Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)
Speaker: Peter Montagnon, Associate Director, Institute of Business Ethics
Chair: Adam Bennett, St. Antony’s College, University of Oxford
The PEFM series has tackled culture and finance repeatedly over the past year. And the industry itself hasn’t been silent on the question of culture. Barclays, for instance, launched the ‘Transform’ programme to restore trust in the bank and place its values at the centre of its operations.
But are attempts to reform culture genuine? And can they have an impact? In early May, PEFM hosted Peter Montagnon, Associate Director of the Institute for Business Ethics to discuss rebuilding trust in banks on the basis of cultural change.
Montagnon’s core point was a simple but important one: culture must be understood as belonging at the heart of business, not a peripheral PR gloss. Culture, in the Institute for Business Ethics framework, is made up of core values, the ethics they imply, and the conduct that follows from those ethics. The values of a company set the tone for the behavior of all employees.
The core values of a corporation should be at the root of its business plan. In fact, Montagnon argues that all corporations already have business plans based on a set of principles. The problem arises when those principles haven’t been consciously chosen to reflect the values and morals of the business. Companies with track records of bad behavior are implicitly resting on bad values. Clearly and explicitly connecting the business plan to the intended values of the company will have a direct impact on conduct.
What does this mean, practically? For one, managers should set reasonable expectations at the business unit level. Montagnon cited a study that found 69.7% of unethical behavior in business (business broadly, not just finance) is driven by unrealistic business objectives or deadlines. Under pressure, driven by demanding expectations, employees may be more likely to make ethical compromises.
Ensuring a coherent corporate culture requires engagement all the way at the top. Boards should be actively following questions of culture within companies, and should have the courage to replace a chief executive or other senior management if they are failing to champion the true values of the company.
Internal audits can be a useful tool in ensuring the cultural integrity and coherence of corporations, says Montagnon. Auditing culture may seem strange; how to quantify values and ethics? But there can be important indicators of weaknesses in culture, Montagnon says. Auditors should look not only to actual ethical violations, but also to other signs of weak culture or low morale: high staff turnover, reports submitted late, or structures of reward that misalign incentives.
Exit interviews can be critical moments to glean an unvarnished insight into behaviour. Montagnon also thinks shareholders can do more to check up on culture. By asking questions at shareholder meetings, for instance whether the board regularly checks compliance with the firm’s code of conduct, or what arrangements are in place for whistle-blowing.
Montagnon’s view on cultivating trust in banks is fairly sympathetic to the industry. Though pointing out examples of gross misconduct, he cautioned against further regulation, or ‘over-regulation’. In fact, he suggested that regulation could be counterproductive for encouraging trust in banks, arguing that regulation implies distrust and the need to police behavior.
To pitch improving culture as an alternative to regulation, as Montagnon was at times doing, conflicts with the mainstream view that rules don’t necessarily imply distrust, but rather create a framework in which trust is credible. From this perspective culture and sound regulation should be seen as complements rather than substitutes.