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Daniel Tischer (2013) the Embeddedness of Ethical Banking The University of Manchester Research The Embeddedness of Ethical Banks in the UK Link to publication record in Manchester Research Explorer Citation for published version (APA): Tischer, D. (2013). The Embeddedness of Ethical Banks in the UK. University of Manchester. Citing this paper Please note that where the full-text provided on Manchester Research Explorer is the Author Accepted Manuscript or Proof version this may differ from the final Published version. If citing, it is advised that you check and use the publisher's definitive version. General rights Copyright and moral rights for the publications made accessible in the Research Explorer are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. Takedown policy If you believe that this document breaches copyright please refer to the University of Manchester’s Takedown Procedures [http://man.ac.uk/04Y6Bo] or contact [email protected] providing relevant details, so we can investigate your claim. Download date:04. Oct. 2021 The Embeddedness of Ethical Banking in the UK A thesis submitted to The University of Manchester for the degree of Doctor of Philosophy In the Faculty of Humanities 2013 Daniel Tischer Manchester Business School People, Management and Innovation Division LIST OF FIGURES 5 LIST OF TABLES 6 ABSTRACT 8 DECLARATION AND COPYRIGHT STATEMENT 9 LIST OF ABBREVIATIONS 10 CHAPTER 1: INTRODUCTION 12 OVERVIEW OF THE THESIS 20 CHAPTER 2: ETHICAL BANK BUSINESS MODELS 23 PROFITS FOR OWNERS 24 CURRENT CONCEPTS OF PROFIT AND SOCIAL OBJECTIVES OF THE FIRM 29 CSR 30 Philanthrocapitalism 33 NORMATIVE ETHICS : MOTIVATION , CONDUCT AND OUTCOME 36 THE ADVANTAGES OF THE STAKEHOLDER MODEL FOR MANAGING SOCIAL IMPACT OF THE FIRM 46 TOWARDS AN ETHICAL BANK BUSINESS MODEL 51 CONCLUSION 58 CHAPTER 3: ETHICAL BANKING AND THE UK BANKING INDUSTRY 60 ETHICAL BANKING : A SMALL AND PECULIAR SECTOR 61 Demutualisation and Consolidation of Building Societies 63 Two Dominant Firms 65 The Financial Crisis as an Opportunity for Change? 69 What does Ethical Banking Look Like Elsewhere? 74 TOWARDS AN EMBEDDED VIEW OF ETHICAL BANKING 80 SIX DIMENSIONS OF EMBEDDEDNESS 90 CONCLUSION AND IMPLICATIONS 96 CHAPTER 4: METHODOLOGY 100 RESEARCH DESIGN 101 Aims and Questions 102 RESEARCH STRATEGY AND MIXED -METHODS RESEARCH 106 PHASE I: SOCIAL NETWORK ANALYSIS 109 Data Discovery / Gathering 113 Population 114 Design 117 Data Analysis 120 Limitation and Problems of the Social Network Analysis 123 PHASE II INTERVIEWS 125 Data Gathering, Sample and Approach 126 Analysis 128 Use of Secondary Data, Validity and Credibility 129 CONCLUSION 131 CHAPTER 5: NETWORK EMPIRICS: ETHICAL BANKING RELATEDNESS IN THE UK 133 NETWORK DATA ANALYSIS 134 Basic measures 136 2 Network and Group Measures 139 Social Fabric of the Ego-Networks 141 Functions of Actors within the Network 146 Testing Equivalence and Correlation 153 DISCUSSION OF FINDINGS 158 Network Embeddedness of Ethical Banks 159 A District View on Ethical Banks’ Structure 162 Relationships within Ethical Bank Subgroups 162 Relationships between Ethical Banks 164 Individual Ethical Banks with Peculiar Network Positions 165 CONCLUSION 168 CHAPTER 6: EMPIRICAL INVESTIGATION OF ETHICAL BANK BUSINESS MODELS 170 COST RECOVERY IN ETHICAL BANKS 171 Credit Unions 171 Building Societies 174 Niche Ethicals 178 Discussion 182 ETHICS AT THE CORE : SOCIAL VALUE CREATION IN ETHICAL BANKING 184 Aims: Do Organisations Have a Clear Mandate of What They Want to Achieve? 184 Products, Services and Behaviour: Focused on Mission, or Focused on Competition? 187 Profits: How Do Profits Support the Mission and How are They Distributed/Reinvested? 192 Size: Can Big be Ethical? 194 STAKEHOLDER ENGAGEMENT OR BOARD HEGEMONY – CAN STAKEHOLDERS REPLACE SHAREHOLDERS 197 Who are the Owners? The Missing Principle 198 Democratic Participation: Are Members Integrated in the Governance Process? 200 Government Complacency and the Gold Standard 204 Competitor Influence 205 CONCLUSION 208 CHAPTER 7: ETHICAL BANKING AS INDUSTRIAL DISTRICT: IDENTITY AND TRAJECTORY 212 SIX DIMENSIONS OF INTERACTION AND EMBEDDEDNESS IN ETHICAL BANKING DISTRICT 212 Sectoral Cultural Identity 215 Complementary Services 219 Connectivity and Exchange 222 Competition 229 Trade Associations 234 Industry Regulation and Legislation 238 THE INDUSTRIAL DISTRICT AS ‘D IS ’ANALOGY 241 CONCLUSIONS 243 CHAPTER 8: POLICY-MAKING FOR AN ETHICAL BANKING SECTOR 247 THE POSSIBILITY OF POLICY -MAKING AT SUBSECTOR LEVEL 248 KEY FINDINGS 251 Competition and Complementarity 251 Dependence on Big Banks 253 Trade Associations 254 Current Regulatory Practices 255 ALTERNATIVE WAYS FOR SECTOR AND FIRM 258 Privileging the Subsector in Policy-making 258 3 Organising Subsectors in Germany and the Netherlands 261 POLICY RECOMMENDATIONS 264 Policy-making for a Subsector 265 Reorganising Banking 267 Horizontal Integration for Ethical Banks 270 Centralisation of Services and Clearing 271 Niche Ethicals as Specialised Ethical Banks 273 Aligning Industry Culture and Education 274 IMPLICATIONS 275 CHAPTER 9: CONCLUSIONS 278 CONCEPTUAL CONTEXT 278 SUMMARY OF FINDINGS 281 CONTRIBUTION 285 Ethical Banks at Firm Level 285 Ethical Banks as a Sector 287 Network Analysis of Sectors and the Industrial District 289 Contributing to Policy-Making 291 LIMITATIONS 292 CONCLUSIONS 295 REFERENCES 299 APPENDIX A – QUESTIONNAIRE 313 APPENDIX B – INTERVIEW GUIDE 318 Word count: 84,067 4 List of Figures FIGURE 3.1: BANKING SECTOR ASSETS AS % OF GDP 62 FIGURE 3.2: ETHICAL BANKING SEGMENTS BY NUMBER OF FIRMS AND TOTAL ASSETS 2010 FIGURES 62 FIGURE 3.3 ETHICAL BANK MARKET SHARE AS % OF INDUSTRY TOTAL AND DISAGGREGATED MARKET SHARES OF THE SEGMENT 65 FIGURE 3.4: DEPOSIT INTEREST RATES, 1993-2008 74 FIGURE 3.5: OVERDRAFT INTEREST RATES , 1993-2008 74 FIGURE 5.1: ATTRIBUTES OF RESPONDENTS AND ORGANISATIONS IN THE RESPONDENT ’S NETWORK 138 FIGURE 5.2: STRUCTURAL EQUIVALENCE OF ETHICAL BANKS 155 SOCIOGRAM 5.1: ETHICAL BANKING NETWORK ILLUSTRATING RESPONDENTS (CIRCLES ), NON -RESPONDENTS (SQUARES ) & TYPE OF ORGANISATIONS (COLOURED ) 159 SOCIOGRAM 5.2: ETHICAL BANKS BRIDGING BETWEEN GROUPS 165 SOCIOGRAM 5.3: AMBITIOUS BS 3 AS BRIDGE BETWEEN BUILDING SOCIETIES & OTHER ETHICAL BANKS 167 FIGURE 6.1: BUILDING SOCIETY INCOME AND EXPENDITURE 177 FIGURE 6.2: CHARITABLE DONATIONS AS % OF PROFIT AT YEAR END BY ETHICAL BANKS AS DISCLOSED IN THEIR ANNUAL REPORTS . 193 SOCIOGRAM 7.1: ETHICAL BANKING NETWORK ILLUSTRATING RESPONDENTS (SQUARES ), NON - RESPONDENTS (CIRCLES ) & TYPE OF ORGANISATIONS (COLOURED ); RECIPROCITY (RED CONNECTIONS ) 224 5 List of Tables TABLE 3.1 HISTORIC DEVELOPMENT OF BUILDING SOCIETY NUMBER , ASSETS AND BRANCHES , SELECTED DATES 64 TABLE 3.2: SIZE OF CREDIT UNION SECTOR IN SELECTED COUNTRIES, 2011 DATA 68 TABLE 3.3: PERSONAL CURRENT ACCOUNT (PCA) MARKET SHARES PRE - AND POST -FINANCIAL CRISIS , BY NUMBER OF CUSTOMERS 71 TABLE 3.4: CUSTOMER SATISFACTION SCORES FOR UK RETAIL BANKS 2008-2010 (S OURCE : TREASURY 2011) 72 TABLE 3.5: COUNTRY -LEVEL INDICATORS : CONSOLIDATED BANKING DATA REPORTING POPULATION 75 TABLE 3.6: CONCENTRATION ANALYSIS: % OF TOTAL DOMESTIC BANK ASSETS HELD BY TOP 2, 5 AND 10 BANKS , BY DOMICILITY 76 TABLE 3.7: GERMAN THREE PILLAR SYSTEM (VARIOUS FIGURES ) 77 TABLE 3.8: COMPARISON OF ETHICAL BANK ORGANISATION BY SIZE & BRANCH 78 TABLE 4.1: LISTING OF FINAL POPULATION BY TYPE . 116 TABLE 4.2: ATTRIBUTE CATEGORIES FOR THE EGOCENTRIC NETWORK ’S EGOS AND ALTERS 120 TABLE 5.1: MEAN DEGREE OF EGOS BY TYPE OF ORGANISATION AND TOTAL (43 NETWORK ) 137 TABLE 5.2: IN-DEGREE AND OUT DEGREE CENTRALITY FOR TWO KEY NODES (43 NETWORK ) 140 TABLE 5.3: GROUP LEVEL E-I INDEX 142 TABLE 5.4: BETWEEN -GROUP RECIPROCITIES (43 NETWORK ) 145 TABLE 5.5: RANGE OF HUB AND AUTHORITY VALUES FOR SELECTED TYPES OF ORGANISATION WITHIN THE NETWORK 146 TABLE 5.6: BROKERAGE SCORES BY ROLE FOR EACH ORGANISATION AND IN TOTAL 149 TABLE 5.7: CHOICE OF STRUCTURAL HOLES MEASURE FOR SELECTED NODES 150 TABLE 5.8: PEARSON R CORRELATION COEFFICIENTS BETWEEN VARIABLES 157 TABLE 6.1: OVERVIEW OF SERVICES OFFERED BY THE 47 BUILDING SOCIETIES 174 TABLE 6.2: 2010 INCOME STREAMS OF INTERVIEWED BUILDING SOCIETIES IN % OF TOTAL INCOME BEFORE ANY COST 176 TABLE 6.3: OVERVIEW ON NON -FINANCIAL & FINANCIAL DATA AND SERVICES OFFERED 180 TABLE 6.4: ANALYSIS OF CUSTOMER COMPLAINTS FOR LARGE ETHICAL BANKS AND HIGH STREET BANKS 190 TABLE 6.5: SELECTED ETHICAL CONSUMER SCORES FOR BANKS 191 TABLE 6.6: CAPITAL FUNDING SOURCES OF 48 UK BUILDING SOCIETIES 194 TABLE 6.7: BUILDING SOCIETY AGM VOTING RESULTS 201 TABLE 6.8: OVERVIEW OF ETHICAL BANK BUSINESS MODELS FEATURES 208 6 TABLE 7.1: ETHICAL BANK HISTORICAL DEVELOPMENTS 218 TABLE 7.2: ORIGIN OF BUILDING SOCIETIES 1 AND NICHE ETHICALS 2 DIRECTORS (N1=39 & N2=5) 228 TABLE 7.3: DEGREE OF CONCENTRATION IN BUILDING SOCIETIES 231 TABLE 8.1: COMPARISON BETWEEN LARGEST AND SMALLEST ORGANISATIONS 262 7 Abstract University of Manchester Daniel Tischer, PhD The Embeddedness of Ethical Banking in the UK 2012 Following the financial crisis that began in 2007, various groups and individuals demanded an ecologically diverse banking sector to help spread risk in the banking industry and to more effectively cater to customer needs. To date, however, measures to change retail banking have been limited to modest structural and incentive adjustments to boost competition and modify the banking culture which prompts an investigation about the nature of the ethical banking sector and its ability to grow and thrive. The lack of progress in reforming banking in the UK raises questions of whether and how we could encourage and sustain ethical, social and non-profit alternatives to current high street banks. Because prior academic research in ethical has been limited, the research aims to fill gaps with regards to understanding the network established between ethical banks their business models and to identify the type of intervention needed to promote ethical banking as an alternative to established mainstream retail banking.
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