We live in strange times indeed when the most talked about publication is not a new celebrity biography, prize-winning novel or celebrity chef cookbook, but a report about the technicalities of banks.
Two weeks ago the press headlines were dominated by the Salz review into Barclays and the report on HBoS by the parliamentary commission on banking standards. Usually these reports on banking are little more than a great cure for insomnia but the Salz review and the HBoS inquiry were quite different. They are riveting reads that lay bare the inside story of the financial crisis and have reignited the public debate about what went wrong during the financial crisis.
There are some striking similarities between the Salz review and the report on HBoS. Both highlight the role of a sale and growth focused culture in laying the foundations for financial crises. Both underline the lack of regulatory oversight and emphasise the need to strengthen corporate governance measures.
But the Salz and the HBoS inquiries are two very different beasts. Anthony Salz was commissioned by a bank that was wounded by a series of scandals, but is taking active steps to heal itself. It paints a picture of a bank that was too clever for its own good. In contrast, the inquiry into HBoS was conducted by hostile parliamentarians picking over the corpse of a dead bank and it reveals an organisation marked by deep incompetence.
The HBoS inquiry is a scapegoating exercise. In contrast, the Salz review asks how a living, breathing bank might change its ways for the better.
The Salz review was commissioned by Barclays following the revelation that traders in Barclays, as well as other banks, manipulated the Libor rate. This sparked public outrage, fines from regulators and the resignation of the chief executive.
Part of Barclays’ response to this increasingly tough spot was to commission Mr Salz, a widely respected City lawyer, to undertake a review of the organisation. With the help of the Boston Consulting Group, 600 interviews and £17m, Salz produced a 236-page report with a list of 34 recommendations.
The report begins by reminding the sceptical public of the importance of banks, and Barclays in particular, to the UK economy. It then goes on to trace the fate of the bank during the long financial boom up to 2007, the bank’s response to the financial crisis (including the acquisition of parts of Lehman Brothers), and the subsequent scandals it has faced, such as the manipulation of Libor and the mis-selling of payment protection insurance.
After tracing out this unhappy history, Mr Salz turned his attention to the roots of the problems and these included corporate governance, incentive structures, human resource systems, culture, regulation and risk management.
The report concluded that, while Barclays was strong on technical matters such as risk management, it was less adept at managing the ‘human’ side of the enterprise such as culture, human resource systems and reputation.
This led Mr Salz to make a series of recommendations related to reinforcing good governance practices, strengthening human resources, realigning rewards and risk and building a more sustainable culture.
Unsurprisingly Salz found much that can be changed at Barclays. There are many recommendations about the structure of the board and pay and incentives. But the real issues seem to lurk beyond the boardroom. The roots of many of the problems described in the report seem to be the culture and ethos of the organisation.
Mr Salz portrays Barclays as a bank with a fragmented culture. He demonstrated that each division of the bank had remarkably different sets of values. Different parts of the sprawling bank were often like completely different organisations. The shared values that were supposed to hold the bank together were ignored or forgotten.
The only thing that everyone seemed to agree on was that producing results was what mattered (often irrespective of how they were achieved). The review points out that “the success stories were largely attached to strong personalities, successful sellers, revenue earners and individuals who demonstrated cleverness and ability to win”.
In addition to a fragmented culture, the review unearthed a weak human resource function. Many of the core human resource activities had been effectively usurped by people at the coalface. Recruitment, socialisation and pay were often made up on the fly. The result was gross imbalances between policies and practices in different parts of the organisation. It often meant that tried and tested processes were ignored in favour of local expediency.
The final underlying cause that is briefly mentioned in the report is collective intelligence at the bank. There were a couple of very telling passages in the report that speak of an obsession with “cleverness”. Barclays’ staff needed to show they were smart enough to outwit the regulators and clients.
But smart people working for Barclays would use their significant intellects in very narrow ways. This certainly helped to deliver results but it also meant people did not think critically about the problems the banks faced. When problems were spotted, people were reluctant to show they were not smart enough to solve them individually and consequently did not disclose them to superiors. The result was wicked problems were swept under the carpet.
These deeper problems faced by Barclays are unlikely to be addressed by a single change programme. Meaningfully addressing the problems identified in the Salz report will require a deeper change in the shared ethos of the bank.
Changing an ethos means doing more than just writing a new set of values – it requires a focus on the day-to-day practices of banking. Following major self-reflection exercises such as Salz, there is always a temptation to overload employees with all sorts of change programmes. Often these are more about demonstrating that the organisation is doing something and making the chief executive look good. Sustainable change is an after-thought.
If Barclays is to avoid this trap it is vital that change programmes are deep but not widespread. They need to be focused, but meaningful. But most importantly changes need to resonate with employees and wider stakeholders. Perhaps a good place to start is for the bank to return to the basic belief we used to associate with banking, such as prudence and precision.
Andre Spicer is professor of organisational behaviour of Cass Business School
Key points
• There are some striking similarities between the Salz review and the report on HBoS.
• The Salz review was commissioned following revelation that traders in Barclays, as well as other banks, manipulated the Libor rate.
• Changing an ethos means doing more than just writing a new set of values – it requires a focus on the day-to-day practices of banking.
Libor: the recent past
• Barclays Libor rates were first noticed as far back as 2007, when Bloomberg cited the higher rates.
• In 2008, Paul Tucker relayed his concerns about the higher rates to Bob Diamond, which was followed by a British Bankers’ Association review into Libor setting, which did not reveal fixing. In June 2012 Barclays was fined £290m for Libor fixing, followed by a £940m fine for UBS for the same thing.
• An independent review into Libor, announced by George Osborne was ongoing, when RBS was fined £390m.
• The FSA reported in March that 26 messages referring to “lowballing” of Libor submissions had been ignored.
