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Can integrity be quantified?

 

In advance of our event at the Bank of England on 21 March 2017, we asked interested parties to write on the theme: Worthy of trust? Law, ethics and culture in banking…

 

One intriguing development among large City banks is the recent growth in the use of models and metrics for the purpose of compliance. While models have traditionally been put to work in the realm of trading and risk management, the use of quantitative techniques has now expanded to the problem of ensuring that employees adhere to organisational norms.

In one London-based bank that I observed, this process started with the identification of the values that the organisation wanted to promote (‘integrity’, ‘leadership’ etc.). This first step was then followed by a detailed listing of observable behaviours. These behaviours, in turn, were then linked to a series of tangible outcomes or results. Many of these outcomes were translated into and measured in a survey.

This new trend is in many ways a reaction to the global financial crisis. The challenge for banks, as a sociologist would put it, calls for increasing cultural cohesion around shared values as well as increasing normative conformity, while preserving their profitability.

The banks, however, have responded to this new challenge with innovation. Traditionally, as the celebrated City historian Philip Augar argued in The Death of Gentlemanly Capitalism, the secret sauce that made the old City merchant banks responsible were decidedly social. These included internal careers, joint liability, shared public school background and other forms of demographic similarity that culminated in self-regulation. Unfortunately, these traits were based on small firm size and social closure, rather than diverse, meritocratic multinationals that the large City banks have become. But in the post-crisis era of the 2010s, and faced with the challenge of cultural and ethical scrutiny, the large City banks have turned to something they know well: numbers. Hence compliance metrics.

Will it work? Two academic debates shed light on this initiative. The first relates to the ability of companies to manage their culture. Can it really be done? Since the 1980s, and as management theorist Gideon Kunda documented in Engineering Culture, organisational theorists have debated the concept of normative control, that is, the instrumental shaping of a company’s culture through seminars, training, etc., to compete more effectively. Today, technology companies like Google are at the forefront of this trend. But as management theorist Daniel Denison concluded in an extensive survey of this literature, the empirical evidence for its effectiveness is mixed1.  It seems, in other words, that some phenomena are more easily measured than managed, a paradox that speaks to the problems encountered by the risk management function, aptly described by Michael Power in Organized Uncertainty.

A related debate concerns the expanding realm of quantification, that is, the use of numbers. In parallel to the rise of smartphones, social media and big data, movements such as the ‘quantified self’ have brought the use of figures from the realm of science and business to the sphere of the personal. But numbers, as Wendy Espeland and Michael Sauder document in Engines of Anxiety, often come with unintended consequences. Their study of American law schools concluded that the widespread use of rankings in admissions and career services ‘create and reinforce a rigid hierarchy that penalises lower-tier schools that do not conform to the restrictive standards used in the rankings’.

In sum, the new adoption of metrics, measures and quantitative indicators in the compliance functions of City banks is a significant new trend with far-reaching and yet unknown consequences. This ambitious experiment comes with a big promise: to bring back the positive aspects of old-school capitalism, in a plus-size format that our giant banks can implement, and without the elitism of the now-defunct merchant banks. The academic literatures on normative control and quantification offer grounds for caution, but if successful, the City of London will have demonstrated once again its ability to reinvent itself so as to remain successful through different moments in history.

1 Daniel R. Dension. ‘What is the Difference between Organizational Culture and Organizational Climate? A Native’s Point of View on a Decade of Paradigm Wars.’ 
The Academy of Management Review, Vol. 21, No. 3 (Jul., 1996), pp. 619-654

Daniel Beunza, Assistant Professor, Dept of Management, London School of Economics

Senior Managers and Certification Regime

Exploring how the SMCR - and especially Certification - can be implemented in the most effective way across the sector.

The Senior Managers and Certification Regime is a major regulatory change that will affect all banks and building societies. Responding to recommendations by the Parliamentary Commission on Banking Standards, the government and regulators have together developed a comprehensive framework to ensure better accountability and responsibility for behaviour, competence and culture in banks and building societies. The new framework provides an opportunity for the industry to focus on and demonstrate a culture of professionalism. We are working with firms and regulators to facilitate this, including areas where a common approach across firms could support both the objectives of the regime and the skills and development of the people covered by it.

Professionalism

Evaluating whether a more 'professional' approach to banking would improve behaviour and competence across the industry.

The Parliamentary Commission on Banking Standards found that 'banking culture has all too often been characterised by an absence of any sense of collective responsibility to uphold the reputation of the industry', and argued that a greater focus on professionalism could be an answer to this. Working with a leading team at the University of Leeds, we are researching the issues around professionalism in banking. In particular, we are reviewing how professional qualifications are currently used across the sector, and at whether a stronger role for professional bodies, along the lines seen in some other sectors, like medicine or law, would help raise standards. To inform this work and develop a rounded picture of 'professionalism' and what it means in banking, we are surveying banks and building societies, professional bodies and a wide range of other interested groups, including consumer bodies and investors.

Assessments

Providing an honest and impartial assessment to Boards of progress against objectives on behaviour, competence and culture.

The BSB assessment exercise presents Boards with an objective and impartial view of their firm's culture, identifying where things are working well and recommending areas for improvement. It draws on information not only from Boards and senior teams, but also from employees, investors (or members), trade unions, customer groups and other relevant bodies. In doing so, it will provide constructive challenge to each firm individually, while building a collective understanding of common issues across the industry, or sectors within it. We undertook our first annual assessment exercise in 2015 with ten firms (Barclays, Citi, HSBC Bank, Lloyds Banking Group, Metro Bank, Morgan Stanley International, Nationwide, RBS, Santander UK and Standard Chartered). The BSB itself will not publish individual assessment reports - each firm owns its own report - but key themes and messages will be set out in the BSB's annual report, the first of which will be published in Spring 2016. Given that Board engagement is central to the assessment work, only firms that have their headquarters in the UK are eligible for the full assessment exercise. All firms, including branches of firms headquartered overseas, will however be included in a focused membership-wide survey, which will allow each participating firm to benchmark itself against its peer group.

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