CREDIBILITY CRUNCH

RECOVERY FROM THE CREDIBILITY CRISIS IN BANKING

Neil Crofts

November 2008

A u t h e n t i c i s - w w w. a u t h e n t i c i s . c o m - n e i l @ a u t h e n t i c i s . c o m
 Authentic Banking
Introduction

Banking is not the first industry or sector to face a credibility crisis. Nor is it the first to nearly self-
destruct, due to significant down prioritizing of the very thing that makes it strong; It is the scale
of the consequences that make the credibility of banks so significant. However there is still much
to learn from other credibility crises and how the players have responded.

Governments around the world have taken drastic action to shore up the financial credibility on
which banks depend, but this will have only have a marginal effect on the reputation of individual
banks and the banking sector as a whole. With intervention, Governments have assumed the
credibility from the banks.....can Governments successfully transfer that credibility back to the
market and how long will that take?

Governments themselves are not without responsibility for the Credit Crunch. For example the
Community Reinvestment Act 1977 required banks to
meet the credit needs of the "entire community". It `I've been extraordinarily dis-
became against the law not to lend.  There was there- tressed by how badly the most
sophisticated people in business
fore more lending to those least able to repay. Fannie
handled risk management.''
Mae and Freddie Mac (US Government sponsored
mortgage giants) were encouraged to guarantee a Alan Greenspan
wider range of loans in 1990's. Homeownership in-
creased, more buyers drove prices up, making loans less affordable to the poor and 'requiring'
even slacker lending standards.... Seeds were sown and banks looked to offload these assets
quickly.

And of course we, the customers, are part of the equation too. Globally there are very different
credit cultures: Japan's 125 year mortgages, Germany's absence of a house buying culture and
general credit adverse nature (they insisted on the 500 Euro note!); Nordic countries strict bank-
ruptcy laws (for life); America's no stigma to fail culture ; UK predominance of Credit Cards (125
Million Cards for 60 Million people vs Germany's 15 Million cards for 80 Million people)... And
then we have Islamic Finance under which interest may not be charged. What is common is the
lack of basic financial awareness among many banking customers internationally.

Banks - more than most rely on a reputation for probity and integrity. Credit is derived from 'cre-
dere' - to trust. Who would hand over their money to someone they did not trust?  or trust to make
a positive return? One strategy that will rebuild trust in the banking sector will be increased regu-
lation by governments and international bodies.

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However this alone is unlikely to be enough and banks may prefer to mitigate more draconian leg-
islation by taking proactive action to rebuild credibility themselves, and thus, aid the process of
transferring the temporary and artificially up-held credibility back to where it belongs.....with the
market and the banks.

This paper explores ways in which others have responded to their own credibility crunch and how
banks may be able to employ similar strategies and how those strategies might be implemented.

Pro Cycling - a cautionary tale

Just before the start of the Tour De France in 1998, an employee of the Festina Team was stopped
on the border between France and Belgium. His car was found to be loaded with medical prod-
ucts that could be used to enhance the performance of athletes.

Up to that point riders, teams, sponsors, media, regulators, fans, governments and society at large
had effectively condoned doping, by turning a blind eye to its practice. It was well known that
past champions had used amphetamines and other stimulants to keep going and there was a tacit
acceptance of this.

This acceptance of what they all knew to be wrong was protected by an ‘omerta’, a code of silence.
That remained largely intact until the police intervened in July 1998.

Something had changed in the expectations of society. Whereas before July 1998 doping was an
acceptable price that all involved were willing to pay, not only for success, but just to be at the ta-
ble, after July 1998 it became increasingly unacceptable. Since July 1998 Pro Cycling has been in a
protracted and damaging battle for credibility with fans, sponsors, the media, the authorities and
society.

The price of victory - Marco Pantani

1996 Tour de France podium - Richard
tested positive, then died from a co-
Virenque , Bjarne Rijs, Jan Ulrich all
caine overdose.
later discredited.
Alex Zulle a talented rider following
the herd rather than his own princi-
ples

To begin with many teams were in denial that they had a problem. There was a little window
dressing and a tightening of the code of silence, but for most it was business as usual.

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With aching, painful slowness it has begun to dawn on most of the players that there will be no
return to business as usual, that change has already happened. That they are no longer in the driv-
ing seat and they have quite some catching up to do.

What has changed is the expectations of society

and once society’s expectations have changed
there is no going back. Pro Cycling's resistance
to change has made the process of change far
longer and far more painful than it need have
been.
Over the last few years we have seen the emer-
gence of a new breed of cyclist and a new breed
of team. Cyclists who wear their integrity with
pride, support anti doping initiatives and
“A voracious reader of economic and
business reports would have a hard
time finding a financial-industry
statesman talking candidly about the
errors and flawed judgment among
managers or directors. Nor will you
find a hint about how these private
institutions should govern themselves
in the future to avoid a recurrence of
such widespread devastation.”

openly condemn fellow riders who are caught Ben W. Heineman Jr

cheating. Teams too have stepped up. There
has been an emergence of explicitly clean teams who use transparent, independent oversight to
ensure their credibility. There has also been a wave of emotional admissions of riders and ex-
riders coming clean about their past.

The lesson for Banks

What went wrong for cycling was that they did not spot the changing standards that were ex-
pected of them until it was too late. This is analogous to the situation with banking; the credibility
created by past greatness and achievement was slowly emptied without "filling the bottle". While
everything was going well no one really questioned the culture of internal behaviour of banks -
apart from the occasional “Fat Cat” headline and accompanying ineffectual murmuring of politi-
cians.

Following the credit crunch the fat cat is firmly out of the bag and it will not go conveniently back
into it. Societies expectations of banks have changed and they will not change back. There will be
no return to “normal”.

What has made the credibility crisis in cycling longer and far more painful than it need have been,
was the denial that there was even a problem to start with, and the sheer front with which teams
and riders tried to return to normal. Those who saw the change as positive were outraged. A far
more effective strategy would have been contrition, engagement with stakeholders and a transpar-
ent and explicit strategy for change. The crisis could have been over in 2 years instead of continu-
ing after 10.

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In the end what is finally making the difference for cycling is the cultural change of teams and rid-
ers. While banks, to a greater or lesser degree, understand and realize that they have a problem.
And that this problem is self-inflicted. The path to recovery is far more uncertain and far more
perilous. Their opportunity also lies in cultural innovation, to a way of being that is more in keep-
ing with the morals and standards of today’s society. Because it is society which ultimately de-
cides whether an industry, sector or individual institution is credible or not.

Moral movement

The morals and ethics of our society are not constant, they trend in a generally socially liberal di-
rection (this is not the same as financially liberal). What was once acceptable is no longer accept-
able; slavery, child labour, racism, homophobia for example. As more and more people are better
educated this trend is accelerating.

Other sectors have been caught out by this moral movement. Many clothing companies have been
caught out by the shift from cheap goods at any price to cheap goods as long as it does not involve
child labour. Animal testing, fur farming, battery farming of chickens, excessive pesticide use, ge-
netic modification of food, pollution of rivers, nuclear energy are all areas where whole sectors
have been caught out by changes in the moral landscape of our society.

For the banking industry the moral shift we are see-

ing is away from profit at any price towards profit Obviously, public and govern-
without gambling, profit without exploitation and ment trust in industry decision-
profit with transparency.
making has eroded. Now corpo-
rate leaders must honestly dis-
The opportunity for Banks cuss their mistakes and propose
how checks and balances can
As is often the case in these shifts there is a huge ad- work before the slow process of
vantage for the first movers. The ones who proac- rebuilding trust can begin.
tively take the risk of doing something new and dif-
Ben W. Heineman Jr
ferent. Except of course that in this situation the risk
of doing something new and different is a far smaller
risk than the risk of remaining in denial, not doing anything and just hoping it will all go away.

The first Banks to publicly acknowledge that there are things to learn and there might be better
ways to be will have an advantage. The first banks to take steps towards transparency, integrity
and authenticity will have an advantage. Banks that don’t move fast enough will be playing catch
up for a very long time.

Authentic Banks

Authentic businesses are those which generate their profits through the pursuit of a profound and
positive purpose. In the research for my book Authentic Business I came to the conclusion that
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authentic businesses spend, on average, up to 80% less on motivating people, both customers and
staff, than other businesses. Authentic businesses also have impeccable credibility.

Authentic Banks exist - Zopa, Triodos and Grameen banks for example, but these are tiny players
on the very margins of banking. The opportunity exists for a group of banking executives to em-
bark on the authentic transformation of their bank.

To some extent this was trialled, with great success, by ANZ Bank in Australia. A few years ago
they found themselves the least popular employer in Australia. They discovered that their un-
popularity stemmed from same kind of moral movement. People were wanting their employers
(and their banks) to stand for something they believed in.

ANZ performed a bottom up values led transformation and tripled their share price and became
on of the most popular employers in Australia.

Values led transformation is powerful, but not as powerful as a purpose led transformation, which
includes values as well. Bottom up transformation is nearly always more powerful than top down.

The opportunity lies in identifying the core motivations of a wide cross section of staff and using
that core motivation to articulate the purpose of the bank. The purpose statement must inspire
employees and deliver on established corporate objectives as well as delivering value for the wider
community.

For example the opportunity exists for a mainstream bank to claim the "social role of banking" po-
sition. If money is the lubricant of our society then banks are the oil pumps (if you can forgive
such a mechanical analogy).  Credit Cards, loans, mortgages, savings accounts all have a vital so-
cial role as long as they are applied with wisdom.  

Another available slot is for a bank position itself as a "financial coach", although it would be vital
to do it without being perceived as either patronising or manipulative?

Imagine a bank providing free and unbiased education about finance with branding - but without
any selling. This education could take numerous forms - the most obvious would be to ensure that
all communication was clear, unbiased and easily understandable.

In this way the bank becomes a platform for employees to achieve something that they already
believe in passionately. The requirement to motivate staff is turned on it’s head as they become
fully engaged with the business.

Once the purpose is clear the project becomes one of identifying obstacles to it’s achievement and
removing them. Once a team or business have a shared sense of purpose they are extremely moti-
vated and quickly form teams to remove these obstacles. As the obstacles are removed the busi-

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ness becomes more and more authentic. The staff become more passionate and the customers
more engaged.

Neil Crofts is the author of Authentic - how to make a living by being yourself and Authentic
Business - how to set up and run your perfect business, he is also the founder of Authenticis a cul-
tural innovations agency that helps businesses to profit from their authenticity.

neil@authenticis.com

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