108.09台灣銀行家雜誌第117期 / By Olga Rakhmanina
Culture Shift: Banks' Roadmap to SurvivalBankers Digest
To paraphrase the famous opening lines of Charles Dickens’s novel ‘A Tale of Two Cities’, consumers of financial services are now experiencing the best and the worst of times. On the one hand, access to banking has never been easier as modern technology allows near-instant service for activities ranging from checking your balance to applying for a loan to seeking financial advice. The banking industry wants to stand for convenience and expedience in the eyes of its customers. Yet, recent history indicates that customer journey often entails experiences that fall far below the standards applicable to institutions providing ‘public good’ services, such as banks. Following a string of high-profile financial scandals, including systematic product mis-selling, anti-money laundering failures and benchmark rates manipulations, confidence in the industry is at the record low. Despite modest improvements over the last few years, Edelman Trust Barometer 2019 shows that financial services industry remains the least trusted sector .Regulators around the world consider that misconduct at firms invariably results from the organisational culture that permits - or even encourages – inappropriate behaviour. When the UK Parliamentary Commission on Banking Standards published its review of the industry in the wake of the LIBOR scandal, it reflected the sentiment: ‘Banking culture has all too often been characterised by an absence of any sense of duty to the customer and a similar absence of any sense of collective responsibility to uphold the reputation of the industry’ .WHAT’S IN THE WORD?Culture permeates all areas of the business; its deficiencies manifest in multiple ways which can harm the company’s relationships with consumers, investors and regulators. Whilst a fundamental element of any business, there is no single definition of what culture actually means and comprises. Most widely used descriptions include ‘what people do when no-one is watching’ or ‘shared values and norms that shape behaviours and mindsets’, which suggest a set of principles for the permissible way of doing things around the organisation. Creating and maintaining sound culture is critical for the business for a variety of reasons. Well-managed organisations that promote working in the interests of consumers and markets benefit from the virtuous cycle effect as stronger reputation helps attract more business and better quality employees; this, understandably, enhances the chances for long-term commercial success. The reverse is also true as misconduct tarnishes the organisation’s reputation and – by extension – cultural failures at one organisation reverberate through the whole industry, which explains persistently low public trust. De Nederlandsche Bank (DNB), financial services regulator in the Netherlands, is seen as one of the pioneers in promoting supervisory examination of ethical behaviour and culture. Whilst tasked with prudential supervision of the sector, DNB concluded in the immediate aftermath of the financial crisis that its focus should go beyond ‘facts and figures’ and consider other factors which can put financial stability at risk, such as financial institution’s behaviour and culture . As other regulators around the world follow suit, prudential and reputational implications of deficiencies in organisational culture are not in doubt anymore. The latest report from Group of Thirty (G30), an international organisation linking top representatives of the private and public sectors and academia, Banking Conduct and Culture, also sought to inject a sense of urgency in the debate on cultural change, albeit for a different reason. It points out that ‘without earning trust every day, the continued survival of banks is at risk from displacement by new industry entrants, a growing list that includes fintech start-ups, technology firms, retailers and telecom companies’ . To remain relevant in the new world, banks are under pressure to re-think their business purpose and role in the society.SPEAK UP, PLEASE!As first instances of misconduct in the banking industry were coming to light, they were often perceived as examples of individual maverick behaviour separate from the values that underpin actions of the vast majority of bankers. Subsequent revelations of the extent and depth of poor industry practices, however, quickly refuted this claim and pointed in some cases to a culture of pursuing profit at all costs. Significant effort is necessary to overcome this deep-seated mindset; there is a broad consensus that culture shift will take many years to complete and require a holistic approach encompassing all levels of the organisation. Setting the ‘tone from the top’ has become business mantra recognising that the firm’s highest level of management defines and promotes organisational values as well as seeks to lead by example. More recently, as G30 points out, some banks are also pursuing a ‘tone from above’ strategy in recognition that the most effective behaviour examples are set by immediate line management, rather than remote senior executives – an approach particularly relevant to large corporations with multiple offices. Contributors to the Transforming Culture in Financial Services Discussion Paper, published by the UK’s watchdog Financial Conduct Authority (FCA) in March 2018 to stimulate debate on the topic, also highlight the importance of middle management as it translates ‘top management expectations into front-line employee behaviour’ and underline its significant power to influence organisational culture in both positive and negative ways .Linked to this is the need to create of a safe environment for employees to speak up and voice both concerns about existing practices and suggestions for improvements. Often referred to as culture of phycological safety, it is viewed as essential for encouraging more open and productive atmosphere for staff to develop and progress. According to another contributor to the FCA’s Discussion Paper, technology companies are the most enthusiastic adopters of this approach as they ‘view such a culture as a pre-requisite for high-performing teams’. Other writers also suggest that it is insufficient to simply declare an ‘open door policy’ as it will not automatically result in an ‘open door culture’; in fact, this requires a concerted effort to establish response mechanisms which would demonstrate that staff feedback or concerns are taken seriously and acted upon. Similarly, practical staff training, which helps translate what organisation’s cultural values mean in everyday scenarios and empower employees to make judgment calls in ambiguous situations, is essential for confident and engaged workforce. FOLLOW THE MONEYIn his recent speech on the importance of culture and governance, Andrea Enria, Chair of the Supervisory Board of the European Central Bank – which directly supervises Eurozone’s largest banking groups – specifically highlighted remuneration as a critical factor in any corporate culture . Indeed, this has become a long-standing issue subject to intensive debate; it is now widely recognised that financial incentives underpin organisational culture because they articulate the companies’ behavioural expectations and signal acceptable norms of customer service. After all, the recent egregious examples of misconduct in banking were often rooted in flawed incentive structures that rewarded achieving financial targets without regard to any other factors, such as consumer interests or reputational risk to the business. When Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry published its Interim Report in late 2018, it linked systemic conduct failures to a number of factors, including ‘greed – the pursuit of short term profit at the expense of basic standards of honesty’ as companies focused on getting a larger share of customers’ wallets and little else . When Financial Stability Board, an international policy co-ordinating body, released its Principles for Sound Compensation Practices in 2009, regulators around the world were primarily focused on risk culture and ensuring that remuneration policies do not affect the company’s financial position . The debate has shifted somewhat since then with the industry exploring different ways of influencing staff behaviour through compensation frameworks. For instance, in January 2018, the European Union (EU) saw implementation of the guidelines on remuneration policies and practices in retail banking which require remuneration frameworks to take account of the rights and interests of consumers . The obvious solution is to remove the traditionally used link between hitting financial targets and the size of the employee’s financial reward; the challenge, on the other hand, is to create a meaningful set of factors which would incentivise the desired behaviour and could be easily measured for remuneration calculations. According to G30, the banking industry has started incorporating cultural and behavioural considerations into performance scorecards to evaluate both ‘what’ and ‘how’ elements of doing business, which results in instances of significant compensation adjustments. According to the UK’s TSB Bank, the institution scrapped all sales targets, sales linked rewards and the use of comparative sales data in favour of rewarding employees based on the level of service they provide to customers . For the new approach to employee evaluation to be effective, senior and middle management need training in applying assessment criteria in practice, since without consistent implementation, meaningful impact will be no doubt under threat. The recent information paper on Incentive Structures in the Banking Industry published by the Monetary Authority of Singapore also cautions that frameworks and policies should translate into tangible decisions on staff remuneration to demonstrate that unacceptable behaviour, should it occur, is not rewarded through the back door . The risk is that well-intended policies will just remain on paper with limited bearing on existing practices.REGULATING CULTUREThe conventional wisdom is that it is impossible – and impractical – to legislate for a particular type of organisational culture since every firm needs to find a unique fit that works with its business model and purpose. Furthermore, there is no right or wrong culture as such; as G30 points out, companies with conduct issues ‘do not necessarily have an overall bad culture but have elements of their culture that are misaligned with the outcomes the firm is seeking and that are driving undesirable or inappropriate behaviours’ . Yet, as culture plays a fundamental role in creating a business environment which precludes misconduct and encourages positive behaviour, regulators are understandably taking strong interest in firms’ culture. In addition to extensive work on compensation, some regulators have introduced more individual accountability for senior executives as well as encouraged diversity of thought to promote more responsible and open cultures (both topics have been analysed in our previous issues). The FCA has been exploring how behavioural economics – so far limited to understanding consumer biases – can be employed to encourage better compliance within firms through analysing the conflict between employees perceiving themselves as virtuous, moral individuals and their deep-seated group mentality. Other efforts focus on operational matters seeking to prevent particular manifestations of misconduct. For instance, Guidelines on product oversight and governance arrangements for retail banking products – introduced in early 2017 by the European Banking Authority, the EU’s regulatory agency – look to prevent consumer detriment which may arise as a result of flawed design and distribution of products, e.g. consumers buy products not appropriate for their objectives . However, as Alison Cottrell, CEO of the UK’s Banking Standards Board – an organisation promoting high standards of behaviour and competence in banking – highlights: ‘A low rate of conduct breaches might not strike many as a particularly high bar for a good culture’ . In other words, organisational culture is a lot more than just a compliance box ticking exercise. A lot of progress has been made, but experts sound a note of caution: Culture shift is a complex matter that requires significant effort and time investment. Stakes are high, however, as trust in financial institutions is significantly compromised and – should firms fail to turn the tide of misconduct scandals – their future is at risk. Banks will do well to remember what Bill Gates said back in 1994: ‘Banking is necessary; banks are not’ .