Article was originally published in International Banker, Spring 2019 Edition and the International Banker website on 12 June 2019.
Trust is a powerful relational and social axiom historically associated with the financial sector. Business contracts like social contracts require trust. Among the most important social contracts is that between the banker and the customer. Whether a customer is obtaining a home mortgage, financing cash flow, or acquiring a business, trust is a core element of the relationship. Yet distrust for the financial sector looms large today. Dynamic financial-sector management and board leaders are responding by advancing efforts to restore the trust in the social contract. The human, or “H”, factor within financial organizations in this social contract is essential to successfully rebuilding trust and creating sustained economic growth.
Perpetuation of distrust
Leaders within the financial sector presently possess extraordinary influence and are in a unique position to create opportunity. The financial sector manages more capital today than ever before. Consider the fact that the top 500 asset managers influence more than $50 trillion globally. (By comparison, the 2019 U.S. government budget is $3.8T.) With projected global growth estimated to be 25 percent from 2017-2022, the opportunity to creatively invest in profitable areas that grow and benefit the community is significant.
Part of the challenge for the financial sector is that today, the top 5 percent of households own more wealth than the bottom 95 percent combined, with the financial services sector paying the highest average wage rates. The fallout due to the highest paid sector allegedly causing the financial crisis has perpetuated a culture of mistrust towards the industry.
The vision of a truly great capitalist society is of one that wisely manages risk in order to maximize the financing of human endeavors. Investing in our fellow humans has steadily brought us out of financial crises in the past and particularly since 2012. Capitalism for the few is a narrow-minded, weak social model. History is replete with stories of visionary leaders, such as Ada Lovelace, who invented the first computer program, and Coleman Mockler, who lead Gillette for 15 pivotal years. Visionaries such as these inspire others to improve the conditions implied within the social contract, grow businesses, and in doing so, promote prosperity for all.
For the financial sector, finding ways to efficiently finance additional growth and create jobs will contribute towards reducing poverty and thereby build goodwill and trust . The U.K. and U.S. each have approximately 5.7 million private sector businesses, the majority of which employ less than 500 employees. Directing the 25 percent expected growth towards building communities, financing new business ideas, and capitalizing growth will reduce economic disparity. Promoting an “H factor” of empowering and educating humans to improve their standard of living demonstrates impactful leadership.
Culture and the “H factor”
The “H factor” in finance is at an inflection point. Customers are again beginning to trust financial-sector leadership. However, if the prevailing leadership returns to the pre-2008 business model, the trust factor may be destroyed for future generations. Nurturing and fostering a culture within its organization and with its customers that promotes a trust-based social contract is the responsibility of every financial organization’s directors and officers.
What challenges do financial companies face in ensuring that past mistakes arising from a toxic culture of greed and selfishness are not repeated? Technology has fueled many efficiencies and increased the top end speed of change and disrupted the financial sector, but technology is not necessarily improving culture. A healthy culture arises from the face-to-face communication and interaction between humans within an organization. As younger generations continue to show a preference for the use of technology in lieu of direct human interaction, building and maintaining a culture of trust between customer and banks will remain a challenge and an opportunity for forward-thinking leaders.
During the past two hundred years, volumes of novels and social studies examined the depravity and loneliness of greed. Rob Kaplan, CEO of the Federal Reserve Bank of Dallas, Texas, (his last job was Harvard professor), frequently teaches that happy and inspired employees are the most productive. We are often tempted by the desire for more money and to buy more things, hoping those purchases will improve our lives. What we actually desire is unequivocal confirmation that we are valued. Few of us will lie on our death bed wishing we’d bought more crap; rather we will all hope that our lives were meaningful. Inspirational leaders develop human-resources (HR) strategies for work-life-productivity balance, and in this way build a culture conducive to happiness.
Leaders in the financial sector teach us, within the context of the social contract, how to manage capital efficiently. Great leaders are honest, humble and give of themselves, and are keenly aware of their leadership responsibilities. Great strategy supported by great culture is an eminent goal. Beginning with the influence of great thinkers such as Peter Drucker in the 1950s, the notion of service and excellence became central to business leadership. Drucker was famous for asking insightful and poignant questions and offering proverbs such as “Start with what is right rather than what is acceptable” and “Management is doing things right; leadership is doing the right things”. This notion influenced the definition of Level 5 leadership first presented in 2005 by Jim Collins in his book Good to Great: Why Some Companies Make the Leap… and Others Don’t. “Level 5 leaders display a powerful mixture of personal humility and indomitable will.”
Ten years later – lessons learned
Since the breakup of Arthur Andersen and the many listed-company failures from 2000 to 2010, corporate governance and leadership expectations have shifted. The board’s role has, is and will continue to evolve. As the average tenure of a public company chief executive officer decreases, the board’s responsibility of managing business continuity and succession has increased. The board’s role in monitoring strategy and culture has expanded. The H factor is an increasingly significant differentiator. One example is the expanded definition of “our customer”. The updated definition encompasses both the buyer and employee as a part of the company’s customer group. The attraction and retention of talent and buyers have grown to be similar management tasks. Expanding the definition of customer causes leaders to care differently about the culture of an organization. Today’s customers care about workplace diversity, the global environment, sustainability, income equality, and, yes, governance.