societies to establish how to provide the “social balance” to which Galbraith refers enables the problems to persist – such as the fleecing of schools in the UK.

 

Enabling the “social balance”?

 

The “social balance” (Galbraith ibid) is about how society reacts to private enterprise. The most obvious example is the automobile – private industry propels the development of cars but it is the public sector that provides the roads, traffic control and policing, emergency services and hospitals (usually), pollution control and similar. India is a great and recent example – http://uk.finance.yahoo.com/news/india-car-sales-soar-where-054302682.html. But, the ability of the private sector runs well ahead of the ability of the public sector to react.

 

Nowhere is this lack of social balance clearer than in the provision of expertise in “back office” areas in the public sector and in the third sector. While their front of office capabilities may be excellent, the non-profit sector cannot, in the main, recruit the best people (it cannot offer financial incentives to match anything like the private sector) and therefore its systems and processes fall well behind.

 

This is compounded by the continuous belief by government that they have to “do something” directly (like the FMSiS above) and in the third sector that anything spent outside of front end is a waste of money. Donors (whether governments, trusts and foundations, companies or individuals) suddenly have a different mindset as soon as they donate. How many would ask companies to stop spending on finance operations – yet, many donors insist that their donations can only be applied to front end work – the cause – and nothing to overheads. While it is good to keep overheads low, governance and financial management dictate that these “enabling” areas of any organization (like people management training) are as good as the front end operations so as not to stymie the work of the charity, NGO or pubic sector organization.

 

Having worked in all sectors (with most of my working life in the private sector) it is clear to me that the non-profit sectors are continuously starved of capability and expertise in the areas that could make them far more efficient and capable – not just to survive but also to enable far better work to be accomplished. If they work well it is in spite of the problems put in their way. Most don’t manage and the failures of the public sector to manage large IT projects, for example or the non-profit sector to survive continue.

 

So, how can the non-profits develop a response to the needed social balance so that they don’t get fleeced?

 

Pro-activity in the social balance

 

Governments and those who provide central governance to the non-profit sectors have undertaken so many actions and some have provided stability. But, each sector and those within it are challenged continuously.

 

What is needed is first, recognition that there is a problem. Each sector should assess where the main problems lie and government has to step up and signal that it will not do everything but begin to be the chief enabler for the non-profits. For example, restrictive funding for charities, whereby donors only provide money for front-end purposes, should not be allowed. The practice is akin to shareholders telling companies which part of the business their funding is allowed on. It is not a loan – it is a donation and restrictions mean more bureaucracy and less ability for the charity to manage itself.

 

If a donor believes that a charity spends too much on overheads, it can withhold donations just like a shareholder can invest elsewhere – but restricting funding in this way is counter-productive.

 

In the UK, this is something for the charities Commission and government to act on.

 

Second, there has to be a stepping up on ability – which will lead to improved processes and systems (although improvements in each need money as well and the proposal above is one way of directing more into this area).

 

This stepping up of ability should be driven by government who should require firms of accountants to do what the legal profession does – provide at least 2% pro-bono capability into non-profits. I have been highly impressed by law firms’ ability to do excellent pro-bono – less so by the finance industry.

 

CSR divisions of companies should also be driving their best finance people into non-profits – in a meaningful way to address the social imbalance.

 

Governments should look to reward those who go from the private sector into the public or third sector (even for a time) with tax incentives (much like students having to repay their student loans). It is not a great time to do this, but it would indicate a lot.

 

Third, the big accounting organisations should ensure that they focus more attention on public sector and third sector – understanding the problems and devising exams and maybe alternative paths to accreditation rather than the one-size-fits-all approach. Certainly, the CIPFA and IPSASB provide the basics for the public sector but the incentivisation for the best to go into that sector let alone education or charities / NGO’s is far less and the number of accountants that enter the charity sector (for example) with the same skill levels and drive as those in the private sector is small.

 

Fourth, trustees from private sector organisations have to become involved – not just from a governance standpoint but setting examples and putting the bar as high as it needs to go to make the enablers work. This is hands-on stuff not just remote governance.

 

Separate sectors, common interests

 

Except in a society where the three sectors don’t exist (e.g. communist states), the challenge is greatest at the intersections of society – where the sectors clash. Yet, as in the example of automobiles above (or any other transportation systems), different sectors live off each other – and the charity sector fills many of the gaps that society does not see fit to fill in private or public sectors.

 

The sectors need to be different, of course, but there does need to be a far better understanding of the problems that our economic structures throw up and how to deal with them or fleecing of our schools will recur but be seen to be a mere tip of the social iceberg.