Trust UBS? It Will Take a Lot For a Happy Ending!
Musings About Trust in Banking (V)
While we have examined the recent past, the greatest obstacle lies ahead — how to ensure a seamless journey towards better banking after the forced marriage between Credit Suisse and UBS. I will discuss four key challenges that must be overcome, and trust will again play a crucial role. First, the transition phase must be handled with care, as it involves merging two unwilling entities while downsizing. During the transition phase, employees must take a proactive approach by doing their job mindfully and with full effort to keep clients and investors aboard, and this in a situation where they will be uncertain about their own job security or future prospects as “survivors” of the layoffs. Active trust management is crucial during this phase for everybody involved to muster the energy to cope (or even thrive). Second, in order to regain or sustain trust UBS must urgently identify the causes of the scandals and problems inherited from Credit Suisse, not only by rooting out the bad apples, but also by understanding the mechanisms that led to unethical behavior. UBS needs to identify what caused the “bad barrel” at Credit Suisse. Difficult decisions and changes in management practices unvariably will become a necessity. As a third suggestion, I propose a new risk-management strategy for the future “monster-bank” — a nickname given to it in Switzerland. Given its immense size and entwinement with the welfare of the Swiss nation, conducting business as usual is not an option. Instead, the bank should be treated like a nuclear power plant, where a no-accident policy is strictly enforced. High-reliability organizations, as discussed in literature, provide valuable lessons that UBS should consider adapting. Fourthly, I will also argue, that the Swiss public is expecting the new UBS to be a highly responsible organisation — a bank that merits the trust of all actors involved. Unethical banking finally needs to become a thing of the past for the good of all involved!
The Transition Phase: How To Navigate the Layoff Phase
The merger between Credit Suisse and UBS caught employees at both banks off guard. Prior to the merger, UBS, under the leadership of the then-CEO Ralph Hamers, had been undergoing a modernization process, with a focus on agile working and a decentralized, less bureaucratic, and proactive work environment. While at the same time and despite being aware of the difficult situation their employer was in, employees at Credit Suisse worked hard to regain traction, particularly those who remained loyal to the bank. This effort placed them under immense strain, but also likely fostered a sense of solidarity among them. Currently, all employees from both banks are at risk of being part of the announced massive layoffs and of loosing what they might have experienced as motivating (in the caseo UBS) or affectively binding (in the case of CS). Yet precisely in this challenging phase, UBS urgently and more than ever requires proactive, motivated and solidaric employees who can demonstrate to suspicious clients and investors that the bank is not only as good as it was but even better for them in the future.
The trust literature provides a helpful model for enabling pro-active responses in such challenging situations, which requires two key factors.
First, there must be credible cognitive bridging at the top, with active trust management and a convincing outlook that explains the ongoing and changing context in understandable terms, while also emphasizing hope. Additionally, care and support are crucial, as demonstrated by other studies. Second, top-down trust is also important, particularly in terms of empowerment. In this situation, the courage, empathy, and support of middle and lower-level leaders will be critical in providing employees with the latitude and energy needed to respond effectively.
UBS has taken action by appointing Sergio Ermotti, a new and former CEO, to lead the transformation. The reason cited for his appointment is his extensive experience and intimate knowledge of the Swiss banking sector, as well as his successful track record as a turnaround manager during the last financial crisis. Additionally, his deep network within Swiss politics is seen as an asset. The hope is that Ermotti can provide the necessary inspiration and hope for employees and all other stakeholders. The success of the transformation will also depend on how well the transformation team understands the situation.
The Detoxifying Cure: Bad Barrels not only Bad Apples
Both the chairman of the board and the CEO of UBS have stated that their goal is to eliminate the toxic culture in certain parts of the former Credit Suisse. Although the exact meaning of “toxic” is not completely clear, they have emphasized that they will closely monitor the behavior of managers and some may need to leave. Additionally, they plan to scrutinize the “unhealthy” incentive culture. It seems clear to the current leadership of UBS that without such a “detoxifying cure” public, but maybe also stakeholder trust at large cannot be won back or sustained.
The literature on unethical decision-making provides a more precise understanding of the concept. Here toxic can be equated to circumstances creating incentives, contagion effects and norms, which are conducive to unethical intentions and behaviors. In the descriptive literature that I will draw from, unethical behavior is defined as a violation of widely accepted societal norms, which may or may not coincide with organizational norms. In fact, when referring to “bad barrels,” it is more likely that the organizational norms are not accepted by society. Unethical behavior may also be illegal, but it is not limited to illegality. Individuals whose characteristics lead to unethical decision-making are often referred to as “bad apples,” while “bad barrels” refer to the more general organizational environment that fosters unethical behavior. Bad barrels and bad apples can also interact, for example, if bad apples cause social contagion and strengthen a bad barrel or if bad barrels attract bad apples which then strengthen the bad barrel situation. A meta-analysis identified several factors that contribute to unethical decision-making:
Who are the bad apples? The study identifies individuals who are more likely to make unethical choices at work, including those who obey unethical orders from authority figures or act out of fear of punishment (low cognitive moral development), those who manipulate others for personal gain (i.e., are Machiavellian), those who lack awareness of the consequences of their actions (i.e., have an external locus of control), or those who believe that ethical choices are relative to circumstances (i.e., have a relativistic moral philosophy). Organizations can use these findings to inform personnel selection and leadership promotion, and to prioritize leadership development as a means of promoting ongoing personality and moral development. Incorporating moral literacy into educational curricula can also help address these factors.
What then makes the bad barrel?
The study provides strong evidence that companies promoting an “everyone for himself” culture, or egoistic climate, are significantly more likely to encourage unethical behavior among their employees. Conversely, when a company emphasizes the well-being of multiple stakeholders, such as employees, customers, and the community (benevolent climate), or adheres to rules that protect the company and others (principled climate), ethical decision-making is more likely to occur. Furthermore, a robust ethical culture that clearly communicates expectations for acceptable behavior through leader role-modeling, reward systems, and informal norms, is vital for preventing unethical decision-making in the workplace, as also emphasized by Treviño in 1990. Organisations thus are well advised to analyze how their systems and procedures pronounce benevolence and ethical principles; in addition especially HR practices which emphasize competition and egoist behaviors — such as high powered incentives, very large pay and positional goods differentials and overambitious goals — should be used with caution only.
Taking the recent CS/UBS case as an example, it becomes clear that the HR practices mentioned in the last paragraph of the study are the “low hanging fruits” that banks can utilize to prevent unethical decision-making and to set up a more robust ethical climate. Typically banks, even more so investment banking, are relying on high powered incentives, stark status and pay hierarchies and pronounced, ambitious “sales” goals. In an industry where other factors are already contributing to “unhealthy” risk taking, the advice must be to drastically reduce those aspects which lead to an egoistic climate. Also, those who were responsible for the former unethical choices need to leave.
Observing how middle and lower-level leaders manage the current transition phase at UBS would also provide valuable insights. Leaders who can create a supportive and empowering environment for their teams are more likely to establish a benevolent climate that discourages unethical behavior. Such leaders should be retained and promoted as they can play a crucial role in building a better and more ethical banking industry in the future. As Henry Mintzberg suggested during the previous banking crisis, it is crucial to pay close attention to middle management and identify the remaining community builders who can drive positive change. These leaders are the key to creating a more ethical and sustainable banking industry.
Building the Future: A High Reliability Industry…
After successfully managing the transition phase and detoxifying the bank, a crucial final shift must occur. As the first merger of two systemically relevant banks and one with an asset size larger than twice the Swiss GDP, Switzerland’s interest must be in creating a “too reliable to fail” bank. The philosophy of risk management in banks must change from a risk-return perspective to a reliable performance perspective, as demonstrated in “high reliability organizations” (HROs). HROs operate in challenging and unpredictable environments where errors can have severe consequences. They share a common characteristic of being able to operate safely and effectively in high-risk environments. These organizations prioritize safety, commit to continuous improvement, and foster a culture of mindfulness that encourages workers at all levels to be vigilant and proactive in identifying and managing risks.
The characteristics of HRO are summarized in the following figure:
What does this mean in simpler terms? High reliability organizations (HROs) need to create a culture of trust and benevolence, where problems can be discussed and solved openly. They must continuously invest in the development of critical thinking and strive for excellence by questioning and improving processes, and practices. These organizations should not tolerate overconfidence, selfishness, or unhealthy competition.
…and a High Responsibility Organisation
Sticking to high reliability principles is one step, which must be followed by a commitment to become a responsible bank! Such a bank would also seek to ask the normative question: what is our purpose? And its purpose would go beyond do no harm as discussed so far in this article. It would have to define its circle of moral concern — to whom do we want to contribute positively — and its general ethical philosophy — based on what do we define what is right and wrong. And such a bank would seek to not only better its processes and practices as asked for in the high reliability organisation but also to enable the (moral) development of its employees, the development of services which contribute positively to society and in general would seek to bring the good life to all it touches.
However, achieving this type of organization requires a shift away from the focus on short-term profits that investors often prioritize. The executive team and board of directors of UBS then would face a challenge in balancing the need for financial success with the long-term prosperity of the bank and responsible banking practices. Despite these challenges, it is worth asking if we (the Swiss people) can afford not to have an HRO(2) UBS? In other words, can we afford not to have a reliable and trustworthy bank that can operate safely in unpredictable environments and contribute positively to society? For me the answer is clear: we finally need to move to good (reliable and virtuous) banking!
All Is Well That Ends Well?
And yet if we look back on these five articles on Credit Suisse/UBS even this might not be enough. Can we get responsible banking without responsible corporate governance, good regulations of the banking sector and more alert and less (excessively) confident stakeholders? History suggests that we cannot. What we should demand is:
- We need an effective and responsible board of directors. Unfortunately, in the case of Credit Suisse, the board has failed for 12 years. Even at the last general assembly, some of these obviously not courageous, critically thinking, and morally alert board members were re-elected, despite other suggestions (see, for instance, Ethos Stifung). It appears that institutional investors are still not paying attention to who is sitting on the board, and current laws make it very difficult to hold board members accountable. Corporate governance scholars will need to develop ideas for better selecting board members (such as background checks by the Financial Authority) and implementing harder criteria to ensure that certain personality profiles are not eligible. Additionally, incentives and obstacles for board members to speak up need to be analyzed and added to soft laws of good corporate governance, along with regular board team trainings. Finally, responsible institutional investors should work together to remove ineffective and morally deficient boards.
- We need better regulations, and it is up to legal scholars and politicians to work this out. It is clear that we must reestablish the reputation of the Swiss banking sector. The recent near-bank run highlighted the importance of effective regulations and timely interventions for maintaining calculative trust. Unfortunately, it seemed that none of this was present. Regulations, which had been put into place after the last banking crisis, were deemed ineffective, and the too-big-to-fail precautions were said to be inadequate for the current situation. The coordinated efforts of the federal council, FINMA, and SNB were initially seen as timid and then questioned by numerous experts after the solution presented was declared as “the only feasible” without even explaining why alternatives were not adequate. Additionally, the chosen solution curtailed shareholder rights and could lead to significant costs for the Swiss public in the future without being legitimized in a democratic process. Therefore, an extensive and in-depth analysis, not to be led by consulting firms like McKinsey, is needed, as well as a problem-oriented, non-populist debate in parliament. New regulations must be deliberated with the public (and with stakeholders), as a loss of calculative trust could have severe consequences. Much is at stake, and we must act accordingly.
- We, the civil society, must also awaken and demand a positive outcome from this situation! An essential lesson from the last banking crisis was overlooked: we cannot trust banks naively, whether as clients, investors, or citizens. At best, we should approach banking with suspicion, as their trustworthiness remains uncertain and requires informed qualification. Furthermore, we must not hesitate to act if we observe banks behaving unethically again. We must change our bank, quit our jobs loudly at amoral employers, and only invest in sustainable and responsible banking.
Literature
Kish-Gephart, J. J., Harrison, D. A., & Treviño, L. K. (2010). Bad apples, bad cases, and bad barrels: meta-analytic evidence about sources of unethical decisions at work. Journal of applied psychology, 95(1), 1.
Mishra, A. K., Mishra, K. E., & Spreitzer, G. M. (2009). Downsizing the company without downsizing morale. MIT Sloan Management Review.
Mishra, A. K., & Spreitzer, G. M. (1998). Explaining how survivors respond to downsizing: The roles of trust, empowerment, justice, and work redesign. Academy of management Review, 23(3), 567–588.
Weick, K. E., & Sutcliffe, K. M. (2001). Managing the unexpected (Vol. 9). San Francisco: Jossey-Bass.
Weick, K. E., & Roberts, K. H. (1993). Collective mind in organizations: Heedful interrelating on flight decks. Administrative science quarterly, 357–381.
Thanks
Thanks to Sara Fontanet who went through the pain to look at earlier versions of this article series and pointing out some logical flaws.
