Conduct and Culture

2016-05-19 17:59

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.

Culture? It’s the way we do things around here. The doing, not the talking. 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 better behave like you do, because group membership is always conditional. And those conditions are culture.

Ubiquitous, our culture is the covert framework that gives us swagger when we’re with our peeps; makes us cautious when we’re not. It’s the lessons we learn from Day One. Dad is Dad. Mum is Mum. We know our place, play by the rules, get fed, loved and accepted. As we grow up, we make the circle bigger. Family, school, friends, communities, cities, universities, work. Each time, through trial and error, we learn that each social system requires a specific set of attitudes and behaviours. This is how we get closer to the inner circle, attribute status and grow our influence.

Strategy on the other hand is two parts planning and one-part hubris. It’s the easy part of management. The talking before the doing. Strategy is the CEO demanding a 15% increase in revenue. Culture is the reactive cost-cutting mindset that results in travel bans, hiring freezes and an inward focus on process. Strategy is the ambitious market share growth plan, 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 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 cultural ability of the organisation to do what it says it's going to do.

And yet here we are. Culture and Conduct: The Corporate World’s Latest Fashion Fad! What gives? IMO the big three reasons:

1. 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.

2. The world is more connected. More transparent. And that changes the way consumers are protected.

3. And bad culture costs money. Just ask VW how much their culture of putting profits before telling the truth about emissions is going to end up costing them. Thirty Billion € anyone? Did anyone in VW not think about raising the issue as a tad unethical? Or was the VW culture one that crushed any dissent, tacitly endorsing such conduct?

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, 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, I suspect.

The truth about revolutions is that they don’t happen overnight. Yet banking regulation has changed dramatically in the last five years. The UK regulator is now called the Financial Conduct Authority. This places conduct, the way in which business is done, at the heart of ensuring a more robust financial system, while protecting the customer from nefarious business practices. So what has changed and what does this mean for me and you:

• The key objective of regulation is a positive outcome for the customer. This is a massive 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. As Capitec recently found out. 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 (a possible defence by Capitec). If this is true, surely someone at Capitec 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. John Myburgh’s report on African Bank shows very clearly what happens when a culture of fear, normative rule breaking, and narcissistic managers run the show. (A cynic may ask whether there are any other kinds of banks?) 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, NOTwe 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 – hey furnisher retailers? The words ‘Director’ and ‘Personal Liability’ are increasingly being used in the same sentence. Just ask Khulubuse about Aurora. Directors at banks will soon be sweating when charges of poor conduct are levelled at their institutions.

Yet most banks haven’t quite grasped the seriousness of the situation.

Compliance used to be 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. Shaping Conduct is a hugely complex behavioural challenge. It requires a deep understanding of people, not rules and regulations.

Running a Conduct programme out of those very same compliance departments is the equivalent of tasking a mid-level HR manager with running a diversity and inclusion programme. In other words, no one’s really going to take it seriously. Fortunately, public opinion and regulators aren’t as slow on the uptake as highly paid bankers seem to be. 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, has 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.

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. Conduct, 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. So while banking remains an aggressive alpha-male culture, this very fact will just 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 the right kind of organisation must remove us. Taking advantage of the asymmetric nature of financial literacy, 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.

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