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.

How Corrupt Are the Banks? Corrupting Cultures.

“Rigging the system to fix their bonuses. The word “corruption” is not enough to describe what they were doing.”

 

So stated one expert observer on Radio 4’s Today programme this morning (November 12, 2014) about the Foreign Exchange corruption in the world’s banking systems. UBS, RBS, Citibank, JP Morgan and HSBC were fined $3.4bn and Barclays is still to settle.

 

The travails at Tesco on which I have recently written, appear almost trivial beside the corruption (and, yes, “corruption” is the word to describe what was happening) that pervaded the western world’s banking systems leading up to and well beyond 2007.

 

The Bank of England apparently feels exonerated by the fact that no-one there knew anything about the foreign exchange mis-dealings at the five (or six) banks now fined. Just like the protestations at Tesco’s auditors (PwC) who, after 30 years, knew nothing about the culture changes that were at the root cause of Tesco’s recent failings.

 

Culture is the root of corruption

 

Francis Fukuyama in his excellent books “Political Order and Political Decay” and “The Origins of Political Order” showed how culture is at the root of society at the national level.

 

This is as true of companies – complex adaptive systems if ever there were any – as of nations. Companies are directed entities and depend on senior management and Boards allied to the competitive and regulatory environment in which they exist for the culture that they employ. The culture of every business is different – depending on the specific people they employ, the rules they employ, the country and region they exist in and the external environment.

 

The culture of any business organization is not a secret to those working within in it and is not a secret to those who work closely with it.

 

When a culture goes bad, as it clearly did in the case of Tesco and on a much broader and deeper scale in the case of the banks, it is not sudden and evolves as a result of changes that are both internal and external. Culture change has been the topic of many books and papers since well before the advent of quality management and Deming but these books tend to dwell on how to improve the culture to one of quality control or of “excellence” (as in Tom Peters’ “7 S’s”).

 

Unfortunately, there is little literature on how to understand corrupting business cultures in order to make changes that impact early enough so that customers, the business and shareholders are not hurt. The issue with banks is that nations have been hurt as a result of the toxic atmosphere in these institutions and the noxious emissions that resulted.

 

This cultural health and safety aspect of banking is clearly not understood by regulators (nor, indeed, by Directors and Audit Committees let alone external audit firms). Regulations are all about legal change and regulators are, to a large extent, ticking and checking against a set of procedures in the same way that external auditors carry out their roles.

 

The prime aim of such regulators seems to be to do a job so that they cannot be blamed for any failures. The Bank of England – crucial to the proper oversight of our financial systems – has failed so often in the past ten years but now seems comforted that no-one inside the BoE knew what was going on. RBS’s own (relatively) new CEO (Ross McEwan) voiced his anger on the BBC at the actions of “a very small group” of foreign exchange traders ruining everything for the many good people that work for RBS. He was asked the right question by the BBC interviewer (Kamal Ahmed) – “is culture changing enough”? McEwan responded that it was not changing quickly enough. But, the bad culture became institutionalised (as Ian Fraser’s excellent “Shredded” showed)  and the thought that senior management did not know of such a culture existing within such a key area of the bank is too sad to be true.

 

Walk into any office of any organization and any seasoned business manager will detect the culture. Ask some questions and listen to the responses. Any organisation is based on how its culture works and who benefits from that cultural response to its aims and ambitions.

 

Short-termism, where bonuses are made through short-term risk-taking and often corrupt dealing, is bred in cultures that are knowable. For management to claim not to be aware is ludicrous. As many senior bankers said around 2008/9, they knew the culture was wrong but could not stop it as everyone (every bank) was the same – no-one was willing to stop.

 

Fukuyama describes well how corrupt societies work where lack of trust exists around the centre (e.g. government) and where corruption is rife. No-one is wiling to be the first to pay their proper taxes, for example, if no-one else does. The same was true with the banks – everyone was corrupt, so who was going to stop the game? No-one. Now, no-one trusts the Banks – supposedly, a central plank on which wider society floats.

 

With the foreign exchange corruption, which occurred much more recently, there seems to be little or no excuse. The banks have been going through huge structural re-assessments since they sank in 2008 and senior management were being changed along with it. The Bank of England should have been focused on critical market areas (Foreign exchange transactions in London – 40% of the world’s transactions take place here – are hardly trivial) and should not have been unaware of the overhang of a corrupt culture in UK banks. To claim otherwise is nonsense.

 

The culture within regulators has to be changed along with the banks. While no-one claims they are corrupt cultures, a culture of defensiveness, box-ticking, shifting blame and lack of knowledge is the worst cultural set for a regulator. They need (like external auditors) to be responsive to societal needs – not tick and check but pro-actively understanding the organisations they are supposed to be regulating (or auditing). This is not an easy task for organisations that appear to be completely incapable of doing this important job – not wanting to rock the boat before it sinks. But, rocking the boat may throw out those who are bent on sinking it before it sinks – that is what good regulation (or auditing) is all about.