Retail and investment banks are under scrutiny like never before. Culture is in the crosshairs – but too many banks are using processes and consultancy rather than legal work, reckons Shearman & Sterling partner Barnabas Reynolds in this guest essay for City A.M.
How banks run themselves has been a topic of great consternation since the financial crisis.
Regulators, politicians and various other stakeholders are all eagle-eyed for changes in ‘culture’ – with onerous burdens placed on banks to report.
Yet too many of the numerous functions undertaken by commercial and investment banks are wrongly seen as capable of being controlled predominantly through processes – often designed by management consultants and other non-lawyers.
Those processes are ineffective in achieving deep-seated, sustainable cultural change.
The practice of “culture-by-consultancy” can in fact defeat rather than enhance culture-building by virtue of its box-ticking approach. Many of the current processes will remain ineffective unless there is greater involvement from lawyers at both the design and implementation stages.
After 2008, regulators sought to encourage a culture of probity, loyalty to clients, and compliance. Managers were exhorted to set an appropriate tone from the top.
Pronouncements by regulators led to banks developing processes to comply, often reaching out to consultants for help. This approach has involved extensive paperwork, training and data-gathering exercises. Latterly, cultural change programmes have used similar techniques in seeking to address “softer” issues such as diversity, recognition of environmental interests and social change.
The problem is not the aims, which are laudable, but the mechanistic approach, with the notion that culture is something to be papered up in policies, minutes, organisation charts and procedures, and that this will somehow lead to a new, fundamental and pervading mindset.
The language used by consultants includes well-worn but subjective notions such as “best practice”, and allows for a merry-go-round of delivery, coming back to the first after finishing with the last, with a self-generated list of improvements.
If the results were truly effective that would be acceptable. Yet what the processes fail to do is apply coherent reasoning in a way that is consistent, predictable and capable of winning the hearts and minds of staff.
A key piece missing from the jigsaw puzzle is legal reasoning. Generations of effort by common law lawyers has created a methodology that allows for the sophisticated application of (often memorable) rules. This most valuable discipline comprises an approach honed by argument, the careful assessment of facts and building from precedent. It involves a commonly accepted, practical, and easy-to-grasp system of reasoning which allows like cases to be treated alike, and differing cases to be distinguished.
Compliance with applicable laws and regulations is a baseline of institutional expectation. However, key legal concepts such as equity and reasonableness should also, in addition to clarity and consistency, be fundamental to any cultural analysis, more so than self-referential ideas of best practice. It is overall unfortunate that legal disciplines are generally overlooked, with the result that cultural change programmes achieve inferior results to those which could otherwise be delivered.
The problem is how to develop a commonly understood, practical way of behaving which permeates a firm, allowing innovation to thrive and ensuring respect for the system itself.
Rules and precedents, along with judgement, are the most effective way of doing that – ie, legal methodology, which has value even when new facts or issues arise.
This does not mean that the principles or rules developed or applied should be legally binding. They would not be. The point is merely that untrained personnel, however well-intentioned, are unlikely to be in a position to create their own system of reasoning across a complex practical area, such that it will withstand the scrutiny of others. The effects of their efforts will therefore be insufficiently felt.
What now needs to happen is that many banks must start afresh, with (practising) lawyers looking over what has been done. Basic principles will have to be carefully formulated and ordered, in a hierarchy of importance, reflecting the activity of the particular business. Hypothetical situations will need to be developed and written down, by reference to possibilities based on actual business activity. These should demonstrate what amounts to acceptable practice and where the lines are drawn. Then there can be training, which should only be conducted by those adept at implementing legal reasoning methods.
When something goes wrong, there need to be proper fact-gathering processes and hearings at which arguments can be presented and heard in an unhurried format.
Legal reasoning has been developed to its current form as the only system that carries legitimacy across society. The best version, the common law, has been successfully exported all over the world, gaining acceptance and being chosen above other systems where the option arises. Its methods are impersonal and not dependent on individuals, although some are clearly better at it than others. The results it brings are not from luck. They arise because of its superior approach and its intrinsic ability to gain acceptance.
If the right expertise is deployed, real cultural change can be achieved. Only by such means will any programme be accepted by all as well-meaning and credible, rather than as the creation of particular individuals trying to do their best but inevitably falling short a lot of the time.