Codes aren’t culture

  • Date:01 Nov 2012
  • Type:Company Director Magazine
John M Green questions whether companies value culture and reputation highly enough.

In June, Barclays PLC’s outgoing chairman admitted the company’s role in the UK’s LIBOR inter-bank interest rate scandal had "dealt a devastating blow" to its reputation. Unsaid, but more important, was how the sordid episode gave an unfair free kick to the legions of people feeling jaded by the free-market system.

But the manipulation of LIBOR was not capitalism at work. It was the other C-word, cronyism – an apparently illegal cartel of chums sitting around in leather Chesterfields scratching each other’s backs, indifferent to the harm they were wreaking on the clients they were paid to serve and subverting a crucial price-setting infrastructure.

Crony cartels are a leech on capitalism; competition is its lifeblood.

The usual incentive to form, or join, a cartel is so customers pay more, boosting profits for shareholders and bonuses for executives. But that’s not only wrong, it’s dumb. Once the secret combination is uncovered, a company’s most valued asset – trust – shatters. Barclays agreed to a fine of almost $500 million and, following the revelation, saw its share price plummet, ripping billions out of innocent shareholders’ pockets, wrecking years of good work.

Despite examples like this, many people mistakenly see crony capitalism as the norm, when it is actually the parasite. Controversial US thinker and author Charles Murray recently wrote on this and you should jump at the chance to hear him speak when he visits Australia for some mid-November lectures.

But back to Barclays. When the LIBOR scandal broke, the then CEO, still clinging to his job, dismissed it as "some people act[ing] in a manner not consistent with our culture and values". However, soon after, with a new chairman and a new CEO on the way, it was no longer merely "some people".

Instead, new chairman David Walker suggested that perhaps the bank’s culture and values might indeed have been at fault. In announcing Barclays would conduct a "reputational risk" test on all its businesses, Walker called on boards to be more aggressive in questioning their executives: "Culture and reputation are the issue of most concern now," he said.

He’s only partly correct. We as non-executive directors do try to assure ourselves that a company’s culture is, in practice, identical to how it’s portrayed to us and to shareholders. (It’s clearly not easy when we keep seeing examples of ostensibly fine boards, such as Barclays, learning too late that they may have been victims of smoke and mirrors.)

But where the new Barclays’ chairman is wrong is when he says it’s only now that culture and reputation are of most concern.

Surely if we dig for the roots of the global financial crisis (GFC), and we don’t have to dig far, we’ll find them smothered by a rotten cultural mulch of swaggering, short-term profit-seeking where too few people asked what was right, instead focusing on how to earn the fastest and biggest buck, and hang the rest.

It’s better late than never but, seriously, are some big companies only waking up to culture and reputation five long years after the GFC first erupted, as if all that trauma taught us nothing?

It’s hardly encouraging either when the CEO of Barclays’ corporate and investment bank recently told a New York investment conference that as part of this new world, "we have to take a fresh look to see if there are products and services in which, given the changing environment, we no longer deem it appropriate to do business, regardless of financial return".

What changed environment could he mean? A change from an environment where it was once appropriate to manipulate global interest rates, but now "everyone" despises that, it’s no longer okay?

Through all this, Barclays boasted a Reputation Council, a senior executive committee supposedly charged with managing the reputational implications of the bank’s transactions and business relationships. Not only that, Barclays was one of the founding subscribers to the Equator Principles, a voluntary framework many companies use to manage the environmental and social aspects of their businesses.

Clearly, while fine-sounding codes, principles and corporate structures are important, they are insufficient.

Codes are not culture.

Let me convert Mark Twain’s famous quote about character and reputation into business-speak: "Culture is like a tree and reputation is like its shadow. The shadow is what we think of it. The tree is the real thing."

Given the Barclays example, companies might want to place culture and reputation risk far higher on their corporate risk matrixes, perhaps as an overarching risk.

But this is not currently a common perspective. In the 2012 Excellence in Risk Management Survey from Marsh & McLennan/Risk and Insurance Management Society, corporate risk managers only ranked reputation as their eighth most important risk, while, surprisingly, top management in the so-called C-Suite ranked it far lower, as their 16th.

That survey was done pre-Barclays, so let’s see what people think next year. But more importantly, what do you think this year?

John M Green FAICD is a leading company director, and author of the novels Nowhere Man and Born to Run