Bob Diamond provided a very visible focus for the anger against bankers that has been building up over the past five years. His resignation from Barclays is unlikely to change much, though, because the abuses which took place at his bank are endemic across the whole sector.
An interesting question from Chris Dillow, in response to Thursday’s post on Barclays:
Yes, but how possible is it for individual CEOs to affect corporate culture? What tools have they got? How long would it take?
Could it be that bankers, regardless of their CEO, are predisposed to act badly because of the abundance effect?:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1157085
What power do CEOs have to counteract this?
The standard response from Organisation Development, Change Management and HR practitioners would probably be that leaders set the tone of an organisation and that, by their behaviour and attitudes, they reinforce (or sometimes change) the corporate culture.
That’s true up to a point but industries have cultures too. This is something I have often wondered about over the years. It’s easy to see how company cultures become established, especially when shaped by powerful leaders but what about whole industries? Even without a centralised leadership, industries develop standard practices, some of which look very odd to the outside world. As Edgar Schein says, culture is the result of unspoken shared assumptions and beliefs. Often, these assumptions are shared across a whole industry but only become obvious if they conflict with those outsiders.
Why, for example, do private gyms all have joining fees? Other membership-based service providers don’t. Who decided that was going to be the norm? Even where an industry has a large number of companies, like broadband for example, their standards and ways of working are remarkably similar. It took several attempts at regulation to end some of the less customer-friendly ones.
There is probably a PhD in there for someone to research how cross-company industry norms are established and maintained. There can be little doubt, though, that, as Chris says, the cultural norms in the banking industry are very strong and that the assumptions that underpin them are ever more at odds with those of the rest of the population.
He’s also right about the effects huge amounts of money have on the culture. It is difficult enough to go against group norms at the best of times but when doing so means you might miss out on massive earnings it requires a will of iron. If all your mates are coining it, you’d be mad not to.
It’s hardly surprising, therefore, that Libor rigging has turned out to be an industry-wide problem, or that many within the industry can’t see what all the fuss is about. While politicians and journalists fumed, analysts shrugged and former insiders said that it had been going on for years. According to one trader interviewed by the Telegraph, “everyone knew” and “everyone was doing it”. The practice was regarded as so normal that some Barclays staff thought they had at least tacit approval from the Bank of England.
As in 2008, there is a major clash of assumptions between those who work in investment banking and just about everyone else. What most outsiders assume to be bad behaviour is just workaday stuff in some corners of the banking industry. Among the wider population, attitudes are somewhere between apoplectic outrage and weary “here we go again” fatalism. Those on the inside, meanwhile, can’t really see what all the fuss is about.
The few who still defend Bob Diamond and other bank bosses have a point though. This culture is so deeply ingrained that individual CEOs will find it difficult to change and, even if they are successful, it will take time. To an extent, there has always been a do-whatever-it-takes-to-make-money culture in the City and it’s not going to change overnight. (This exchange from Yes Minister was written some years before the Big Bang deregulation but it doesn’t look out-of-place today.)
The trouble is, banks are so much a part of the country’s infrastructure that their failure, or even just their poor judgement, can have catastrophic effects. People can’t and won’t wait for gradual change. They want something done quickly. The Libor scandal has only stoked the anger. As both Alex Marsh and Ian Fraser said, this could be banking’s ‘Milly Dowler moment’ – the point at which even those who were formerly ambivalent get angry with the banks in the way that they did with the Murdoch press.
Yet, given the City’s deep-rooted culture, how can it be forced to change? Only by imposing terrifying punishments, says Chris:
We could learn from pre-modern states. They imposed brutal punishments upon wrong-doers, in part because they needed to terrorize their subjects into submission simply because they had no other means of controlling them. Similarly, if shareholders or regulators cannot control bankers – and it looks like they can’t, draconian punishments for wrongdoing are needed to keep them in line. As Voltaire nearly said, “it is wise to kill a banker from time to time to encourage the others.”
Now Chris wasn’t actually advocating dark-age style amputation, blinding and castration for bankers (at least, I don’t think he was) but the point about more severe punishment is well made. If you stand little chance of getting caught and, even if you do, your bank gets fined, you’ll probably take the risk. The threat of dismissal might concentrate the mind a bit more but investment bankers seem remarkably good at getting new high-paying jobs even after being fired. Discouraging bad behaviour in the City therefore requires some criminal sanctions, in the same way we make executives individually liable for breaches of equality and health and safety laws.
In other areas, lawmakers have recognised that persuasion and education can only go so far. Reducing sexist and racist behaviour in the workplace, getting people to wear seatbelts, stopping footballers doing monkey chants at black players and turning drink driving from normal leisure activity into social suicide have all required the threat of punishment to lead the changes in attitudes and make them stick. Sometimes attitudes don’t change quickly enough so sanctions are needed to give them a helping hand. Stopping racist language and accidents is important but so is preventing financiers from acting as though they were outside the law. Perhaps the same approach is needed.
Libor rigging and other bad behaviour is endemic in the financial sector and it is seen as normal by many insiders. But racist language and drink driving were once regarded in the same way – not exactly nice but, hey, boys will be boys. Changing assumptions took some time and some people had to be punished before others got the message. As I’ve said before, nudge isn’t always enough. Sometimes you need a big stick too.
Flip Chart Fairy Tales 
I am very tempted to suggest nationalising the lot, then we can fully reform the structures, culture and have a proper clear out of those who think their job is to bend and manipulate markets to provide themselves with bonuses and stuff anyone else. Public servants don’t come to the job with these sort of expectations, so perhaps some of the public service ethos may help. But of course these are multinational institutions who hold more power than the Government, insist they need funds to survive, don’t care what they do with the money when they have it, get into trouble, need more public money and then threaten to move the markets against government when they don’t get the money. The powerful individuals are paid obscene sums of cash and probably paying very little tax; the poor sods working in the branches paid much less and put under pressure to sell me products I don’t want. Damm it, it is MY tax money they are getting poured down their gullets, don’t I have any say in what they do with it!
Goes off to lie down in a dark corner ……..
Why not understand an industry and how it works in a country and the world as a system? Industries include providers of goods/services, professional institutes, trade associations and trades unions all of which have leaders.
True leaders at all levels show their commitment to the requirements of stakeholders (incl customers, employees and communities) by what they do every day and not just by what they say and write. These requirements are deployed to an industry’s organizations by their management systems to determine and reconcile any conflicting requirements. These management systems then are used to encourage, control, monitor, correct, audit and review behavior.
International standards are published and continually updated for these organizational management systems with themes such as quality and sustainability. Organizational management systems can be developed to conform to these standards. Such management systems can be used to help leaders to stay ahead of our legislators and regulators. Indeed, by making stakeholders more successful they prosper and grow because the stakeholders want them to.
That is how shared organizational beliefs can be influenced throughout upbringing, schooling, work and retirement. All this can be funded by work that adds value for customers instead of yet more taxes for laws and regulators. By definition true leaders are not victims of group-think.
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I think education can go further than is sometimes assumed. The problem may be the environment, not the process. I posted yesterday using the analogy of the Spanish football team and the moneyball thesis, applying it to modern corporate organisation. The Spanish team used to be very fragile psychologically. Casillas said before the final that this was a generation “educated to win”. In that short phrase, he encapsulated all that can be good about modern corporate structures: a true and honourable recognition of one’s inheritance, a humility in relation to prior legacy. From consistent quarter-final losers to three-time winners is a massive jump. And it wasn’t down to fear of punishment. It involved analysing the strengths of existing culture and looking to resolve the weaknesses. It involved humble people educating humble people to win – but not at any cost.
Where managerialism takes over, and where hierarchies reduce the number of people involved as the tasks get more complex, we get the big-hitter striker syndrome: a man or woman at the top on whom everyone is focussed. A man or woman on whom everything depends. A man or woman who will one day fail; or perhaps, over time, frequently fails – but has the physical presence to convince us they are, even so, actually succeeding; and so deserve the massive salaries they command. Sounds a little like the England football team, don’t you think?
Human beings are learning machines. It’s what they do best. So education has a massive part to play here – but the environment must be right for it to do its job properly. Get the environment right – focussing on everyone instead of just the big hitters – and the results may lead to the kind of collegiate genius of a goal of Iniesta, Fábregas and Silva – instead of the individual brilliance of Messi or Ronaldo. Remember: relying on Messi’s 80 goals, Barcelona lost the Champions League and the Spanish league this year. Relying on six midfielders – instead of four or five and one overpaid striker – won Spain their third tournament on the trot.
Excellent points, all well made. Before the final some commentators were sniggering at Spain’s lack of a center forward (aka striker). I wonder if they learned anything? A team is stronger as a team of skilled but humble individuals helping each other to succeed than as a group instructed to make the star shine. Thank you.
What’s the empirical evidence here? Are there examples of CEOs successfully changing corporate culture? I suspect many involve obliquity (O’Neill at Alcoa) or starting with blank slates (a “neutral” culture being changed for the better or a start-up) rather than Augean stables. Efforts to change a bad culture – even by great bosses – can fail: Brian Clough at Leeds United.
So, what facts are there to challenge my scepticism?
Chris, I didn’t think I was challenging your scepticism, at least not as far as investment banks are concerned.
I have worked in companies where CEOs and their exec teams have changed cultures (really changed, as in shifting assumptions about hierarchy etc) but it has taken a long time and it has rarely been the big wow change of popular management literature.
Where there is a deep-rooted industry-wide culture, though, like you, I wonder how much difference even powerful CEOs like Bob Diamond can make.
In fact, Brian Clough went to Leeds without Peter Taylor, didn’t he? A lesson in that for all those in favour of pyramidal structures.
What will it take to change the City culture? (IMO) More than anything shareholder expectations and probably the clients of the biggest shareholders.
The governance and powers of shareholders may merit some tweaking (cue Vince Cable) but I would hazard a guess that if the major pension/investment funds & institutional investors chose to flex their moral muscles they wouldn’t need to rely on changes in the law. Are their clients, shareholders or boards calling for them to do so? I doubt it.
Of course the problem there is that we all have pensions & investments which are being managed by these major players who by their nature and position are part of the “City culture” problem…
Perhaps that’s the bigger systemic issue… we are all vested in the system but we want someone else to make it “right” AND ensure our pension pots & investments are bountiful.
Probably not something you are going to hear the politicians or the mainstream media say. It’s easier to bash the banks, call for reform and build your reputation for a bit of short term gain… is that really so much different from the mentality of the traders in the LIBOR scandal?
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Why are we all so surprised that some of those who work within the banking sector have behaved so poorly? What seems to be missing here is that usually when a business fails they cease trading. But banks are seen to be ‘too big to fail’ and so they are publicly enabled to continue through bailouts etc. Have we gone beyond legislation now? Should there be much more fundamental structural reform throughout the economy? I don’t know but there are certainly lots of interesting questions 🙂
I wonder what Mr Deming would have said, I believe one area he would have focused on would have been the culture of bonuses that drive such behaviours.
Culture (normative behaviour) reflects the structure and purpose of the industry, not the moral habits of the people within it. Culture is ideology, i.e. pure superstructure. Changing the cast will make no difference if you are still putting on the same play in the same theatre.
You ask “how cross-company industry norms are established and maintained”. In the case of the City there are two factors that stand out relative to other industries. The first is job-hopping. Moving to another bank/brokerage/trader is considered perfectly normal, particularly after the annual bonus round. This regular movement helps establish a common set of norms and values and also spreads “innovative” practices. Management not only tolerate but encourage this, hence the prevalence of head-hunting.
The second factor is physical proximity, which facilitates the first factor. Investment banking and financial trading is obviously concentrated in specific areas. In the past, this reflected proximity to merchants, with the result that banking culture and merchant culture overlapped considerably. Since the introduction of electronic trading in the 70s, and the coincident disappearance of merchant business on the doorstep (notably in both New York and London with containerisation killing the old docks), the rationale has been driven more by the legacy of regulatory privilege (e.g. the Corporation of London) and the proximity of legal, political and commercial (company HQ) elites. This has led to a financial sector monoculture, which has in turn spread out to influence commerce (notably through IPOs and M&A) and politics (through lobbying and funding, and also indirectly via regulatory capture).
When investment banks’ customers were primarily merchants and industrialists, the bankers needed to exhibit norms that secured the latter’s custom, hence the importance of “my word is my bond”. Similarly, when retail bankers focused on small businesses and middle class depositors (before the credit card boom), they exhbited appropriate norms: your bank manager took a keen interest in your business, and you liked the idea that your bank was run by incorruptible Quakers.
Fully separating retail and investment banking would go some way to fixing the culture (though it’s worth remembering that culturally a high-street cashier is a world away from a forex trader anyway), but ultimately the rapacity of financial traders is the result of the widespread financialisation of the modern economy. Denying them access to retail deposits would only make a small difference to them (though it would make the rest of us feel much more secure), given the huge amounts of money swilling around in pensions, insurance, equity markets and sovereign wealth funds. A lot of money = a lot of transactions = more commission.
The problem is a surplus of capital, all of it seeking a return.
We would propose the 3G solution for this issue ……………Governance, Governance, & Governance. Improved transparency , accountability and responsibility (esp. corporate social responsibility)
Imagine if the government, the sector and customers all took their share of responsibility for putting things right – or is that a big ask?
Nick Leeson (the original rogue trader) suggested on TV this morning there was an element within the investment banking fraternity which treated the industry’s rules and regulations with scant disregard.
He suggested tougher penalties for the small number of individuals who broke the rules (as happens in the USA) would be an effective deterrent. He might be right up to a point but there are wider concerns.
Unprofessional behaviour driven by the prospect of higher profits has been taking place for years – including avoidance of compliance frameworks, manipulating LIBOR, mis-sold payment protection insurance to consumers and complex financial products to small businesses, following earlier mis-sold endowment policies from the 1980s.
Unfortunately there have been too many instances where key players in financial services industry have been more concerned with profit than the delivery of effective service to clients and customers, compliance with business controls designed to protect customers, and delivering value to investors and shareholders. “Bankers” now, unfortunately, have a reputation that is hard to distinguish from dodgy builders.
Managers and leaders in organisations should be making it clear that professional behaviour is expected of all their employees. Even when serious misconduct doesn’t constitute a crime (fraud or false accounting) a breach of appropriate standards should be dealt with as a disciplinary matter – including the action of dismissal from employment.
Seems like my comment got lost in the aether. So I’ll try to reprise it.
On the PhD front, there has been quite a lot of work on the culture of professions, which provides us with some good conceptual starting points for thinking about industry culture.
First, it is possible for organisational culture to override professional culture and even national culture. We’ve seen it happen. So, it’s not impossible. However, it does take investment. And that’s where my sympathy for Barclays and other banks runs out. They haven’t invested in even monitoring their culture, let alone in changing it. Rather, as one can glean from Bob Diamond’s public pronouncements over the years, they’ve preferred to indulge in knee-jerk defensiveness and turning a blind eye. All the less sympathy for Diamond since he grew BarCap from a very small team, he had a big hand in setting up the original cut-throat, throw the rules out the window in search of profit culture.
Second, partly in response to Chris, there are examples of positive culture change (IBM, Phillips, etc.) but as in all social science, they are rarely pure, because culture change isn’t cheap, so it often only happens alongside other change spurred by a burning platform. And that’s the most likely path here – Barclays will change only if there’s an impetus, probably from regulation.
Are harsh punishments necessary? It seems so. There’s a strand of the psychological literature that suggests that to guard against rare infractions you need memorable or scary punishments because it’s seeing/remembering people caught and punished that sticks in the mind.
A comparable harsh punishment in some professions is about being “struck off” – if you’re caught doing serious wrong you’ll never be able to work as a doctor again. That’s not an infallible system, but it does seem to have some effect in keeping ethics on the agenda.
Thirdly, what we know about organisational culture is that there’s a trade off between freedom of action and a conscientious culture. This is not about “core values” and other surface phenomenon, this is about the jobs people do and the way they do them. At heart, there is a truth that if you want to make money doing casino trading then the flexibility required will militate against being too meticulous, too rule bound. Does that mean it can’t be ethical? No, but it will need more oversight. And anything (including Libor transactions) that doesn’t need this level of flexibility should be in a division that is given much less freedom. But that kind of oversight and division between functions costs money.
And that last bit, about “costs money” is where the overall culture, both of Chicago School deregulation economics in society as a whole and at the industry level starts to bite. No-one spends lots of money on maintaining an ethical culture unless forced to. Regulation is part of how you force them to.
It’s easy to get lost in the layers upon layers of irony here and it would, to some extent, be funny were it not for the catastrophic effect each of these very real corporate brand disasters are having on everyone, from the PM down to the council road sweeper who sadly won’t be seeing much of a retirement as a consequence and is having to swallow an austerity pill for someone else.
The bank of england was built to resemble a fortress because of a very real fear of “the mob”, a term coined by the establishment terrified by the gap between the “haves” and “have nots” and the natural malcontent arising from the ancient issue of what was perceived as “usery”.
Yet what most people fail to realise is that the principles and practices associated with religions like Quakerism which form the foundations of many of the banking institutions, were also responsible for at least an agreed code of conduct in the way business was conducted and led to the establishment of charitable trusts etc which are still operational today.
It’s a tad hypocritical for people to criticise ltd companies for their quarter-on-quarter performance, demanding ever increasing returns on shares, forcing executives to take increasing risks to provide that ROI but then throw their toys out of the pram when the inevitable crashes happen.
There’s a lot of nonsense being spoken about banking culture given there’s no such thing.
Investment banking is entirely different from retail etc.
These two entities very clearly need to be separated and ring fenced as:
– they require very different skill sets
– they demand very different cultures
– they have hugely divergent attitudes to risk and reward
– they need to be capitalised very differently to mitigate against risk
An investment bank that gets it wrong should die by the sword it lived by – market forces. If attached to a bigger sibling, however, like a heroin addict needing a constant fix it will always raid the family silver and won’t see that there’s an issue in doing so.
Economies, however, are built on steady-state performing stocks.
Pensions, bonds etc rely on these stocks.
Steady-state performance comes from having a long term strategy and nurturing relationships inside and out. Investment banking culture however, is all about being the best at all costs, regardless of what the apologists will say.
Diamond is an example of the failed notion of the performance culture. Nothing wrong with performance per se, of course, but that “win at all costs” uber competitive approach isn’t appropriate for the vast majority of corporate organisations. He brought the Barcap way into the retail bank, as many of his peers have done elsewhere, but without adapting it to blend the best of both worlds. I’ve seen many, many examples of the same attitude and approach and it doesn’t last.
The good news is, corporate culture can be transformed within a few years. But as other commentators have said, it does take investment, faith, measurement, incentivisation, a long-term vision and honesty. Re-configuring the HR processes like reward and performance management may well be something to build into the early phases.Incentivising the right behaviours with a dash of governance will have an impact as well. But arrogantly ignoring the culture management problem in the hope of recovery on the back of some fortuitous trading at someone else’s expense isn’t going to cut it….and it may well take more than the bank of England’s fortress to quell the growing mob next time.