John R Childress
The Challenge of Managing Ethical Behaviour in Banking JOHN R CHILDRESS Senior Advisor Corporate Culture & Strategy Execution “We simply do not know if we have the tools to change the banking culture.” Lord Turner, FSA Chairman The Situation: Between 2008 and 2013 the banking industry as a whole has been fined nearly $150 billion for unethical and fraudulent activities. While there are a small number of individuals who perpetrate unethical behavior and wrongdoing, their actions have considerable financial and legal ramifications and have negatively impacted employee morale as well as the trust of regulators and the public. In fact, most global banks are trading well below breakup value, signaling a significant lack of investor optimism in positive change. One global institution, Citibank, states on its website and in its ethics document that “conducting business responsibly and ethically is critical to protecting our reputation for integrity and maintaining our competitive advantage” and is therefore augmenting its existing Citi Code of Conduct with an additional company-­‐wide top-­‐down communications, staffing and education campaign of “Zero Tolerance”. Other banks are following suit with new policies and internal procedures in an attempt to reshape culture and eliminate unethical behaviours. While such approaches are well intentioned, the real question is: “will they bring about positive and sustainable behaviour change?” We believe this is unlikely since there are already numerous internal compliance and business safeguards in place, as well as training programs, yet still the issue of unethical and overly risky behaviour remains. While we do not know the internal culture and workings of the major banks and financial institutions as well as those leading and working inside the organization, we do believe, based on several decades of successful work on large scale culture change in numerous industries, that developing a culture of responsible finance and instilling ethical behaviours requires a multifaceted approach and must include the thinking, tools and methodologies of behaviour change at scale. The senior leadership of the global banks, as well the regulators, see the elimination of unethical activities as strategically important to long term sustainability and restoring trust in modern banking. We would like to use this white paper to begin a dialogue on effectively managing ethical behaviour within banking. Corporate Culture as a Business Risk A 2009 study of risk managers stated that “most risk professionals – on the whole a highly analytical, data rational group – believe the banking crisis was caused not so much by technical failures as by failures in organisational culture and ethics.” (RiskMinds 2009 Risk Managers’ Survey; Childress, 2013). 2014 © John R Childress 2 In a 2010 presentation to the Society of Actuaries’ Risk Symposium on the topic of “Creating a Risk Management Culture”, Norman Marks and Michael Rasmussen stated: “while some risk-­‐
taking will be governed by rules and controls, much is governed directly by culture – where often rules and controls are not effective, fail, or are ignored.” Traditional Culture Change Approaches: To reshape their current corporate culture, numerous global banking groups are attacking the problem with highly traditional approaches. Some have publicly revised their Corporate Values and are using internal cascading communications to reeducate their employees on the importance of ethical behaviour. Others use their CEO and key senior executives in extensive “Town Hall” meetings with employees to urge better behaviour. Still others are reviewing and revising compensation and even placing a percentage of annual performance pay on “living the culture”. From the outside, government regulators and other bodies have been promoting tougher oversight and additional regulation as the solution. While all these are part of the solution, most of these attempts tend to ignore the real fact that culture change is the replacement of one set of accepted and frequent work behaviours with another. Real culture change is behaviour change. Understanding Corporate Culture If you don’t understand your culture, you don’t understand your business. The term Corporate Culture is a poorly defined business term and often lumps too many elements together to be useful in understanding how to effectively manage important issues such as ethical behaviour. If anything, corporate culture is a “rear view mirror” concept and can only be understood by observing daily behaviours and how employees consistently approach problems, deal with business opportunities and interact with each other. Also, contrary to popular opinion, there is no single “corporate culture”, especially in banking (Childress, 2013). Banking is more a collection of strong subcultures, often organized around different functions and business models (commercial banking, investment banking, wealth management, Operations & Technology) and even within functions strong subcultures can exist. When one or more of these subcultures is out of alignment with the values and ethics of the company, problems can and do occur. Sustainable culture change and the ability to effectively engender ethical behaviour must be tackled from multiple directions: (see Figure 1) Push Mechanisms: Top Down • Responsible Finance and ethical behaviour established by senior management as a strategic and business imperative • Culture to be defined as specific work behaviours, not generalities or platitudes • Personal change, role modeling and “active leadership” by all levels of management (Backstage Leadership™) • Reinvigoration of true organisational purpose (beyond profit and EPS, which are actually outcomes) • Reinforcing communications, “branding” and training 2014 © John R Childress 3 Pull Mechanisms: Bottom-­‐up • Championing of new behaviours by informal and highly respected peer-­‐group leaders • Well designed, orchestrated, “viral” contagion of new behaviours through informal subculture networks within the bank • “Living the Culture” engagement and learning workshops Sustainability Mechanisms: • Revised policies and business processes that promote new and desired behaviours • Compensation models that foster team accountability for ethical behaviours • Hiring profiles that include desired values and behaviours, not just “best and brightest” • Culture metrics (gap analysis and tracking) Experience in behaviour change at scale across many different industries has shown that “active leadership” and “peer-­‐group pressure” are the strongest levers for reshaping culture (Childress, 2013, Hererro 2006, 2011). Since senior leadership has a significant impact on what is expected, supported and rewarded inside banking groups, it is important to recognise that organizations tend to be shadows of their leaders and therefore the behaviour and active leadership of the culture is paramount to real culture change. Senior leadership teams and managers that are aligned on the importance of behaviour change and who understand the principles behind reshaping day-­‐to-­‐day work behaviours tend to behave and manage in ways that encourage and support a set of clearly articulated ethical and productive work behaviours and professional practices. Too often, however, executives and managers ignore (consciously or unconsciously) risky or “bad” behaviour in direct reports and employees, which can easily lead to a perception that such behaviour is “condoned by the bosses”. In many cases a poor culture starts at the top (Childress, 2013). You get the culture you ignore! In many cases executives and managers are not aware of how their own behaviour fosters certain behaviours and creates the culture. Reshaping Behaviours Research by academics and behavioural scientists has shown that individual behaviour at work is determined more by peer pressure than employer proclamations, decrees, rules or regulations. Banks in particular are comprised of numerous sub-­‐cultures, each of which have strong unwritten ground rules for how members should behave in order to “fit in” and remain a “part of the group”. Experiments in group behaviour have consistently proven that even when individuals know what is right and know what should be done, many will not take the important step of speaking up or going against the “collective group” to which they belong. (Herrero, 2006, 2011; Thaler and Sunstein. 2009). Reshaping culture is more about shifting behaviour than issuing proclamations, new policies or new values statements, and one of the quickest ways to reshape behaviour is using sustainable behaviour change methodologies and appropriate peer group pressure (Herrero, 2006). To reshape ethical behaviour within banking, it is important to answer several key questions: • What are the specific ethical work behaviours we want from our employees? It may vary from department to department. • In what ways do these desired behaviours match with our current business “purpose” and “operating principles”? 2014 © John R Childress 4 •
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How woule those new behaviours contribute to commercial impact or business objectives? What is the decision-­‐making framework against which employees should judge the decisions they take? What frameworks do they currently use? Why don’t more employees “speak up” or initiate dialogue when they see or know of wrongdoing or risky behaviour? What are the internal and external motivations that will persuade people to adopt new behaviours (e.g. speak up)? By understanding these key questions, it will be possible to build an evidence-­‐based approach to the challenge of managing unethical behaviours. Culture Change in Other Industries Currently there are few, if any, successful culture change activities in banking to use as direct examples. However, an analogy can be made within industries where “safety behaviour” is critical to company performance and people’s lives. In the offshore oil and gas industry, strong, macho subcultures exist among pipefitters, welders, drill crews, and other operationally intensive functions. Line managers often have strong personalities with years of experience and they oversee younger crews, all eager to make a name for themselves and “be the best”. (The analogy to trading rooms is not too far off). In a testimony before the US Senate Committee on Energy and Natural Resources, MIT Professor Nancy Leveson identified corporate culture as the most critical element of safety in the Oil and Gas industry. (Leveson, 2011). A successful approach to culture change on oilrig platforms using peer group dynamics and sustainable behaviour change methodologies is detailed in an interesting paper by two Stanford and Harvard Business School professors (Meyerson and Ily, 2010). Recently, John Childress spoke at length with Dr. Scott Geller and Dr. Steve Roberts of Safety Performance Solutions and the Virginia Tech University, the recognized experts in behaviour based safety change in the oil and gas industry. Both are adamant that the behaviour change principles so effectively used in oil and gas for decades are transferable into other industries where strong subcultures exist and behaviour can be linked to positive and negative outcomes (Geller, 2012). The Opportunity for Banking: Now is a timely opportunity for banking leadership to learn to manage unethical behaviours with an effective intervention where employees at all levels feel confident and empowered and take personal accountability for the behaviours and effectiveness of the business and their colleagues. Such an intervention should result in positive peer pressures, more open dialogue within peer groups and with management concerning risk, behaviours and values, plus greater compliance and professionalism. Such shifts will lead to a significant reduction in excessively risky and unethical activities. Employees at all levels will begin to accept greater personal responsibility for the culture and the overall spirit and pride in the organization will substantially increase. Corporate Culture and Change Expertise John R Childress, is one of the most experienced practitioners in corporate culture and culture change and has over 30 years of hands-­‐on experience advising senior executive teams on culture change and strategy execution. John’s recent book, LEVERAGE: The CEO’s Guide to Corporate Culture is considered a must read by senior executives. 2014 © John R Childress 5 Mr. Childress is available as a Senior Advisor to banks and regulatory bodies to advise and support on culture change within UK banking. References: Childress, John R., 2013. LEVERAGE: The CEOs Guide to Corporate Culture. The Principia Press, London Drummond, John. 2013. Motivating Millions: The 2013 Sustainable Behaviour Change Marketplace Survey. Corporate Culture Ltd., London Geller, E. Scott, 2012. Beyond Safety Accountability: How to Increase Personal Responsibility. ABS Consulting, Rockville, MD Herrero, Leandro. 2006. Viral Change: The Alternative to Slow, Painful and Unsuccessful Management of Change in Organizations. Meetingminds, London Herrero, Leandro (2011) Homo Imitans: The art of social infection. Viral Change™ in action. Meetingminds, London Leveson, Nancy G., 2011. Risk Management in the Oil and Gas Industry: Testimony of Professor Nancy G. Leveson before the United States Senate Committee on Energy and Natural Resources. MIT Energy Initiative, http://mitei.mit.edu/news/risk-­‐management-­‐oil-­‐and-­‐gas-­‐industry Meyerson, D.E. and R.J. Ely, (2010) “An organizational approach to undoing gender: The unlikely case of offshore oil platforms”, Research in Organizational Behavior: An Annual Series of Analytical Essays and Critical Reviews, VOL 30, 30: 3-­‐34. 2009 Risk Managers’ Survey: The causes and implications of the 2008 banking crisis. RiskMinds, Moore, Carter & Associates, with Cranfield School of Management Thaler, Richard and Cass Sunstein. 2009. Nudge: Improving Decisions About Health, Wealth and Happiness. Penguin Paperback, New York 9 December 2014 John R Childress Senior Advisor on Culture Change, Leadership and Strategy Execution London [email protected] www.johnrchildress.com +44-­‐(0)7833-­‐493-­‐999 2014 © John R Childress 6 Figure 1: Push, Pull & Support Process for Reshaping Culture 2014 © John R Childress