14 November 2018
Rob will ask the big questions about the role of business leaders in creating an ethical culture in their businesses, what happens when it goes wrong and how to regulate business culture.
I’ll talk tonight about the role of business leaders as culture carriers within their businesses, their industry sectors and within society.
I’ll try to unpick corporate culture - what is it, who owns it, what happens when it goes wrong?
I'll ask about who cares when it goes bad and I'll pose the question as to the role of the regulator (at least in financial services).
Finally I will ask - to what extent do business leaders have to take into account the expectations of society?
That’s lots of questions – I’m by no means claiming to have all the answers.
The impact of culture is not a surprising topic for a financial regulator - look at the risk management, governance and business strategy failings that manifested themselves during the GFC and the litany of mis-selling, market misconduct and poor customer treatment that have come to light since.
But – the damage caused by rotten corporate culture is also not unique to FS – you only have to look at the oil industry, auto industry, food industry.
What is corporate culture?
This is a tricky question – as per the title of my speech tonight, you could say that it is like an elephant, it can be hard to describe to someone who hasn't seen one but we all know it when we see it.
I’ll pull on a couple of fairly classic definitions:
It’s the shared behaviours that reflect the underlying mindset and heart of an organisation.
It’s “the instinctive behaviour of people when no-one is looking”
Maybe it’s as simple as “the way things are done around here”.
So musing on individual behaviour and corporate behaviour, we like to think that morality is linked inherently to our individual personalities or values. However, research suggests it is not and that for all of us, it is influenced by what we see around us.
So employees who are routinely dishonest at work are not necessarily dishonest at home; people who are courageous at home are not routinely courageous at work.
Moral behaviour does not exhibit what researchers call “cross-situational stability”. Rather, it seems to be powerfully influenced by context and, in an organisational sense, this context is the culture and cultural norms of your company.
Some senior regulators in FS that I have worked with claim you can sense a good or bad culture within an hour of being in the building
I’m not sure about that but I do know - even if defining it is relatively straight-forward, measuring it is hard and changing it even harder
Favourite anecdote – Barclays
One of my pet anecdotes about how to spot corporate culture relates to Barclays Bank in the UK. Post LIBOR and other regulatory mishaps they commissioned a report (the Salz report) into culture within the bank
The report commented on the staff culture survey where worst score related to the staff’s fear of delivering bad messages to senior executives – “messengers got shot”
And what was excluded from the summary of the survey given to the Board? That staff were unwilling to deliver difficult messages
That’s a judgement call made by those informing the Board that amply demonstrates the very culture staff had pointed to.
As the report commented, culture matters because poor culture within a business leads to behaviours that in turn can lead to poor outcomes for customers and investors.
It can impact on consumer and market trust and confidence in firms and products. It can damage society and the economy.
So - who cares when it goes wrong?
Customers? Well, I would say so if you look at VW, Wells Fargo, AMP.
Regulators? For sure, look at the fines, ordered redress and court proceedings in relation to PPI (UK), LIBOR, Interest Rate Swaps, CBA
Taxpayers? in the US, UK, Europe, NZ banks/finance companies were bailed out so taxpayers care very much.
Shareholders? Well, arguably not so much. If you look at BP (Deepwater Horizon). VW (emissions), Lloyds (PPI), the share price recovered relatively quickly. It seems to me that the share price suffers materially only if the event threatens profits or business models over the longer-term. It can be hard to see the moral judgement being exercised over conduct by most shareholders.
This partly explains the US model of imposing bigger and bigger regulatory fines as a desperate attempt to actually make the corporates hurt and the shareholders react
The fact that the biggest fines levied on financial services firms in the US have all been imposed on foreign banks rather than US banks does puts a moral hole in the US stance.
So to take that theme forward - one of the greatest challenges for directors of listed companies today is how to balance the interests of shareholders (who may appear to care little for customers, employees or society) with those of the broader stakeholders.
Germany and UK have built that into their companies law – directors are legally obliged to consider the interest of the employees, the community, the environment
The sense of the primacy of short-term shareholder returns over long-term sustainability of the business model and the trust and respect of the public has damaged some industries.
Boards need to find a way of growing their companies and providing returns to investors whilst insisting that their companies behave ethically and fairly.
It’s an important point that research (whilst mixed) does suggests that good culture and good behaviour demonstrably contribute to good business outcomes.
Who owns corporate culture?
Well, of course, everyone. But first and foremost, Boards and senior management.
Boards because you set the strategic direction and the values of your company AND you hire and direct the CEO
Senior management because you're in the building and you decide who to hire, to fire and to pay and promote
So what do we expect of Boards?
Boards have to mean it, they have to model it and they have to motivate everyone to get in line. especially the executives
Everything a board does has an impact on the culture and on the behaviour within the companies they lead.
If a company has a rotten culture, if it treats its customers badly, if it disappoints its regulators, if it misleads its investors and its creditors – the board owns it.
To drill down into that:
The appointment of the CEO and the construct of their remuneration package is arguably the most critical single decision the Board makes that will impact on corporate culture.
So Culture is hard to measure but you have to try - it can ebb and flow and it can be significantly different in one location or product area to another.
In The FMA and RB report on conduct and culture within NZ’s banks, we talk a lot about what I like to call the “wiring”:
Boards and management have to construct the wiring - the systems the processes the controls that create an environment where the interests of customers are at the heart of the business model.
It brings into play some fascinating thinking around organisational design and behavioural science.
I have had this discussion with the boards of RBS and HBOS/Lloyds in the UK - they did not set out to go under and they did not set out to mistreat their customers.
And they still don’t really know how it happened. But it did.
Working out how and why those things happened and how to avoid them happening again is incredibly complex.
For financial services – as the core cultural driver, we’re asking the industry to show us how they put customer interests at the top of their priorities.
You want to be at a point where serving the needs of the customer ranks more highly than how much you can ram down their unsuspecting throats.
I should add – having happy or satisfied customers is not necessarily the best measure to focus on.
In FS of all industries, just because a customer happily bought the product or paid the fee does not mean that it was a good or proper sale or a service that was well-delivered.
This is made more problematic because a lot of life’s most important financial decisions can take years to be proven good or bad decisions. And usually by the time you know, it’s too late to do anything about it.
So again – what can boards (and indeed management) do:
In asking themselves whether they have built the processes, the training, the checks & balances to generate good customer outcomes - the Board can start by asking themselves what behaviours they are exhibiting.
The anthropologists and sociologists will tell you about learned behaviour. About children learning from their parents and most of us learning from those we look up to.
The signalling that board directors and senior executives do by their actions cannot be under-estimated. Even for the most articulate of board chairs or CEOs, actions speak louder than words.