Promotion of an ethical culture in banking, ethical-performance transparency for shareholder oversight, and changed hiring policies should be among the actions taken to prevent more failures.
In my last blog, I highlighted some of the continuing issues with banking culture, today I suggest policies which would address the problems.
Banking has long regarded itself as a profession rather than a trade, yet other professions, such as law and medicine possess key distinctions. For instance, there is common academic and vocational training – including ethics – before permission to practice is granted. Throughout the professional’s life, continuing education plays an important role in maintaining standards, and ethics are clearly linked to the work. Most significantly, each profession has a governing body – respectively the Law Society and General Medical Council – which closely regulates standards and the conduct of members.
Some financial services, such as retail banking or investment management, require specific qualifications. However, investment banking and capital markets have no common professional training route beyond standard regulatory exams.
A scheme of compulsory professional training should be initiated in banking, to ensure that banker interests – and through them, their firms – matches society’s interests. At the core of this training would sit a code of ethics, which would define right and wrong according to accepted social standards, providing guidance on conducting finance responsibly. The code would cover obligations and responsibilities to the individual firm, to the shareholder, to the community, reflecting aspiration standards and behaviours for bankers.
The aim of this would be to equip a banker to think more broadly and longer-term about his or her daily business, so minimising mistakes which have been come from narrower and shorter-term perspectives. For example, one important question in banking practice would be: is this a sustainable solution for my client and for the firm? Another would be that innovative financial products must show economic and social utility before adoption. In other words, Harley Street-style ethics would become part of Wall Street culture.
Banks might respond that ethics are already institutionally embedded; but active ethics and passive compliance isn’t the same thing. As we learn from sport, it is important to act ‘in the spirit of the game’. While individual firms often issue their own codes of conduct and offer annual training programmes, more can be done. Banking operates within a culture of compliance with fixed rules and processes within which staffers operate, rather than demanding personal responsibility in behaviour. The financial crisis should have taught us that no system of rules can cover everything, even if most responses to date have been rule-based, therefore in addition individuals require principles to guide them through complex business situations, with an internal culture which reinforces this.
As part of this ethical framework, ethical behaviour should be linked to employee performance reviews at every management level and within a firm the ultimate ethical responsibility should rest with the CEO and be reviewed regularly at board-level given the important linkage to firm reputation. Allied to this, each public firm would report on ethical standards – and transgressions – to its shareholders in each financial reporting period.
Too onerous? Yet more box-ticking? Or simply ensuring that finance takes seriously its responsibility to its shareholders in running an ethically-aware and reputation-centred organisation. In other words, ethics should become part of how firms manage their business and are rated on their performance by their shareholders.
None of the above should be taken to dispel the need for other reforms. The crisis had many causes, it needs many answers. Professional standards of conduct would be the first rung of a ladder of oversight, which would climb to business unit working practices, then to enhanced governance, through industry regulation, before reaching systemic macro-prudential supervision.
This is not a call to train a generation of banker boy scouts, but rather to ensure that a revitalised banking profession attains the higher ethical standards which society is entitled to expect. Business history shows that high standards are fundamental to the practice of a profitable, competitive, and sustainable enterprise, supporting the overall economy.
There is also the matter of self-interest.
The rise of corporate and social responsibility and its inclusion in mainstream business strategy has taken place because it is seen to add long-term value to a business. For example, in 2008 Lord Woolf carried out a review for British Aerospace of business ethics in the defence industry.
If we are to take a strictly business view from a UK perspective, this is not an issue which would provide anything but a competitive advantage for a financial centre. London as a global business centre would be enhanced if its banks operated with higher ethical standards.
Ethics correlate with business aims: they provide clients and investors with trust in decision-making at their counter-parties; and form part of a firm’s reputation which attracts better quality workers. Most importantly, it leads to sustainable financial performance.
The latter point may be controversial with sceptics – but to take but one case, it is my suggestion that executives empowered to think ethically and independently, rather than those slavishly focused on the year-end bottom line would have argued against some of the business strategies adopted in the run-up to the crisis.
Similarly, the case for recruiting a more diverse cross-section of society into finance – another strategy to diminish groupthink in decision-making – should also be considered. There is something very wrong with a system which has consistently recruited some of the best and brightest graduates, supposedly linked pay to performance, and still ends up in a financial crisis. These weren’t helpless firms caught up in a maelstrom of external factors, such as sub-prime housing and increased savings from China and the Middle East; these were institutions which had forgotten about their wider and longer-term responsibilities.
Sustainability relates to wider stakeholders in finance: employees, investors and the community. It is in the financial industry’s direct interests to restore public trust. After all, the public aren’t simply taxpayers, or indeed voters; they are the industry’s retail customers and the decision-makers at their corporate clients.
So if we are serious about fixing the financial system – and we must be, because we need banks for the success of our economy – restoring public trust and remaining competitive globally, the industry must professionalise itself and address an ethical deficit.
A first step for the industry would be to set-up a new body, a Council of Professional Standards and Ethics, which would set guidelines and standards for financial practitioners, oversee ethical training, and undertake governance for all wholesale bankers and traders.
It would work with academia to institute professional training, with firms to devise internal oversight and training systems.
It would allow bankers to attain professional standards and apply ethics in business situations. And it would be able to ban an individual deviating from these standards from practising in its jurisdiction.
The doctors of Harley Street, individuals who often have similar educational experiences to investment bankers, but who undergo significant professional training and adhere to strict ethical codes, have something to teach the workers of Wall Street.
A professional ethical culture makes nothing but good business sense.