Five years after the crisis, the financial sector is still being hit by a series of revelations of unacceptable and inappropriate behaviour, 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 behaviour 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 behaviour have come under intense scrutiny. Discussions in the media and elsewhere focus on the ethics of bankers and the need to reshape behaviour, 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 organisations 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:
- clear and public commitments from the chairman and CEO that the old ways of working are not acceptable, and that the journey towards a ‘new bank’ will include major culture change
- new, high profile value statements and codes of conduct usually including a principle of ethical, responsible banking and the importance of fair and high quality service for customers
- a redefinition of the skills and behaviour needed to deliver the business strategy: in an environment focused on risk management, transparency and ethical behaviour, are the behaviour and competencies that led to the global financial crisis the ones needed to revive the sector?
- reformed mechanisms (e.g. reward structures) to stop unwanted behaviour being reinforced through misaligned reward and promotion processes.
What does achieving cultural transformation mean in practice?
- Senior commitment: a true commitment from senior executives to transformational change, including a review of the core beliefs and routines that exist within the bank. To be effective it is vital to have visible and authentic role-modelling of values, with leadership demonstrating decisive action to prevent the re-emergence of unacceptable behaviour.
- A structured approach to managing people risk: what are the critical functions and roles – the areas of the organisation with the biggest impact on performance or reputation? What is the succession pipeline (internal and external) like for these areas? Is the organisation’s key talent in the critical roles and functions?
- Incorporation of talent risk into wider risk management governance and reporting: Is people risk being monitoring in the same way and in the same forums as operational, market or credit risk? Does it have visibility outside the HR function?
Successful and credible cultural transformation will depend on two important elements:
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:
- cessation of certain business activities and/or the sale of certain products that are perceived to be contentious or unfair
- radical overhaul of traditional norms and routines (e.g. no longer paying bonuses or the introduction of the bonus-malus).
- Articulate clear measures, making it easier for peers and the public to hold banks to account.
- Frame the behaviours that should be rewarded through incentive structures.
Financial services organisations globally 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 global banking industry and monitor and manage talent risk will require bold actions.