Without trust, we have nothing

What if banking followed the lessons that mining has learnt?

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?