Knowledge Center: Article
How Organizations Can Restore and Maintain Trust7/21/2014 Cathy Powell
There are special factors about banking that in retrospect made eye-popping industry turbulence seem almost inevitable. Originating with the U.S. housing market bubble, the financial crisis, with the demise of Lehman Brothers, reached global dimensions, eventually causing losses in excess of $2.3 trillion.
Hugo Banzinger, in his Insight column in the Financial Times, wrote, “the root causes were loose monetary policy, incomplete regulation, over leveraged banks, investors’ search for yield, the reckless selling of products and the globalization of finance. Governments had to inject vast sums of capital to prevent the collapse of the banking system.” The human consequences of the financial crisis were far reaching – hundreds of thousands of jobs lost, massive cuts in public spending that impacted the most vulnerable in society, millions of homeowners impacted by falling house prices, pension funds reduced, savings obliterated, people having to work longer before retirement – the list goes on. And above all, as banks emerge from the crisis by rebuilding their businesses and capital, and governments slowly recover some of their bailout money, the public’s perception of bonuses for failure and mis-selling mean that regaining the trust of the public, investors and their employees is still a long way off. Looking beyond Banzinger’s root causes, were there other ‘soft’ factors inherent in those organizations that pre-disposed them to failure?
As someone who has worked for 20 years in the field of organizational health, what I noticed most when I moved from the retail sector to retail financial services in the late 1990s was that strong financial performance was not dependent on high levels of customer satisfaction or employee engagement. Branches could be highly profitable without high customer satisfaction. A branch achieving above 70% customer satisfaction rates was considered to be a star performer (and in some retail banks they still are).
Customer inertia, largely due to fear of things going wrong and the hassle factor of transferring to a new bank, means that customers put up with poor service they would simply not accept in other sectors. Until recently, retail banks enjoyed a sub-10% customer churn rate. According to recent research by Pitney Bowes, retail banking customer defection rates are now estimated at 18%. The banking industry would be well warned to keep a close eye on customer loyalty.
Loyalty depends on trust. Many retail banking customers still have lower levels of financial awareness and are less prepared to exercise their ‘buying clout’. This puts them in a vulnerable position, placing huge emphasis on the seller to play the role of ‘trusted adviser’. Many retail banks exploited this position and are now paying the price in terms of massive fines for miss-selling personal protection insurance on loans. The damage to their brands is yet to play out.
In other industries, if you provide poor service or your products aren’t competitive or you betray customer loyalty, you feel the effect pretty quickly. In retail banking, the disconnection between profitability and customer satisfaction buffered the banks from reality. Low customer churn rates and weak customer expectations further fueled complacency and led to a sense of invulnerability in the senior leadership.
We now know that many frontline employees in retail banks were telling their employers that they felt pressured to sell PPI (Personal Protection Insurance) when it was not in the customer’s best interests. Why could their voices not be heard?
It is also now well established that before the financial crisis, risk directors were voicing serious concern about their organization’s lending policies. While highly leveraged remuneration policies clearly played their part, what was it about the values, style of leadership, and the prevailing culture in the industry that led highly intelligent people to ignore these warnings? What created the conditions for mis-selling that led to massive fines, further loss of trust and the loss of billions of dollars of shareholder value? Could this have been avoided if banks had more open and accountable cultures? But the lessons from this devastating period of economic history are not limited to banking.
THE FIVE TESTS
In our work with banks, insurance and asset management companies, capital intensive engineering operations and the extractive industries, we have distilled five tests of whether an organization is running towards a cliff edge of unmanaged risk. Answer these questions yourself on a 0-10 scale.
Test 1: Do your customers really love you? 0 – 10)
If your customers are staying with you because they have nowhere else better to go you are creating your own precipice. Find out the root causes of customer dissatisfaction and fundamentally shift your operating model to address them.
Test 2: Do you understand your business? (0 – 10)
Complexity is the enemy of risk management. If your business processes or structures are so complicated that only a few people can understand their intricacies you are not in control of your own destiny.
Test 3: Are there dead elephants under your table? (0 – 10)
From Enron’s much documented demise to Northern Rock’s risk management policies through Shell’s overstatement of reserves to Toyota’s quality problems one fact shines through….people knew, people spoke but leaders didn’t listen. Is your organization a place of truth telling?
Test 4: Have you built the integrity muscle? (0 – 10)
Much has been made of Barclays sending people on citizenship courses. Perhaps a little too late? You don’t build resilience and stamina by going to the gym a week before the marathon. A few good role models are worth a hundred citizenship courses. The DNA of integrity, trust and honesty has to be built over time and above all role modeled from the top.
Test 5: Are you holding true to your purpose? (0 – 10)
Truly healthy organizations have a strongly shared purpose. It goes beyond making money. It appeals to our higher selves. In unhealthy organizations purpose is subordinated to ego. When egos of a few are allowed to dominate, and leadership resembles a monarchy, royal messes are sure to follow.
If you score less than 20, grab some senior colleagues and get busy. Trust takes time to win and seconds to lose.