A report from The Economist Intelligence Unit Sponsored by: A crisis of culture Valuing ethics and knowledge in financial services Contents About the report 2 Executive summary 3 Introduction: In search of culture 5 Case study: Rebranding Goldman Sachs 8 Chapter 1: Ethics in the firm 9 Case study: Changing tracks at UBS 12 Chapter 2: Safety in knowledge 13 Chapter 3: Reincorporating culture 15 Case study: Keeping it simple 17 Conclusion 18 Appendix: Survey results 19 1 © The Economist Intelligence Unit Limited 2013 A crisis of culture Valuing ethics and knowledge in financial services About the report A crisis of culture: Valuing ethics and knowledge in financial l Michel Derobert, general secretary, Swiss Private services is an Economist Intelligence Unit (EIU) report, Bankers’ Association sponsored by CFA Institute. It examines the role of integrity l Bob Gach, managing director, Capital Markets, Accenture and knowledge in restoring culture in the financial services industry and in building a more resilient industry. The report l Steven Münchenberg, chief executive officer, Australian draws on three main sources for its research and findings: Bankers’ Association l A global survey of 382 financial services executives l Robert Potter, chairman, City HR Association conducted in September 2013. Of these, 42% are based in l Ulf Riese, finance director, Handelsbanken Europe, 34% are based in Asia-Pacific, and 20% are based in North America. One-half are C-suite executives, and the rest l Hiba Sameem, researcher, The Work Foundation are senior executives and managers. Nearly one-fifth (18%) l Richard Sermon, chairman, City Values Forum are executives from asset management firms, 16% are from l Jacques de Saussure, senior partner, Pictet commercial banks, 15% are from retail banks, 12% are from insurance and reinsurance firms, 11% are from private banks, l Jon Terry, global head, HR Consulting Practice, PwC 11% are from fund management firms, 9% are from investment l Andre Spicer, professor of organisational behaviour, Cass banks, and 8% are from wealth management firms. Business School l A global survey of 50 executives from firms supporting the l Gert Wehinger, senior economist, Financial Affairs financial services industry across a number of areas, including Division, OECD Directorate for Financial and Enterprise technology, marketing and business processes. Affairs l A series of in-depth interviews with senior financial industry l Martin Wheatley, chief executive officer, Financial executives and experts: Conduct Authority l Juan Ignacio Apoita, global HR director, BBVA We would like to thank all interviewees and survey respondents l Peter Cheese, chief executive officer, Chartered Institute for their time and insight. The report was written by Michael of Personnel and Development Kapoor and edited by Sara Mosavi. l Prasad Chintamaneni, global head of banking and financial services, Cognizant l E. Gerald Corrigan, managing director, Goldman Sachs 2 © The Economist Intelligence Unit Limited 2013 A crisis of culture Valuing ethics and knowledge in financial services Executive summary Back in 1980, just 9% of Harvard MBAs went role that greater knowledge plays in building a into financial services. By 2008, the figure was stronger culture within financial services firms. up to 45%. Lured to Wall Street and the City by generous pay packages, financiers were The main findings are as follows. encouraged to chase rapid earnings growth. l Most firms have attempted to improve Short-term profit priorities led to extreme adherence to ethical standards. Global risk-taking at many firms, with employees institutions, from Barclays to Goldman Sachs, selling complex derivative products they did not have launched high-profile programmes that understand (and that many of their corporate emphasise client care and ethical behaviour. Our clients did not need), and lending to people who survey supports the anecdotal evidence, with could not afford the repayments. nearly all of the firms represented in the survey having taken steps to improve adherence to Since the global financial crisis of 2008, the ethical standards. Over two-thirds (67%) of firms question being asked about the industry is represented in the survey have raised awareness whether it can change, shifting its culture to of the importance of ethical conduct over the become more risk-averse and client-centric. last three years, and 63% have strengthened There is little doubt that strengthening culture, their formal code of conduct and the system including the promotion of ethical conduct for evaluating employee behaviour (61%). Over and greater knowledge, is a priority for the top two-fifths (43%) of respondents say their firms echelons in the financial services industry. In have introduced career or financial incentives to recent years many firms have launched thorough encourage adherence to ethical standards. reviews of their practices as part of their efforts to decide who they are, what they do, and how l Industry executives champion the they should do it. But it could take years before importance of ethical conduct... Despite a spate change is seen at all levels of the organisation. of post-crisis scandals that suggest continued profit-chasing behaviour, large majorities agree In A crisis of culture we examine the global that ethical conduct is just as important as financial services industry’s record on ethical financial success at their firm. Respondents would conduct; we investigate the level of knowledge also prefer to work for a firm that has a good financial services executives have of their own reputation for ethical conduct than for a bigger firm and of their industry; and we explore the or more profitable firm with questionable ethical 3 © The Economist Intelligence Unit Limited 2013 A crisis of culture Valuing ethics and knowledge in financial services standards. Nearly three-fifths (59%) personally making their firm more resilient to risk. Three- view the industry’s reputation on ethical conduct fifths think gaps in employees’ knowledge pose a positively; and 71% think their firm’s reputation significant risk to their firm. outperforms the industry’s. Executives may have confidence in the effectiveness of current efforts l Nonetheless, a lack of understanding to improve adherence to ethical standards, but and communication between departments consumers remain unconvinced. The industry was continues to be the norm. Many argue that voted the least trusted by the general public in ignorance was a key contributor to the global the 2013 Edelman Trust Barometer. financial crisis: managers signed off complex products they did not understand, while HR l …but executives struggle to see the benefits departments agreed to incentives they did not of greater adherence to ethical standards. realise encouraged risk-taking. Five years after While respondents admit that an improvement in the crisis not much seems to have changed: 62% employees’ ethical conduct would improve their say that most employees do not know what is firm’s resilience to unexpected and dramatic happening in other departments. Over one-half risk, 53% think that career progression at their (52%) also say that learning about the role and firm would be difficult without being flexible performance of other departments would be the on ethical standards. The same proportion least helpful to improving their performance. thinks their firm would be less competitive as a consequence of being too rigid in this area. Less Senior executives need to ask whether the than two-fifths (37%) think their firm’s financials power to influence at their firm is shared widely would improve as a result of an improvement in enough. The ultimate question for financial the ethical conduct of employees at their firm. It services firms is: who is, or who should be, in seems that, despite the efforts made by firms in charge—the bankers, the traders, or those recent years, ethical conduct is yet to become a support departments that keep risks in check, norm in the financial services industry. such as human resources, compliance and risk? The challenge for firms is to form enduring l To become more resilient, financial services partnerships between functions to ensure that The firms need to address knowledge gaps. the firm is run by experts in everything it does. increasingly complex risk environment has A number of firms, including ones interviewed made advancing and updating knowledge of the for this report, are already bringing together industry crucial for those working in or serving different functions to vet big, important the financial services industry. Nearly three- decisions concerning the firm’s future and to fifths (59%) of respondents identify better ensure a coherent culture and approach to risk. knowledge of the industry as the top priority for 4 © The Economist Intelligence Unit Limited 2013 A crisis of culture Valuing ethics and knowledge in financial services Introduction In search of culture and financial institutions fixated on return on equity—encouraging them both to chase revenue In many cases and to keep capital levels modest to increase Pre-tax profits at the world’s 1,000 largest banks there is no profitability. In the short term, the effects were surged by almost 150% between 2000-01 and dramatic. But the focus on boosting profits such a thing 2007-08, according to the magazine The Banker, rapidly was not sustainable, and eventually led to as a single as firms borrowed heavily to boost profits.1 a global financial crisis in 2008. culture within Financiers also devised new techniques, such as securitisation, that allowed lenders to sign Financial services firms are working hard to a bank apparently lucrative deals and then sell on the change the pre-crisis culture. But for change risk. Martin Wheatley, the chief executive of to permeate throughout the firm could Andre Spicer, professor of the Financial Conduct Authority (FCA), the UK’s take years, if not decades. In fact, since the organisational behaviour, industry regulator, sums up the problems that fed crisis emerged, there have been a number of Cass Business School the crisis as a collision between financial services scandals in the financial services industry.