The Banking Sector: Do We Need a Cultural Revolution?

The fallout from the financial crises of the last eighteen months has seen a lot of scapegoating, with the finance sector’s bonus culture a frequent target. The Economist recently examined two pieces of research into what drives the performance of CEOs, and what impact the culture they promote has on their organisation’s success. Some of its conclusions are surprising.

Seeking to test the hypothesis that companies irresponsibly chasing short-term gains were largely responsible for the crisis, the first paper looked at how different types of incentives for CEOs affected the performance of financial sector companies during the credit crunch.

The interesting conclusion was that higher long-term incentives were correlated with poorer performance during the credit crunch. Moreover, the use of share options, which have been dubbed “managerial heroin” for their propensity to encourage bosses to seek short-term highs at the expense of long-term stability, was not observed to affect performance one way or the other. A final note to those keen to punish bank executives financially for their role in leading us into depression: most of them have already lost enormous amounts of money by refusing to sell their shares in their own institutions as they collapsed in value.

The second piece, which caused those of us at GlobeScan who regularly work on employee surveys to take notice, used a survey of 793 American CEOs to determine the impact of “organizational identification” on performance. In other words, if bosses feel a deep connection to their company does this help them to make the right decisions on its behalf? Using questions such as “when I talk about [the organisation] I often say ‘we’ rather than ‘they’,” and “when someone criticises [the organisation], it feels like a personal insult,” the researchers found that organizational identification made bosses less likely to take perks such as corporate jets, or to take risky decisions such as diversifying into new business areas. This led to a reduced need for costly and cumbersome oversight or large long-term incentives.

The finding leads me to wonder about the wider effect of corporate culture on a business’s (or indeed any organization’s) success. Some may take it for granted that it is desirable to have an employee base that is motivated by the success of the organization and feels a sense of personal identification with it, but it may not be straightforward or cost effective for an organization to change a culture that is not working. There is a substantial literature on how positive cultures are associated with high performance: this 2005 study by Coogan & Partners being one example. How, then, do you measure and manage your organization’s culture?