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The hard side of soft controls: The 7 elements of building a foundation of trust from the inside out

Frontiers in Finance - The hard side of soft controls

All organizations need to develop a robust set of soft controls if they are to earn the trust of stakeholders. For financial services firms, the challenge of rebuilding trust is currently especially severe. To rebuild trust, at least seven soft-controls need to be embedded within financial service firms.


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Rebuilding trust

Restoring trust in the financial services sector is widely recognized to be a key priority. Trust has been severely damaged by the financial crisis; perceptions of financial companies, among the public and political leaders alike, are profoundly negative. Rebuilding trust is essential to restoring confidence in financial markets and to underpinning economic recovery more generally. For individual companies, creating or recreating relationships of trust – not just with customers, but with shareholders, regulators, ratings agencies, even their own employees – can hold the key to a return to growth and profitability and to sustained competitive advantage.

Trust is an ephemeral, intangible quality. Many business leaders, in finance as elsewhere, proclaim its core importance. Fewer, however, understand what creates trust or how to nurture it within and outside the organization. But it is vital that they do better. According to the 2013 Edelman Trust Survey,1 banking is globally the least-trusted of 18 major industries, and is the only industry that has seen no recovery in trust since the financial crisis; in the UK, almost 60 percent of the public rate the banking industry’s performance as poor or very poor.

Banking and financial services scandals are a significant factor behind this lack of trust and perception of poor performance. A very recent UK Parliamentary Report on the banking system found that: “The UK banking sector’s ability both to perform its crucial role in support of the real economy and to maintain international pre-eminence has been eroded by a profound loss of trust born of profound lapses in banking standards.2 When Edelman asked people what causes these scandals, a range of reasons were cited: corruption; a compensation driven culture; and conflicts of interest. Crucially, nearly 60 percent of people identified causes as ‘internal’ and with the business’ control. The Boards of financial institutions frequently debate about how to ensure their policies, and more importantly the intent of the policies, are properly carried out and followed throughout a sprawling global institution. How can they start to rebuild trust with investors, regulators, customers and other important stakeholders? With the right tools, and a proper understanding of the issues, it is within the power of financial companies to rebuild trust.

Understanding trust

Trust is a function of two complementary characteristics: competence and integrity. No organization will inspire trust if it is not competent, if it cannot get the basics right. But competence is not enough. To earn trust, an organization has to behave according to sound moral and ethical principles, and focus on truth and fair dealing, uprightness, honesty and sincerity. Like many other organizations, banks have long known that ensuring people behave with integrity and according to agreed values depends on instituting the right combination of rules and underlying culture, what we term here respectively hard and soft controls.

Hard controls include explicit policies, regulations and procedures, together with specific responsibilities, structures and targets, backed up by rewards and sanctions – most fundamentally dismissal – in the event of misbehavior. Soft controls embrace all those intangible aspects of an organization’s culture which frame and condition individual’s expectations of proper behavior. They include aspects such as client centricity, professionalism, team work and empathy. Neither hard nor soft controls alone is sufficient. In other words, hard controls can only be effective when they are supported by soft-controls – policies that employees understand and believe in are more likely to be followed. Conversely, without the necessary hard controls there is little opportunity for measurement and it becomes a theoretical (i.e. less productive) exercise. The challenge is have the right balance between hard and soft-controls.

“The UK banking sector’s ability both to perform its crucial role in support of the real economy and to maintain international pre- eminence has been eroded by a profound loss of trust born of profound lapses in banking standards.” 

However, it is not enough merely to note that hard and soft controls need to work in harmony. Soft controls need to be specifically inculcated and nurtured. Cultural issues are often seen as ‘fluffy’ or intangible, not something for dynamic, decisive senior executives to be concerned with. In fact, soft controls need to be made as explicit – as ‘hard’ in their own way – as hard controls.

The key foundations

We have argued above that if a financial institution is to behave with integrity, an essential foundation for building trust, then it has to reflect explicit ethical principles. In common business-speak, it needs to develop and articulate a statement of its mission, backed up with what are variously described as core values, business principles and codes of conduct. Once these are in place, we have found in the course of a great deal of research on how soft controls influence organizational behavior and performance that there are seven critical cultural dimensions which differentiate good from poor organizations.

All of these foundations need to be built and reinforced if the organization is to behave with integrity, true to its principles, and earn the trust of its stakeholders. These foundations are to some extent less easy to measure than profit or loss. But many tools are now available which can identify the critical indicators which make them visible and real. Increasingly, financial services companies are commissioning a cultural audit alongside the financial one, as part of an assessment of its risk management systems and controls.

Making the change

Armed with this conceptual framework, and an understanding of the seven prime dimensions of integrity, boards and chief executives can make a practical difference to their organization’s performance, beginning by asking the following key questions:

  • Do we have the right mission? Is it clear, explicit and well-understood?
  • Is the mission properly translated into a normative framework of core values, competences and behavioral standards?
  • Do we have the soft controls in place which will drive people to behave correctly?
  • Can we account for and demonstrate that, to ourselves and to relevant external stakeholders such as regulatory authorities?

The business of rebuilding trust has to begin with the right foundations.

1 Edelman Trust Barometer 2013 Annual Global Study, www.edelman.com

2 Changing banking for good, Report of the UK Parliamentary Commission on Banking Standards, June 2013 (emphasis added) 

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