The following is the seventh and final article in a series on bank risk culture. The previous articles can be accessed here or by clicking the HOME tab on the blog.
A total meltdown in any industry requires nothing less than a total rethink of the way forward. However, rather than finding themselves engaged in a total rethink of the how and why they must transform their business, banks have been engaged in responding to more legislation and regulation as well as improving their governance and internal controls.
The problem for banks is that neither governments nor regulators can create a better future with great institutions—only bankers themselves can.
Thus, while it is of great importance that banks fully address the limitations of their approach to risk as well as their “culture of risk”, it is not enough and it will never be enough. Bankers need to rise to the challenge. The question is how?
In the series of articles to date we have demonstrated that focusing solely on the risk culture within banks is not sufficient. In the article previous to this in the series, which can be accessed here, we demonstrated that while legislators, regulators and bankers have been obsessed with risk culture and managing risk, we gain a better understanding of what caused the crises by analysing the human ecosystem within which banks operate.
The financial crisis was from beginning to end a failure of the system of values within the human ecosystem of banks; leadership that was focused on size and following the herd, poor selection of suppliers (rating agencies and small banks with ninja loans), misaligned employee incentives, management placing too much reliance on false paradigms and risk models and above all customers who were poorly served.
It is therefore patently obvious that the only way to build and create institutions that will be economically and competitively sustainable is by addressing this breakdown in that human system of values—and that can only be done by bankers. Such an approach requires bankers to think completely differently and break with the past in order to create a more sustainable future.
Banks have arrived at what I call A Gazpacho Moment—one in which it is finally realised that the conventional will no longer suffice and a decision has to be made to move to the unconventional.
In order to effect this break with the past we have to create a new strategic business model—one which in effect takes full account of the human ecosystem within which banks operate.
A New Strategic Business Model – The Human Asset Bank
I call this human ecosystem of banks and the values necessary for them to achieve economic and competitive sustainability The Human Asset Bank. Such an institution or organisation is underpinned by a set of mission and values unique to its own competitive advantages and strengths and which is cognizant of the impact of its operations on its ecosystem.
As we shall see, this is an important break with the past for very many reasons. The first and most important of which is that it represents a move away from the nebulous idea of culture to a situation in which what the institution is guided by is its own mission and its own set of values that are consistent with the competitive space it wants to create for itself.
Consequently, a bank guided by its own mission and values will for example only execute those business activities it deems appropriate to its circumstances rather than simply following the herd and getting too large or too difficult to manage. Similarly, a bank guided by its own mission and values will only work with suppliers that share its own values and not supply it with worthless loans. Neither would such a bank approve a mortgage only to foreclose two years later.
So, what does a commitment the total transformation of a bank look like? Here it is:
Mission and Values that have Real Meaning and Purpose – Our organization is a human ecosystem of employees, managers, customers, suppliers and the community. These human assets are motivated by our mission and guided by our values and these have real meaning and purpose. They are the primary sources of inspiration, collaboration and innovation within our human ecosystem, and thus are the basis on which we achieve both economic and competitive sustainability. While we maintain a properly functioning system of governance and controls, it is our mission and values that ensure that we always do the right thing.
Exemplary Leadership and Management – Management’s primary responsibility is to exemplify and reinforce the mission and values. In the long term that is the basis on which management and the organization will be assessed.
In pursuit of their responsibility management will work to develop, integrate, and sustain the organization’s human ecosystem. This includes a commitment to never growing the organization beyond a scope and size which would diminish management’s ability to excel in that duty.
Individual Employees, Individual Leaders – We do not hire robots and we abhor perverse incentives. Our aim is to engage, motivate, and develop every single employee in accordance with the mission and values such that they become a leader in their own right and fully contribute to sustaining the organization.
Flexible and Responsive Network of Employees – Our employees constitute a flexible and responsive network for both enhancing performance and reducing risks. That network is strongly influenced and guided by our mission and values.
Committed to the Long-Term Interests of our Customers – Our success will be measured, in part, by the utility of our products and services to our customers in both the short and long term. As such, we will ensure that our mission and values are embedded within our sales teams and that said teams continuously share and practice them with our customers.
Engaging Suppliers Who Share Our Values – We fully recognise that the quality of our customer products, services, and solutions are entirely dependent on the quality of purchased inputs. As a consequence we will only engage those suppliers who understand and are willing to assist us in our mission and share in our values.
Streamlined and Efficient Systems and Processes – We will consistently work to develop efficient and effective systems and processes in order to safeguard the integrity and stability of the financial system.
We have also made a sincere commitment to work with other banks, financial institutions, and regulators to improve the efficiency and effectiveness of the systems and processes within the industry. Our aim is to reduce the level of risk and complexity in our own operations as well as the level of systemic risks within the financial markets. We will further endeavour to maintain an organisation structure that is both simple and transparent in order to facilitate the free flow of information and improved risk management.
Masters of our External Environment – Mastering our external environment and not succumbing to economic and mathematically precise orthodoxies is crucial to the long-term sustainability of our organization.
We will develop independent and objective assessments of our external environment. Without exception, our actions and activities will always be guided by our mission and values and we reject opportunistic and short-term maximization of profits as a mode of operation.
Aligned with the Human Imperatives of the Community – We consider the maintenance of the integrity and stability of the financial system both a privilege and a public duty.
We recognise that there is a symbiotic relationship between the success with which we perform our public duty and the sustainability of our organization. Further, in performing our public duty we will also ensure that our interaction with governments will always be open and transparent.
Making the Human Transformation
Making such a transformation is not easy. As a matter of fact it would probably take three to five years. However, banks need to start somewhere or at least demonstrate that they have a sincere commitment to real change.
Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).