If there was one positive to come out of the global financial crisis (GFC) it was that companies and financial institutions realised they could no longer operate in a way they had become accustomed to.
Many of the banks that came crashing down did so from adopting short-term practices that incentivised dangerous behaviour.
In the past, many business chiefs took their lead from US economist Milton Friedman, who famously argued in 1970 that businesses’ “sole purpose is to generate profit for shareholders”.
Moreover, he maintained, companies that did adopt “responsible” attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive.
Power of good
In recent years, there is no mistaking the steady shift to a more enlightened stance that companies have a duty to act responsibly.
This is partly based on the view that, in the age of transparency and mass communication, reputational damage from acting negatively will be punished in the markets, but also from a broader understanding that good practice is more likely to deliver profitability in the long run.
Take Sweden’s Svenska Handelsbanken, one of Scandinavia’s largest banks.
When things started going wrong for Handelsbanken in the 60s – manifested in a combination of falling profitability and misselling scandals – a desire to change the business model was widely recognised, says the bank’s CEO Anders Bouvin.
Bouvin says the bank ran into problems because it had got too big and had not implanted the necessary discipline required.
In a bold move, it turned to former academic Jan Wallander – who had successfully developed a devolved leadership model at a smaller Swedish bank, Sundsvallsbanken – to return Handelsbanken to profit, making him CEO in 1970.
Wallander’s leadership model differed from other banks’; it didn’t contain bonus structures.
This meant Handelsbanken could operate a more honest approach to customer service,
“Without bonus schemes, we were able to gain customers’ confidence because they knew we would only sell them products that they wanted and needed,” he adds.
“Even if we were really good at not mixing up our own incentives with what’s best for the customer, I think just the mere suspicion that that could be the case is enough for us not to want to do it. This approach helps us attract customers and be perceived as a trustworthy banking partner,” he adds.
The approach has paid off in spades. Handelsbanken has consistently beaten rivals on an important metric – return on equity – since Wallander’s model was put in place 47 years ago.
It’s also consistently ranked by ratings agencies and other bodies as one of the world’s strongest banks.
When rivals were being hammered by first the Swedish banking crisis in the early 90s, and then the GFC in 2008, Handelsbanken stood firm.
Not only that, it was also able to lend money and expand the number of branches in Scandinavia and the UK during the crisis.
“It was business as usual while some of our competitors were in intensive care. Other banks did not have the possibility to lend more money – even withdrawing credit lines to survive – whereas we could move forward during the banking crisis because opportunities were there,” says Bouvin.
India’s Tata Group is another example of a company that has an emphasis on good corporate culture at the heart of its ethos.
It has developed the Tata Code of Conduct, which has been adopted by all 100 companies across the group, says Dr Mukund Rajan, Chief Ethics Officer and Chairman –
Tata Global Sustainability Council of Tata Sons, the holding company of the group.
“Every Tata company also has to go through the Tata Business Excellence Model (TBEM), which entails a holistic appraisal or audit of a company, its leadership, its strategy, its operations, HR practices, customer-centric practices, and results,” he adds.
The result is that the Tata brand is consistently voted India’s most valuable. “It is our commitment to strive for value creation for all our stakeholders and not just our shareholders that has earned us the trust of the nation,” says Rajan.
Raising the bar
In the UK, Sir Win Bischoff, Chairman of the Financial Reporting Council (FRC), is leading a push to improve corporate culture in companies and financial institutions, to mitigate risk and develop long-term resilient performance.
It’s a project he has personally taken on. As one of the best-known leaders in the financial services industry, Bischoff has held chairman and chief executive roles at some of the biggest banks, including Citigroup, Schroders and Lloyds Banking Group.
“There needs to be a concerted effort to improve trust in the motivations and integrity of business. Rules and regulations will not on their own deliver productive behaviours over the long term,” says Bischoff, who is currently also Chairman of JP Morgan Securities, the European arm of the one big investment bank that managed to avoid the worst of the financial crisis.
“There needs to be a concerted effort to improve trust in the motivations and integrity of business.” – Sir Win Bischoff
Since it was formally launched in 2016, the culture project developed by the FRC has gained plenty of traction from companies.
“This work has stimulated debate on culture in boardrooms and beyond, and highlighted the importance of companies entering into effective dialogue with their workforces and wider stakeholders,” says Bischoff.
South Africa’s Professor Mervyn King, who has been a long-time champion of strong corporate governance, says good culture is vital for corporate success because “tomorrow’s companies will be expected to create value in responsible and sustainable ways”.
King, who was a contemporary of Nelson Mandela in his early legal career and was inspired by him to promote positive corporate values, says: “It will no longer be appropriate for businesses to concern themselves solely with maximising profits at the expense of our natural environment, workers’ rights and protection, care for suppliers, health and safety, and concerns for other species as well as ourselves.”
King suggests US economist Milton Friedman’s statement that the “sole purpose of a corporation is to make profit without deception or fraud” is invalid.
He adds: “We used to ask how much money does the company make? Today the critical question is: How has the company made its money?”