The underlying cause of Northern Rock’s collapse, which triggered the financial crisis, was clear: weakness in board governance, product complexity, risky business models, executive behaviour and inadequate regulation.
It was uncannily similar to the events leading to our collapse at Equitable Life in 2000.
On the tenth anniversary of the financial crisis, we see some very positive developments. These include the emergence of the PRA and FCA to focus on solvency and customer protection respectively, new corporate governance standards requiring individual accountability for executives and directors alike, and recognition that good corporate culture is crucial to good business and customer outcomes.
Over many generations, the UK financial services industry has done so much good. It has been somewhere safe to save, somewhere to get help with a loan for a home or a car and somewhere that helps out when things go wrong, like a flood or a burglary.
Sadly though (and in some cases disastrously) there are too many examples of the industry falling down on the job.
The profound consequence has been that consumer trust in financial services has been decimated. In every customer focus group we hold, the pervasive feeling right from the very start is of a deep distrust; that there must be more in it for the company, or executive bonuses, than for the customer.
It is no easy task to restore industry credibility. Terri Dial, Lloyds TSB’s retail director in 2005, understood retail banking better than anyone I have ever known. She introduced a brilliant idea whereby her senior executive team were required to look at customer complaints and respond to them personally.
Building on this, non-executive directors should insist on seeing all complaints addressed to the chief executive, including the replies. From that, they will get as good an insight into company culture as they could wish.
That said, I have never in my career seen a company change its culture. Organisations often state their values but, in my experience, these are ones to which they aspire rather than consistently demonstrate.
What I have observed is chief executives changing the prevailing climate in an organisation. A new chief executive will inevitably start by laying down what they expect of their teams. Many will comply as their employment and bonus will depend on that. It is much less clear whether the team actually believes in the chief executive’s new ways.
If business success is demonstrated, followers become more committed because everyone likes to share in the success. But this is no change of culture, simply exhibiting behaviours and following processes that please the chief executive.
The climate can be maintained by constant monitoring but, if that relaxes, it does not take long for old behaviours, those systemic to the underlying culture, to reappear, for good or bad.
The worst combination is a bad culture or climate underpinning success. It is very unusual in my experience for a board to tell an executive team it is demonstrating the wrong sort of success.
Regulators or canny analysts and media commentators are much more likely to point to weaknesses – but chief executives can be pretty adroit at rationalising their modus operandi. At least temporarily.
Financial services are complicated and becoming more so. With Brexit and the company reforms needed to address it, we are facing into the unchartered waters of unwinding quantitative easing. We are also facing into a technology revolution based on different paradigms.
There will be few executives who have much experience of what is to come, yet it will be the executive team that boards will be looking to for company leadership. The executive team will have some knowledge about this new world through attending seminars and talking to peers.
However, non-executive directors without expertise in the subject matter will not know whether the executives know just a little more than them or a lot. We all want executives who have a belief in what they are doing but that does not mean they really understand this new environment and are able to do best by their company.
In my opinion, the boards of all large financial services companies should have a non-executive director who is an IT professional, conversant with today’s technologies, and another who is a customer behaviour professional, conversant in behavioural economics.
It is not trite to pay heed to the old adage that the future is not what it used to be. And, while it is pretty well impossible to change company culture, boards must have to address and be seen to address company climates to restore customer confidence without being pressed to do so by regulators.
Chris Wiscarson is chief executive of The Equitable Life