How badly run are banks?

Interesting insight into the extent to which the British public thinks banks' governance has deteriorated over the last 22 years. According to the British Social Attitudes Survey, the percentage of the public saying banks are well run has crashed from 91% in 1987, to 19% in 2009.

This longterm trend provides some explanation why politicians and regulators seem happy to proceed with further intervention in banks' governance regimes despite a lack of concensus around the root causes of the credit crunch. While researchers and bankers have done a good job of examining limited aspects of the credit crunch, the wider narrative has congealed around banks being poorly run.

And, to give this deterioration some context, over the same time period, the percentage of the public saying the NHS is well run has improved from 35% to 54%; trade unions has improved from 27% to 35%, and even the press has remained static at 39%. Surely time for the banks to take a more proactive role in explaining how their governance woes are being addressed?

Reputation and the Board: Bridging the Gap

Thank you to all those who attended the annual Henley Reputation Conference last week. The theme was 'Bridging the Gap' between the organisation and the board. An excellent day run by the John Madejski Centre for Reputation saw some excellent presentations and strong debate amongst the mainly private sector delegates.

On behalf of the Governance Beyond Boardroom network, I gave a presentation and panel session on the results of the project. For a version of the presentation, see here.

The panel session afterwards brought together Simon Culhane (Chief Executive, Chartered Institute for Securities and Investment) and Peter Montagnon (Senior Investment Adviser, Financial Reporting Council). The panel tackled two particularly pertinent questions from the practitioner audience:

1. How do you apply the analysis of governance culture?
The audience seemed keen to see the fuller toolkit approach to be posted soon on the project's website. However, a delegate from a big four bank said that their induction focuses on the corporate culture but this learning fizzles after a few months when it is not backed up by the behaviour of senior managers. She concluded that there is a disconnect in large banks between what the HR function tries to promote in terms of a strong governance culture and what operational functions actually practice. A number of other delegates from FTSE100 companies agreed with this sentiment.

2. Does the person who draws up the corporate culture own the governance function?
This question focuses on an essential causal direction and is particularly pertinent in light of the Mansion House conference last month (see previous post). While the event was held under Chatham House rules (so I cannot attribute comments), there was a split in the debate between those who argued that culture is a supporting part of the GRC function and those who believed that governance rules and procedures should be tailored towards producing a culture that supports board strategy. Of course, there is considerable crossover here and the potential for some productive future research.

Both questions are key for organisations seeking to realign their governance culture with corporate strategy. Please let me know if these themes chime with your organisation's requirements so we can take forward the project's work together.

Regulator in the Boardroom?

Hector Sants, "Culture Inspector"?

You may have heard a rumour circulating that the FSA wants to put a 'culture inspector' on the board of banks and other financial institutions. As Anthony Hilton writes in the Evening Standard recently, this is a canard but it is not necessarily a bad idea.

...trust won't be restored until people have confidence in the City's ethics and in many cases these are inseparable from the firm's culture. So, vague though the term is, culture is going to be a continuing concern for regulators, politicians and the public.

This continuing concern can be traced more accurately to a speech last month by Hector Sants, Chief Executive of the Financial Standards Authority when he said:

It is crucial that we improve behaviour and judgements. To do this we must address the role that culture and ethics play in shaping these.

Sants went on to suggest how this might work:

For regulators, the starting point should be that we want the firm to have a culture which encourages individuals to make the appropriate judgements and deliver the outcomes we are seeking... The regulator's focus should therefore be on what an acceptable culture looks like and what outcomes that drives... It is neither feasible nor desirable for the regulator to specify the type of culture a firm has, nor the measures and metrics by which this should be assessed. What should matter to the regulator are the outcomes that the culture delivers and that the firm can demonstrate it has a framework for assessing and maintaining it.

This is the crux of the issue - can firms demonstrate that their culture governance framework (assuming they have one!) is robust, accurate and produces a culture tied closely to its corporate strategy. Of course, this is much harder and complex than at first glance. Just think how such a framework might work in your team/department before considering how such a framework can be rolled out across a major institution, and still retain its usefulness.

Developing such a culture governance framework is further complicated by Sants' further correct observation that:

... a box-ticking approach to regulating culture will not work. The regulator must focus on the actions a firm takes and whether the board has a compelling story to tell about how it ensures it has the right culture that rings true and is consistent with what the firm does.

So where does that leave Boardrooms in the City? Simply, they need to act rapidly to develop a culture governance framework that can stand up to regulatory scrutiny. While the FSA won't proscribe a framework tool, boards need to develop one based on leading academic research and best practice. In this, board members should look to the Governance Beyond Boardroom network for where to start.

Welcome to the Governance Beyond Boardroom Network

Thank you to all those colleagues who attended the original seminar at the end of September 2010. It was great to see you all there, to see the lively debate amongst the group, and to see some productive contacts being made throughout the morning. Thank you also to those have already provided feedback on how the project progresses, please keep the suggestions coming - this is an open network where all ideas are welcome!

The presentations are now live on the project's website (click here) , as is a link to this blog. This medium seems to be the quickest and easiest way to link you all up. So please reply to these postings directly or send me your comments and I will post as new topics. I will create an email group to inform you when a new postings appear, and aim to send updates monthly.

As we said at the seminar, we believe the 'Governance Beyond Boardroom' agenda opens up a number of new research streams. We also agreed that the network is a good vehicle for matching potential projects with both research council and private sector funding. Please have a look through the list below and make additions/suggestions so we can start to build a picture for which projects we should seek funding. I will be posting a separate blog on how we can prioritise this list.

The 12 potential research projects that seemed to be most interesting amongst the seminar participants are (in no particular order):

1. A Stakeholder Definition of Corporate Governance. Issues raised include: status of legislative and regulatory definition; understanding the relationship between profit maximising, enlightened shareholders and stakeholder focus; who is a stakeholder; empirical measures for stakeholder engagement.

2. Management of the GRC (governance, risk and compliance) function. Issues raised include: management skills weakness; who in the organisation sets the governance culture; relative importance of non-profit generating corporate functions.

3. Governance Beyond the Boardroom in other sectors. Issues raised include: is the financial services sector peculiar in the role/importance of SubAgents; what industry-specific issues can be isolated in other sectors; can/should regulators identify core vs. sector-specific governance issues?

4. Exploring the Principal-Agent-SubAgent model. Issues raised include: the 'dotted line' link between Principal and SubAgent; whether CEOs and Boards recognise culture as an operational concept; whether this model presumes the breaking up of large banks; sequence/dynamic of the issues identified in the research (i.e. 'what is corporate governance' needs to come before 'drivers of corporate governance' or 'business case').

5. The linking architecture of governance between junior and senior levels. Issues raised include: the role, purpose and practice of Board subcommittees; corporate norms vs. rules; case studies of corporate induction programmes.

6. Complexity as a link between corporate culture, strategy and governance. Issues raised include: building on the work of the Complexity Group led by Prof Eve Mitleton-Kelly (LSE) and Prof Chris Mallin (Birmingham); identifying how to gain research access to large financial institutions; potential for in-depth study of financial services institution.

7. The context of corporate culture. Issues raised include cross-cultural Joint Venture projects; universal standards of corporate behaviour; impact of 2010 Bribery Act.

8. Alternatives to the tickbox mentality. Issues raised include: development and assessment of qualitative metrics; narrative reporting options; regulator assessment on non-quantitative metrics.

9. The business case for stronger governance. Issues raised include: correlation between strengthening governance regimes and bottom line effect; other relevant metrics (e.g. reputation, recruitment & retention, analyst assessment); sector-specific business success metrics (e.g. brand awareness in FMCG sector).

10. What does good governance look like? Issues raised include: case study development; criteria of good governance; is good governance the absence of poor governance?

11. Who 'lives' corporate culture? Issues raised include: informal reporting structures; introducing corporate culture KPIs; Board-level engagement with culture programmes.

12. How to instill a corporate culture. Issues raised include: efficacy of training programmes; quantitative metrics of culture change programmes; different delivery mechanisms of culture change programmes.

I am sure there are many more suggestions that I have missed! Please reply to this blog to add more research streams and suggestions.

Many thanks, Andrew