A decade on from Northern Rock, it’s time to ask: why do we never learn from crisis?
Boards and executives alike argue that each time a crisis comes along, this time it’s different.
That may be so, but customers are more likely to see the latest crisis as just another example of financial services companies not getting their act together.
Ten years on from the devastating run on Northern Rock in the UK, its pernicious consequences remain, and have never been much addressed.
If we compare the 2001 Equitable Life crisis to Northern Rock’s, the underlying causes are uncannily similar.
Despite the very public nature of all that went wrong at the Equitable, the banks that failed in 2007/8 learned not a thing.
Why was that, we must ask. In my judgement, one major factor is organisational culture and its deep resistance to change.
In my 40-year career, in whatever business, in whatever part of the world, whether the Americas, India, Europe or the UK, my experience has always been the same – I have never seen a company change its culture.
What I have observed is chief executives changing the climate that prevails in an organisation.
Read more: Northern Rock: 10 years on from the bank that failed
A new chief executive will inevitably start by laying down what they expect of their teams. Many will comply as their employment and bonus depend on doing so.
It is much less clear whether the team actually believes in the chief executive’s new ways.
If business success is demonstrated, the followers will become more committed: everyone likes to share in the success. But this is no change of culture, simply exhibiting behaviours and following processes that please the chief executive.
The climate can be maintained by constant monitoring but, if that relaxes, it does not take long for old behaviours, those systemic to the underlying culture, to reappear – for good or bad.
And once things go wrong, it’s not easy task to restore industry credibility. Before the Northern Rock and Equitable crises, consumers had faith that banks and pensions companies would do right by them. Mission statements such as Customer First were commonplace, but in many cases weren’t worth the paper they were written on.
Terri Dial, Lloyds TSB’s retail director back in 2005, understood retail banking better than anyone I had ever come across. She introduced a brilliant idea whereby her senior executive team were required to look at customer complaints and respond to them personally.
Read more: The financial crisis 10 years on: A timeline of the crash
I can still hear today the collective groan but, in gaining an insight into what doesn’t work for customers, there are few better ways.
If somebody complains directly to a chief executive, it is rare to receive a personal response.
If a customer telephones an organisation asking to speak to the chief executive about their unhappiness, few contact centres even know the chief executive’s name, and if they do, customers will often be told that the chief executive does not take calls.
Non-executive directors should insist on seeing an analysis of all complaints addressed to the chief executive, including the replies.
From that, directors will get as good an insight as any into the way the company really values customers.
Even with that knowledge of how customers really feel, and how the chief executive responds to those feelings, the pressure on a business to deliver outstanding results in a low-interest-rate environment is all-pervasive.
The Prudential Regulation Authority’s Sam Woods recently referred to organisational behaviour that “might meet the letter of the regulation” but is “designed to circumvent the spirit”.
The chase for profit appears destined to trump sensible business development with good customer outcomes. Throughout the 1990s, when companies like the Equitable were seen as so successful, there was enormous pressure on financial services companies to deliver similarly.
At Lloyds TSB, where I was at the time, we commissioned a leading strategic consultancy to give insight into what it was that Equitable were doing that we might emulate.
They told us little that we didn’t know: the Equitable salesforce was 10 times more productive than ours, their costs were a fraction of ours, and their investment returns were phenomenal. But why and how remained a mystery. The fact is that it was too good to be true.
The position with Northern Rock was similar. Competitors looked on enviously at Northern Rock’s sales growth.
The pressure to emulate them was relentless.
In all the years the Equitable and Northern Rock were being too good to be true, competitors were driven to changing their modus operandi which, at best, led them to cutting margins to uneconomic levels or, at worst, mismanagement.
Flawed business models being applauded and allowed to persist for years is beyond awful. This spread toxicity into the wider financial services industry and the price continues to be paid to this day.
Read more: A decade on from the crunch, we still need to confront ‘too big to fail’