Culture and the financial sector’s “H factor”
Trust is a powerful relational and social axiom historically associated with the financial sector. Business contracts, like social contracts, require trust. Among the most important social contracts is that between the banker and the customer. Whether a customer is obtaining a home mortgage, financing cash flow or acquiring a business, trust is a core element of the relationship. Yet distrust for the financial sector looms large today. Dynamic financial-sector management and board leaders are responding by advancing efforts to restore the trust in the social contract. The human, or “H”, factor within financial organizations in this social contract is essential to successfully rebuilding trust and creating sustained economic growth.
Perpetuation of distrust
Leaders within the financial sector presently possess extraordinary influence and are in a unique position to create opportunity. The financial sector manages more capital today than ever before. Consider the fact that the top 500 asset managers influence more than $50 trillion globally. (By comparison, the 2019 US government budget is $3.8 trillion.) With projected global growth estimated to be 25 percent from 2017-2022, the opportunity to creatively invest in profitable areas that grow and benefit the community is significant.
Part of the challenge for the financial sector is that today, the top 5 percent of households own more wealth than the bottom 95 percent combined, with the financial-services sector paying the highest average wage rates. The fallout due to the highest paid sector allegedly causing the financial crisis has perpetuated a culture of mistrust towards the industry.
The vision of a truly great capitalist society is of one that wisely manages risk in order to maximize the financing of human endeavors. Investing in our fellow humans has steadily brought us out of financial crises in the past and particularly since 2012. Capitalism for the few is a narrow-minded, weak social model. History is replete with stories of visionary leaders, such as Ada Lovelace, who invented the first computer program, and Colman Mockler, who led Gillette for 15 pivotal years. Visionaries such as these inspire others to improve the conditions implied within the social contract, grow businesses and in doing so, promote prosperity for all.
For the financial sector, finding ways to efficiently finance additional growth and create jobs will contribute towards reducing poverty and thereby build goodwill and trust. The United Kingdom and the United States each have approximately 5.7 million private-sector businesses, the majority of which employ less than 500 employees. Directing the 25-percent expected growth towards building communities, financing new business ideas and capitalizing growth will reduce economic disparity. Promoting an H factor of empowering and educating humans to improve their standards of living demonstrates impactful leadership.
Culture and the H factor
The H factor in finance is at an inflection point. Customers are again beginning to trust financial-sector leadership. However, if the prevailing leadership returns to the pre-2008 business model, the trust factor may be destroyed for future generations. Nurturing and fostering a culture within its organization and with its customers that promotes a trust-based social contract is the responsibility of every financial organization’s directors and officers.
What challenges do financial companies face in ensuring that past mistakes arising from a toxic culture of greed and selfishness are not repeated? Technology has fueled many efficiencies and increased the top-end speed of change and disrupted the financial sector, but technology is not necessarily improving culture. A healthy culture arises from face-to-face communication and interaction between humans within an organization. As younger generations continue to show a preference for the use of technology in lieu of direct human interaction, building and maintaining a culture of trust between customers and banks will remain a challenge and an opportunity for forward-thinking leaders.
During the past 200 years, volumes of novels and social studies have examined the depravity and loneliness of greed. Rob Kaplan, CEO of the Federal Reserve Bank of Dallas, Texas (his last job was as a Harvard professor), frequently teaches that happy and inspired employees are the most productive. We are often tempted by the desire for more money and to buy more things, hoping those purchases will improve our lives. What we actually desire is unequivocal confirmation that we are valued. Few of us will lie on our deathbed wishing we’d bought more crap; rather, we will all hope that our lives were meaningful. Inspirational leaders develop human-resources (HR) strategies for work-life-productivity balance and in this way build a culture conducive to happiness.
Leaders in the financial sector teach us, within the context of the social contract, how to manage capital efficiently. Great leaders are honest, humble and give of themselves, and are keenly aware of their leadership responsibilities. Great strategy supported by great culture is an eminent goal. Beginning with the influence of great thinkers such as Peter Drucker in the 1950s, the notion of service and excellence became central to business leadership. Drucker was famous for asking insightful and poignant questions and offering proverbs such as “Start with what is right rather than what is acceptable” and “Management is doing things right; leadership is doing the right things”. This notion influenced the definition of Level 5 leadership first presented in 2005 by Jim Collins in his book Good to Great: Why Some Companies Make the Leap… and Others Don’t. “Level 5 leaders display a powerful mixture of personal humility and indomitable will.”
Ten years later—lessons learned
Since the breakup of Arthur Andersen and the many listed-company failures from 2000 to 2010, corporate governance and leadership expectations have shifted. The board’s role has, is and will continue to evolve. As the average tenure of a public-company chief executive officer decreases, the board’s responsibility of managing business continuity and succession has increased. The board’s role in monitoring strategy and culture has expanded. The H factor is an increasingly significant differentiator. One example is the expanded definition of “our customer”. The updated definition encompasses both the buyer and employee as a part of the company’s customer group. The attraction and retention of talent and buyers have grown to be similar management tasks. Expanding the definition of customer causes leaders to care differently about the culture of an organization. Today’s customers care about workplace diversity, the global environment, sustainability, income equality and, yes, governance.
Ten years ago, discussions of corporate governance were mostly limited to the halls of academic institutions and regulatory entities. Strangely, corporate governance was thought to be mostly or merely legal and rule-centric. This misconception was a failure of business culture at large. Evolved and effective corporate governance includes policies and procedures that provide for both opportunity and accountability, powered by Level 5 leaders. Governance is highly strategic and is essential to elevating and sustaining a company’s culture. In this regard, it is a foundational element of the social contract of trust between customer and firm. A positive “tone from the top” can ignite a culture of continuous improvement that is attractive to employees, customers and the public.
“The times they are a-changin’,” sang Bob Dylan during the 1960s in the midst of global social upheaval and change. Today, we are in the midst of similar change, particularly within the corporate culture. We are making some progress in the boardroom and the C-suite, as the “loser now that will be later to win” is the person of difference who is earning and gaining positions of leadership. But there are still those who, if they don’t “start swimming”, will soon “sink like a stone”; those who are narrow-minded, over 65, pale-skinned and in possession of both X and Y chromosomes—if they don’t “heed the call”.
Leadership, care and governance
Fulfilling the Duty of Care is more than showing up for four board meetings and reviewing financials. Highly effective leaders exercise care on an intellectual, emotional and even spiritual level, as in, “What do you really believe about the business and its contribution to society?” The Duty of Care is a legal board responsibility; caring requires a deeper human level of engagement, including knowing the business well.
The interplay of board and management is among the most important elements of a company’s culture. Furthermore, the interplay of board, management and employee contributes to the fulfillment of the social contract and is intrinsic to corporate governance. Employees may not know their company’s board members and management personally, yet their influence is noticed and often discussed on social media.
Great governance and great leadership are inextricably linked. In his 2019 “Letter to CEOs”, Larry Fink writes, “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” And, “One thing, however, is certain: the world needs your leadership. As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions and communities where they operate, particularly on issues central to the world’s future prosperity.” A well-governed organization inspires the confidence of all stakeholders.
“Culture eats strategy [and governance] for breakfast”–Peter Drucker
A failure of culture is a failure of governance. Wells Fargo suffered 10-figure reputational damage resulting from the misdeeds of bank employees. “It takes a lifetime to build a good reputation, but you can lose it in a minute.” How many terrific ideas have failed due to a founder’s, manager’s or board’s failure to recognize the importance of the relationship between culture and strategy? A company needs the right strategy to thrive, but strategy needs the right culture to succeed. The right culture can be immeasurably impactful.
Like trust and care, neighbor is another word with strong business and cultural implications. “Like a good neighbor, State Farm is there” is that insurance company’s familiar jingle. Crisis often brings us—neighbors—closer together. The rising generation who have entered the workforce within the last 10 years were not impacted by the global financial crisis (GFC) in the same way as their parents. However, Millennials, who tend to choose apps and algorithms over human interaction, will need evidence that a banker or wealth manager is a good neighbor and provides benefit. In addition, this rising generation base their decisions regarding trustworthiness not on face-to-face interaction but on the news reports about security breaches and hacks, their online experiences with companies and postings on social-media channels. These interactions quickly inform their beliefs about a company’s culture.
Changing and emerging consumers are prioritizing culture, and especially where business culture can positively impact social problems. If you want to understand your customer, especially the changing customer, understand their culture.
Cyrus Taraporevala, president and chief executive officer of State Street Global Advisors, said, “We believe that at a time of historic disruption, increased focus on corporate culture and how it supports strategy is essential to sustainable, long-term value creation. This is good for investors…and good for our shared prosperity.”
Our world, and especially the financial sector, is desperate for courageous leaders who will inspire future generations by caring for their neighbor and executing strategies that will grow prosperity among more humans to positively impact global issues for generations to come.
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-  Meet the Millennials, KPMG, https://home.kpmg/content/dam/kpmg/uk/pdf/2017/04/Meet-the-Millennials-Secured.pdf
-  Cyrus Taraporevala, President and CEO, State Street Global Advisors, Corporate Board Member, Culture Matters, Second Quarter 2019