The trouble with banking culture
Monday, Nov 21, 2016, 02:53 AM | Source: Pursuit
By Paul Kofman
Gone are the days of the highly respected bank manager, a pillar of society. Today, the public image of banks leaves much to be desired, with industry surveys indicating persistently low levels of public trust in the profession's integrity and ethical standards.
Historically, unscrupulous behaviour was perpetrated by rogue traders and individuals who didn't belong in an institution where loyalty and job security were sacrosanct. In recent years the focus on those individual misdemeanours has turned towards questionable group behaviour. Groups of finance professionals (divisions, subsidiaries) became implicated in a series of trust-eroding scandals. Whistle blowers were quick to point to instances of bad culture.
What caused this? From the early 1980s deregulation created a more competitive sector where job security and employee loyalty no longer counted as much, and mergers, spinoffs and carve-outs spurred survival of the fittest.
While that certainly boosted economic growth and opportunity, it also transformed the banks' inner workings. It took the Global Financial Crisis for the public to start taking notice and suggest that the world of finance had lost its credibility.
Public reaction was (and is) to call for tighter regulatory oversight, but policing the financial sector alone cannot eradicate the lack of public trust. More likely it entrenches the perception. To rebuild trust, the banking and finance sector needs to address the culture within. Now how easy will that be? Consider some of the problems:
Culture is not well defined
We have a broad understanding of culture – patterns of behaviour, beliefs, values, and group interaction – but, what determines a culture which supports a workplace to function ethically is difficult to objectively define. Such a determination depends on many factors, circumstances, and individual perceptions. That subjectivity makes it almost impossible to influence culture by universal guiding principles or a code of conduct.
Distilling culture to a single aspect – like perverse remuneration structures, whereby financial advisors are incentivised to prioritise sales over client interest – is not particularly helpful. How do we know whether tweaking the remuneration structure will enhance employee satisfaction (which is another aspect of workplace culture)? It is not at all clear whether attacking a symptom will stop the underlying disease, or, in fact, make it worse.
There is no mono culture
Large diverse organisations do not have a single, homogeneous culture. Culture on the trading floor is very different from culture in corporate advisory, or wealth management.
The larger conglomerate financial institutions serve very different clienteles and work under different competitive pressures, which explains why it might be possible to simultaneously have good and bad culture represented in the one organisation. Highlighting the societal benefits of financial literacy, while also encouraging young adults to spend on credit cards, does not seem at odds.
That may explain why senior management may struggle to have a good grasp of the "average" culture in their organisation.
Culture from the top
Culture starts from the top. An all-too-familiar slogan. Listening to the CEOs, I have no doubt that they are well-intentioned and lead by example. They are also genuinely embarrassed whenever mishaps occur down the ranks. Management consultants would have advised senior management that they "set the tone," so a breakdown in culture leads right back to the top.
It is somewhat ironic to note that hierarchical governance structures are often condemned by workplace culture specialists, yet those same specialists expect culture to be driven top-down. Without a complete overhaul of recruitment, internal governance, and performance development, it seems unrealistic to expect senior management to change culture simply leading by example.
Culture is set (or evolves) right through the organisation, hierarchical, functional and through informal group structures (some bottom-up). So if a change is to occur, it will require more than a media appearance by the CEO.
Regulate it right
Culture is not something you can regulate. Certainly regulation can deter or curtail bad behaviour, so I'm not advocating self-regulating banks. But regulation imposes significant cost on those that do in fact behave as good corporate citizens. Also, penalising institutions does not seem nearly as effective as penalising individuals.
Corporate fines or settlements are too easily 'recovered' by imposing higher fees on clients – yes, another symptom of a poor culture.
To make matters worse, an increasingly large proportion of the banking and finance industry is in fact unregulated. Technologically disruptive providers like Fintech, P2P, crowd funding and various offshore markets remain largely out of scope for our guardians.
To claim that the Global Financial Crisis has done us a favour may be too much for some to swallow. Yet, the focus on how our financial system operates, and where it failed its customers, highlighted the need for internal reform. A sustainable banking and finance sector upholds professionalism and ethical standards in all its operations. While difficult to get right, culture really seems to be the key.
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