Rebuilding trust in finance
As some of readers might have noticed, NFU has the topic of trust in finance as its top policy priority in 2016.
So why is trust in finance important? Finance, whether bank or insurance, is fundamentally a social activity. Finance is about aiding customers, be they individuals, firms, or institutions, to overcome financial insecurity and to build value for the future.
As a consequence, the goal of financial firms should be to maximize added value for their customers – and the profits should come as a result. Is this the goal of modern finance? In too many instances, the response is no.
Take the chairman of a big Nordic bank as an example. When asked what his responsibility as bank leader is, he replied: to deliver maximum returns to the shareholders. And why? Because legislation stipulates it. Neither himself nor the bank had any other responsibility aside from that one, he emphasized. Any other end goals are for politicians or citizens to voice and implement, using legislation to define and limit financial activities.
Following this line of thought, the way in which financial firms should act to rebuild trust is to make sure that they comply with rules and regulations. Since the financial crisis in 2008 a great mass of such rules and regulations has been produced, which in practice means that financial firms build trust by hiring compliance staff that make sure the firms abide by those same rules.
But is that the way to rebuild trust on the long term? Research indicates otherwise.
As David de Cremer, Professor of Management at Cambridge University, recently pointed out (https://hbr.org/2015/03/why-our-trust-in-banks-hasnt-been-restored) three essential factors are needed to be perceived as trustworthy: ability, integrity, and benevolence. de Cremer holds that benevolence is a disregarded factor in the discussion about trust in finance.
Benevolence essentially means having somebody else’s interest at heart. This does not rule out that you can have your own best interest at heart at the same time. But it implies a certain care for your neighbour’s well-being, who – and this is supported in research – reciprocates with trusting you only when she clearly feels that her interests are catered to.
So are the current business practices in finance benevolent, and conducive to trust? Customer outcomes in financial firms are to a great extent a result of the way employees interact with customers. So a central element would be to make sure employees are encouraged to act in the best interest of the customer, which is to be allowed to act with his or her best interest in mind. When a financial institution puts shareholder value maximisation as the overarching goal, the incentives given to employees logically are designed to support the same goal. If on top of that value maximisation is expected on a quarterly basis, the incentives tend to align – and more often than not at the expense of the client.
Rebuilding trust in finance therefore require management models that acknowledge the need for benevolence. Consequently, business models should strive to connect with customers on a personal level and finance employees should be allowed to put their clients’ best interest first. Hard economic facts should be complemented with softer, relationship-based credit assessments. And having shareholder value maximisation as the goal for a firm – in the words of former General Electric CEO Jack Welch “the dumbest idea in the world” – must be replaced with putting clients and their financial needs first.
Many talk about trust in the financial world, but few really do anything. From NFU’s side, our first contribution is a soon-to-be-published research report on the use of performance measurement systems in the Nordic financial sectors. Indicative results clearly show that you get what you measure, and the way finance employees’ performance is measured does matter for the relationship with the client – and whether a benevolent business practice is achieved. Thereby, finance employees matter for restoring trust in finance, and as such they are important stakeholders in the discussion about how to build it back up again on the long term.