Why

Banks Should Focus On Culture,

Now More Than Ever

John R Childress
The Principia Group







J o h n R . C h i l d r e s s
h a i r m a n
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Tinfo@theprincipiagroup.com
h e P r i n c i p i a G r o u p
L o n d o n

http://johnrchildress.wordpress.com

Why Banks Should Focus On Culture, Now More Than Ever

Over the past several months government agencies and business

leaders have begun an intense and very public debate about how
to prevent another financial meltdown, and another bailout, now
that the global economy seems to be headed for recovery. The
big issue concerning regulators is that unless real change is
implemented in how branks conduct their business and how they
are regulated, the world could easily find itself in the same
situation as before; the combination of excessive risk taking and
lax regulation leading to another global financial crisis.

While everyone seems to be focusing on regulation as the key strategy for bringing the situation
under control, we believe that other avenues should be both understood and explored if a
sustainable solution is to be created. One of these important avenues is corporate culture.

Warren Buffet, one of the more savvy investors of the past three decades made a bold and profound
statement in his recent annual letter to the Berkshire Hathaway shareholders:

Culture, more than rule books,
determines how an organization behaves.
- Warren Buffet

In addition, another insightful comment comes from Paul Moore, former head of risk for HBOS, now
part of Lloyds TSB.

There is no doubt that you can have the best governance
processes in the world, but if they are carried out in conditions of
greed, unethical behaviour and an indisposition to challenge
they will fail. - Paul Moore, former head of risk, HBOS

Paul Moore got fired for his comments at the time; a testament to the openness of the previous
banking culture to criticism about its internal culture and ways of working.

We strongly believe that reshaping corporate culture, in conjunction with
prudent regulatory changes can work together to help build a stronger,
more responsive and responsible banking industry. One of the challenges
in this approach is that the importance and business impact of corporate
culture is not well understood. Too many refer to culture as the soft
stuff with little relevance to the analytical business world of global
finance.

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To help those in the banking industry and the regulators to better understand corporate culture and
its value to business performance, we have prepared a series of four articles, entitled: Why Banks
Should Focus on Culture, Now More Than Ever. Each article builds upon the previous one, and
should be read in succession.

The four articles focus on:
What is Corporate Culture and Why it Matters to the Bottom Line?
The Determinants of Corporate Culture.
Is the Culture of Banking Broken?
How to Reshape Corporate Culture

This entire series is focused primarily on the banking industry, but has insights and application for all
other industries struggling to remain relevant in a changing global landscape. For those who need a
better understanding of how the financial services industry has changed from a public service into
a corporate pirate, you should read the informative article by Demetrie Comnas on The Origins of
the Banking Crisis (http://www.theprincipiagroup.com/downloads/The_Origins_of_the_Banking_Crisis.pdf).

What is Corporate Culture and Why it Matters to the Bottom Line?

Its no secret that the recent global economic meltdown and resultant
bailouts caused more than just financial damage to the global banking
industry. The brand image of banking, and bankers in general, has taken a
major hit for the worse. Where banks were once respected institutions of
integrity and financial prudence, and bankers admired for their business
acumen and community service, today the reputation of banking is at an all
time low.

The poor image of banking is not solely in the eyes of the public, however.
Sadly the stain is internal as well. Inside many major banking organizations
morale is at rock bottom and feelings of professional pride are a distant
memory.

And the rush to rebuild their image and business standing through the implementation of new
business models, restructuring, advertising campaigns and transformation programmes may
actually be making things worse. Long-term employees feel insecure about their futures, new
employees are wondering how to get ahead amidst all the changes, and corporate, commercial and
retail customers are wondering whom to trust. To make matters worse, several of the large banking
institutions are losing top talent in droves as individual performers search for a better fit at other
banks or even in private financial institutions such as hedge funds. These are some of the hidden
speed bumps that will slow down the banking industry in its efforts to recover its reputation.

We believe this time of upheaval and transition provides a perfect opportunity for leaders of
courage and wisdom to remake the image and brand of banking and grow shareholder value by
building healthy, high performance corporate cultures.

The Hard Edge of Corporate Culture

Hold On! Before you stop reading, thinking this is perhaps another of those fluffy articles on
organizational behaviour or human resources, let us state our position on culture and its connection

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to strategy delivery and operating performance.

First of all, while the experts and academics still dont fully agree on what culture is, in everyday
terminology corporate culture is often called the personality of an organization, or more simply
the way we do things around here. More recently corporate culture has been recognized as more
complex than just the collection of shared employee behaviours. A more comprehensive
understanding of corporate culture takes into account not only shared behaviours (mindset), but
also skills and business processes. CEOs and senior executives we have worked with find the
following definition easy to understand and use: the habitual ways we go about solving business
problems and treating each other.

It is now well documented that corporate culture impacts performance and that a culture can either
propel or hinder strategic and business agendas (McKinsey Quarterly 2006, No 3; McKinsey
Quarterly 2007, No.3; Towers-Perrin Global Workforce Study 2007-2008). In a recent study on
culture among 300 European banks it was estimated that if a bank was to succeed in increasing the
human-orientation of its corporate culture by 10% the ratio between EVA and invested capital would
rise by 2.44%.

Like it or not, understand it or not, culture matters to the bottom line. And at no time is culture
more critical than during periods of large-scale change.

How Culture Impacts Performance: The relationship between culture and performance is more easy
to see with the understanding that Strategy Structure Culture are interlinked and for top
performance, these three critical business elements must be in alignment. In simple terms,
everyone knows where we are going (strategy), its clear who does what in the organization
(structure), and we all understand the ground rules for working together and for dealing with
clients (culture).

In less turbulent times when the pace of change was slower, organizations were able to gain
alignment between these three critical elements and as a result produced efficient performance and
long-term growth.

However, with the explosion of technology, rapid globalization, aggressive new competition and
shifting regulation, companies are often forced to shift their strategies, and to subsequently
reorganize in order to remain competitive (the history of the airline industry is an excellent
example). When new competitive strategies are called for, a company usually needs to reorganize
to better deliver on their new strategy.

The problem is, thats as far as most senior teams take it;
thinking that improved performance should naturally
follow.

Because most CEOs and senior executives are often
insulated from the real internal culture(s) within their
organization, it becomes difficult to see the link between
culture and performance. It also becomes difficult to see
when the existing culture is no longer aligned with the
new demands of the business.

Unless there is work done to reshape the culture, the old
culture can act as an anchor, slowing down and in some
cases even stopping real change. Therefore, to fully
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implement a new strategy or to rebuild your organization to be effective in a changed world, it is

critical to reshape culture as well.

While it may be tempting to believe that culture is an internal issue, how we work together inside
the firm, it should also be understood that culture directly impacts how we deal with clients and
prospects. Expecting alignment and collaboration on a new client pitch from a culture of silos and
fiefdoms is both naive and costly. The fact is, a culture will treat its customers in exactly the same
way it treats internal departments and each other. No wonder everyone is looking for a magic
training course to improve the teaming abilities of various bank departments during a major new
client pitch.

In a large study of European banks published in 2003, researchers found a negative correlation
between culture and short-term profitability, but a strong positive correlation between culture and
Economic Value Add, postulating that investing in people and teams to build a strong internal
culture may be costly in the short term but a wise investment in the long run. In many cases it is up
to the leaders to balance their strategies to provide for improved profit performance while also
building long-term economic value.

So, if culture impacts performance and our ability to implement business strategies and change, then
why isnt corporate culture more valued in the executive suite?

We believe it stems from the so-called culture gurus who have for the past three decades (ever since
the publishing of In Search of Excellence) been focusing entirely too much on the outward
manifestation of culture, that is behaviours, and not enough on what really creates corporate
culture in the first place. We believe that the majority of those involved in consulting and writing
about corporate culture and culture change have been far too interested in pushing the solutions of
executive coaching or team training as their solutions and have missed the two primary shapers of
corporate culture: repetitive business processes and the activities of the senior leadership team.

The Determinants of Corporate Culture

Corporate culture impacts performance in ways that are often invisible to

those inside the company. While culture can be evidenced through
observable behaviours (resistance to change, lack of trust between
departments, blaming and lack of accountability, single focus on individual
gains, short term focus versus longer term value creation, etc.) a culture is
not simply the sum collection of the values and behaviours of its
employees. That would be totally unworkable and a recipe for chaos.
Instead, there are two major ingredients that cause people to behave in
common and predictable ways, which then creates culture. As a reminder,
our definition of culture is: the habitual ways we go about solving
business problems and treating each other.

The two strongest determinants of culture are internal business processes and the activities of the
senior leadership team.

Business Processes: After 30+ years of working with senior teams on turnarounds and performance
improvement we are convinced that corporate culture is greatly determined by the business
processes the company adopts, not culture statements or values posters, and that repetitive
behaviours (what we see as culture) are the result and not the cause of culture.

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In essence, a business process, such as annual planning or departmental budgeting, or a

management process such as the performance review or promotion process (not the ones in the
handbook but how they are actually done in real time) have a tremendous impact on shaping first
individual, and then collective behaviour and ultimately the corporate culture. People can give lip
service to a set of values on the wall or a fancy mission statement, but cant escape complying with
internal business processes. And those who dont adhere to the internal business process are few
and usually gone before too long.

Plus, poorly designed business processes do double damage by fostering malicious obedience and
cynicism, while at the same time prompting time consuming workarounds that hinder productivity
and reduce performance. The annual bonus process within most banks is an excellent example. Not
only is the process based on a false assumption (that the only way to keep high performers
performing and thus run a profitable institution is to pay them big bonuses) but an inordinate
amount of valuable senior management time is taken up every year in seemingly endless meetings
with key employees trying to find a compromise between individual expectations (and often
demands) and the size of the overall pie handed down from corporate. In this case the unwritten
process (individual bonus negotiations) has definitely shaped a key part of the culture of banking.

We believe it makes good sense for senior executives to look closely at the business processes they
are using internally. What we suspect you will find is that many of them are legacy processes,
developed some time ago when business conditions were different and may not be fully appropriate
for your current strategy or the pace of business today.

Leadership Shadows: The second key determinant of corporate culture
is leadership, and specifically we mean the senior executive team. High
performance leadership teams understand that their collective work
processes (e.g., meetings, performance management, quarterly
reviews, new project investment requirements, etc.) and their
collective behaviour (teamwork, turf-battles, blaming, respect for
others ideas, etc.) cast a positive or negative shadow across the entire
organization. And since employees tend to take their cues on what is important and how to behave
from their leaders, negative activities and behaviour at the top foster negative behaviours far down
into the organization, adversely impacting performance and productivity.

Whether the leadership team is aware of it or not, the way they
Organisations are shadows of
work together and how they manage the business casts a
their leadershipthats the good powerful shadow far into their organization. And actions speak
news and the bad news!
louder than words! When the leadership team says one thing
and then behaves differently employees quickly figure out the
real story. When a senior executive talks about the core value of respect and then promotes one of
the most abusive managers, the real story of what is important around here quickly gets around.

When members of the leadership team come into the building and head straight for their offices,
head down, not interacting with anyone, thats the story that gets talked about in the canteen and
the pubs, not the speech one of them gave on employee engagement and openness. The actions
dont match the words. And an even more powerful shadow cast by the senior team is how they
interact with each other.

If you want teamwork and collaboration on major client pitches as a core value and business driver,
it better happen at the top or you wont achieve it anywhere else, even with the best consultative
selling training or cross-functional collaboration workshops. If two senior executives wont support
each other and openly bad-mouth each other (as is the case with many co-head arrangements
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currently in fashion), you can forget about any meaningful support and cooperation, let alone
intelligent collaboration on major client deals.

With this understanding of the importance of culture on performance and the realization that
culture is built through internal business processes and leadership behaviours, lets look more
specifically at the culture of banking today.

Is the Culture of Banking Broken?

Today there are numerous discussions in newspapers, business
journals and government corridors chanting the mantra that the
culture of banking is broken. They cite examples such as the mad
rush into derivatives and other risky investment vehicles, obscene
bonuses paid to bankers, the endless search for acquisition targets
in order to expand scope and scale, the lack of focus on customer
service, the retreat from lending, and the obsessive focus on
internal profits as opposed to providing a public service.

Well, the culture of banking has changed significantly over the past 40 years, and based on the state
of the global economy, not for the better. But if we really understand what creates corporate
culture in the first place (internal business processes and the behaviours of the leadership team)
we would realize that we now have the culture we created, whether by design or default, it was
created by choices made concerning business processes and leadership styles! Another valid point
of view is that the culture of banking has evolved while leaders were focused on other issues, such
as acquisitions and establishing global footprints.

Changing Processes: Over the past 40 years many of the internal business processes in banks and
financial institutions have changed dramatically. Processes focused on credit risk assessment and
processes steeped in the ethos of stewardship of other peoples money have given way to new
processes focusing on deal making, profit maximization, product development, advisory services and
asset securitization.

A major shift was from the skills and processes of portfolio lending to the more lucrative generation
of new products and services in order to create additional revenue streams. This was to prove to be
perhaps the single most significant change in the culture of banking, and brought with it a
fundamental shift in priorities, values, systems, rewards, and viewpoint.

The process of originating debt was no longer just to serve the needs of the borrower, but was now
perhaps more to serve the needs of the investor. Originate-and-hold had become originate-and-sell,
which eventually became originate-to-sell. Critically, banks had also learned that the faster they
could originate and distribute their paper, the better the return on capital employed. A new element
thus entered the commercial banking culture and lexicon.speed.

Hiring processes also shifted dramatically. Rather than hiring experienced individuals to develop and
manage departments, banks began to aggressively poach whole teams from rival institutions. When
a whole team migrates to a new bank, they bring their culture with them! And many times they
negotiate hard with their new bosses to be left alone to do their jobs make money for the bank,
making it clear from the outset that they dont want to be part of the bank culture.

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Another large set of processes that shifted during this time was training. The fundamentals of credit
and risk, as well as management training all but disappeared in the banks, being replaced instead
with sales training, negotiation skills and profit maximization training.

Leadership Shadows: During this time period the profile of those in leadership
positions changed dramatically as well. Rather than a diverse representation of
all the various banking functions and disciplines, top teams became more and
more populated with investment bankers and rainmakers. The management
and leadership qualities of the David Rockefeller era were
replaced with the brashness of the likes of Richard Fuld and the
greed focus of Fred Goodwin and others. What was valued in
leadership style switched from one extreme to another. This
trend followed the cult of the charismatic leader syndrome so prevalent in big
business during the hectic growth years of the 80s and 90s. Thoughtful and
inclusive was replaced with loud, charismatic and aggressive.

In addition, the notion of a leadership team aligned around a vision of public service and sharing a
set of common values was replaced with a view that this is a jungle and the biggest and meanest
will survive. Stress and internal politics were the environment senior managers had to live with, or
get replaced. And it became a 24 by 7 global business where speed was the forcing function and
profit the only yardstick.

And big deals were happening at all hours day and night. Many believed the large amounts of
money paid out in salary and bonuses compensated for the stress and long hours, but the children
who rarely saw their banker parent didnt always agree.

With a new set of internal processes and a reconfigured leadership ethos we wound up with a
banking culture radically different. This whole process of banking culture change was further
accelerated (some say caused) by the systematic dismantling during the 1980s and 90s of the Glass
Steagall legislation and the wholesale lack of accountability on the part of the regulators.

As a result, like it or not, we have the banking culture we created. The good news, however, is that
its possible to reshape it again, this time by design, not default! After all, unless banks take the
accountability to create their cultures by design, the regulators may try to mandate a banking
culture. The worst of both worlds!

What It Takes to Reshape Corporate Culture

So wheres the silver lining in the dark cloud of bank regulation and reform? We believe this is the
perfect time to ask two fundamental business questions:

What kind of culture do todays global banking institutions need to win in the marketplace with
their clients and to win hearts and minds within our own company?

What is our enduring purpose why do we really exist as an organization? (And remember,
profit is a by-product, not a purpose!).

We believe the current crisis and aftermath represents one of the most important opportunities in
decades for ambitious and courageous CEOs to strengthen and deepen their franchises. It is also the
perfect time to begin to shift the culture of banking internally, before drastic and costly regulatory

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/)0$2"3*45)4&$

measures are passed out of public frustration and anger. The sensible and we believe workable
solution is for regulation and self-regulation (internal culture change) to work hand in hand to bring
about both opportunity and stability.

Reshaping culture is the role of the CEO and the senior team. It
is not an HR or OD exercise as much as it is a leadership
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responsibility. What is the best culture for the bank? One that
is aligned with and fully supports the Strategy and Structure of
the organization. With a little help from outside experts, the CEO
and senior team can quickly come to grips with what processes,
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actions and behaviours most fit and support the strategic
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interests of the business.

If a bank decides to shift its internal culture, we suggest they
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NOT begin by issuing lofty mission statements or long lists of
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core values. Begin instead by taking a hard look at the current
culture (particularly its strengths and weaknesses) and also the
existing business processes and the work attitudes and
behaviours they foster.

Then the CEO should take a hard look at the senior leadership team. What shadows are they casting
over the organization? What is the culture they allow (and foster) as a result of the way they work
and behave? Its also a good idea for the CEO to take a hard look in the mirror: assess your own
leadership style, the processes used to run business and deal with issues and people. An important
question is: What shadow am I casting?

Fast Break Culture Change: And if you find room for improvement, dont buy into the commonly
held view that culture change takes years and tons of senior management time and effort, plus
endless workshops and all-hands communication meetings. It can happen relatively quickly if you
take the right actions and are truly committed.

Take a page from the playbook of the New York Police Departments
Broken Windows policy on reducing violent crime. The theory is simple
(and even easier to enact inside a company than it is in a sprawling
metropolis like New York City):

Broken Windows Policy: untended disorder and minor offenses
give rise to serious crime; therefore dealing with minor offenses
now is a significant deterrent to serious crime later.

This is how the banking industry got itself in trouble, by ignoring its broken windows with an
eventual build up of tolerance for outside the norm behavior and risky deals, finally leading up to the
excessive risk taking and blatant disregard for governance and self-regulation. The result being the
recent global financial meltdown, the disappearance of once venerated institutions and the colossal
bailout using public funding.

Once you have decided on the culture you want and have defined the leadership activities and
business processes you need to run the business and build a high-performance culture, take a high
visibility approach to holding people accountable.

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The first time you terminate a senior executive for flagrantly acting against the desired culture, you
will have fired the shot heard round the cubicles. Everyone will know that this company is serious
about its values and building a high-performance culture.

And it wont be long before employees start holding each other, and themselves, more accountable,
just as community anti-crime groups began to spring up all around the City after the police began to
take a highly visible approach to minor crimes. Deal with your broken windows before they
become serious crimes.

Clarity of purpose is critical in helping to define the culture most appropriate for your business
strategy. If you are clear on why we exist as an organization then your values will easily follow, as
will your culture. We have seen too many sets of values and mission statements that have no
connection to the actual running of the bank other than they are a nice to have and look good on
the lobby wall.

Every time I speak to a group of bankers, or any business executives for
that matter, I always begin with the same activity. I ask them to take out
a blank sheet of paper and without conferring with anyone, to write
down all the Values of their company. More often than not I get first
blank stares, then uncomfortable coughs and shuffling of chairs. The fact
is, in all the years I have done this exercise the group average has rarely been above 50%! What if an
employee at a shareholder meeting or a town hall meeting asked the senior team to do the same
exercise and got a 50% response. What would be your excuse?

By the way, Enron had published values, too. They even had them chiselled into marble in their
massive lobby: Integrity, Communication, Respect, Excellence. Enough said!

Today in most organizations the message inside is clear corporate values are nice words, but
actually are quite meaningless in connection to the everyday running of the bank. We can
remember the dates of our kids birthdays and our wedding anniversary because they are important
to us, but we cant remember the company values!

So spend some time getting very clear on your purpose as a business and then build your values
based on that. If its what you are really passionate about and what you really believe in, then you
will easily be able to rattle off all your values, and you will even have personal stories and examples
to illustrate each one. Then build other examples of day-to-day situations within your bank that
show how the values are meant to be applied. Make a list of executive behaviours that are in-
bounds (that are consistent with the purpose and values of your bank) and those behaviours that are
out of bounds. Talk about values at every staff meeting. Talk about how values support every part
of your business: sales, new client development, client satisfaction, revenue generation,
productivity, and of course profitability. If you make the connection, so will your people.

Why is this critical? Remember that it is impossible to treat clients any better than we treat each
other so instilling the values of your culture into everyone will actually show up in radically improved
service to clients. And after all, they pay the bills (and the bonuses).

Bringing culture into alignment with strategy and structure is the role of leadership. Culture cant be
managed, but it can be led!

Want a practical example of stepping up to the real challenges and beginning to shift the battered
image of banking? Try this.

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10

The other evening I was at a meeting of Insolvency and Restructuring professionals to hear a talk
from a senior member of Her Majestys Revenue and Customs (a loose equivalent to the IRS in the
US). After a lucid and frank presentation about the role of HMRC during the recent financial crisis
and the rising number of companies in default (and individuals in personal financial distress), a
senior member of the audience stood up and said the following:

As someone involved in helping companies survive their financial troubles Id just like to state that
from my experience over the past several years of this business crisis, the HMRC has done more to
help distressed companies than the banks!

His remarks earned a standing ovation from the audience. Like it or not, believe it or not, thats the
perception of banking today by many business professionals, and the public. The culture of banking
is broken and it will take courageous leadership to mend it.

So, want to start on the path of rebuilding the brand of banking? Take a stand on the right things to
do. Invest in rebuilding the culture of banking. And if not this issue, then look and you will probably
find numerous others.

If banks dont begin to self-regulate and shift their culture and practices, I am afraid it will be
attempted through government regulation, and that is definitely not the most effective or efficient
solution.

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