Wall Street: A Crisis of Culture
Posted by Larry Doyle on December 2, 2013 10:22 AM |
Five plus years after the demise of Lehman Brothers and the onset of our ongoing economic crisis, the questions still beg as to whether Wall Street has learned the lessons needed to rebuild meaningful confidence in our markets and implemented real changes to do just that.
The Economist recently released a fabulous report addressing these very questions. For those with even a passing interest in Wall Street, this is a must read. (Props to the regular reader who brought this story to my attention.) What do we learn?
Back in 1980, just 9% of Harvard MBAs went into financial services. By 2008, the figure was up to 45%. Lured to Wall Street and the City by generous pay packages, financiers were encouraged to chase rapid earnings growth.
Short-term profit priorities led to extreme risk-taking at many firms, with employees selling complex derivative products they did not understand (and that many of their corporate clients did not need), and lending to people who could not afford the repayments.
Since the global financial crisis of 2008, the question being asked about the industry is whether it can change, shifting its culture to become more risk-averse and client-centric. There is little doubt that strengthening culture, including the promotion of ethical conduct and greater knowledge, is a priority for the top echelons in the financial services industry. In recent years many firms have launched thorough reviews of their practices as part of their efforts to decide who they are, what they do, and how they should do it. But it could take years before change is seen at all levels of the organisation.
The main findings are as follows:
Most firms have attempted to improve adherence to ethical standards.
Industry executives champion the importance of ethical conduct . . . but consumers remain unconvinced. The industry was voted the least trusted by the general public in the 2013 Edelman Trust Barometer.
…but executives struggle to see the benefits of greater adherence to ethical standards. While respondents admit that an improvement in employees’ ethical conduct would improve their firm’s resilience to unexpected and dramatic risk, 53% think that career progression at their firm would be difficult without being flexible on ethical standards.
The same proportion thinks their firm would be less competitive as a consequence of being too rigid in this area. It seems that, despite the efforts made by firms in recent years, ethical conduct is yet to become a norm in the financial services industry.
For an industry that still largely compensates its people based on short term profits, the conflict presented by elevating truly meaningful ethical behavior remains a conundrum that many executives on Wall Street find exceptionally challenging. As The Economist concludes:
A number of deep-rooted tensions, however, will make creating a strong culture a big challenge for the industry over the coming years. While executives champion ethical conduct, they struggle to see the benefits of greater adherence to ethical standards, reporting that, in reality, it can hamper career progression in the industry as well as the firm’s competitiveness.
Also, few see knowledge of other departments and functions as crucial to improving their everyday performance, even though a lack of communication and understanding between functions is often quoted as a factor of the financial crisis.
The pressures firms faced before the global financial crisis— such as quarterly reporting requirements and pleasing short term investors—will not go away anytime soon. But it is clear that the financial services industry is trying to mend its ways.
The key will be to overcome the basic tensions that continue to riddle the industry, and over time see whether the top echelons are doing enough to foster a strong, risk-proof and client-serving culture at their firms.
The jury remains out and, in my opinion, without meaningful changes in the appropriate regulations properly enforced on those within the top level executive offices, investors and consumers will remain unconvinced that prioritizing ethical behaviors will be little more than “talk is cheap.”
For those interested in reviewing this report in full, I welcome providing the following attachment:
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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.