It is widely argued that fundamental culture change is needed in banks if the lessons of the crisis are really to be learned and if a more stable, publicly-acceptable banking industry is to emerge. But calls for culture change are commonplace. What is rarer is successful implementation. What are the key principles and practical steps which need to be followed? And what can we learn from applying a risk-focused lens to the people agenda to improve performance and manage reputational and talent risk?
Five years after the crisis, the financial sector is still being hit by a series of revelations of unacceptable and inappropriate behavior, market manipulation and mistreatment of customers. It is clear that historical practices were wrong, and need to be changed. A fundamental change in culture and behavior is an essential step on the road to rehabilitation and the creation of a sustainable and safer financial sector for the future.
The misalignment of interests and flawed staff incentives that drove past behavior have come under intense scrutiny. Discussions in the media and elsewhere focus on the ethics of bankers and the need to reshape behavior, notably by reducing bonuses. For regulators, a priority is to ensure that banks deliver better outcomes for customers. In response to regulatory pressure, banks are beginning to undertake significant reorientation of their business models and their treatment of customers. The conduct agenda, especially in the European context, is driving a need for widespread culture change.
Hand in hand with cultural change comes the need for financial services organizations to more effectively understand, monitor and manage talent risk. For a sector so familiar with risk management as a discipline, the extension of the existing risk framework and practices to incorporate people and talent is a powerful way to underpin lasting cultural change.
Many global banks have started top to bottom cultural change programs. This approach often includes:
Most importantly, banks need to regain trust with regulators, customers and the public. This involves building new relationships with customers and regulators. Laying the foundations of trust will depend on providing more transparency, simplified products and better quality advice, regardless of the sales channel.
In addition, banks need to show that the root causes of the behavior that caused the crisis are being addressed, by proving they are re-balancing stakeholder interests when making core business decisions. Previously, banks demonstrated a disproportionate focus on profit at the expense of benefits to the customer. In future, successful, sustainable business models will be built on the fair balance of stakeholder interests. Banks need to prove to the public and regulators that this principle has been embedded in the entire value chain from strategy to product development to sales and after sales.
KPMG worked with a global financial services organization to review and redefine the core leadership competencies and behaviors required following a near-fatal collapse in performance. Pre-crisis the bank was demanding its leaders display innovation, a global mindset, and expansionist and ambitious behavior. All people levers – recruitment, promotion, remuneration – were structured around these competencies, which were clearly aligned to the global strategy.
Following the collapse, KPMG worked with the group to redefine the leadership competency framework. Gone was the now-hubristic behavior, and in its place were core skills relating to communication, cost management, risk management and change leadership: the skills, in other words, required to rebuild the bank. The wider people management framework, from recruitment, through performance management and incentives, was realigned to ensure that the new behavior was embedded across the group.
What does achieving cultural transformation mean in practice? At a minimum, there needs to be:
Successful and credible cultural transformation will depend on two important elements:
Statement of intent
The change journey should start with some high impact, symbolic actions that demonstrate that the bank is taking culture change seriously, and that there is no going back. These symbolic actions could include:
Conduct must be embedded
Financial services organizations are facing unprecedented pressure to change their culture. Half-measures will not be enough in today’s environment. Real and lasting transformational change to re-establish trust in the banking sector and monitor and manage talent risk will require bold actions. It is essential that the industry does what it takes to achieve this so that it can continue to provide a valuable – and valued – role in supporting the economy and wider society.
Risk management is a core capability for all financial services organizations. Applying this discipline and framework to the monitoring and management of talent risk is a source of potential competitive advantage in a post-crisis world.
Frontiers in Finance reviews recent stress testing and asset quality reviews of Eurozone banks including likely longer-term impacts and opportunities.
Improving bank annual reports through an integrated reporting model offers more opportunities to build shareholder trust and value.