What is a healthy bank culture?

When people express concern about bank culture, there are three things they could be referring to.  The first is risk culture, which has to do with professional skill and discipline.  How does a bank stay safe and sound?  The second has to do with the need to be trusted, and the moral obligations banks take on as a condition of their social license to operate.  I call that “fiduciary culture,” which may or may not turn out to be a useful label.  The third is institutional style, which tells you a lot in a sly way.

APRA requires the board of a bank to “form a view” regarding its risk culture, and to nurture it.  I expect the prudential supervisor to be having conversations with bank boards regarding this topic in the next few months.   I gave a speech about that recently at the Financial Review’s Banking and Wealth Summit.   I got a nice reception, but risk is not what public attention is currently focused on.  What people are talking about is ethics and values, scandals and alleged crimes.

These are important matters, I want to give you a sense of what “good” is.  Risk and conduct can be teased apart for analytical purposes, but they are aspects of a single organizational culture or sensibility, so I’ll throw them into the pot together and try to give you a taste of healthy banking chowder.  I’ll save style for the end.

I count seven qualities of a desirable bank culture.  The first is passion for the work.  Employees and executives should experience joy from being a team, from using their skills, achieving commercial success and keeping their promises.  Bankers being the sort of people they are, this joy will be reflected in eagerness to get the details right.  If you have nothing to do with banking, that may sound pretty tame, but I assure you, “passion” is the right word.

The next quality is openness – honesty, integrity, candor, asking questions, “speaking up.” Openness sometimes requires personal courage, but since taking risks that can be avoided is not a good quality in a bank, I’ve left courage off my list of organizational virtues.  What the organization must do is be sure that those who speak up are protected.

Openness includes simplicity.  Complexity is fun if you’re clever, but it often masks issues that ought to be addressed.  Openness also includes clarity about what the institution will not tolerate.  In a world already full of gray zones, ambiguity is not our friend.

Accountability with fairness.   If you want your bank to survive and prosper, failures have to be examined and understood.  Taking individual responsibility makes the team stronger.  But a bank must be a “just society.”   The fact that so much depends on judgment makes it imperative that people believe they will be treated fairly when losses occur.  Otherwise the organization will turn bureaucratic and people will avoid making decisions.

Awareness of what can go wrong.  A bank should know in its bones that rapid growth is dangerous, that entropy, laziness, overconfidence, timidity and complacency will always be threats, and that what is called “risk” is really, to borrow Mervyn King’s name for it, radical uncertainty.  What the former governor of the Bank of England means is that we don’t just not know the odds regarding future events, we don’t even know what events the odds would be about.  Bankers ought to be skeptics.  And they should read more history than economics.

Challenge is the leitmotiv of bank governance. The right relationship between a board and management has a bit of tension in it.  Supervisors around the world increasingly want to see evidence of “effective challenge.”  Challenge is the reason for a risk management organization headed by a chief risk officer with unfettered access to the board, and for an internal audit function that effectively reports to the chair of the audit committee.  A wise bank knows that risk decisions benefit from the participation of people who view matters from different perspectives – and will politely stand their ground.

Another feature of a strong culture is the prevalence of conversations.  Banks are awash in rules and limits, policies and procedures, but command and control alone won’t work.  You have to talk things over.  Bankers should find it natural to consult their colleagues.  Silos are a cause for worry.  Disciplined open-ended conversations make the best use of an appropriately structured board.

This gets me to style.  Style is an aspect of culture.  Having a distinctive style suggests a strong culture.  It isn’t necessarily proof of a healthy culture, though.  The Godfather had style, remember.

Style manifests itself in a host of little things: how employees and executives dress, how they address each other, interior decoration, ethnic and gender diversity, logo and typography, travel and entertainment policies, the length of memoranda, the length of meetings, shared vocabulary, behavior at the Christmas party.  In the context of the bad customer outcomes we have all read about, style sounds trivial.  But it isn’t.  Style makes values visible.  It reinforces what risk culture and fiduciary culture both seek to achieve, which is to make certain behaviors instinctive.

Style is an artistic phenomenon.  Art taps into and expresses subconscious urges and anxieties.  So never dismiss an idiosyncrasy that attracts your attention as “just” a stylistic matter.  It is trying to tell you something.

The culture of every satisfactory bank imbeds certain values, but can do so in different ways.  I used to call on a bank in Kentucky that typically invited me to lunch.   The waiter in the bank’s dining room always suggested “some of our fine Kentucky bourbon while you gentlemen study the menu.”  My hosts invariably declined.  “It spoils your night drinking,” the bank’s president would explain.   Now cross the Atlantic.  At a time when lunch at most London banks was practically a religious observance, Warburgs served the meal in two shifts: at 12:30 and 1:30.  Of course you could have a glass of wine, but you couldn’t linger over it.  Both of these customs were theatre, advertisements for the bank you were visiting, evidence of a culture that insisted on self-discipline but wasn’t bombastic about it.  Good qualities.

Some stylistic peculiarities are bad news.  Calling on banks all over the United States, I discovered an inverse correlation between return-on-equity and CEO office size.  But the most intriguing indicator is the absence of discernible style.  It doesn’t prove anything, but you have to ask yourself some questions.  Does the organization know what it wants to be and how it plans to get there?  It’s hard to see the future, but you ought to at least have a theory.

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