Which is harder, a financial turnaround or a moral turnaround?

If we are to go forward, we must go back and rediscover those precious values – that all reality hinges on moral foundations and that all reality has spiritual control.
Martin Luther King, Jr.

One of the biggest challenges facing any modern organization is the threat of insolvency or bankruptcy.  Even highly successful companies can become heavenly burdened with debt while trying to finance an acquisition or finance new factories to capitalize on growth opportunities.

In most cases these risky plays pay off.  The acquisition or capital expenditures bring in additional revenue and the debts are paid down to a manageable level.  Unfortunately, sometimes the risk is too great and the company is saddled with excessive debt and has difficulty repaying the loans plus interest.

A company in this precipitous situation needs to engineer a financial turnaround in order to avoid insolvency or bankruptcy.  A financial turnaround is one of the most difficult management challenges in modern business and often means taking somewhat draconian measures to cut costs, trim headcount, sell off assets, and make other hard decisions in order to bring costs in line with revenue.

While a financial turnaround is difficult to achieve, there is a growing industry of experts and expertise to assist the management team and the institutions holding the debt, to restructure and refinance.  This is also an increasingly well-respected area of expertise, with many of the large consulting firms building practices in business turnaround and financial restructuring.  Recently Citibank bought one of the top turnaround firms, Alix Partners, to form the nucleus of their growing insolvency and turnaround practice. The experts in these practices have sophisticated financial models, financial restructuring packages, access to expert legal advice, and often place interim management inside the organization to guide the turnaround.  And the bank and financial institutions are quick to assist in providing extended support.  After all, an insolvency or bankruptcy is bad for the economy.  It makes much better sense to help put the company back into the black.

But what about a moral turnaround?

If this phrase is new to you, let me explain with an example.  Today’s big banks are making buckets of money each quarter, but are morally bankrupt. The culture of big banking is broken and has recently led to the need for massive bailouts using taxpayer money for excessively risky and greedy management decisions. A case in point.  Not only has Barclays Bank been fined for massive rate fixing (the LIBOR scandal), the CEO, COO and Chairman have resigned in disgrace. And serious investigations by the Financial Services Authority in the UK and several US institutions are underway in several other major global banks.  In addition the press is filled with articles, some even written by former senior executives depicting of the “broken culture” within the former highly respected financial institution, Goldman Sachs.

Just recently, however, there are reports that the board of Barclays Bank has appointed an independent and respected banking executive and former lawyer, Anthony Salz,  to review of its worldwide operations would assess its “values, principles and standards of operation” and would outline any changes required.

Barclays has a real ­opportunity to use the events of the past weeks to drive a change in its values and practices and I look forward to hearing views on the changes that should be made.   -Anthony Salz

I am highly sceptical that another review, by a person inside the banking industry, will really change the culture of banking. Let me explain.

First of all, there is no Turnaround Management Association for cultural or moral turnarounds. In the eyes of most financially oriented executives, culture is “the soft stuff” that gets in the way of real business.  Second of all, even the experts in organization behaviour and HR can’t agree on a definition of corporate culture, let alone what constitutes a good from a bad culture.  The difference between a healthy and an unhealthy Balance Sheet or Profit and Loss statement is drummed into the head of every business person, but not for culture.  The metrics of culture are few and when there are metrics, they are often regarded as highly subjective and not rigorous. Think a financial turnaround is difficult?  Try to change a culture that is morally bankrupt!

Another thing that makes a culture change or moral turnaround so difficult, some say impossible, is that most people inside these institutions have very little internal motivation or desire to change their behaviour.  What individuals believe to be good or bad culture is often very different in people who work right next to each other.  When a company is facing financial insolvency, there is a huge call to action as employees fully understand that jobs and the future of the company are at stake.  When a culture change is required, however, there seems to be little motivation to hold each other and themselves to higher standards of conduct or behaviour and often very little incentive to change behaviour.  After all, it’s them (usually referring to senior management) that need to change, not us.

I admire the board of Barclays Bank for openly acknowledging that the culture is broken, but appointing an insider to “study the situation and present his findings and recommendations” sometime in May, 2013 is a waste of time and money.  Cultures don’t change as a result of newly written “Values Statements” (Enron had value statements, so did RBS and dozens of other morally bankrupt companies).

There are three ways to reshape a culture and they must be enacted together, and with commitment and determination.

First, change the leaders at the top.  While few and far between, there must be high-integrity banking executives who can be recruited to replace the current “cabal” at the top of Barclays.  Change out the entire lot and start with a blank sheet of paper and put together a leadership and management team that understand that banking is the opposite of gambling with other people’s money.

Organizations are shadows of their leaders; that’s the good news and the bad news.

Second, review and revise all the policies and procedures that reward poor behaviour.  For instance, bonus structures based on transaction size versus business fundamentals, or review meetings where the information is sanitized before it ever gets to the top floor.  Culture is driven in large part by policies and procedures that reward certain types of behaviours.  Root out and change those policies and internal business procedures that reward the wrong behaviours. How?  Start by asking the employees what policies and processes are driving negative behaviours. You will discover a bucket load.

Third, enact legislation to separate investment banking from commercial and retail banking.  In the US that means bringing back the Glass-Steagall Act. Take away the incentive for investment bankers to gamble with people’s deposit money.  And take away the safety net of “too big to fail”.  Like an overgrown tree, pruning is healthy for sustainable growth.  And equally important, enact legislation that clearly holds banking executives and the regulators more accountable.

This is harsh medicine, but the future credibility of a once great institution is at stake and the disease requires bold intervention.

One day the CEO cometh unto his trusted HR department and sayeth. “Go forth and launch this company onto a sea of excellence!”  And the HR executives cried out, “Are you out of your mind?”

I fear that another “culture review” will create lots of talk but little real change.  I would love to be wrong.

Tight Lines . . .

John R Childress

john@johnrchildress.com

About johnrchildress

John Childress is currently Visiting Professor in Strategy and Culture at IE Business School in Madrid and a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
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2 Responses to Which is harder, a financial turnaround or a moral turnaround?

  1. mimijk says:

    I think this is such a critical conversation and one that I fear is not going to occur where it most needs to be held. This is the reason I left Big Law – the slow, relentless diminution of culture replaced with the ever popular ‘eat-what-you-kill’ operational imperative. To me this isn’t a chicken-or-egg question – culture drives change. If you want institutions to reform, look at the ethos before you look at the process.

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  2. Raunak says:

    John, I doubt if banking organizations will ever make changes themselves. Talk of values, ethics etc. are just talks! It is time for authorities to step in and do as you suggest; separate retail and investment banks. Bailouts for speculative losses make no sense to me.

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