There are indications that the financial services industry is addressing the cultural change required to restore trust in the sector
Many major financial institutions could improve their risk management by fostering more open corporate cultures. To do so, they should promote environments in which employees are given the freedom or even encouraged to voice ethics- or values-driven concerns regarding problematic business practices.
Such openness would help to engage employees in their company’s mission and enable them to raise issues more effectively at early stages, before such issues morph into substantial damage to reputation or the bottom line. Such cultural change – not just added regulations – is key to restoring trust in the financial sector.
I have argued the above since 2010 in Ethical Corporation pursuant to an inquiry into some of the causes of the 2007-08 financial crisis and its aftershocks (see original article and part 1, part 2 and part 3 of a follow-up series).
Such arguments may have seemed a bit unorthodox at the time but, recently, prominent figures in the financial services industries in both the UK and the US have publicly identified fostering open culture as a crucial element of efforts to avoid corporate misconduct and manage risks in complex financial organisations.
Salz Review of Barclays
In early April, the independent Salz Review of Barclays’ corporate values and business practices was released on behalf of the bank.
The review was commissioned by Barclays in the wake of its involvement in the Libor-rigging scandal. Led by Anthony Salz, a former lawyer and now executive vice-chairman at Rothschild, a team of accountants, consultants and other experts reportedly conducted – in addition to wide-ranging documentation review and employee surveys – over 600 interviews with past and present employees and board members, regulators, shareholders and other stakeholders of Barclays in coming up with an extensive set of analyses and recommendations.
The Salz Review would make a good read for any student of corporate governance. While it identifies compensation practices skewed in favour of risk-taking and short-term reward, over-leverage and other substantive factors as underlying Barclays’ troubles, one key take-away from the review is that corporate culture also matters – greatly – to how well a corporation performs its role as a steward of precious trust and resources of its stakeholders.
Moreover, a key component of a sound culture, according to the Salz Review, is openness of senior management and employees in general to concerns and issues raised by others in the organisation.
Salz points out that Barclays suffered from significant cultural shortcomings and there is a definite causal link between such shortcomings and the types of misconduct that he was asked to review.
Here are just a few of the numerous passages on openness of culture from the Salz Review (our emphasis added):
“There is … evidence from Barclays’ internal Employee Opinion Survey of a cultural unwillingness to escalate issues. A significant proportion of employees in the investment bank, for example, said that they were ‘reluctant to report problems to management’, and that they did not feel able to ‘report unethical behaviour without fear of reprisal’.”
“There was also in some parts of the [Barclays] group a sense that senior management did not want to hear bad news and that employees should be capable of solving problems. This contributed to a reluctance to escalate issues of concern.”
“Reluctance by staff to escalate issues, coupled with an expectation that employees needed to show that they could resolve problems themselves, rather than look to others to do so, created a culture that lacked openness. Given these dynamics, we did not find it surprising that some in Barclays Capital failed initially to escalate Libor issues within the investment bank and to the group-level executives outside it. It is difficult to balance encouraging initiative, creating a culture of openness as to mistakes and enforcing a zero-tolerance approach to breaches. But that balance is critical in an investment bank.”
Accordingly, a key recommendation made in the Salz Review is the following (our emphasis added):
“Barclays should foster a culture where employees feel that escalating issues is safe and valued.
Barclays should maintain robust arrangements for raising concerns (whistle-blowing) which are perceived to protect those raising them and to lead to actions being taken to address the underlying culture and values issues. There should be regular reports to the Board which are detailed enough for the board to form insights as to the culture and behaviours within the organisation.”
Salz also links trust by stakeholders to open culture: “To facilitate trust, the bank must improve its openness and transparency.”
In addition, he points out (as my piece in Ethical Corporation did in a more general sense) that, despite “an explosion in new regulation”, “regulation alone cannot address the fundamental underlying causes that led to the business practices which are in the spotlight – the cultural shortcomings we found”.
Rather: “It is a theme of this review that rules need to be supplemented by a clear set of values that are understood through discussion and application, and that develop into a culture which tends to ensure good rather than bad behaviours.”
It appears that Barclays is receptive to the commentaries and recommendations in the Salz Review. Barclays chairman Sir David Walker has said of the review that “we must learn from the findings”, and Barclays has stated that it has already launched a programme of cultural change that is “substantially aligned” with the Salz Review’s recommendations.
Jamie Dimon’s self-appraisal
While the Salz Review as an independent review of a major banking institution’s culture and practices is impressive, JPMorgan Chase CEO Jamie Dimon’s recent, unusually candid self-assessment on behalf of the leading US financial institution is refreshing.
On April 10, the firm released Dimon’s annual letter to shareholders for 2012.
In reference to the London Whale trades, on which the firm reportedly lost billions of dollars, Dimon states frankly in his letter: “The London Whale was the stupidest and most embarrassing situation I have ever been a part of.” Nevertheless, the experience may yet prove to be a catalyst for positive change. Dimon describes in his letter several lessons learned that explicitly pertain to culture, including the need for openness (our emphasis added):
“We are devoted to ensuring that our systems, practices, controls, technology and, above all, culture meet the highest standards.”
“Sometimes people don’t ask hard questions because they want to avoid conflict. That cannot be the way we operate … asking hard questions is what we owe one another to protect ourselves from mistakes and self-inflicted wounds.”
“…if you see anything that doesn’t look right, raise your hand and say something. We tell our people to escalate problems early so we can bring more resources to bear on solving them. And we don’t blame the messenger here. Those who highlight problems are doing this firm a great service.”
Just as the Salz Review sees openness as underpinning a culture built on values, Dimon emphasises in his letter that “a culture of character and integrity … comes from fostering an open environment, where people speak their minds freely, to treating people with respect – at all levels, from the CEO to clerks in the mailroom – to setting the highest standards combined with recognizing and admitting mistakes”.
The insights in both the Salz Review and Jamie Dimon’s letter would seem very useful not just to Barclays and JPMorgan Chase, respectively, but to the banking industries in the UK and the US in general.
It remains that both institutions need to take or complete solid steps to implement cultural lessons learned from painful experiences of scandal and major losses, respectively, and to monitor and report on progress on such implementation.
Nevertheless, the clear and renewed focus of these leading institutions on transforming culture to be values-driven and truly open to the expression of values is hopefully the beginning of a new trend in the banking industries on both sides of the pond.
Wilfred Chow is a US-based lawyer and corporate governance researcher and writer. He previously served as a managing director and associate general counsel at a leading financial services firm in the US.