Just over a decade from the beginning of the financial crisis, regulators have been working hard to introduce new measures that should ensure that another similar crisis would be less likely to erupt. Many are asking how successful regulatory reforms have been as the real cause of the crisis is so difficult to address.
Boise State University of Idaho, US gives a concise description of what is meant by the ‘tone at the top’. It is a term that is used to define management’s leadership and commitment towards openness, honesty, integrity, and ethical behaviour. It is an essential component of the control environment. The tone at the top is set by all levels of management and has a trickle-down effect on all employees. If the tone set by management upholds honesty, integrity and ethics, employees are more likely to uphold those same values.
Some recent reports coming from German business giants illustrate very graphically that unless the quality of leadership in business is underpinned by impeccable ethical behaviour, a financial and reputational crisis becomes inevitable. In 2015 Volkswagen was humiliated when it became clear that the top brass of this German giant knew about their engineers’ tampering with the emission system of cars to defraud customers and circumvent environmental controls. The strong brand that is associated with anything that is made in Germany was severely tarnished. The company’s shares are still struggling to hit the levels achieved before the scandal became public.
European regulators have tried to foster within banks a culture of compliance with regulation
More recently, the equally important corporate giant Deutsche Bank has had to face the reality of its toxic corporate culture. Deutsche has been involved in 28 cases of regulatory infringements since 2000 and had to pay fines amounting to $12.5 billion. Its troubles are not over. Many analysts are asking whether Deutsche will continue to exist at all in its present form.
The toxic corporate culture that afflicts Deutsche Bank can be found in many organisations that believe that they are so successful in generating profits that no regulator will dare to touch them.
On the day Deutsche started issuing discharge letters to staff employed in its London office as the cull of 18,000 jobs started, some executives had called in upmarket Fielding & Nicolson tailors into the London headquarters to fit them with new bespoke suits that cost about €2,000. Journalists of the popular media took photos of the tailors walking in the Deutsche offices holding several suit bags.
Deutsche’s new CEO Christian Sewing attempted some urgent damage limitation tactics to hide the toxicity of the bank’s culture. He told a German newspaper: “I can’t understand that someone would call tailors to fit suits on Monday. On the same day, we had to tell many colleagues in share trading that they would have to leave.”
One can easily be misled into believing that an organisation has the right culture by merely believing the waffle in mission statements reproduced on corporate websites. In 2017, former Deutsche CEO John Cryan issued a letter of apology to the bank’s clients and shareholders for the incidents of misconduct. He wrote: “We want to be a bank that contributes to economic growth and the community. A bank that can generate a positive impact – for the clients, employees, investors and society.”
The reality is that the tone at the top was very different from what the former CEO wrote. Deutsche Bank repeatedly failed to fulfil promises made to regulators each time it was fined for lapses over the past 13 years. The bank’s top management preferred to settle penalties imposed by regulators rather than contest them. But they continued to promote a culture that rewarded short-term profitability at the cost of long-term sustainability.
William Black form the University of Missouri-Kansas City argues that Deutsche Bank either needs to be under completely new management, where you have to rip out the entire top leadership, or it needs to be merged with another bank. No large organisation can survive for long when its management and employees adopt a silo mentality that promotes internal competition rather than a corporate alignment between strategy and all operational units.
European regulators have tried to foster within banks a culture of compliance with regulation. They have encouraged bank executives to put their clients’ interest ahead of their own bonuses and ambitions. For this to happen the top brass of banks need to set the tone at the top to get everybody in the organisations to approach rules in the same way.