This week the Economist Intelligence Unit published a report sponsored by CFA Institute titled A Crisis of Culture: Valuing ethics and knowledge in financial services investigating the culture within leading firms around the world and better understanding the importance placed on ethical conduct.
On the surface, an overwhelmingly positive picture was being painted in the survey responses: some 93% of the senior executives who participated said that they would prefer to work for a firm with a reputation for ethics, and less than 1% reported that their employers have done nothing to improve adherence to ethical standards in the last three years.
However, when we dug deeper in to the implementation of such standards, some of the results were astounding, providing a real insight into the fundamental flaws which still exist in a post-crisis industry.
Despite the near unanimous agreement that ethical conduct was necessary and established at their firm, over one half think that career progression at their firm would be difficult without being "flexible" on ethical standards, and only 37% think that better ethics lead directly to financial results. Just 43% said that their firm offer career or financial rewards for respecting the ethical code of conduct.
This is a concerning disconnect between words and behaviour that could be the result of C-suite hyperbole--they don't mean what they say--or simply the natural lag effect of substantive cultural changes--these values take time to root themselves in the corporate DNA. Either way, the suggestion that ethics is at odds with financial performance is just plain wrong and symptomatic of the hard work the industry has ahead of itself to restore trust in the public square.
The report highlighted several cases such as Handelsbanken and Pictet, two of the most respected and successful banks in Europe, that have consistently placed the long term stewardship of clients assets' and interests above short term profit seeking. More importantly, clients themselves are demanding a departure from performance-centric metrics in defining value from their advisors.
In a recent survey conducted in partnership with Edelman, CFA Institute found that retail clients overwhelmingly viewed behavioural and ethical related attributes such as acting in their best interests much more important than performance. Finally, as asset ownership continues to concentrate into the hands of the largest global pension and sovereign wealth funds, these organizations--whose motivations are driven by their beneficiaries liabilities rather than alpha hunting--are taking much more activist roles to shape healthy culture and practice.
So if there is precedent of an ethical culture correlating with financial rewards and reputation and clients of all shapes and sizes are asking for cultural transformation, what is holding the industry back? Understandably, executives are perhaps worried about the short-term implications of such a marked transformation such as a spike in employee turnover or stock price pressure.
More generally, I think it's only natural that some level of paralysis and inertia remain as organizations hold on to what worked in the previous era. But if leaders don't stand up and act courageously soon, regulators will constrain these firms back into utilities and asset owners and clients will look elsewhere for value.
We therefore believe there is an urgent call to action for leaders of the industry to move towards a fiduciary culture. A culture that is built on a system of trust where clients and investors work as partners and their values are aligned.
A fiduciary culture is embodied by long term compensation schemes built on client success, a paramount concern for the caretaking of underlying beneficiaries, deeper investment in compliance and risk management, a fresh and honest look at leadership span to ensure strong internal controls, simple and transparent financial product design and communication, and firm-wide and public commitment to an ethical code of conduct and education.
Executives must realize that the previous era of financial capitalism ended with the global crisis in 2008. Clients, asset owners, and the general public are looking for the industry to return to its core purpose of serving the greater good, providing value to society so that economies and communities' thrive.
Leaders, the future of finance rests on your shoulders...it's your move.