Joe: Moves to Change Culture in Banking Sector Are Welcome

The Central Bank has just published its report on culture in the Irish banking sector, concluding that cultural “failings within the banking sector … caused detrimental and in some cases devastating impacts on consumers. … [I]t is clear that consumer-focused cultures in the banks remain under-developed, and that banks need to over-come obstructive patterns of behaviour in order to transition to maturity”.

There is no shortage of examples of a rotten culture of illegality in the Irish banking sector. In the 1970s and 1980s, both Irish Trust Bank and Merchant Banking failed because bankers had run the companies in a cavalier and irresponsible manner with little regard for consumers.

Depositors with Irish Trust were lucky enough to be compensated by the government, despite objections to this reimbursement by the Central Bank (which, ironically, was supposed to protect customers). Depositors in Merchant Banking, however, were not so lucky; they lost their savings.

In the 1990s, it emerged that the state-owned National Irish Bank (NIB), among others, had been facilitating tax evasion through bogus non-resident accounts. A parliamentary inquiry concluded in 1999 that the evasion was an industry-wide phenomenon.

More recently, the financial crisis in Ireland was caused, in part at least, by a culture of irresponsible and speculative lending that fuelled a property bubble. Furthermore, the recent tracker-mortgage scandal, in which customers were forced to overpay the rate of interest on their mortgage, causing them significant financial strain, will cost banks €1 billion in compensation and expenses.

Gathered together, Irish banks have demonstrated a long history of prioritising their own short-term financial goals at the expense of customers and taxpayers.

The goal of this new report on banking culture is to re-engineer leadership practices and decision-making processes so that the interests of consumers will be taken into consideration. Changing culture is an incredibly difficult and ambitious objective.

The difficulty is that organisation culture is mostly invisible. The observable features of culture (management decisions and internal communications) are just the tip of the iceberg, but much of what informs these behaviours (group dynamics, market forces, the regulatory environment, etc.) remains invisible and intangible beneath murky waters.

Wading into these depths, the review concluded that banking leaders are too directive and commanding in their style and insufficiently collaborative. Less senior staff members are insufficiently empowered to contribute their perspectives, especially where those contributions may challenge groupthink. Moreover, the question of how corporate strategy will impact customers is often an afterthought, rather than a proactive planning consideration.

As part of a suite of measures to promote a better operational culture, which protects and prioritises consumers, the Central Bank has proposed, in the first instance, that banks should be more diverse and inclusive spaces in which better, more informed decisions may take place. Secondly, they propose reforming the law to make it easier to hold managers individually accountable.

With regard to the first limb, the Central Bank called on bankers to ensure “their organisations are sufficiently diverse and inclusive, particularly at senior level, to prevent group think, guard against over-confidence, and promote internal challenge”.

At present, however, a significant majority of senior managers tend to be older white Irish men. This is not a peculiarly Irish phenomenon; many boardrooms in other jurisdictions are often considered “male, pale and stale“.

Nevertheless, there has been a significant volume of research which suggests that greater ethnic minority and female representation in boardrooms has a positive impact on corporate performance and corporate governance. In particular, women tend to be more attentive monitors than their male counterparts and have fewer attendance problems at board meetings.

With regard to the second limb, the Central Bank seeks to enhance its architecture of regulatory enforcement. In particular, it argues that legislation should be introduced to make senior managers clearly specify their responsibilities and make them more accountable for their individual actions. They will have a legal obligation to make sure that they take all reasonable steps to ensure that their area of business is complying with all relevant legal requirements.

It is hoped that the greater emphasis on individual accountability will make bankers “own” their responsibilities, force them to treat customers better, and drive good governance and cultural change.

These recommendations, which are based on the Senior Managers Regime in the UK, were proposed in this column six months ago.

Enhancing the regulatory framework on individual accountability will require legislative change. Meanwhile, the Corporate Governance Code already requires banks to consider appointing more diverse candidates to senior positions, and has done so since 2013, albeit with disappointing results thus far. The reticence to voluntarily appoint more women to these roles might now, however, prompt a conversation as to whether gender quotas might be an appropriate next step.

Gathered together, the Central Bank’s attempts to change banking culture draw on behavioural studies and international best practice. They go beyond attempting to steer mere strategy and policy but rather entirely redesign the context within which those decisions are formulated. Recognising the adage that “culture eats strategy for breakfast”, the Central Bank has given bankers something significant to chew on.