R-E-S-P-E-C-T: How can banks win it back [1]

At a recent banking summit in China, the focus was on how international banks can regain the moral high ground. In response, Norman Chan, chief executive of the Hong Kong Monetary Authority, wrote a piece in the South China Morning Post that argues this will be difficult unless banks move from a shareholder model to a stakeholder focus [2]. At Ethical Systems, we couldn’t agree more.

When companies- especially banks- prioritize short-term profits over the health of their long-term relationships and reputation, they invite ethical problems, long term costs, and the animosity of the general public.

Yet, while the call to action is simple, the steps needed to get there are anything but. Chan outlines a variety of trends that have led to a new type of bank and banker including:
 

  • Less investment of personal monies
  • A decrease in average employee longevity
  • Wider focus on the mass market
  • The addition of investment banking and other activities to their service portfolio
  • Consolidation of local banks into global financial firms

While no one is recommending that we revert banking to how it looked fifty years ago, there is a valid argument for a dual pronged strategy of expanded external regulation and more intensive internal refocusing. Chan advocates for "new regulations dealing with capital buffers, liquidity management, leverage, bankers' compensation, ring-fencing of deposit-taking business from riskier operations and so on" as well as increased internal governance and controls that "are designed to achieve the desired behavioural change across the entire firm." The former is up to governments and regulatory bodies, but the latter will need buy-in from everyone within the organization- especially the owners, directors and management of the banks.

Most important is the overhaul of the internal cultures at the banks themselves (see our page on corporate culture [3]). Chan advises looking backwards to clue us in as to how to behave in the future: "Banks need to...put the interest of depositors and customers ahead of the banks' own commercial interests, just as bankers did in the past." Only this way will a shareholder primacy model be jettisoned for a stakeholder concentration that allows the horizon to define the road. Staying true to customers and values that obviate unethical behavior is the best way for banks to achieve both sustainable success and reestablish the trust and respect they used to command.

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