Old Heads on New Shoulders17. December 2012 by Joachim Goldberg
Hardly a week goes by it seems without some new banking scandal in the headlines: tax evasion; LIBOR manipulation; mis-selling of derivative products and insurance; embargo dodging; money laundering, etc. Some of the obvious victims have included private investors and municipalities, but there are also innumerable faceless individuals and firms, taxpayers and savers who have suffered indirectly as a result of the apparent lack of integrity. Behind the veil of an investment banking ‘success story’, regulators have found unethical, if not criminal behaviour. In the public perception, the credibility of the investment banking business model is threadbare, hence the repeated calls for a complete change in banking culture. It is the only way client confidence be rebuilt.
However, turning a culture on its head is not so easy. This is because the various scandals are not a result of a questionable business model, per se, but rather an example of how norms within an organisation gradually drift over time. So it is not the kind of products a bank sells or who it sells it to that matter; rather it is the incentives and the performance pressure imposed on the bankers. We are talking not just about the bonus culture here, but also about the revenue and profit targets that are almost arbitrarily set x-per cent higher than those of the previous year.
I remember my first encounter with this kind of investment banking in the mid-90s. It swept through the industry like a new broom, shaking up the dusty, old-fashioned institutions with the promise of limitless growth. “We are flying to Mars!” was the rallying cry of one banker. “Let’s go and make some money.” It was clear that we had seen the end of the former civil-service-like employment relationships with their steady incomes and comfortable pensions. Instead, performance was to determine pay whose scale had no upper bound. Bank bosses dangled the carrot of the superbonus – the payout of a lifetime – to encourage adherence to the new approach. At the same time, they applied the stick of job insecurity to those who did not make the grade. “If you do not like risk,” reminded one, “you chose the wrong job.”
So imagine one wants to change this culture. This amounts to saying goodbye to the organisational norms the wider society considers unacceptable and imposing new ones. To do this however, means bosses must first accept that what they were doing in the past was wrong, i.e., they must incur a perceived loss, which is something few people will be willing to do. By losses I do not mean just cost-cutting, job losses or wage restraint. For the bank heads this means relinquishing the long-held beliefs that have been now exposed as ethically dubious or even illegal. It is precisely for those people who were instrumental in introducing the ideology in the first place that the change will be the most wrenching. One must even expect the stiffest opposition from this group. They will make some changes, of course, but none that would expose the past decisions as ill-founded. Who, after promising a flight to Mars, wants to merely take the train to the next station down the line?
Albert Einstein once said that one cannot solve a problem using the same kind of thinking that created it. The same applies to changes to social norms. In order to impose a new culture, new decision-makers, unburdened by the discredited success definitions of the past, are urgently needed.