Banking StandardsWritten evidence from the Chartered Institute of Personnel and Development

Background

1. The CIPD represents the HR profession and is the leading independent voice on workplace performance and skills. Our primary purpose is to improve the standard of people management and development across the economy and help our individual members do a better job for themselves and their organisations.

2. Public policy at the CIPD exists to inform and shape debate, government policy and legislation in order to enable higher performance at work and better pathways into work for those seeking employment. Our views are informed by evidence from 135,000 members responsible for the recruitment, management and development of a large proportion of the UK workforce.

3. Our membership base is wide, with 60% of our members working in private sector services and manufacturing, 33% working in the public sector and 7% in the not-for-profit sector. In addition, 76% of the FTSE 100 companies have CIPD members at director level. We draw on our extensive research and the expertise and experience of our members on the front-line to highlight and promote new and best practice and produce practical guidance for the benefit of employers, employees and policy makers.

General Comments

4. Recent events in UK banking have profoundly destabilised public confidence in the sector. The behaviour of bank bosses and senior employees of financial institutions has been roundly condemned, with the Treasury Select Committee’s recent report on LIBOR branding recent behaviour “disgraceful”. We agree with this assessment but stress that the problem extends beyond particular individuals or institutions:

Recent events in UK banking have generated significant criticism from many quarters, but CIPD research points to a breakdown in workplace trust preceding the financial crisis and existing across most industry and public service sectors.

These events have highlighted to many that failures in the system are as much, if not more, due to leadership and what had become acceptable corporate behaviours and cultural values, as they are due to the regulatory framework.

It is not possible to legislate for culture change, but it is important that better codes of practice, better leadership development and definitions of corporate values that employees at all levels can be held accountable to are promoted and strongly encouraged.

The HR function has a critical job to do in this respect as the function responsible for understanding corporate cultures and leadership behaviours, and promoting the practices and interventions required to change corporate culture over time.

It is also critical that HR leaders have the insight and ability to educate and where necessary to stand up to the leaders of the business in challenging behaviours that are out of step with espoused values.

5. It is apparent that there is already some consensus for change and action among the banking community and beyond to achieve a decisive shift in behaviours and values, but this will take time. The Lord Mayor’s “Restoring trust in the City” initiative and the set up of the City Values Forum is evidence of a wider interest in encouraging organisations to operate to a higher standard, incorporating performance against values and behaviours alongside the financial considerations. Solutions to this problem will require efforts from a range of stakeholders including regulatory bodies, professional institutions in the sector, business leaders, HR and behavioural experts, together with government:

Government and the financial service regulators must ensure that there are structures in place to facilitate a more sustainable business environment, by encouraging businesses to report on human capital metrics and holding financial institutions to account by shining a light on both best practice and wrongdoing.

Businesses and business leaders must aspire to higher standards in their operations, by consistently demonstrating the right values in their own behaviours, communications, and actions, and by utilising their HR teams to understand and reinforce the leadership development and people management processes necessary to sustain the right corporate cultures aligned with their business strategy.

The professional institutions in the financial services sector such as the Chartered Banker Institute, the BBA, the Chartered Institute for Securities and Investment, and the City HR Association should all play a part in setting standards of behaviours or codes of practice, working with other relevant bodies including academics with deep understanding of behavioural change.

We now turn to address the specific questions outlined in the terms of reference.

Question 1: To what extent are professional standards in UK banking absent or defective? How does this compare to other leading markets, other professions and the historic experience of the UK and its place in global markets?

6. The term “professional standards” can be understood in two ways: firstly, as tangible professional standards as they relate to specific technical competencies and skills; and secondly, as they relate to standards of behaviour and practice. Both can be said to have been somewhat absent or deficient in UK banking in recent times, but it is important to differentiate between the two; because whilst the former relates to something tangible that is either present or absent at a particular time, the latter relates to the “culture” of an organisation or sector, which is more deeply ingrained and shapes its outlook, operations and interactions.

7. “Culture”, for these purposes, may be understood as a set of collective behaviours, attitudes and assumptions that shape the way an organisation operates, and how it is perceived both internally (by its staff) and externally (by its clients and the public). The CIPD does not believe it is possible to legislate for culture change. We agree with Sir David Walker’s assertion, that behavioural change is needed and that this is unlikely to be achieved through legislation. It is more likely to be accomplished through clear identification of best practice and non-statutory routes.

8. The destructive culture evident in some banking organisations results from:

A singular focus on financial gain and business growth, with a tacit if not explicit disregard for how that growth is achieved thereby setting a tone within the organisation that can encourage rule-bending and dysfunctional behaviours in pursuit of high personal and collective rewards.

Disproportionate risk and reward, where high levels of reward outweigh understanding or perception of risk by individuals or groups. This issue has been present for a long time and continues to grow.

A lack of focus or understanding by organisations about their people, their behaviours, and the emergent corporate cultures that have been at the heart of the current problems. Almost all financial institutions espouse corporate values that include integrity, but without clear definition and accountability, it carries little weight in influencing behaviours. Performance management practices that take little account of behaviours vs results, and leadership that is not consistent in reinforcing the right behaviours, and doesn’t listen to or take action on wrong behaviours, all are part of creating an inappropriate culture.

9. Traditionally, the corporate culture in the UK and how it is perceived around the world has always stood as a high standard for ethical business practices. In our research work on trust and corporate values, this has consistently been observable, but there is now a recognised diminution in the perceptions of behaviours in the UK banking sector. Surveys on trust such as the Edelman Trustbarometer show declining trust and belief in all types of businesses doing the right thing. This has been impacted by behaviours of all kinds of leaders in all kinds of sectors. Against that context, the route back to higher levels of trust in the banking sector is much harder.

10. However, there are many examples of positive corporate role models in how values are expressed, purpose is clear and understood to be more than just enriching the corporate stakeholders, and leaders are held accountable at all levels for properly representing the values and expected behaviours. These provide positive case studies of what can be accomplished, but cultural shift can only start from the top and it is ultimately the top corporate officers who have to be held responsible for the cultures that exist in their businesses.

11. As the representative body for the HR profession, we aim to develop standards and insights on best practices and to disseminate these through HR practitioners who develop and enable the processes and practices that reinforce corporate cultures. We encourage codes of practice and behavioural standards in the HR profession itself through both our Profession Map and our Code of Conduct. In this vein, we are working together with and welcome the work of the Chartered Banker Institute and the City Values Forum in developing a set of professional behavioural standards for those working in financial institutions. Articulating, disseminating and driving best practice will be vital in achieving sustainable change for the better, and professional standards and codes of conduct have a key role to play in this.

Question 4: What caused any problems in banking standards identified in Question 1?

Culture

12. The CIPD believes that the underlying factor contributing to the problem in banking standards is one of culture, where excessive focus on financial gain has often come at the expense of a more sustainable, responsible business outlook. This culture can be most identified in the investment and commercial banking operations, but there is also evidence of a “bleed” across into retail banking arms for example in the inappropriate selling of mortgages and other financial products.

13. This emergent culture is due on the one hand to a loss of sight of core purpose—an intensive focus on making money for the institution and its shareholders without an adequate alignment to a broader social and economic purpose. Perception of an organisation’s purpose directly affects the way its staff behave—if employees see the purpose of their company, and their own role, as only to generate profit, then this is what they will aspire to achieve. It also serves to incentivise risk-taking among employees seeking huge financial rewards and recognition as “top talent”.

14. This culture has gone unchecked for so long as to become accepted as “conventional wisdom”, with the attitude that this cannot and will not change—which is attributable in part to the lack of influence and focus of the HR function in these institutions. Organisations need to re-evaluate their purpose—placing importance on the social value of what they do, as well as the financial—and re-considering their duty to their stakeholders, not just their shareholders. This purpose, and corresponding values, must be clearly articulated to employees, who in turn must be engaged and committed to these. There must be channels for employee voice and staff should feel able and supported to challenge wrongdoing when they witness it.

Remuneration

15. Remuneration practices based on incentives to keep so-called “top talent” have established disproportionate financial rewards in critical areas of the banking sector which have not only led to rewards for failure, but have incentivised the sort of behaviours that led to the financial crisis and have damaged trust in the financial system. Furthermore, the way that remuneration practices are devised and implemented have further entrenched the problem. Risks relating to reward have not been adequately assessed or managed, and many organisations have reported difficulties with the implementation of their reward practices.

16. This high remuneration culture in specific areas of the banking sector have become systemic to the point where individual institutions are extremely fearful of changing their practices or policies for fear of losing their people. Tackling this issue would likely require stronger regulation or intervention unless voluntary alignment across the sector could be achieved.

17. CIPD research exploring reward professionals’ approach to remuneration shows that the majority of organisations prefer pay confidentiality to transparency. In addition, many organisations have difficulty linking remuneration strategy to their overall business strategy, and communicating performance standards to their employees. The good news is that some organisations are aware of these problems and are taking steps to address them—69% of organisations we surveyed reported being prepared to manage reward-related risks in the future. However, more needs to be done by individual organisations and the sector as a whole.

Recruitment and retention

18. A further consequence of the perception of the banking industry has been the effect this has had on recruitment and retention. A somewhat self-reinforcing, monolithic working culture has been created, with the same types of people recruited time and again. This is due in part to the low value that has been placed on diversity throughout the sector as a whole, and in part to “self-deselection” from the recruitment process by those who either believe that they do not possess the characteristics required to succeed in the sector, or feel that it is not for them. The consequence of this is the reinforcement of “groupthink” that results from lack of diversity and diverse ways of thinking and approaching problems.

19. Lack of diversity in recruitment is reinforced by rewarding the same behaviours and personality types based on delivery of financial performance above all, and leads to lack of diversity up through the organisation. This is manifested for example in the relative lack of women in mid to senior levels of the banking sector.

Performance management

20. Good management is crucial to the success of any organisation. The way people are managed, their skills utilised and how they are driven to succeed has a great impact on behaviours and business outcomes. However, when it comes to management capability, the UK lags behind its key international competitors in implementing good practice. This is no less true when it comes to banking. Too little attention and resources are focused on development of good leadership and people management skills, and this has to be addressed as part of the solution. Behavioural codes of practice, proper alignment to good corporate values, must be reinforced through measurement and holding people accountable.

21. CIPD research has highlighted that firms with a more qualified management workforce and dedicated programmes of management development perform better—this is not only a question of treating employees well. Banks and financial institutions must pay greater attention to the people management skills and leadership capabilities of their managers, and invest in training and skills development in this area, to build the foundation for lasting sustainable business activity.

Question 5: What can and should be done to address any weaknesses identified? To what extent are such weaknesses subject to remedial corporate, regulatory or legislative action, domestically or internationally?

22. We reiterate that we do not believe it is possible to legislate for culture change, but that it is possible to identify good practices, to encourage investment in the embedding of these practices, and to enhance human capital measurement and reporting to hold corporate leaders more accountable. Culture change must start from the top.

Government and regulatory authorities

23. It is not the role of government or regulators to tell CEOs how to manage and reward their people, but they can challenge and insist on the implementation of better standards of practice. A key task will be to continue to hold banks and financial institutions to account by shining a light onto both best practice and wrongdoing. It will also be important, in the interest of securing sustainable business practice, to enable frameworks that facilitate a more sustainable business environment. The Employee Engagement Task Force was a welcome step in the right direction—the challenge now is to ensure that the thinking behind it is sustainable and that it is translated into action.

24. Encouraging or requiring more consistent reporting of organisational and human capital metrics that provide more visibility on how an organisation is focusing on its people and understanding cultural and organisational dynamics would be a significant way of reinforcing change. In the CIPD’s view, the Revised Guidance for Directors on the Financial Reporting Council’s combined code (UK Corporate Governance Code) should be updated to highlight the importance of effective public reporting of Human Capital Management (HCM) metrics. HCM information can show how an organisation recruits, develops, rewards and manages its people, its leadership pipelines and capabilities, and aspects of culture and workforce engagement, and how this underpins sustainable, rather than short-term organisation performance. Investors with better information on the importance of HCM to long-term shareholder return are more likely to ask critical questions of business leaders and put a premium on best practice.

Business leaders and Corporate Governance

25. Business leaders must acknowledge their vital role in driving behaviours and culture, and seek to understand the cultures and norms that have emerged in their businesses. Externally, there is a need to develop a stronger sense of their purpose and wider appreciation of their stakeholders. Internally, working through their HR functions they should devise and implement effective and consistent management and leadership practices that embody the right values and behaviours.

26. Boards must also demand more understanding and information on the organisational and cultural dynamics and behavioural norms, backed up by better human capital metrics. Experience of positive business cultures and how to manage cultural change should be sought out in Board members who can ask the right questions and challenge the corporate management.

27. Evaluation, reward and selection of corporate officers through the Board and the Board sub-committees should pay much closer attention to behavioural styles and understanding, and it is critical to ensure that the necessary experience exists on Boards to make these judgements.

28. Leaders and Boards must continue to address the problem of excessive and misaligned remuneration practices. These must be re-examined in light of the organisation’s values and sense of purpose and properly aligned with these. CIPD employer guidance on managing reward and its associated risks is available from our website. Although problems with remuneration have become entrenched over time and will be difficult to change, things can change, if there is a concerted and deliberate effort on the part of organisations to “move as one” and act together.

29. Finally, it is crucial, in banks as for any organisation, to ensure that there are proper channels in place for employee engagement and employee voice, and that this is visible to senior leadership. A healthy workplace culture must allow, and indeed encourage, challenge and criticism—particularly where this relates to irresponsible practices or wrongdoing. Some businesses already include consideration of these issues in their company reports—other businesses might wish to consider doing this as well. Government may or may not wish to legislate on this in due course.

HR practices and the HR function

30. The HR profession also has a vital role to play in driving and sustaining good corporate governance, including risk management, remuneration, recruitment, retention and employee voice. The role and capabilities of HR needs greater attention from businesses, which has historically been lacking. Businesses and business leaders often get the HR they deserve by the value and attention they place on it. HR needs to be held to account in understanding and enabling the development of good corporate culture, and will need to respond in ensuring it can confidently express this in business risk and value terms.

31. As the representative body for the HR profession, the CIPD will continue to encourage and drive innovation and best practice through our membership, holding the profession to account and supporting our members to become the business-savvy, insight driven professionals modern organisations need.

32. We are working with the City Values Forum, the Chartered Banker Institute and the City HR Association to promote professional standards in the City. We support the Chartered Banker Institute’s Foundation Standard for Professional Bankers and hope that organisations subscribing to the Standard will be held to account for their performance.

33. Crucially, if these things can be done right in banking, where they have been deemed to be at their most serious and difficult to address, then there is the potential to drive good and sustainable practice and competitive advantage across a wider range of business sectors.

References

Chartered Institute of Personnel and Development, Code of professional conduct, July 2012.

Chartered Institute of Personnel and Development, Good management: A new (old) driver for growth?, October 2011.

Chartered Institute of Personnel and Development, Human capital management: Introducing and operating human capital management processes, September 2008.

Chartered Institute of Personnel and Development, Managing reward risks: An integrated approach, October 2009.

Chartered Institute of Personnel and Development, Reward Management, May 2012.

Chartered Institute of Personnel and Development, Reward risks, November 2011.

Chartered Institute of Personnel and Development, View from the City: How can human capital management and reporting inform investment decisions?, November 2010.

Chartered Institute of Personnel and Development, Where has all the trust gone?, March 2012.

28 August 2012

Prepared 19th June 2013