Efficient and effective utilization of resources are key objectives of UK banks. Financial institutions adopt a view that remaining efficient is important when trying to remain competitive, a number of statistical studies show that the most efficient banks have substantial cost and competitive advantages over those with average or below average efficiency. Banks obsess over their cost to income ratios, making sure that they remain competitive through reductions in their operational costs. Is this drive for an efficient, well-oiled business killing culture?
All that matters for many Global Financial Institutions is increasing shareholder value; often at the expense of ethics. Since the crisis in 2008, ethics and adopting an ethical culture should be a core part of business within banks, however evidence suggests companies are either resistant to change or simply do not want to change. John Greenwood, CEO at the investment management firm Creechurch Capital, has worked in the financial sector for 20 years states “the culture of tolerating, and even rewarding, any sort of behaviour for profit, hasn’t changed”.
What is Culture?
A recent survey by McKinsey & Company analysed corporate culture when capturing value from M&A; the survey showed 50% of the candidates said that “cultural fit” lies at the heart of a value enhancing merger, and 25% called its absence the key reason a merger had failed. 80% struggled to even define culture. Warren Buffet one of the more savvy investors of the past three decades states that “culture, is more than rule books, it determines how an organization behaves.”
Why is Culture important?
Culture within financial services is under the spotlight as never before. The on-going combination of excessive risk taking and lax regulation in banks may well lead to another global financial crisis, hence why regulators are attempting to implement real change in banking culture. The reshaping of corporate culture, in conjunction with prudent regulatory changes can work together to help build a stronger, more responsive and responsible banking industry.
Regulators feel that corporations need to rethink their values, goals and behaviour, as this is crucial to market integrity and in ensuring that customers get a fair deal. The right culture is recognised as the key to re-engaging with customers and responding to their rapidly changing expectations. However, change is challenging. The culture of any business is a hugely complex and deeply rooted entity. Organisations may be resistant to cultural change as it risks current profit margins and shareholders wealth – ethics are trumped by revenue.
The cost to income ratio is a key financial measure, and is particularly important when valuing banks. It shows company’s costs in relation to their income. This ratio gives shareholders and investors a clear view of how efficiently the bank is being run. To remain efficient, major banks aim to keep fixed and administrative costs to a minimum, this ongoing drive to keep operational costs down leaves employees uncertain about the security of their jobs. Many investment banks have launched job cutting schemes in order to control costs. Credit Suisse recently cut 30% of its London workforce in order to remain efficient. London is a high-cost centre and the new strategy intends to strip any excess costs. Employees grow uncertain about the security of their jobs, causing them to look elsewhere to gain extra security.
The financial crisis left banking institutions and their reputations at an all-time low. The poor image of banking is not solely in the eyes of the public; however, sadly the stain is internal as well. Inside many major banking organizations morale is at rock bottom and feelings of professional pride are a distant memory. Culture or the lack of culture is widely believed to have led to many of the industry’s failings, with poor behaviour from the leadership committees reflecting on the overall firm’s behaviour and performance.
Many banks, including Deutsche Bank, Citi, Barclays and Lloyds are responding with sweeping culture change strategies to restore trust, accountability and put customers back at the forefront. Responsibility has to be the focus of many banking actions. Deutsche Bank has identified culture change as an essential part of their strategy for 2020; they plan to integrate corporate values and beliefs into their people management tools such as objective setting, performance management and leadership. It is important for corporations to recognize that senior managers in particular play a key role in living the values and acting as role models. With role models being held in high esteem, employees behave in a way that an institute’s desires rather than acting on oneself. Retaining customers in the long term and sustaining growth. Each and every employee is encouraged to help shape the bank’s new culture.
The idea that leaders should be ethical in their actions is still unapparent; future implications are bleak if the problem is not addressed. However, change is on the horizon; a strong culture within is now expected to lead an institute to gain competitive advantages. Some companies are already involved in initiatives to address the problem.