With­out trust, we have noth­ing

What if bank­ing fol­lowed the lessons that min­ing has learnt?

Financial Mail - Investors Monthly - - Ivory Tower - STU­ART THEOBALD

You would think by now we’d have a pretty good idea about what caused the fi­nan­cial cri­sis. But pick up any book or ar­ti­cle on the sub­ject and you’ll find a unique view. Even in se­ri­ous aca­demic cir­cles there is lit­tle agree­ment. One economist, Mark Jick­ling, counted 25 dif­fer­ent causes dis­cussed in the aca­demic lit­er­a­ture by 2009. Of course, all of th­ese may be cor­rect, but as­sem­bling a never-end­ing list of causes dis­si­pates fo­cus in the re­form ef­fort. What can be more ef­fec­tive is to iden­tify un­der­ly­ing themes that we can fo­cus on in our ef­fort to re­shape the global fi­nan­cial sys­tem to bet­ter with­stand a cri­sis. When we do that, one theme stands out above all oth­ers: the eth­i­cal cul­ture within bank­ing.

A survey done last year by the Economist In­tel­li­gence Unit of bankers in the City of London found 53% of them agreed that “strictly ad­her­ing to eth­i­cal stan­dards in­hibits ca­reer pro­gres­sion at their firm”. That’s right — they think that be­ing eth­i­cal is bad for their ca­reers.

What­ever tin­ker­ing we do to the bank­ing sys­tem, I doubt we’ll have a re­silient sys­tem while we don’t think be­ing eth­i­cal is a good idea. That cul­ture has to change.

Cul­tural change is nice in the­ory but tough to do in prac­tice. At a re­cent event dis­cussing the topic, the di­rec­tor of a ma­jor Euro­pean bank (I can’t say who be­cause it was un­der the Chatham House rule) said that bankers had de­vel­oped a kind of post-trau­matic stress syn­drome. He ar­gued this had cre­ated new risks: bankers had be­come so scared of mak­ing de­ci­sions and hav­ing their names at­tached to them that there was a whole new prob­lem emerg­ing of pass­ing the buck. Bank­ing is ul­ti­mately about tak­ing risk and if your cul­ture be­comes one of be­ing afraid of risk, then you are not go­ing to be a very good bank.

His point was that there has been cul­tural change, but that it’s not been very healthy. The bash­ing of bankers meted out by reg­u­la­tors, the me­dia and politi­cians has re­flected the rage felt by the or­di­nary pub­lic but has done lit­tle to make bankers more eth­i­cal. They’ve just be­come more timid.

Are there ex­am­ples that we can learn from? I’ve sug­gested that a good one to study is our own min­ing in­dus­try. Ethics in min­ing comes down to the safety of work­ers. SA’s min­ing in­dus­try has ex­pe­ri­enced a dra­matic change in cul­ture since the 1980s, when in­juries and deaths in the mines were con­sid­ered part of the business. The rise of Cosatu and the fall of apartheid en­sured this at­ti­tude changed. But it took di­rect in­ter­ven­tions by reg­u­la­tors, changes of lead­er­ship of the mines, and a raft of new laws. Now mines are ob­sessed with safety.

If bank­ing fol­lowed the lessons from min­ing, what you’d get would be this. Ev­ery re­sults pre­sen­ta­tion would start with a dis­cus­sion about

Boards should choose the lead­er­ship of banks by how trust­wor­thy they are

eth­i­cal fail­ures. Any iden­ti­fied vi­o­la­tion would be high­lighted and cor­rec­tive mea­sures dis­cussed. Ev­ery banker would have the right to refuse to follow any in­struc­tion he or she con­sid­ered un­eth­i­cal and would be fully pro­tected in do­ing so. Ev­ery banker would have ac­cess to an “ethics of­fi­cer” who would in turn re­port all is­sues di­rectly to the board. Ev­ery banker’s per­for­mance agree­ment would in­clude spe­cific ethics ob­jec­tives. Suc­cesses would be re­flected in bonuses and vis­i­ble recog­ni­tion of those who suc­ceeded.

Of course, ethics are harder to mea­sure than safety. In­juries and deaths are un­am­bigu­ous and clearly vis­i­ble. There is no spe­cific metric one can mon­i­tor to as­sess whether ethics are be­ing taken se­ri­ously. An in­crease in re­ported in­stances of eth­i­cal vi­o­la­tions would not mean fewer vi­o­la­tions were tak­ing place.

Be­cause of the mea­sure­ment prob­lem, the ap­proach in bank­ing has to be dif­fer­ent. Ev­ery banker has to de­sire to be trust­wor­thy and their be­hav­iour should be guided by that. If we want bankers to be trust­wor­thy they should feel that their ca­reer pro­gres­sion will be en­hanced if they are. Boards should choose the lead­er­ship of banks by how trust­wor­thy they are and how ef­fec­tively they can drive trust­wor­thi­ness through­out the or­gan­i­sa­tion. Trust­wor­thi­ness is in­tan­gi­ble, but we know it when we feel it. We should be able to trust that bankers are con­cerned about their clients’ in­ter­ests. In­still­ing that gen­uine sen­ti­ment across a bank would be like in­still­ing a safety cul­ture across a min­ing business but with the added dif­fi­culty of the mea­sure­ment prob­lem.

Per­haps there are min­ers who feel like help­ing bankers learn about cul­tural change?

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