Can the Financial Institutions Change Their Culture?: 5 Reasons Not To Expect Too Much

The Royal Commission into Misconduct in the Financial Services Sector in Australia has highlighted and indeed helped drive the need for cultural change in the financial sector. This short discussion identifies just five impediments to deep cultural change in the industry.

The five impediments identified are not intended to be comprehensive , however they do serve to illustrate some of the challenges. What can be done from a culture change perspective will also be specific to organisations and can be the topic of another discussion. Before launching into the five impediments let’s set the scene.

Corporate Culture: Culture is often defined as ‘The way we do things around here!” That’s true enough and the universal nature of the statement suggests that just about anything you do can influence culture one way or another. That has been foundational to nearly all my professional work. And the financial institutions will be doing a lot following the Royal Commission.

Expect Textbook Corporate Responses: Much of the response will be good corporate stuff: action plans based around the Royal Commission findings; public relations releases; interviews with a polite, conscientious, empathic CEOs (or the next best person); divesting now unwanted businesses; reviewing remuneration strategies; fixing IT problems; changing a few executives; learning to live with a more active regulator with some new rules; Board members bein more vigilant; winding back the aggressiveness of the sales culture (at least for a while); convincing the public that the banks and others are not really the bad guys, etcetera. The largely ‘virtue signaling’ corporate programs of social responsibility, sustainability, leadership and core values will probably be ramped up and just maybe taken more seriously. Some of what will happen will be uncomfortable, regardless it is all pretty well understood and a variation of what the organisations do now – it will all be implemented within the same corporatist paradigm. In the public arena, some executives being charged with criminal offences will mostly be new (if it happens), and the bank boards will themselves face a decision regarding how much support (direct or indirect) they (shareholders and investors) will fund for these executives. 

The financial sector’s staff have for a while now been doing some of the lifting for their executives. They will talk to their friends, neighbors, and customers. The people I know in the industry have been saying: the problems identified were with someone else in the bank/insurance industry; it was all known without the Royal Commission and being dealt with anyway; it is no big deal and we shouldn’t worry; there’s nothing to see over here.

Regardless, this might not quite be business as usual for most of the financial sector nor is it the apocalypse. The share prices of the banks went up on the release of the Royal Commission report. There will be some big changes and it will change the culture of many entities and the industry …. so besides being stuck in an operating paradigm, why shouldn’t we expect too much.

1. Drivers of Public Companies and Executives: The corporate cultures of public companies are driven by income, market share and growth expectations, particularly those of the bigger banks and insurance companies. The motivations of the Boards and C-suite executives are unlikely to change and nor are many of the ethical conundrums. The drive to be legal will increase or at least be acted on. This will overwhelm any drive for improved ethics (though Shareholder activism would help).
2. The Socialization of Executives: Despite all the business press, the socialization of the executive class and the financial sectors executive class seems to encourage at least two things. A detachment from (sociopathy) and in some cases an antipathy towards the customer/person negatively impacted by their actions and secondly a suspicion of the ethical position (Machiavellianism) as being both costly and unprofitable. I’m not suggesting these are the personality characteristics of the executives but rather role characteristics learned and implemented as they go about their business (and part of their success). The espoused position is, of course, the opposite and masking this is also a learned skill – see below.
3. Don’t Give Up Power and Influence: Corporations along with their lobbyists aim to ‘influence’ the regulators/government to make life better for them. The finance industry will be busy (re)building that political influence and power. It will take more time to recapture the regulators (yes, I expect this will happen even if it takes a decade or two and a bit of government ‘deregulation’). At least two ex-State Premiers Anna Bligh (Qld) and Mike Baird (NSW) are recently in the banker ranks and there will be other ex-politicians ready to use their contacts and influence. And don’t forget Josh Frydenberg (Treasurer) worked for Deutsche Bank. I’m sure there are more. Money and power are intertwined.
4. Skilled Defensiveness: The financial services executives are smart and would have been aware of the issues and moral hazards. While the Royal Commission may make the sector’s executives seem incompetent, Chris Argyris of Harvard University might argue, the executives demonstrated great skill in being able to avoid dealing with the issues. There would be defensive routines that executives and their underlings use every day to save face, avoid conflict, and reinforce their self-esteem and status while reducing costs and enhancing profits. They will continue to apply these skills in their ‘new’ context.
5. The DNA of the Australian Finacial Sector: The basic principles of the finance industry will still apply. For example, take every opportunity to transfer the risk, cost, and responsibility to the customer. Even as we speak some banks will be taking steps with customers to do just that e.g. applying tougher lending standards and putting pressure on customers who took out interest-only loans, adding new fees where people are least likely to look eg. dormant accounts. Could burning a few (hundred or more) customers be the acceptable price for a bank getting the risk profile where it wants it while not risking it’s profit levels… besides, the Royal Commission is over now.
   

Customer Influence + Fallout: I’m hazarding a guess that many ‘customer owned’ banks in Australia (e.g. Bendigo, Heritage) probably have cultures closer to what the public might expect. It would be an appalling outcome if the competitive position of these banks was undermined by an attempt to stem the behaviour of our larger banks and institutions. However, that is a real risk. Expect that the economic damage done as a result of the financial sectors poor behaviour is not over yet (e.g. overpriced housing, sucking money out of the economy and particularly the retail sector just as many Baby Boomers move towards lower spending patterns).