Diamonds and Rust: The Need for Ethical Climate Change in Banking

The takeaway: The British  scandal over interest-rate rigging underscores the need for ethical climate change in banking. In addition to regulatory and policy changes, doing this involves the combined efforts of CEOs, boards of directors, investors, depositors, and other stakeholders to make banking better. To start, it means understanding and enhancing the moral shadow cast by every institutional and individual action. It also means cultivating a moral compass, along with a code of conduct or banker’s oath, so that principled business leadership and a fiduciary ethic can be revived. But this won’t work unless there’s also a firm commitment to embed ethical principles and sustainability commitments throughout the value chain.

The challenge to CEOs and governing boards is to foster a better climate in which the ethical beliefs and values of the firm can be embedded in business operations, relationships, and all forms of accountability. The challenge for rest of us – investors, depositors, employees, intermediaries, policymakers, regulators, the media and educational institutions – is to demand and enact a better climate in which the ethical beliefs and values of CEOs, governing boards, and capital investors can flourish.

“I’ve always tried to live my life by a moral code and things that I thought were right. And when I’ve been involved with institutions that I’ve been responsible for, I’ve tried to bring those standards of conduct into those organizations, and insist that those organizations live by that same kind of moral or ethical code…and that it conduct its business in a highly professional, responsible, ethical way.  I stressed that at Goldman Sachs in everything we did, and ultimately developed what we called Our Business Principles. It was a written statement of the special features of what we felt Goldman Sachs stood for, and there were fourteen of them. ‘The clients’ interests always come first, and if we serve our clients well, our success will follow.’ That was one of the principles. That was the kind of thing we talked about.”
John Whitehead, former Chairman of Goldman Sachs, author of Goldman’sBusiness Principles”, Interview with Marcy Murninghan, 1997

We need more John Whiteheads. Desperately.

We also need more ethical, engaged, and diligent boards, and investors that recognize their fiduciary obligation does not mean favoring short-term profits at the expense of other values, including longer-term sustainable prosperity.

At a bigger level, we need more conscientious capital markets, which recognize that the purpose of finance is to serve society, not screw it.

All of these come to mind as we witness yet another banking scandal, the latest in what feels like a conveyor belt of bad behavior where money, power, and politics are involved.

Sordid Saga

In late June, Barclays was fined $451 million by the U.S. and U.K. for submitting false interbank lending rates affecting trillions of dollars in interest paid by corporations and consumers for mortgages, car loans, and credits cards. The London Interbank Offered Rate (LIBOR) scandal is widely viewed as the tip of the iceberg, affecting as many as 20 major banks. Investigations underway in Canada, the U.S.Japan, the E.U., Switzerland, and Britain are looking into possible rate rigging activity going back as much as 5 years.

Heads began to roll—and return back. First, last Monday, Marcus Agius, Barclays chair, announced his resignation. Then on Tuesday, July 3rd, Barclays American-born CEO, Robert E. Diamond, Jr., resigned, the day before his scheduled appearance before a Parliamentary committee. Also exiting: Barclays chief operating officer, Jerry del Missier, reportedly at the urging of the Bank of England and the Financial Services Authority, Britain’s top securities regulator. On Tuesday night, Agius was back again as full time chair, admitting Barclays had “a long way to go” to regain the trust and respect of its stakeholders. He’ll stay until a replacement for Diamond is found, and then step down, according to reports.

The fallout was fast and furious. See my companion piece, “What Others Are Saying: Rotten Culture“, for a rundown of reactions on both sides of the Atlantic.

Tuesday night, politicians heralded Diamond’s departure. On Wednesday, whilst we Yanks celebrated Independence Day, Diamond appeared before MPs on the Treasury Select Committee—some of whom used to work at Barclays. He came out fighting, reiterated his disgust with the behavior of those on his watch—and pointed to other institutions, regulatory and competitive, that are culpable. The widespread reaction was that his appearance did little to satisfy onlookers. Especially grating was the exceedingly friendly tone, with Diamond using first names to address his inquisitors add making frequent references to former Barclays employees.

On Friday, the U.K. Serious Fraud Office launched a criminal investigation, in response to calls from the Chancellor of the Exchequer George Osborne and Opposition Labor leader Ed Millibrand.

The murkiest, most disturbing aspect is the possible collusion between public officials and banks. There’s that 29 October 2008 phone call to which Diamond referred, the one from Paul Tucker, deputy governor of the Bank of England, allegedly passing on concerns expressed by senior politicians that Barclays rates were higher than others. Apparently this was interpreted as a signal to “low-ball its reported rate,” says The Wall Street Journal. “We’d be surprised if any central bank officials in the U.S. or the U.K. weren’t privately encouraging lower rates during the crisis. They were already doing so publicly. Since the monetary authorities were attempting to manipulate interest rates of all kinds lower during the crisis, why would Libor be an exception?”

Outraged, Paul Tucker asked to give his side of the story, and did so today before the Treasury Committee. He denied “leaning on” Barclays, and reiterated his concern that BoE and the government feared Barclays needed a bailout.

Over the weekend, reactions escalated as the stain on London’s banking culture widened. Whilst initially the blame concentrated on low level traders – primarily male; testosterone is a huge part of trading floor culture – suspicion has sinced moved up the hierarchy. It’s now focused on what Bank of England officials knew, and when they knew it.

When banks can’t be trusted with other peoples’ money, what is government to do? That’s the question the Brits are taking up in earnest, with public hearings and pronouncements from public officials and political leaders. Calls for remedial action include limiting the £17 pay-out to Diamond after his departure; setting up a government-backed investment bank; breaking up big banks; and “fence-ringing” between commercial and investment banking activity. Earlier today Reuters reported that the European commissioner in charge of financial regulation will propose amendments to E.U. market abuse rules so that “loopholes” are closed and criminal sanctions tightened.

In the wake of Diamond’s departure, Britain’s “supersized” financial system needs a massive rethink affecting purpose and structure, editorialized the Financial Times, because “the reputation of banking in London matters.” If trust is to be restored, government needs to enact policies that it already favors, rather than conducting expensive, time-consuming inquiries. “A major part of the answer must be to separate the investment and retail parts of universal banks,” said FT editors. “This would not only deal with the financial risks and conflicts, it would address the deeper problem of culture that Mr. Diamond embodied.

The clash between retail and investment banking has always been evident. What is now clear, however, is that the hard-charging, revenue-seeking investment banking culture predominates when they are pushed together. The more herbivorous retail banking ethos – with its emphasis on patient stewardship – is marginalised. This seems to lead ineluctably to the proliferation of socially questionable trading activities and abuses such as the Libor scandal.

Indeed, separating “casino banking” from “stewardship banking” is something many in the U.S. are calling for, too. It means creating measures akin to Glass-Steagall, the 1933 law separating investment from commercial / retail banking that was killed off in 1999 after big banks flagrantly violated its provisions and lobbyists persuaded politicians to repeal it.

We’ve seen this sordid dynamic at higher levels. “You help me, I’ll help you.” Innuendo. Favors traded. The nod and wink of unspoken, yet direct, appeals, between public officials and private sector players. While I don’t know who’s guilty of what and can’t begin to predict the fallout from this, I do wonder, because this directly relates to work I do, what CEOs and boards and investors could do, as well as average people.

What steps can we take to support existing reform efforts, or generate new ones? What can we – as depositors, investors, citizens – do to restore integrity to banking and make banking better?

Thankfully, there are a number of initiatives underway aimed at building better banking, both within the U.S. and around the globe. I’ll turn to those in subsequent posts, and encourage you to get involved.

In the meantime, early last week, when the story first broke, I asked a couple of highly-regarded bankers I know what they would advise the Barclays board to do—aside, of course, from wholesale resignation. Ron Grzywinski and Mary Hougton are the two living co-founders of Chicago’s ShoreBank, the nation’s first community bank, a bank that’s been called “too good to fail” but had to close its doors in 2010. I’ll share what they had to say a bit later on.

The Need for Ethical Climate Change

I think there’s a human tendency to want to use one’s power to help the other—for approval, to be a good guy, for whatever the reasons. That can be a good thing, or it can be bad—it depends on intentions and outcomes, on context and character, on the judgment of those involved.

Unless you’ve got a deeply ingrained sense of conscience, it’s easy to veer off course. When no one’s looking, or challenging your actions, or questioning if what you’re doing contradicts or undermines other ethics and commitments, then bad things just keep happening—and escalate. That’s not just mission-creep; it’s moral creep, or self-interest, wrongly understood, to twist Tocqueville.

And institutional climate becomes toxic with its poison, affecting the public sphere, too.

No wonder there’s heightened interest in behavioral econnomics and finance on these matters; human foibles and passions play an enormous role, permeating hierarchies and work groups, from the boardroom and across so-called Chinese walls, to the barrooms where people mingle after-hours.

No command-and-control risk management system is going to completely counteract that. Throw in the cozy relationships between government officials and moneymakers, and…well, that’s what drives people crazy, from Citizens United, political contributions, and lobbying, to revolving doors between the public and private sector, to efforts to defang (or defund) new laws and regulations designed to protect the public from bad banking behavior.

It’s the sense that no one cares, that it’s too big and complicated, that they’ve got a good thing going, until somebody finds out. Then there’s a flurry of outrage and pledges to reform, but then gradually, things get back to where they were. Benign cynicism, a belief that we’ll always get screwed.

While some important changes – including stiff penalties and sanctions, along with a Glass-Steagall equivalent – are needed and may occur, the bigger problem is how to address the toxic ethical climate. Our internalized sense of the right thing to do, along with tolerance and respect for others, generally finds little support in the marketplace, frenetic media environment, or public square. Modesty and humility are in short supply, particularly tied to public professions of commitment to certain principles and values that cannot be bought and sold.

The reason we need more John Whiteheads is that we lack the kind of principled business leadership that sets a standard for others to emulate. When it comes to our major multinational institutions, we lack that sense of wise stewardship, of trust, of soulcraft.

And because each and every one of these institutions is self-governing, the same can be said for their boards: the failure of institutions to command public trust is, in large measure, a reflect of the failure of boards to fulfill their legal and moral duty.

Fortunately, some business leaders are beginning to acknowledge this. On July 4th, speaking at Chatham HouseRio Tinto chairman Jan du Plessis made a compelling statement about the need for rebuilding trust, particularly within the banking sector. (You can hear a recording of his remarks here.)

Doing so, he said, “is going to require leadership within the business community. We are going to have to accept that trust is no longer a given and we are going to have to make every effort to re-earn and re-build the trust that we all so desperately need.

In particular, large corporations and multi-nationals now really need to take up the challenge. We need to reassess how we do business and the decisions we make, in order to identify those areas where we know stakeholders rightly expect us to do better. But once we have done that, we also need to go out proactively and explain to the numerous stakeholders around us why they need big business. I am afraid, all too often in the popular mind, small and medium size businesses are seen to be good and, in simple terms, big businesses are suspected of being bad. Business – in particular big business – has a good story, but unless we are going to stand up and be counted, we cannot expect others to do so on our behalf.

Du Plessis went on to argue for sustainable, ethical, and responsible business practices, including more equitable compensation practices and better transparency and reporting. “This is a time for leadership – to demonstrate trust at the top,” he said. “If we show trust at the top and move the debate into something more dignified than that which we have seen in recent times, we can begin the long, slow process of rebuilding trust with those whom we seek to serve.”

De Plessis was talking about power, and how it’s used. He was talking about honor and integrity, a sense of ethics and duty, of following one’s moral compass—of even having a moral compass.

So how do you cultivate a moral compass? You don’t just go out and buy one.

Understanding and Enhancing the Moral Shadow

Years ago, in a project for Harvard Divinity School, I set about asking a group of 28 prominent men and women, mostly CEOs in the financial services, journalism, and entertainment worlds, this very question. In addition to John Whitehead, the effort was backed by, among others, Norman LearGary David GoldbergBob MonksHodding Carter, and the late Peter JenningsJon Lovelace,Teddy Forstmann, and Frank Stanton.

The “CEO study”, as it was called, was a study of integrity, of the way in which personal spiritual convictions about “the good” are integrated with the multiple – and sometimes contradictory – definitions of “the good” embedded in professional, organizational, and public life.

More specifically, it was an examination of the moral values and visions – including their wellsprings, modes of replenishment, and forms of expression. I was particularly interested in learning about the ways in which their values and visions find their way into business policy and practice, as well as public leadership.  The rationale was that decisions about flows of capital, ideas, and images have a powerful public influence, both affecting and reflecting the quality of our civic life.

In a climate of concern about declining moral standards and ethical values, I wondered how a group of people with large amounts of institutional, financial, and intellectual power at their disposal think and act regarding spirituality and civic moral responsibility.  I became curious about how they could reconcile their obvious material and vocational success with the non-economic values so essential to human well-being.

In addition to their substantive answers, what I learned was that this was not a question often asked, and that each and every respondent was more than happy to talk. Even though most of them struggled to find an entry place to their discussion of personal spirituality, soul keeping, and moral identity, they all expressed appreciation for having the chance to think and talk about matters that are so important, yet swept away in the rush of day-to-day demands.

Most of them claimed little affinity to organized religion; indeed, several were critical of Jewish and Christian orthodoxies. Yet religious ideas, images, and institutions were like a moral shadow, a sort of scrim to the scaffold of one’s life story. Crafting a moral compass meant understanding and enhancing that moral shadow, enriched by the teachings of one’s parents and other significant people while growing up.

While the Divinity School study participants’ demeanor and vocabulary couldn’t be considered overtly religious or “churchy,” I did see them all keeping faith, of being “believers”—believers in a transcendent force. Believers in a series of timeless truths regarding right and wrong. Believers in  those values that speak to our most deeply-felt sense of human being, belonging, and becoming. Believers in the virtues of love, dignity, freedom, fairness, service, and truth. Believers in believing— in a world that sometimes seems to be falling apart. They tried to translate their beliefs into practice, to live the moral life.

In fact, months later, several interviewees continued to talk about the importance of the interview to them, personally—in some cases, telling friends and associates how it provided revelation into areas not previously understood.

And this was almost 20 years ago! So what does that mean for today? Why should today’s business leaders be any different? Indeed, I don’t think they are that much different from those I interviewed.

Reviving Banking Leadership and the Fiduciary Ethic

From rules-based to values-based reform │ Last April, an important report on restoring trust in capital markets was issued by the Group of Thirty (G30). The G30 is a private, nonprofit international body comprising prominent individuals from the private and public sector, and academia. In Toward Effective Governance of Financial Institutions, the G30 called on boards to do more to strengthen governance, and that moral values influence the behavior of those with governance responsibilities. The key to reform is to promote change in how these individuals think about their responsibilities—and act accordingly.

“Values and culture drive people to do the right thing even when no one is looking,” said Lord Adair Turner, chair of the U.K.’s Financial Services Authority, in the G30 report. “They are the “ultimate ‘software’ that determines the behaviors of people throughout the financial institution and the effectiveness of its governance arrangements.” (Nota bene: It’s not that he’s against regulation; on July 1st Lord Adair reiterated his call for tighter laws against banker misbehavior.)

The CEO │The CEO embodies the purpose of the company, and stands for an idea—the core idea behind the company’s activities, a way of thinking that defines the work of all the company’s employees, and a culture that includes its corporate values, connecting the company to the larger society, writes economist and best-selling author Robert J. Shiller in his wonderful new book, Finance and the Good Society.  The CEO represents a promise between the firm and its stakeholders that its purpose will be fulfilled, its mission at the forefront of strategy and execution.

Because the path is filled with ambiguities, biases, and distortions, the leadership challenge is to achieve what former HSBC Chairman Stephen Green calls “good value”, an ongoing process that follows certain guiding principles.

Green, who’s an ordained minister in the Church of England as well as a “Lord”, currently serves as Britain’s Minister of Trade and Investment. His reflections on seeking a moral compass in banking are contained within his Financial Times best-selling book, Good Value: Reflections on Money, Morality, and an Uncertain World. Green says that although these principles are not new, in our current globalized era they are more relevant and urgent than at any previous stage in human history.

These guiding principles include integritytreating others(colleagues and customers) as ends, not just as means; ambitionlife balanceleadership; and, what he considers “the one that underpins them all, being able to look ourselves in the mirror and ask two questions about our role in the global bazaar: “How is what I am doing contributing to human welfare? And why specifically am I doing it?

The Board of Directors │ This “human metric” applies not just to CEOs, but to boards, too. Through its composition, boards play an important role in fostering values-based dialogue and culture. They’re also custodians of a firm’s reputation and license to operate.

“The role of the board is to ensure that the proper people with the proper value systems are in place and that the corporation has an ethical environment worthy of its shareholders’ trust,” write governance experts Pat Canavan and Thames Fulton in a recent National Association of Corporate Directors (NACD) blog, “Whatever Happened to Values-Based Corporate Governance?

Barclay chair Marcus Agius’ resignation signaled board culpability when the Libor scandal broke, but now that he’s back, what comes next is less clear. Director boards feature numerous overlapping memberships, comprising an “establishment web, a hard-wired network of interests intertwined with regulators and ethics-setters,” writes Guardian columnist Polly Toynbee. “A thorough sacking would send an electric culture-change signal.”

Institutional Investors │ Many people believe that investors served as enablers of the financial crisis, given structural deficiencies, short-term incentives, and passivity. As long as they were happy, few questions were asked about the manner in which superior profits were generated or what risks were being taken. Fortunately, the U.K. 2010 Stewardship Code emphasizes the important role played by institutional investors and their governance. And even though last October’s proposal for a collaborative investor engagement initiative aimed at banks went nowhere, this year the idea likely will find more support from groups such as the International Corporate Governance Network (ICGN) and the U.N.’s Principles for Responsible Investment (PRI). This area has long been overlooked, and is ripe for reform.

Ethical Climate Change: Some First Steps

Let’s get back to my friends and colleagues, ShoreBank co-founders Ron Gryzwinski and Mary Houghton. I asked them last Monday, before the plot thickened, what they would recommend to Barclays board.

“How about encouraging the board to listen to Stephen Green‘s advice, and to Lady Susan Rice?” Houghton wrote me in an email. Rice, an outspoken proponent of responsible investment and ethics in the profession, spoke last June about the “hows” involved with restoring an ethical climate of trust, which involves values and behavior. She’s the managing director of Lloyds Banking Group Scotland, and chairs the Chartered Banker Professional Standards Board (CB-PSB). More on that in a minute.

“And listen to the New Economics Foundation and current state of their several projects.  This would be like an education session before they begin the search.” Houghton also said the board could take to heart the “very strong” public statements made on June 29th by Sir Mervyn King, governor of the Bank of England. The Guardian called them King’s “most scathing attack yet on the culture of banking in the five-year-long financial crisis.”

“I had a similar thought about hiring Green as an advisor to the board during the selection process. I also thought about adding an ethicist to the board and a couple of women if they don’t have any,” wrote Gryzwinski. “The whole question of board diversity should be examined.”

He went on to talk about something else, near and dear to his heart. “The board could adopt a Code of Conduct (Oath?) for the entire organization prior to hiring.  If Seventeen magazine can do it (today’s NYT biz section) why shouldn’t a bank?

That Code would include a statement about medium and long term increase in shareholder value and tie employee incentive compensation to that longer term increase in shareholder and STAKEHOLDER value! If they did that they would dramatically increase market share because they would discover that many orgs and people would prefer to do business with a bank that is an ethical leader if it also delivers customer satisfaction, or better, customer delight like Apple or the Japanese auto companies did until Obama “bought” General Motors and freed them from their imagined traditional restraints.

A Code of Conduct │A bankers code of conduct is central to the work of the Chartered Banker Professional Standards Board (CB-PSB). Launched in October 2011, the CB-PSB is a voluntary initiative of 9 leading UK banks and the Chartered Bankers Institute, world’s oldest banking institute (1875). It aims to “enhance and sustain a strong culture of ethical and professional development across the UK banking industry by developing a series of professional standards at Foundation, Intermediary, and Advanced levels”. The CB-PSB developed and published the 7-point Chartered Banking Code of Professional Conduct, “which sets out the values, attitudes, and behaviors expected of all banking professionals.”

On July 2nd the group released its first Professional Standard – the Foundation Standard for Professional Bankers (Foundation Standard), also a first for the industry. The Foundation Standard supports individuals and organizations in applying the Code of Conduct by detailing expectations of all banking professionals in relation to two broad areas: knowledge and skills; and professional values, attitudes, and behaviors. It includes knowledge, skill, and performance indicators to assure the Standards is met, and guidance on related learning and development activities.

While the fate of this group’s work is uncertain, it’s a giant step in the right direction. We need something similar in the U.S.

Indeed, the challenge for rest of us – investors, depositors, employees, intermediaries, policymakers, regulators, the media and educational institutions – is to demand and enact a better climate in which the ethical beliefs and values of CEOs, governing boards, and capital investors can flourish.

And the challenge to CEOs and governing boards is to foster a better climate in which the ethical beliefs and values of the firm can be embedded in business operations, relationships, and all forms of accountability.

It means understanding and enhancing the moral shadow, so that leadership and the fiduciary ethic are revived, to the benefit of all.


A special word: There’s a lot of great material to help you understand the Libor scandal. In a separate post accompanying this one, I identify some of my favorites.

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