Conduct & Culture
Updated: Jul 3, 2018
Culture eats strategy for breakfast. As a nation. As a corporation. As an individual. Anyone can plan; but if we can’t get our act together; nothing’s getting done. Strategy is deciding what to do, culture is actually doing it.
It’s the way things are done around here. What actually happens rather than what we say is going to happen. It's the unspoken attitude and behaviour we expect you to understand.
So you want to work for this company? Belong to our religion? Be a doctor? Then you had better act like you do, because group membership is always conditional. And those conditions are culture.
Ubiquitous, our culture is the covert framework that gives us confidence when we’re with our own people; makes us cautious when we’re not. It’s the lessons we learn from Day One. In our families, we're hardwired to know our place, play by the rules, get fed, loved and accepted. As we grow up, we make the circle bigger. From families, to schools, friends, communities, cities, universities, work. With each new stage, through trial and error, we learn how each new social system requires a specific set of attitudes and behaviors for acceptance and success. This is how the group solves problems, how we get closer to the inner circle, belong to something bigger, and grow our influence.
Strategy - two parts planning and one-part hubris - is the easy part of management. The talking before the doing. It's the CEO demanding a 15% increase in revenue and market share. But culture is the reality check. It's the reactive cost-cutting mindset that results in travel bans, hiring freezes and an inward focus on process, despite what the CEO's just announced.
Strategy is the ambitious blue sky thinking; culture, the nit-picking COO that shoots down every idea that isn’t theirs and never got fired for not taking a risk.
Strategy talks about values-, purpose-, diversity and inclusion. Culture is the work-place bullying and the lived experience of a work force too scared to speak up or make a ‘career limiting move’.
So yeah, Culture Eats Strategy for Breakfast. Next time you hear someone mention the “Strategy-Execution Gap” what they really talking about is the culture.
And yet here we are. Culture and Conduct: The Corporate World’s Latest Fashion Fad! What gives? IMO the big three reasons:
The global financial crisis focused the spotlight on how short-term profiteering by banks had reached systemic-risk proportions. Profiting at the expense of your clients had become the new normal. Clients has become counter-parties, not clients anymore.
The world is more connected. More transparent. And that changes the way consumers are protected.
And bad culture costs money. Just ask VW how much their culture of putting profits before telling the truth about emissions ended up costing them. Did anyone in VW not think about raising the issue as a tad unethical? Or was the culture one that crushed any dissent?
Another Case Study in Culture Fail: Johnson & Johnson?
Strategy: Develop an anti-psychotic drug called Risperdal.
Culture: Always plan to market the drug off-label from the start: Meaning promote it as a treatment for stuff it was never approved by the FDA for.
Can anyone pronounce the side effect ‘Gynaecomastia’? According to the US Attorney General (at the time), Eric Holder, their conduct jeopardized the health and safety of patients, damaged the public trust and cost them well over $2.2bn in fines and settlements. Not quite what RW Johnson had in mind when he drew up the company’s famous Credo back in 1943, one would suspect.
The truth about revolutions is that they don’t happen overnight. Yet banking regulation has changed dramatically in the last ten years. The UK regulator is called the Financial Conduct Authority. This places conduct, the way in which business is done, at the er, centre, of ensuring a more robust financial system. So what has changed and what does this mean?
The key objective of regulation is a positive outcome for the customer. This is a big change. No longer is simple compliance with the law good enough. A bank cannot argue they ‘haven’t done anything wrong’ anymore. If a customer is placed in a detrimental position as a result of using your services, you have a case to answer. The days of tying up customers in legalese are gone. Why should a customer be worse off for using one of your banking products? You need to be able to answer that or refund accordingly.
Regulators look for excess profits. High ‘initiation fees’ on existing credit rollovers has apparently attracted some 'unwanted' regulatory attention. Clearly, charging an initiation fee over and over on the same credit agreement is neither fair nor innovative. If this is true, surely someone at a bank that does this (you know who you are) would have noticed this was wrong? In a culture that meant it would be ‘career limiting’ to point this out, we would clearly have a Conduct Issue on our hands.
Lehman Brothers shows very clearly what happens when a culture of fear, normative rule breaking, and narcissistic managers run the show. These examples are only going to sharpen the focus of regulators and investment analysts on culture and conduct – as potential catastrophic business risks, not simply ‘slap-on-the-wrist’ malfeasance. Remember, the bar has been set at ‘positive outcome’ for the client, NOT ‘but we haven’t done anything illegal’.
Boards need to show specific plans and policies in place to discourage poor conduct such as selling customers products they don’t need at unreasonable prices. Loading unnecessary insurance products on credit facilities for instance: a classic target for consumer activists.
The words ‘Director’ and ‘Personal Liability’ are increasingly being used in the same sentence. The Senior Manager's Regime isn't going anywhere.
Compliance used to be a little more than a legal tick-box exercise, in which the spirit of the law placed a distant second to the letter of the law. Compliance officers, usually lawyers with little banking experience, were the monthly irritations the trading desk or deal makers had to put up with. No more. Compliance is now 1st line - embedded into the banking production process. Today's compliance professional is a mix of lawyer, accountant, behavioural scientist, project manager and communications specialist. You see, the main jist seems to be about using culture to shape individual conduct.
Yet, shaping Conduct is a hugely complex behavioural challenge.
And running a Conduct programme out of the old compliance department is the equivalent of tasking a mid-level HR manager with running a diversity and inclusion programme. In other words, no one’s going to take it seriously. They'll pitch up at the mandatory training workshop with a predictably bad attitude, but that pretty much as far it gets. Sorry but that just the way it works....if you really want change then the top brass have to drive it. Hard.
Yet. Fortunately, public opinion and regulators demand more. This is Serious. Panama-Paper’s Serious. PPI Mis-selling Serious. Libor Rate-Rigging Serious. Personal Liability Serious.
Google no longer allow their search algorithms to highlight pay-day loan ads on their platform. There’s a reason for that. Society abhors the idea of profiting from desperate people – real or perceived. Even US regulators are getting in on the act. Credit card companies have always been money printing machines (excessive charges and penalties). Being the US, these companies have for decades kept themselves fairly immune from the legal consequences of their conduct, via what is known as ‘forced arbitration’ clauses in their contracts with customers. Essentially these clauses barred customers from taking the credit card company to court or joining a class action, even when they have been overcharged. The Consumer Financial Protection Bureau, a federal regulator, had recently proposed new regulation to prohibit such clauses Power to the people. The point is, more consumer protection, not less is, um, on the cards.(although the most recent Government has moved to defang the regulator somewhat).
Regardless of one’s personal feelings about free choice and patrimonial regulation, social trends towards consumer protection are clearly emerging. Banks have to change the way they reinforce behaviour in their organisations - and culture is the obvious solution. Conduct, or more specifically changing conduct, requires a complete overhaul in the manner in which people are incentivised. Good luck to you if you think you can carry on like some watered-down version of Wolf of Wall Street. Yes investment banking remains an aggressive alpha-male culture, but this very fact is likely to make it more of a target going forward, not less.
If we see people as nothing more than a short-term opportunity to dupe into signing a contract, that boosts our bonus, but is ultimately to the customer’s detriment, then as people and firms, we are not long for this world. Taking advantage of the asymmetric nature of financial information, especially when people’s life savings are at stake, will never be cool to society at large.
But if as bankers we need a regulator to point that out, then we don’t deserve any respect for the banksters we’ve become.