Credit Suisse: Trust and (Failing) Corporate Governance
Musings About Trust in Banking (II)
This article discusses how corporate governance, the system that controls a corporation, including the board of directors who are in charge, contributes to the reliability, soundness and integrity of a corporation and thereby plays a major role whether a business is seen to be trustworthy or not. I will first outline the expectations of stakeholders from the board of directors to foster trust. Secondly, I will elucidate the factors required for the board to fulfill external expectations and demonstrate the role of internal board dynamics, particularly trust among board members, in enhancing the board’s effectiveness. Lastly, the article proposes measures to prevent the board’s moral disengagement as well as to enhance ethical decision-making.
The Board of Directors and Stakeholder Trust in Companies
Trust is established through holding positive expectations towards the behaviors and intentions of another party, where factors such as competence, integrity, benevolence, and value alignment play a significant role. Trust in companies is geared towards two aspects: trust in the abstract system (eg. the processes and structures applied in corporate governance) and trust in “faceworkers”, important decisionmakers of a business — for instance in the directors. Studies on stakeholder trust have demonstrated that:
- Integrity, honesty, and reliability are highly esteemed by all stakeholders as they provide the foundation for assuming risks in a relationship. For instance, investors anticipate that annual reports will be precise, and letters from the president will represent their best understanding of the situation.
- Internal stakeholders, such as employees and investors, seek indications of managerial competence, expecting the board to make appropriate strategic decisions and provide adequate oversight. Conversely, external stakeholders anticipate technical proficiency, such as high-quality products and services.
- Lastly, deeply ingrained stakeholders, such as long-term investors, employees, and commercial clients, also look for alignment in values with their own.
This brief introduction to stakeholder trust emphasizes that trust is bestowed upon a board of directors that functions effectively. Yet it is not sufficient for the board to simply carry out its duties; board members must also lead by example, uphold a set of values, and have the courage to be honest and speak out when necessary. In essence, the board of directors must foster high performance while also developing moral character and adhering to a set of ethical principles. Stakeholders expect boards to be effective in overseeing and formulating strategies, but they also expect boards to define the company’s purpose and live up to it. Therefore, boards must be capable of answering the question, “What values do we stand for?
In the next section I will explain how the board can meet expectations of reliability, managerial competence and technical proficiency.
The Effective Board of Directors
Research on corporate governance currently emphasizes the importance of establishing correct “processes and principles” for effective corporate governance. However, this emphasis on structural aspects in the literature has restricted our comprehension on the importance of teamwork among board members. Only through effective teamwork can the board leverage its “distributed” competence to manage both oversight and strategic direction successfully. Fortunately, we can glean valuable insights from the literature on top team processes regarding the characteristics of effective teams.
- Effective boards rely on critical and problem-oriented thinking. To succeed, boards must be willing to learn from failures, practice reflexivity, and consider issues from multiple perspectives. This is facilitated by a high degree of cognitive diversity, awareness, openness, and humility (acknowledging that no individual possesses complete knowledge). However, the most crucial factors are mutual honesty and social courage. These qualities enable board members to speak up, engage in debates, and participate in productive discourse, all of which is ultimately leading to collective effectiveness.
- In order to foster cognitive diversity, it is crucial to establish trust among board members and develop conflict management skills. Diverse perspectives can only lead to effective problem-solving if board members are willing to engage in constructive discussions, think creatively, and not avoid conflicts. However, all of this can only be achieved if the board has mutual trust, which creates an environment of openness and transparency. Additionally, trust allows the board to act with the necessary level of reliability that is expected of them.
- Blockers to effective teamwork identified in the literature include power inequality, autocratic leadership, lack of a shared ideology, and short-termism on the board.
What we want are boards striving for high effectivenes — what we mostly get are golf partners or convenient blind and mute bystanders.
Was the Board of Directors at Credit Suisse Effective?
So, how did Credit Suisse perform on these indicators? First, power inequality prevailed. It is widely known in Zurich that the three most powerful chairmen of the board — Rainer E. Gut, Walter Kiehlholz, and Urs Rohner — belong to the same clique. Board members who did not originate from this same clique may have had difficulty having their voices heard. Second, open and honest discussions might not have been abundant. Rumors suggest that none of the Chairmen or CEOs of Credit Suisse over the last 15 years have been vivid and open communicators, which raises questions about the nature of discussions within the board.
Therefore, even though the board appeared diverse on paper (although cognitive diversity cannot be assessed merely by appearance), it seems that the team climate was not suitable for reflexivity, critical thinking, and collaboration that merges insights from various viewpoints.
However, what about the ethical decision-making and ethical involvement of the board? After all, integrity, which is linked to morality, is a fundamental expectation of all stakeholders, and the ethical lapses of Credit Suisse are one of the most frequently debated aspects of the present circumstance. So what are these values the board stands for? And how are these acted upon?
The Case for Ethical Decision-Making of the Board
If we view corporate governance as the act of being in control, it becomes apparent that board members must possess robust self-regulatory abilities, sound reasoning capabilities, and a willingness to make decisions that are not only correct but also morally sound. Ethical decision-making depends on several factors, and I will briefly discuss two here. Firstly, effectiveness alone is not sufficient; it is the pursuit of the right and the good that matters. Board members must position themselves in the moral space, considering which interests they seek to serve (what are the consequences of my decision and what is my circle of moral concern), how they define “the right thing to do” (eg. what principles to apply), and what their own potential is to bring about the (common) good. Additionally, they need to develop a shared moral purpose. Secondly, and as a minimal condition: they must be willing to stand up against harmful actions taken by others. To put it negatively, they should prevent moral disengagement (actually not only in the board, also in the company). Moral disengagement has been studied extensively in moral psychology and is evidenced by the following categories:
Research on moral disengagement is expanding, and we now have a relatively clearer understanding of what causes it. Newman and colleagues (2020) have concisely summarized the research:
The Board of Directors at Credit Suisse and Possible Moral Disengagement
Behaviors of prominent leaders of Credit Suisse point towards some level of moral disengagement as it is easy to come up with examples for moral disengagement. For instance, one article in the Financial Times featured “Former Credit Suisse chief Tidjane Thiam defends his record” — or as the Swiss Press puts it, “using euphemisms, cherry-picking advantageous comparisons, and even attributing some of the blame (it wasn’t me) to avoid taking responsibility. Similarly, at the press conference announcing the merger with UBS, the current chairman of the board responded to the question of who was to blame by saying, “Let’s not look backwards.” Anyone who takes the time to review the press coverage of the last 15 years will find ample evidence of moral disengagement. Why this was the case merits further analysis.
Learnings from Lesson 2
Summarizing the factors contributing to a boards effectiveness and moral disengagement the following factors become pertinent:
(1) Select board members also for character, for instance search for board members, who score high on the Honesty-Humility Factor (as evidence in the Hexaco model of personality) and have a strong and salient moral identity.
(2) enable a pro-active, trust-based and challenging team climate. More than this establish a climate of excellence where board members seek to become better versions of themselves and try to excel in bringing out the good character of the company.
(3) make sure that the chairman of the board is neither overconfident, nor dark triad, nor embedded in a strong power clique,
(4) make board members not dependent on pay (motivation for financial gain is not a good motivation for any board member — they should always be able to walk!),
(5) enable social courage, self-regulation, empathy, and
(6) train for moral literacy.
In sum: we expect the board of directors to act competent but also with integrity. The effectiveness of a board is also dependent on how they manage their team dynamics — mutual trust and the alertness and willingness to speak up are needed. And the board needs to work on its ethical compass, establish a shared moral purpose and fight factors that enable moral disengagement.
A Collection of Insights from Discussion on LinkedIn
One important strand of discussion was about how a board might acquire the necessary deep knowledge:
Then the discussion also turned to the question of the Board — C-Suite relations.
And finally a number of readers noticed by rather timid approach to delineate the conditions for ethical decision-making. As a consequence I reworked the article a bit — and I will write another one, which will be fully dedicated to ask: what is a GOOD board. Here however interesting insights from the discussion:
I would also like to collect the links of this conversation:
DISCLAIMER: THIS IS NOT A SCIENTIFIC ARTICLE — IT IS A FIRST STAB AT THE TOPIC
Literature
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Newman, A., Le, H., North-Samardzic, A., & Cohen, M. (2020). Moral disengagement at work: A review and research agenda. Journal of Business Ethics, 167, 535–570.
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