Changing the culture of banks is a difficult task. However, given that the parties involved in making that change; banks, governments and regulators, are yet to define what it is they are trying to change, it makes their task not only difficult but practically impossible.
In the aftermath of the 2008 financial crisis banks have been told by both governments and regulators that they must change their culture. The latter two have also enacted a host of new laws and regulations which they hope will assist banks in effecting cultural change.
While not wholeheartedly embracing every law and regulation that has been thrown their way, banks have of their own accord devised even more complex governance and internal control frameworks in order to both better manage their culture and safeguard against future crises.
However, we must question whether or not an approach involving more legislation, more regulation, more governance and more controls is in of itself sufficient to change the culture of banks. More specifically, while it should be acknowledged that certain rules in respect of remuneration structures and sanctions can impact individual behaviours; can culture really be regulated or made subject to a set of rules?
The answer to that question is absolutely not and in order to understand why we must make at least a modest attempt at understanding what culture really is and what it represents.
So what is culture?
Many have tried to define culture in organisations and whole books have been devoted to the subject. Yet, the concept of culture is one that remains very difficult to define and I for one would rather not use the term. However, it appears that culture is something which most people have an elementary grasp of what it might represent.
So how can culture be defined in the basic sense?
In empirical terms we can say that culture effectively determines not only what an organisation does but also the why and the how it does it. So for example, one would not say that a tobacco company has a great culture just because it has good governance and follows all laws and regulations—as there is a fundamental problem with its products.
Lou Gerstner, the former Chairman and CEO of IBM defined culture thus: “I came to see, in my time at IBM, that culture isn’t just one aspect of the game; it is the game.”
Consequently, we can say with absolute certainty, that culture is not just about managing risks and avoiding crises. Thus by definition, it is impossible for banks to change their culture by simply following and/or invoking an ever expanding set of rules.
The irony is that if we were to make an even cursory examination of the recent history of financial crises we would have arrived at exactly the same conclusion.
In the 30 years prior to the subprime debacle we have witnessed crises in respect of LDC debt, junk bonds, Japanese asset prices and dotcoms, each of which was followed by a spate of new laws, regulations and governance structures. It appears that nothing has changed.
If banks are to effect a real change in their culture, then they along with governments and regulators need to make a much better effort at defining what culture really is, before they can even begin the process of changing it.
Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).