Anthony Jenkins, the retail banker who succeeded Bob Diamond as the Chief Executive of Barclays Bank, has rightly been criticised this week after the bank announced that it had increased its bonus pool when profits were falling and the bank is pushing through large cuts – 7,000 people – in retail banking. You judge a system by what it does, not what it says it does, and this decision spoke volumes – yelled it from the rooftops, really – about who benefits from the Barclays’ banking system.

Ruth Sunderland spells out the argument at the Mail’s This Is Money column:

Investors, who supported him [Jenkins] with £5.8bn of new capital last year, have been shabbily rewarded with a dividend that amounts to far less than the bonus pool. Thousands of loyal employees, many of whom have tried to serve customers well in the face of the bank’s problems, are being told to ‘go-to’ the job centre.

As for customers, they should be pleased about the branch closures, because they can do their banking on PCs and smartphones ‘when it’s convenient for them, rather than when it’s convenient for us’. Which is fine, unless you are a customer who does not wish to bank online, possibly because of the compromised state of the industry’s IT systems.

Nils Pratley – the Guardian’s financial editor – had this to say:

The mystery in the tale of Barclays’ latest bonus bonanza is that institutional shareholders are not screaming their complaints from the rooftops. Give it time. …

Many would agree with the Institute of Directors, hardly a cockpit of Marxist fury, that capitalism isn’t working at Barclays. Shareholders will get £859m in dividends and staff, chiefly in the investment bank, will collect £2.4bn in bonuses after a year in which profits fell steeply and the bank once again failed to achieve an adequate return on equity. As the IoD correctly says, the bank is being run for its staff, not its owners.

Changing culture

Of course, Barclays is probably unique, even in the banking system, in having had to commission a high-powered review that criticised its internal culture.

The moral of this story? There are probably two.

1. That the only way to create a culture of integrity at a retail bank is to divest the investment bank. We’ve seen exactly the same problem at RBS recently, with Ross McEwan saying that he needed to match the global market prices for investment bankers if he wanted to keep them. All this talk rests on the notion that investment banking is profitable in the long-term, which is true if the rest of us pay for their losses.
2. That changing an organisational culture takes a lot longer than people think, unless you’re ruthlessly single-minded about it. It also involves short-run cost, as the organisation has to unlearn old behaviours and learn new ones. Bob Diamond and Ricci Rich may not be at Barclays any more, but that culture, which I wrote about here, is still in the air.

Of course, breaking apart retail and investment banking is also the only way to de-risk the banking system, as any number of sensible commentators have pointed out, and the Government-sponsored Vickers Report almost recommended.

But it’s not enough, as we know from watching the way Lloyds incentivised staff to mis-sell to its retail customers even after the financial crisis, or RBS has abused its business loan book. Lloyds Chief Executive took his bonus despite these abuses, which had happened since he became Chief Executive. At least Anthony Jenkins chose to waive his, although a large chunk of shares is due to come his way, which will reduce the pain.

Lobbying against change

At the moment British banks have until 2019 to “ring-fence” their investment banking arms, which of course gives them plenty of time to pursue their favoured lobbying tactics.

These are the sort of things you can afford to do if you have the high profit margins associated with oligopolies. First, you make unevidenced claims about the value of the banking sector to the economy as a whole; second, you bury legislators in mountains of detail about the workings of any proposals for reform, thereby increasing the cost of changing the law; and third, you schmooze politicians relentlessly, since they are generally turned to stone by the reflection from large amounts of personal wealth (Ed Miliband shows signs of escaping this Medusa-like curse).

This appears to be true even when they know that this wealth has been accrued by extracting wealth from the rest of us, rather than producing anything that is socially useful.

The answer lies in some systemic changes that reduce the scope of the banks to make monopoly profits – effectively by requiring them to pay for publicly provided services that they get free at the moment. But that is a story for another post.

The picture at the top of this post is in the public domain.

In my last post I wrote about how Art Kleiner’s idea of the Core Group helped us to understand Barclay’s recent history. In this post I am going to develop this idea. If Bob Diamond survived in his position despite his division breaching the rules in 1998 because he’d become a member of the Core Group, we still need to understand why. In the rest of this post I am going to go further into the history.

Patterns of behaviour

There is an important clue in Barclays’ more recent history. When John Varley stepped down as Chief Executive in 2010, the bank chose to appoint Diamond as Chief Executive in the face of warnings about what that said about the bank’s culture. Similar alarm bells were ringing, as seen in the exchanges with the Financial Services Authority (the letters are here), about the bank’s “pattern of behaviour”. The list includes the Protium deal and the ‘extreme tax avoidance‘ scheme that fell foul of the Treasury earlier this year, and others. The rap sheet is here.

My former colleague Patrick Harris works with companies to identify ‘guiding principles’, the rules of thumb that make it possible for staff to understand, quickly and viscerally, the values of the company they work for. In his work, his intention is to help then ‘do the right thing’ for customers, or suppliers, or colleagues, rather than having to leaf through a rule book.

Misguided principles

Patrick does this work because he wants companies to work better. But what if a company’s implicit guiding principles are not benign? Reading Martin Taylor’s account, quoted in my earlier post, and knowing what we know about Barclays’ history over the past 15 years, it is possible to imagine that Barclay’s guiding principles included, “It’s OK to break the rules, as long as you can justify it to the business”. And that one of the reasons it took Diamond so long to resign after the LIBOR scandal was revealed – nudging the chairman out of the door first – was that it took him a while to realise that the world outside the business didn’t see things that way.

Another guiding principle seems to have been, “Helping out your colleagues is more important than respecting the integrity of the banking system or looking after the interests of your customers”. Or again: “The regulators are out to get you” (certainly a driving force in the lengths the bank went to to avoid a British government bail-out in 2008).

Questions of culture

When Diamond became Chief Executive, the FSA expressed concern (the whole exchange is politely British) about “setting the right culture”. In his BBC lecture, given in November last year, just after the quote about culture I mentioned in the previous post, Bob Diamond says a bit more on tone and culture. It’s worth quoting this in full:

Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity. But it’s not just about how we behave towards our customers and clients. It’s also about how we work together with our colleagues, because if you have to deliver for customers with 150,000 colleagues around the world, as we do, you better be able to work as a team.

I used to work in radio and television as a producer, and when you do that work you listen, carefully, to what people say. One of the things I learnt is that people’s syntax always gives them away. Notice that Diamond says, “Our culture must be…”. And there’s a shuffle between ‘customers and clients’ and ‘colleagues’: “If you have to deliver for customers…”. In case this seems obscure, other people in Diamond’s place might have said “Our culture is….” and that “When you deliver for customers…”

Global seduction

So why did Barclays’ culture change? The best explanation seems to be that the Board was seduced by the idea of becoming a global investment bank, and Barclays Capital, and Bob Diamond, were seen as the agents which would deliver this. And, of course, they did, partly through the acquisition of Lehman Brothers assets after the collapse of the American bank. In the process Barclays Capital become the dominant institution within Barclays, and its traders – not just Diamond – the dominant members of the Core Group, in the same way that the marketing department provides the Core Group of a consumer packaged goods company such as Proctor and Gamble.

Because of this, by 2010, when John Varley stepped down as Chief Executive, there was no alternative to Bob Diamond as his replacement, despite his lack of direct retail banking experience, and despite the signals it sent out about Barclays. And the co-head of Barclays Capital, Jerry del Missier, now resigned, became Chief Operating Officer of the bank despite having little operational experience.

Of course, bankers should have learnt by now that ruin is only two steps along the road from hubris: look at the way in which Andy Hornby wrecked the Halifax and Fred Goodwin destroyed the Royal Bank of Scotland. But perhaps they are blind to this because the step in between involves senior executives amassing huge amounts of personal wealth in salaries and bonuses.

Authority and responsibility

But while the ‘blind eye’ culture of the trading floor may be good at generating rewards for bankers, it is not good for the integrity of the organisation. The economist John Kay, a sharp critic of the culture of Britain’s banking system, has written about this:

In his letter to Barclays staff the day before his resignation, Bob Diamond used the naval phrase “on my watch” in finally accepting responsibility for traders’ behaviour during his tenure. Mr Diamond had struggled with the meaning of the phrase but eventually grasped, or was told, what it meant: that the corollary of unquestioned authority is unquestioned responsibility. …

Managers and politicians prefer to follow the maxim of T.S. Eliot’s cat: “When they reach the scene of crime, Macavity’s not there.” On that maxim, an officer is responsible only for things of which he can be shown to have direct personal knowledge: his incentive is therefore to have formal knowledge of as little as possible. … There is a world of difference between an organisation in which you are rewarded for telling management what it needs to know and one in which you are punished for telling management what it does not wish to hear.

In a second article, where he links scandals at Barclays, BP, GSK, and RBS, he makes a broader point about the gap between corporate rationality and public expectations:

We are not interested in whether these companies made good or bad calculations. We are interested in what these incidents tell us about the values of the companies concerned.

As an aside, it is this concern about values which leads Polly Toynbee to suggest that Barclays Board members are purged from public life, on both sides of the Atlantic; the corruption of the Barclay’s Core Group corrupts other Core Groups un the process.

Shocking the system

So what do we learn from this? The key for me is Kleiner’s hypothetical question at the top of Part 1 of this post: “Suppose instead that all organizations are doing precisely what they’re supposed to be doing?” Organisations deliver what their Core Group wants them to deliver, and people in organisations internalise a whole set of expectations about what the Core Group wants or doesn’t want. The only way to change that is to change the Core Group. The question at Barclays is whether the LIBOR scandal and the senior resignations are enough of a shock to create a new Core Group. As a citizen, as someone interested in the integrity of business culture, I hope so; just as I fear it still might not be.

The reworking of the Barclays logo at the top of this post is from The Lakelander’s View blog. It is used with thanks.

How the idea of the ‘Core Group’ helps us understand the Barclays’ rate-fixing scandal

Much of the writing on Barclay’s rate-fixing scandal – which has forced the resignations of both the chief executive, Bob Diamond, and the chairman, Marcus Agius – focused on issues of culture, but without asking where culture inside organisations comes from or how it is set, other than maybe an over-simple idea that it comes ‘from the top’. Of course, some of the interest in culture was prompted by the ex-Chief Executive, Bob Diamond, in the BBC lecture he gave last year, which I imagine seemed like a good idea at the time. Andrew Rawnsley quoted a couple of lines in an article in the Observer earlier this month:

“Culture,” he [Diamond] said in a BBC lecture last year, “is difficult to define. But for me the evidence of culture is how people behave when no one is watching.”

So it seems a good idea to look at this through the lens of Art Kleiner’s neglected book, Who Really Matters: The Core Group.

The Core Group

Kleiner is one of best writers we have on business, and in Who Really Matters he set out to understand who sets the culture of a business and how. This post will mostly be built around some extracts.

When organizations fail, people tend to assume that their leaders are inept, overwhelmed, or corrupt. But suppose instead that all organizations are doing precisely what they’re supposed to be doing?

In starting with this question, Kleiner is drawing on one of the basic systems assumptions: that you should judge a system by what it does, and the outcomes it produces, rather than what it says it does.

He goes on to argue that “in every company, agency, institution, and enterprise, there is some Core Group of key people … Every organization is continually acting to fulfil the perceived needs and priorities of its Core Group”.

And he continues:

It’s because of Core Group dynamics that a depressing number of business corporations have evolved into organizations with one primary purpose: To extract wealth from all constituents … and give it essentially to the children and grandchildren of some of its senior executives.

Legitimacy, not authority

All organisations have a core group; they can’t function without one. But who gets to be a member of the Core Group, and how their needs and priorities are identified by others in the organization, is complex. Ît isn’t just the Board, for example, and it is certainly not the public positioning seen in the Annual Report. Kleiner argues that “The Core Group members are the center of the organization’s networks, and symbolic representatives of the organization’s direction. … Its power is derived not from authority but from legitimacy. Its influence is not always conscious, or even visibly apparent, but it is always present in the implementation of actual decisions.”

I’ll come back to some more of this later in the post and the next one, but you notice a number of things about Barclays when you view it through this lens.

Because (back to Art Kleiner again):

“The organization goes wherever its people perceive that the Core Group needs and wants to go. The organization becomes whatever its people perceive that the Core Group needs and wants it to become.. If a goal is perceived as irrelevant, no matter how worthy it is, no matter how ardently it is advocated, or even how stringently it is mandated by law or regulation”.

Breaking the rules

In the Barclays’ story, the critical point, in terms of culture, was the formation of Barclays Capital in 1996, which Diamond was hired to run. There’s a telling account of this by the former Chief Executive, Martin Taylor, in a recent piece in the Financial Times (linked here via the Australian Business Spectator: free, registration may be required). By his account Barclays Capital was a rogue trader from its earliest days, circumventing limits imposed by the Board in a number of ways that broke the bank’s rules. These irregularities were discovered when Russia defaulted on its debts in 1998.

BarCap turned out to have an exposure significantly beyond the country limit that had been established. It had falsely marked some Russian banking counterparties as Swiss or American, and had blasted through the [exposure] ceiling.

All international banks took losses on Russia in 1998, but Barclays’ experience was worse than most, entirely because of a failure to respect the internal control system. … We looked reckless, and our share price suffered serious damage. The traders were fired. Their leader maintained that he had known nothing about what was going on. He felt terrible. He loved Barclays. He offered to go.

Diamond wasn’t fired. Taylor concluded that BarCap would fall apart without him. “I deserve blame for being among the first to succumb to the myth of Diamond’s indispensability”, he writes in his article. Kleiner would say that Barclay Capital – or perhaps the idea that it represented of a global bank – meant that Diamond, who had joined the Executive Board of the bank in 1997, had become a member of the Core Group.

Not wanting to know

As for Taylor, he realised, at least implicitly, that he had left it. Quite early in Who Really Matters?, Kleiner tells the story of Lothar, a man who realises that he’s fallen out of the Core Group during the course of a merger. One gets the same sense in Martin Taylor’s account of how he came to leave Barclays later in 1998 after the Russia debacle:

The board decided, unsurprisingly, that controls should be tightened up. That is what boards decide. I drew a different conclusion. … I decided that it was neither safe nor sensible to have trading businesses mixed up in a retail and commercial banking group. … [The Board] seemed not to want to know.

As the saying goes: I didn’t leave the company. The company left me.

The picture at the top of this post is from TheTradersWire.com, and it is used with thanks.