Credit Suisse: Loosing Stakeholder Trust

Musings about Trust in Banking (I)

Unfortunately, as of March 19th, 2023, Credit Suisse is soon to be history. In the coming days, we can expect to see numerous articles exploring the role of trust in economic affairs, using Credit Suisse as an example. While it is still too early to comprehensively analyze the intricate dynamics of trust that were at play in Credit Suisse’s case, I will attempt to outline five lessons that can be drawn from an analysis of the Credit Suisse case. Each of these lessons will be discussed in a separate article.

In this first article, I will examine the crisis of stakeholder trust that Credit Suisse encountered in the year preceding its collapse. I will also assess how none of its executive managers seemed to have effectively navigated this situation. Furthermore, I will juxtapose this scenario with existing models from the trust literature that demonstrate how stakeholder trust can be maintained and even strengthened in challenging circumstances.

The second article will look at the lack of good corporate governance at Credit Suisse, which significantly contributed to the erosion of trust in the institution. I will delve into how the board of directors could have enhanced the bank’s reputation and evaluate how board dynamics can foster better ethical oversight and increased board efficacy, drawing on Credit Suisse as a negative case study.

The third article will look at trust and the bank run. In the week before UBS’s forced acquisition of Credit Suisse, a loss of confidence in the bank and the broader financial system led to the possibility of a bank run and nervous investors on the stock exchange. Here, I will discuss how low trust in the bank, a rupture in confidence, and limited calculative trust in bank regulations and other interventions from the outside were related to the bank run.

I will scrutinize the Swiss State’s response to the crisis in the fourth article. The application of emergeny law and the curtailment of shareholder rights, as well as the intransparent communication may potentially undermine trust in the State. I will present some quick surveys conducted in the week after the collapse of Credit Suisse, which point towards this direction and will also point out possible consequences for future calculative trust in the banking system.

The success of the so-called “shotgun” wedding between UBS and Credit Suisse will be discussed in the final article of this series. The success of this merger will depend on UBS’s ability to rebuild trust within the newly merged entity, which is no small feat given the circumstances surrounding the merger and the state of Credit Suisse at the time of its collapse. Additionally, it is crucial to remove the drivers of unethical behaviors that brought Credit Suisse down. Lastly, given the size and importance of this new bank for Switzerland it is imperative that UBS transforms into a highly reliable and responsible organization to mitigate the risks associated with the newly merged entity.

The buyer needs a hundred eyes, the seller not one

A Timeline of the Credit Suisse Drama

To build my small trust ponderings a look at the recent events is helpful:

July 2022: Ulrich Körner becomes the new head of the major bank. Thomas Gottstein announces his resignation.

October 2022: The bank announces a restructuring and a capital increase of CHF 4 billion. Credit Suisse brings Saudi National Bank on board as a new investor.

February 9, 2023: The bank reports a loss of CHF 7.3 billion for fiscal year 2022. Credit Suisse also expects another loss for 2023.

February 28, 2023: FINMA closes an investigation into Credit Suisse over the Greensill scandal. The authority harshly criticizes risk management.

March 6, 2023: Long-time major shareholder Harris Associates sells all shares in the major bank.

March 9, 2023: The bank postpones the publication of its annual report at the very last minute. A few days later, on March 14, the bank then publishes its annual report.

March 15, 2023: The CS share falls temporarily by over 30 percent to a new all-time low of 1.55 francs. Reasons included statements by the new major shareholder from Saudi Arabia.

March 16, 2023: Credit Suisse borrows up to CHF 50 billion from SNB. At the same time, the bank announces a series of debt buybacks worth around CHF three billion.

March 19, 2023: UBS takes over its competitor Credit Suisse (CS). The National Bank supports the takeover with liquidity assistance of up to CHF 200 billion. In addition, the federal government provides a guarantee of nine billion francs to cover potential losses for UBS in connection with the takeover.

The Year Lost to Shore Up Confidence

In 2022, a new chairman of the board, Axel Lehmann, was appointed following António Horta-Osório, who resigned after an investigation commissioned by the Board. Lehmann promised to create a new strategy and “to embed a stronger risk culture across the firm”. Shortly afterwards, Ulrich Körner was promoted to be the new CEO of the bank “to shore up confidence” as Credit Suisse reported a net loss of CHF1.6 billion. The bank had been caught up in almost every major scandal that hit the banking industry in the years before this duo took over (for an overview see here: https://www.theguardian.com/news/2022/feb/21/tax-timeline-credit-suisse-scandals), many of which were still looming large as considerable legal risks. Unfortunately, despite high-reaching wishes, confidence (or more precisely trust) did not return. During their short “reign”, Credit Suisse’s share price plummeted from 5.9 dollars to 0.9 dollars, clients had withdrawn 110 billion Swiss francs ($119 billion) of funds in the fourth quarter of 2022 and the bank suffered its biggest annual loss of 7.29 billion Swiss francs since the financial crisis. At the same time, and despite it was judged to be a “great place to work for”, employees on Kununuu gave the bank a rating of 2.9 out of 5.

Sustaining Trust in Crisis: Learnings from the Literature

So what went wrong from a trust perspective? Clearly, trust in Credit Suisse was in deep crisis when Lehmann and Körner took over. But could they have learned from companies in a similar situation? How can trust be preserved or even built in testing times? Sadly, trust literature is not very rich on the topic of trust preservation. However, in a recent study, colleagues looked at data from four organizations that experienced significant disruption during the last global financial crisis and managed to keep trust levels high. On this basis, a helpful framework was developed that explains how organizational actors can accomplish the preservation of employees’ trust in their organization in times of crisis (https://dro.dur.ac.uk/30437/1/30437.pdf).

Source: Gustafsson, S., Gillespie, N., Searle, R., Hope Hailey, V., & Dietz, G. (2021). Preserving organizational trust during disruption. Organization studies, 42(9), 1409–1433.

The learning was: trust has to be actively managed. In a situation of crisis companies and company executives who actively contribute to the following factors are able to sustain or even build employee trust:

1. First, cognitive bridging is needed — leaders have to make clear how the organisation can transition from the present and difficulty-ridden situation to a hopeful future. Cognitive bridging asks for both an honest look at the status quo and a convincing new strategy.
2. Secondly, it is essential to establish a supportive environment where employees can openly express their emotions, including anxiety, shame, fear, and anger. This will foster the necessary resilience to overcome current challenges. When employees can process their emotions and receive mutual support, they can regain a sense of hope and trust.
3. And third, everything needs to be enacted with inclusion — giving employees a voice to leave nobody behind as well as applying fair and consistent procedures throughout.

In order to utilize these three strategies effectively, it is necessary to have a certain level of trust capital as a foundation. Trust capital refers to the reserve of trust that was built during good times. Furthermore, as indicated in the research mentioned, during times of crisis, leaders must redefine their roles and act as guardians and stewards not only for their organizations and stakeholders but also for their employees.

(External) Stakeholder Trust

Yet what about other stakeholders? I would argue that the mechanisms to preserve the trust of clients and investors are not so different. In an empirical study on stakeholder trust, some colleagues from the US emphasized the importance of understanding stakeholder expectations (in normal situations).

1. For internal stakeholders such as investors and employees, high managerial competence is crucial. In crisis situations, this equates to the cognitive bridging capacity of managers as they navigate uncertainty. Internal stakeholders also value honesty, transparency, a clear reflection of the situation, and a convincing strategy.
2. External stakeholders, such as clients, place greater emphasis on technical proficiency. Hence they require a baseline level of trust in an organization’s ability to carry out its processes precisely and reliably despite the circumstances.
3. Regardless of stakeholder type, honesty and integrity are universally important. In the case of deeply entrenched stakeholders, such as long-term investors and clients in wealth management, value alignment and good intentions also matter. Transparent procedures that give stakeholders a voice, coupled with empathetic behavior, have been shown in numerous studies to be significant signals of good intentions and can facilitate value alignment and trust, particularly in crisis situations.

Learnings from Lesson 1

So where does this leave us? A view from the outside suggests that:

a) There was very little trust capital to start from — trust needs to be built in good times (and throwing money at people is not a substitute for building trust).

b) Cognitive bridging has failed on both sides — neither has the management of Credit Suisse been known for being remorseful and forwardly honest nor did the new strategy convince the markets.

c) Transparent procedures have not been the strength of Credit Suisse in the past (which also seems to be manifested by their apparent lack of technical competence in risk management) — think spying scandals or the handling of legal risks.

d) In addition, whether and how stakeholders were given a voice and were treated with respect was probably very dependent on the client advisors or in the case of internal stakeholders on the leaders in charge. Whereas how client advisors and leaders would understand their job — work for bonus or intrinsically motivated service for customers — could be well a function of the HR practices and culture of Credit Suisse (but that is something I am going to discuss in part IV).

Of course the big question is: should we have trusted CS in the first place? And here the answer seems no! But these lessons can still be helpful — also for the new start within UBS.

Literature

Gustafsson, S., Gillespie, N., Searle, R., Hope Hailey, V., & Dietz, G. (2021). Preserving organizational trust during disruption. Organization studies, 42(9), 1409–1433.

Pirson, M., & Malhotra, D. (2011). Foundations of organizational trust: What matters to different stakeholders?. Organization science, 22(4), 1087–1104.