The Crisis of Culture
by Barbara Ridpath
Posted: 8 Oct 2014
This article is one of two based on a speech given on 25 September 2014 at The OwenJames Group's conference 'Mindful of Good Culture in Delivering Great Customer Outcomes'.
The narrative on the origins of the financial crisis is by now well-rehearsed, but bears repeating with a particular focus on culture.
1. Once upon a time, individuals worked their way up in an institution. What was in their personnel file mattered to their future position in the firm. Today, most individuals are more loyal to their subsector of the industry than to the institution that employs them. They are first a foreign exchange trader or an M&A specialist before they are an employee of Bank A or Bank Z. Individuals frequently move from one firm to another, and corporate loyalty tends not to mean much. At the same time, finance has become much more of a 'hire and fire' industry over that same period, with much less spent on 'in-house' training and employers more inclined to let the employee pay for his or her own training by hiring MBAs. In such an environment, is difficult to create and maintain a constructive, functioning culture.
2. The finance industry in the UK used use 'self-regulatory organisations' and associations to 'self-police,' removing individuals or institutions that did not meet standards so as to hold on to the good name of the whole. Such practices, if not strictly enforced, become discredited. In addition, they became difficult to retain in a global business environment. In a world where someone can find the cheapest price worldwide in a couple of 'clicks,' where people hold vastly different values and views of acceptable behaviours, and where you are less likely to know your counterparty in person, a lowest common denominator of appropriate behaviour began to apply.
Perhaps as a result, it is often said that the most recent banking crisis was the first where banks did not try to help one another-or no longer felt it was in their own interest to protect the system as a whole. In prior crises, bankers, recognizing the fragility of the system as a whole, worked to provide liquidity. This was also due to a shift to reliance on collateralized instead of unsecured lending where it mattered far less to the counterparty if the other counterparty to the transaction survived. As a result, banks pulled counterparty lines as fast as possible. So the culture of banking as a whole changed as it globalized.
3. The industry focussed on maximizing short-term value for the shareholder largely due to incentive structures set up for senior management that encouraged them to do that.
4. Much of the industry lost its purpose due to the distance in the 'value chain' between the business and the ultimate customer. The links in the chain between a group life insurance or pension policy and the end customer make it difficult for the person buying or selling an individual asset on behalf of the fund to remember the individual at the other end of the chain.
5. Many in the industry adopted a tick box mentality on most rules, regulations, codes of conduct, and policies at the expense of using good judgement in decision-making. This was particularly true of some firms' reliance on financial models for 'yes or no' answers without fully understanding the notion of probability distributions, the meaning of a standard deviation and the concept of a long tail.
6. Many firms became too big to manage in addition to being 'too big to fail.' And too big to manage is just too big!
These behaviours and the loss of a sense of organisational culture may be best summed up with a quote from Warren Buffet, "The five most dangerous words in business may be everybody else is doing it."
The backlash from the financial crisis means that customers, governments and other stakeholders are all considering whether we have to redefine a company's 'licence to operate,' not in a regulatory sense, but in the sense of what value a company brings to the society in which it operates: in terms of the resources and infrastructure it uses vs. what it gives back, the taxes it pays, its environmental impact etc.
The good news is that a licence to operate based on a business model that provides long-term benefits to customers and other stakeholders actually provides better long-term value to stakeholders as well. It is much cheaper to retain a satisfied customer, who then does your marketing for you, than to go out and find a new one. In business jargon, this makes improving corporate culture a win-win, not just window dressing. A loyal customer base reduces costs and creates strong, stable earnings, good for the customers and good for the shareholders.
The second article, 'Embedding a Good Corporate Culture in Financial Services', can be found here.
The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.