Can Banks Recover Their Reputations?

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1 REPUTATION INSTITUTE Can Banks Recover Their Reputations? By Kasper Ulf Nielsen and Nicolas Georges Trad Four years after their lending and trading mistakes nearly sank the global economy, banks are again back in the news for all the wrong reasons: Money laundering charges against HSBC and Standard Chartered. Multi-billion dollar trading losses at JP Morgan. And most of all, over the still-emerging LIBOR (London Inter-Bank Offered Rate) scandal, an incredible scheme in which traders at as many as 16 of the world s largest banks conspired to fix the world s most important interest rate. Can banks regain their reputations now, after so many bad events? At first glance, the answer would seem to be, no. At the moment, only tobacco and government are more despised, according to some surveys. To make matters worse, banking is an industry where trust is exceptionally important: even more than most businesses, banking is a business built on faith the faith of depositors, the faith of borrowers, and the faith of counterparties. Take any one of those away and the whole business stands to falter.

2 Can Banks Recover Their Reputations? -Kasper Ulf Nielsen and Nicolas Georges Trad Four years after their lending and trading mistakes nearly sank the global economy, banks are again back in the news for all the wrong reasons: Money laundering charges against HSBC and Standard Chartered. Multi-billion dollar trading losses at JP Morgan. And most of all, over the still-emerging LIBOR (London Inter-Bank Offered Rate) scandal, an incredible scheme in which traders at as many as 16 of the world s largest banks conspired to fix the world s most important interest rate. Can banks regain their reputations now, after so many bad events? At first glance, the answer would seem to be, no. At the moment, only tobacco and government are more despised, according to some surveys. To make matters worse, banking is an industry where trust is exceptionally important: even more than most businesses, banking is a business built on faith the faith of depositors, the faith of borrowers, and the faith of counterparties. Take any one of those away and the whole business stands to falter. Yet over the last five years, banks have acted as if trust didn t matter. Such missteps as making and losing enormous, highly levered bets, or awarding exorbitant bonuses in the same year as it received a government bailout, can only enrage customers who already feel vulnerable because of tough economic times and plummeting home values and fairly or unfairly, blame what some angry European consumers have taken to call the banksters. Consumer exhaustion with bank transgressions is now so great that the industry s entire license to operate seems to be in jeopardy. Last fall, the Occupy Wall Street movement galvanized an entire generation against corporations in general and financial service companies in particular. This spring, after the LIBOR scandal broke, The Financial Times, a conservative newspaper and the hometown paper of British banking, wrote that the only way to save the industry is to fire this entire generation of bank executives. Now, some policymakers are even suggesting that it may be necessary to break the biggest banks up, and restore the Depression-era rules that once limited the bank s ability to trade and operate in certain businesses, such as insurance. Despite all these troubles, there are reasons to remain optimistic about global banking s prospects. A closer look at Reputation Institute s past surveys of consumer attitudes towards banks suggests that their reputations can still be repaired: Bank reputations are volatile, which means they can bounce back again. In 2011, U.S. bank reputations seemed to be on the mend. True, in Reputation Institute s 2012 bank survey, most rankings were lower and that was a survey conducted in January 2012, a few months before most of this year s bad news began to break. But in 2011, 24 of 30 U.S. banks that Reputation Institute tracks for American Banker magazine improved their rankings. In banking, familiarity does not breed contempt. While the public associates namebrand international banks with a variety of financial wrongdoing, they tend to see 1

3 their own bank differently, even if that bank is a major besmirched name. Consumers tend to give their own bank at least 10 points higher on a 100 point scale than a bank they don t know personally. Finally, when it comes to particular products, consumers are generally positive about bank performance. They like their ATMs (although they can be quick to anger if fees are raised as Bank of America learned earlier this year). They appreciate such conveniences as online banking and Pay Pass. But the biggest reason to feel optimistic is that even after the many scandals of the past five years, Reputation Institute s surveys suggest that customers don t really hate banks, they just want to feel that they are being treated fairly. They don t mind their bank making a profit or that some talented bankers are getting paid well. What they do mind is feeling that their hardearned cash is being skimmed off the top. Fixing the problem How do you fix the problem? First, understand its cause. There is no reason to assume, with The Financial Times, that the ultimate fault lies with banks leadership. Certainly, a number of bank industry leaders have failed, but in such a large industry, it s hard to imagine the moral bankruptcy of an entire class. Nor is it easy to imagine that structural issues are the culprit. Shareholders might fire their boards and legislators might limit the repetition of certain kinds of recent abuses, but because they aren t addressing the underlying cause, they won t solve the central problem: how do you stop these powerful institutions from making extraordinarily bad and economically destructive decisions? In fact, the ultimate failure of the banks has not been primarily moral or structural. Instead, the problems reflect a surprising lack of sophistication in managing an important, nonquantitative risk: the risk to their reputation. The major banks are now so global and so complex that the overall potential impact of an important decision seldom seems to be considered. Yet without that kind of overview, terrible mistakes will be made. In a hypercompetitive environment, particularly, the inevitable result is one misstep after another. Over and over again, in trading, investing, advising, and managing, people took actions that looked defensible from the point of view of their own desk, team, or silo, and yet viewed from a more holistic perspective, compromised the bank. Managing for reputation risk. After nearly 20 years as reputation management consultants, Reputation Institute has found that many reputation risks can be avoided simply by creating a structure to evaluate and manage them. Just as a well-run bank will monitor the riskiness of its loan portfolio and its investment holdings, smart companies are now learning to manage and monitor their reputation risks by eliminating the sources of potential reputation disasters before they grow. Companies today have varying degrees of expertise when it comes to managing their reputation. In a recent survey, Reputation Institute found that roughly 13% of major 2

4 companies have reached an advanced stage of reputation management. With some exceptions, particularly among strong regional banks, we find this to be the case with banks as well. Outside banking, the number of companies actively managing their reputation is growing rapidly, as more companies learn about the operational advantages of factoring reputation into their decisions. Developing such a system takes time, but it is the only way to take a truly holistic measure of the risks the company is running. Building a first-rate reputation management system takes years, but five steps is all you need to begin: 1. Say hello to the Reputation Economy. In Reputation Institute s latest global survey of senior reputation leaders, 76% agreed with the proposition that we now live in a Reputation Economy, a world where who you are matters to consumers more than what you sell a proposition perhaps doubly true for banks, where as a middleman, who you are is ultimately a key part of what you sell. Driving this idea through the entire enterprise is an important way to build support for your reputation initiative. 2. Make reputation a key performance indicator. You can t manage what you don t measure is as true for risk management as anything else. Although Reputation Institute s latest reputation leader survey suggests that only 31% of companies track performance as a key performance indicator, further analysis suggests that this is an important metric for focusing attention on important non-financial results. Tracking how employees, customers, investors, and other stakeholders perceive the business can provide an early warning system for spotting emerging problems within the company. 3. Stop the buck. Designating a single reputation leader is another important step. Charging reputation concerns to a particular individual, preferably with the confidence of the CEO, can go a long way toward building a robust reputation risk management system. This may be especially true in a quantitatively focused environment such as a bank, where people naturally speak the language of financial risk much more fluently than the language of reputation. A reputation leader can also provide a second reality-check if some aggressive group within the bank begins to take on outsized financial risks, by reminding them that risks can go well beyond the viability of a particular transaction, such as the role bankers played in the last decade in convincing Greece and other weak governments to take on more sovereign debt. 4. Find a reputation leader you trust. When the CEO trusts the reputation leader, the Reputation Institute survey suggests that the CEO is more likely to ask their opinion when strategic decisions are made, and somehow, those recommendations tend to be implemented more often. The CEO is also more open to regular updates on plans, performance, issues and opportunities. Our survey found that among the more mature companies, a total of 82.2% of reputation leaders say they are fully trusted by the CEO, compared to 60.5% in early stage companies. 3

5 5. Connect. Companies with advanced reputation management skills communicate much more frequently with their stakeholders than companies that don t. They use all the same new and old media tools, including social media, but companies good at reputation management use them much more intensively. It also means using these tools not just to get a message out, but to get messages in. HSBC, for instance, was exceptionally good at its marketing, running advertising campaigns that won industry prizes and widespread recognition, and yet the bank seems to have totally misunderstood the new seriousness of the regulatory climate with respect to US antimoney laundering rules. The first thing is character Asked once whether commercial credit was based primarily on money and property, financier JP Morgan answered that it was neither. No sir, replied Morgan. The first thing is character. Before money or property? his interlocutor asked. Before money or anything else a man I do not trust could not get money from me on all the bonds in Christendom. The same holds true for banks. More than most industries, banking depends on reputation. From Roman columns to bowler hats, bankers have almost always sought to project a conservative image that reassures their customers that they could be trusted with their money. Yet for the past five years, the industry has responded to its repeated scandals with mea culpas to legislators and executive suite sackings, but not much more. Now public pressure is building for some wholesale changes. One way or another, public tolerance for more banking scandals is declining. Despite their size and political power, banks will not be able to continue business as usual. Being too big to fail cannot protect the big banks forever. The only question is whether they change voluntarily, or wait until politicians and angry consumers force the issue. 4