A blueprint to make banks behave
Banking integrity has become an oxymoron. Top bankers need to change this and take responsibility for tackling ethical issues. For this to happen, every part of the organization – from senior management to human resources managers to those on the trading floor and beyond – should be assessed according to the contribution it makes to promoting ethical values, not just the bottom line.
The investigations into the LIBOR rate-rigging scandal showed how commonplace bribery among dealers had become. For example, between September 2008 and August 2009 a single trader at the Royal Bank of Scotland had made corrupt payments to interbank brokers on 30 occasions, by means of risk-free transactions known as “wash trades.”
While the likes of Barclays and RBS have acknowledged wrongdoings and vowed to change course, it’s no longer enough to mollify critics with soothing words, apologies and empty gestures.
That is why we at Transparency International are challenging banks to immediately initiate sustained industry-wide reforms. These reforms should have the clear commitment and buy-in of the most senior bank executives. A new generation of banking management is needed, one that is prepared to devote as much time and money to developing ethical standards as they once spent on circumventing them.
Top regulators have also woken up to the need for change. The European Union made a strong start[PC3] when it committed to cap banker bonuses at 100% of their base salary, with shareholders able to double them. This goes a long way toward tackling the wrong incentives that helped drive banking behavior to the brink in 2008, precipitating the crisis.
In a speech last month, Mark Carney, incoming governor of the Bank of England and chairman of the Financial Stability Board, gave a blunt assessment: “Banks need to participate actively in reform, not fight it. … The time for remorse is far from over.”
But apart from an appeal to bank executives to rediscover their core values, Carney was short of ideas. This is what needs to be done.
At a minimum, the industry must commit to best-practice standards of integrity and agree to a hard and fast timetable for implementation. There must be measurable progress and a dialogue with all stakeholders.
Yes, overhauling the culture of an organization is one of the biggest challenges a chief executive can face. However, from our experience of engaging with companies and sectors beset with endemic corruption, we have learned a thing or two. We would prescribe the following medicine to an ailing financial sector:
- Forge a new management culture: The behavior of bank employees is not hard-wired. They are responding to short-term incentives and skewed values that are reinforced at every step of the career ladder, from initial recruitment to golden parachutes. Banks must put in place a sustainable management and leadership culture, together with the systems that underpin it (e.g., compliance monitoring, coaching, whistleblowing procedures, remuneration policies).
- Sunshine is the best disinfectant: Banks can vastly improve their transparency, particularly public disclosure of their business models, their policies toward customers, relationships with governments (payments, lobbying, political party contributions) and the measures taken internally to deal with unethical behaviour.
- Accountability, accountability, accountability: What has changed? What corrective action has been taken? At every step of this process of reform, the answers to these questions must be communicated to all those who have a stake in a bank’s proper functioning. This means not only “fireside chats” with supervisors, but with investors, customers, employees and civil society more widely.
In the past, these concerns have been farmed out to compliance or corporate responsibility departments. This should change with a commitment by senior management to do all this in a public and transparent way.
There is no quick fix. Cultural change requires a large investment of time and resources. Those who can show evidence of reform, however, may see some sheen restored to their tarnished reputations. Those content with empty promises will find that a culture of corruption and a string of fines are their only legacy.
PHOTO: Bank of Canada Governor Mark Carney speaks to students at the Richard Ivey School of Business in London, Ontario, February 25, 2013.