Remuneration structures linked to short-term performance have created incentives for dishonesty and must be changed
There has been a lot of focus recently on a long and growing list of scandals involving some of the biggest global banks. Barclays has been in the spotlight for manipulating the London inter-bank offered rate and has been fined $460 million by regulators in the United States and United Kingdom.
But Barclays is not alone, the list of other banks involved includes some of the best-known global banks, from Citigroup, JPMorgan Chase, and Deutsche Bank to HSBC, RBS and UBS.
In addition, JPMorgan Chase announced a fresh assessment of losses in the trading positions of its London-based unit, which have now been revised upward to $5.8 billion. Meanwhile, HSBC faces the threat of being fined up to $1 billion by the US authorities for allegations of laundering money and financing terrorists, and Standard Chartered has been accused by the US financial watchdog of violating anti-money laundering rules.
It is not surprising that the banking sector, already under attack in the midst of the global financial crisis, has been hit by a new wave of criticism. But most worryingly, trust and confidence in the financial system have reached a record low.
Although there are many reasons why the banking sector collectively has perpetrated so many misdeeds and broken ethical norms, greed is one of the root causes. Therefore, to fix the banking sector requires reshaping its corporate culture.
The values of an organization are shaped by its corporate culture. Of course, any business aimed at maximizing shareholders' values must strive to make a profit, but the profit-making activities must be legal and morally acceptable. Experience shows that misbehavior in the banking sector often stems from the belief that only bonuses can reward people. Remuneration structures, often linked to short-term performance, have created incentives for dishonesty.
But as Greg Smith, who resigned as a Goldman Sachs executive director and head of the company's US equity derivatives business, wrote in an article, "Why I am leaving Goldman Sachs": "people who care only about making money will not sustain this firm - or the trust of its clients - for very much longer".
Leadership plays an important role in shaping the culture of a bank. Clearly, the "tone at the top" is a key factor influencing how a bank operates. Moreover, qualified leaders motivate subordinates to work for the good of a bank, not just for themselves. In particular, executives of a bank should have a special responsibility to create an environment where people cannot do bad things. As Bob Diamond, Barclays' former chief executive, once declared, "the evidence of culture is how people behave when no one is watching".
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