Why spend all this time finding and fixing and fighting when you could prevent the incident in the first place? ~Philip Crosby
In 1979, Philip Crosby, the former Quality Director at Martin Aerospace and ITT Corporation, published his first business book, Quality Is Free. His proven ideas and philosophy of Quality not only reduced scrap and waste and improved overall product quality, but revolutionised the search for better quality in the US. And it was published at a time of poor quality of American made goods that resulted in a loss of market share to superior quality Japanese goods, particularly automobiles.
Crosby’s fundamental insight to a dramatic increase in quality of goods and services was:
An organization that establishes good quality management principles will see savings returns that more than pay for the cost of the quality system: “quality is free”. It is less expensive to do it right the first time than to pay for rework and repairs.
In other words, you cannot inspect-in quality. For quality output you must design quality into every step of the value chain that impacts your products and services.
Corporate Culture and Ethics in Banking
Taking a page from the successful Quality movement in products and services, it is critical to understand that corporate culture and ethics, like quality, cannot be fixed or improved through inspection and rules alone. Regulation and compliance are important, but not sufficient!
Culture and ethics must be designed in to all parts of banking and financial services, not inspected in! There is no doubt now that corporate culture and ethics are either an asset or a business risk in financial services. The global economic meltdown that began in 2008 and has continued to rack up over $250 billion in fines for large banking institutions has proven that the current culture of banking is a far cry from its original roots as an important business in helping consumers, homeowners and businesses fulfill their goals and strengthen the global economy.
Modern banking has turned into a profit business instead of a profitable service business.
To counteract this dramatic shift in corporate culture and ethics, well-meaning financial regulators have approached the problem through extensive regulation, compliance and audits, as well as stricter reporting requirements. To many bankers the cost of compliance is now a growing burden leading to increased head count, greater time away from customers, and increased operating costs. Compliance is not free.
And even with all this new regulation and compliance, the culture of banking has not changed and continuing fines for fraud, money laundering and excessive risk taking still occur in alarming portions. And in terms of consumer confidence of the financial services sector, the public sees them only slightly more trustworthy than politicians, who are at the bottom of the Edelman Global Trust index. And the below study by the Gallop Foundation shows the erosion of consumer confidence in banking over time. Consequently most banks are trading well below their break-up value.
A New Approach to Improving the Culture of Banking
Regulation and compliance are important but not sufficient for a significant shift in corporate culture in banking. Since culture is defined as the habitual, accepted and rewarded ways of working and dealing with colleagues, clients and customers, we must look beyond regulation for a solution.
Banks and other financial institutions are made up of people, and like all other organizations, are subject to the principles that govern human behaviour, and especially group behaviour.
Culture change is fundamentally behaviour change that is designed into the organization through effective structures and practices, which are then sustained and reinforced by leadership and management.
Taking this view, let’s look at some of the structures and practices that can be engineered into banking and financial services organizations (like quality is built-in to a manufacturing process) to reshape culture and ethics.
In this blog I will only list and briefly comment on a few key culture change levers (we can go into more detail in other blogs or some of my conference speaking engagements).
- Clear articulation of the behaviours required for professional and ethical banking. I am not talking about a laundry list of one-word values printed in the annual report or chiseled into the walls, but practical, on-the-job behaviours that will produce ethical and customer-focused outcomes. In the early days of banking there was an unwritten code of conduct and ethics which guided people’s work behaviour. The problem is most of these were unwritten and as banks consolidated, acquired competitors and brought in new players from outside traditional banking, this code of conduct disappeared.
- Hiring Profiles that fit the desired culture: The practice of hiring the best and brightest, or the most hungry sales people may not fit the desired culture going forward. Focusing on both skills and character are key to helping transform a culture.
- Rigorous On-Boarding: In the early days of banking, the on-boarding of new employees, from clerks to executives, was taken very seriously, with both classroom training in the principles of banking as well as conduct, but also a thorough understanding of the business model and the various functions and departments that made up an effective and efficient bank. Today On-boarding and training budgets have been slashed and replaced with on-line videos and a focus on specific functions rather than the overall business or the culture and behaviours expected.
- Leadership and Management Training: In the heyday of global banking when the cost of money was low and the supply plentiful, banks became hugely profitable despite their management or leadership skills. And to increase the bottom line, internal budgets for management training and leadership development were cut dramatically. Unfortunately they have not come back and many management training activities, if they exist, have been outsourced to external vendors. There is a huge opportunity to bring back in-house good leadership and management development to improve not only skills, but also behaviour and the overall culture.
- Performance Reviews and Recognition: If you speak with most managers and employees in banks you will hear the same thing, performance reviews are a joke! As one manager put it, “my boss tells me to write my own review and then he just signs it and passes it along to HR and it has no real bearing on my advancement or compensation.” Real-time performance coaching is one of the key activities in building a corporate culture that works. And what about upwards reviews as well? Most managers focus on productivity and profit and avoid dealing with attitudes and behaviours.
- Compensation Policies: There is no question that compensation drives behaviour. Parking officers write more tickets if they are on a bonus system that just straight salary! And investment banking has put compensation and bonuses on steroids. I believe in good and healthy compensation and incentives, if they drive the right behaviours. But driving profit for the bank or the individual versus driving solutions and outcomes for clients and customers are two different things.
- Courageous Leadership: The “too-big-to-fail” and “over-regulated” belief of some bank leaders is creating more defensive than offensive activity within banking. And the danger is, modern banking is failing many consumers and clients, who are turning to alternative solutions popping up by the hundreds from FinTech companies who are slowing stealing customers and products from traditional banks. Banks have more competition for customers than ever before, and the number of competitive solutions are growing exponentially. It will take forward thinking leadership, not captains of defense and the status quo.
- Redefining the Purpose of Banking: Perhaps the biggest fundamental shift in banking came about following the repeal of the Glass-Steagall act. Banks moved from a focus on customer service and solutions to becoming product developers, income generators and global profit machines. Expected rates of return approached (and exceeded) healthy risk levels. If customers expect a bank to provide them honest services and tailored financial solutions while banks see their job as selling bundled products and making huge profits, there is definitely a cultural and social lack of alignment.
My suggestion? Let’s keep prudent and appropriate levels of regulation and compliance, while at the same time building in culture and ethics at every step along the banking journey, from sales to back office to financial products and solutions. Only then can banking win back the trust of consumers, and become a trusted cornerstone of a growing and sustainable global economy.
It is less expensive to build-in and manage a culture of ethics and customer service than to pay out billions in fines and loss of brand equity!
Corporate culture is free!
Written and Posted by: John R. Childress
Senior Executive Advisor on Leadership, Culture and Strategy Execution Issues,
Business Author and Advisor to CEOs
Visiting Professor, IE Business School, Madrid
John also writes thriller novels!