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:
- 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 behavior needed to deliver the business strategy: in an environment focused on risk management, transparency and ethical behavior, are the behavior 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 behavior being reinforced through misaligned reward and promotion processes.
What is needed?
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:
- 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-modeling of values, with leadership demonstrating decisive action to prevent the re-emergence of unacceptable behavior.
- A structured approach to managing people risk: what are the critical functions and roles – the areas of the organization with the biggest impact on performance or reputation? What is the succession pipeline (internal and external) like for these areas? Is the organization’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:
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:
- 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).
Conduct must be embedded
- articulate clear measures, making it easier for peers and the public to hold banks to account
- frame the behaviors that should be rewarded through incentive structures.
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.