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