Salz Review - Wall Street Journal

Salz Review
An Independent Review of Barclays’ Business Practices
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8.6 How did leading bankers reach these sobering conclusions? The answer seems to lie
partly in the fact that the crisis (and other events covered by this report) highlighted
in the public eye the imbalance between high pay (at least for some), high risk, and
treatment of customers and other stakeholder interests. It has become increasingly
apparent that the UK public also considers its major banks to be semi-public
institutions. The crisis seemed to reveal levels of carelessness relating to capital
adequacy, concentration of risk and unsustainable funding models. This carelessness
was possibly encouraged by the Government who were content to allow the
misplaced optimism that a new economic paradigm was evolving. The idea that
leaders of some banks somehow allowed their organisations to ‘forget’ these
fundamental principles and to pay disproportionate rewards, based on a share of
unsustainable profits, led to a conclusion that leaders, tone from the top and culture
went awry. Bank leaders became identified with driving profit and shareholder return
rather than promoting a clear sense of purpose, instilling good values, and doing the
right thing for the customer and the long-term good of the organisation. Banks
became synonymous with flawed business practices.
8.7 Appropriate business practices are always important, but disproportionately so in
higher-risk industries where key business concerns transcend growth, profitability
and competitive advantage. In such industries, management focus on developing
business practices which emphasise the importance of never compromising safety or
of managing risk in a way which avoids catastrophic loss. Banking certainly falls into
the latter.
8.8 When culture compromises business practices, severe reputational risks can ensue –
as the Ford Motor Company experienced in the late 1970s. In 1977, a magazine
article 145 , citing a 1973 Ford internal cost-benefit analysis, claimed that the Ford
Pinto’s structural design was dangerous for passengers and that Ford believed it
would be cheaper to pay off lawsuits resulting from damage and injuries than to
recall vehicles for repair. This caused huge damage to Ford’s reputation, with Ford
ultimately directed to recall the Pinto in 1978 for safety failures. 146
8.9 The lessons from other high-risk industries include fostering a culture where:
leadership and operational discipline is focused on areas of highest risk; speaking up
and working collaboratively with regulators and with other stakeholders is
encouraged; and risks and the appropriateness of business practices are continually
evaluated. Industries which have encountered trouble, or which actively look for
potential trouble and collaborate in working to avoid it, offer some useful lessons for
banks. Appendix D summarises what other industries have done to create the right
cultural context, and describes how these lessons can apply to banks.
8.10 Culture is experienced socially and intellectually. It is the experience which
distinguishes being a customer or employee of one organisation from being a
customer or employee of another. Values are the foundation of culture. They
represent the core of what is important – the shared principles by which individuals
and groups in organisations make choices. They help people to determine that which
145 Mother Jones, Pinto Madness, September/October 1977 issue.
146 See Appendix D for further details of this case.