23 August 2016 by Alexandra Jones
Sir Win Bischoff speaks about culture within business, how a strong culture enabled him to lead Lloyds through the financial crisis, and explains how, by its very nature, culture is not something that is short term.
Culture is a combination of values and attitudes, and the behaviour they drive, the purpose of the company, and the way that stakeholders are treated – staff, customers, society and so on. It is a broad area which impacts the behaviour of the company and the way that it is seen in the outside world.
That is important because over the last few years, probably arising from the financial crisis, society has questioned the value of companies. That, regrettably, has moved from financial companies and banks, to other organisations too. It is important that the purpose and value of a company is understood and respected because business is a big part of society. It provides jobs, taxation and satisfaction for people.
Management sometimes responds to the pressure from shareholders by making short-term decisions. However, by its very nature, culture is not something that is short term. It is much longer term than a strategy or a business model. You can have a business model and strategy change without, actually, impeding the long-term cultural aspects of a company. That long-term view of a company, embodied in culture, is important nowadays.
There is not necessarily a unanimous view but the strong majority view is that the board as a whole sets the culture and assesses it. The single most important person in embedding culture in a company is the CEO – and obviously, by extension, the management team too. The board has to hold the CEO and the management team to account. It must assess, gauge and be able to ascertain that culture is embedded right throughout the company. So, the management’s role is supervisory, whereas the CEO has got to play a more active role.
In the United States, culture is probably more shareholder focused. The board’s main objective is as guardian of the shareholders. However, that is beginning to change. Warren Buffett, Jamie Dimon and others have recently come out with a view on that.
They wrote an open letter that was published in the Financial Times, in which they said it is ‘essential that our [America’s] public companies take a long-term approach to the management and governance of their business (the sort of approach you’d take if you owned 100% of a company).’ The very fact that they felt they had to do that probably arose from a greater preponderance of thinking on the boards of US companies about shareholders.
In European companies, the predominance of shareholder return is not as great. For example, in large German companies, employees are essential because of co-determination [i.e. cooperation between management and workers in decision making].
I suppose the UK falls somewhere in the middle of the US and Europe; shareholders are very important, but we consider other things too.
Asia, again, is different because many Asian companies are relatively young and there is still a large family influence in those companies. Therefore, what is good for the family, not individuals, is usually long-term decision making.
First of all, you have got to assess whether the culture is bad, or whether it is the business model or strategy that is bad. The two of them are inextricably linked. There is a view that culture eats strategy for breakfast – I do not believe that for a moment. I think the two of them are equally important.
In banking, people are likely to say that the culture has gone wrong. The business model – intermediating between long-term savings and long-term loans – is probably okay. Culture takes quite a long time to repair. You can of course make a change, and assess whether that is working over a period of six to 12 months, but to really embed it and to be certain that it has changed for the better, it probably takes years, not decades, but years.
It also depends on whether the culture change is being carried out by a person coming in from the outside. Sometimes new CEOs find it easier to embed a new culture than the people inside. I would always advise companies be careful before they change the culture, because the culture is deeply embedded in people who have worked for the company many years – particularly middle management. To change a culture is really rather disconcerting to them too.
Shareholders have big role to play in setting the right culture because they are the owners of the company. They are in a privileged position, with frequent access to management and the board. They should therefore be engaging with the company on culture.
Yet, if their own culture is not long-term orientated, it is going to be difficult for them to tell the companies they invest to think in the long term. The culture of asset managers and asset owners is an important yardstick by which the companies that they invest in can measure themselves. It is important for investors to look at their own performance and what they can help companies with, in terms of engagement and their own evolvement of strategy.
The first thing I had to do is to deal with the reality. The reality was that a very large acquisition had not worked out. It was strategically sound but in terms of timing and size, it was, arguably, a wrong judgment. Anyway, that decision was made and subsequently the government had to intervene and had a 43% shareholding. It is important to not look back but to look forward. But that is difficult when the bank, almost daily, was in the news about all kinds of things that had happened – partly, what had happened in the acquisition was because of the PPI scandal.
Lloyds had, from most outsiders’ point of view, a culture of putting customers first. It was not a flashy bank; it did not go into the deeper realms of investment banking, for example. It therefore kept out of the news on the whole. If it was in the news it was because its business model was thought to be very good. So, in cultural terms, many of the things of the past – the Lloyds’ model and the way it looked after customers – were very good. So, first of all, we set about re-establishing that.
Secondly, to re-establish a culture of confidence and forward thinking, we ultimately had to have results which were satisfactory to the shareholders – and that we had to work on. It was important to give people inside the message that they had done well in the past and could continue to do so. We then had to tell outsiders to let us get on with it to improve the financial performance.
I do not know whether it has got all that much better. Trust is a very, very high hurdle. My view is that there are a number of milestones on the way to trust. One is, for the public at large to understand the purpose and value of business. And secondly, to translate that into respect for what business does, rather than thinking that business is only there to make money for shareholders – it is broader than that. Once you get that, you get trust.
There are a number of staging posts, and we are currently somewhere between the understanding and the respect, but not yet at the trust level. That may be partly to do with globalisation and that people do not understand what, actually, business does and the contribution that it makes to society. Business has probably not been very good at explaining it.
Career Ready provides internships for young people in the last two years of their school life. It is important to show them what business does, but also to raise their aspirations. Initially these people come in, after being recommended by their schools, to see whether they can get an internship; and most of them do, but they come from disadvantaged backgrounds. To get them to look you in the eye is practically impossible − they look down at their shoes and they are very uncertain.
The extraordinary thing is: two years later, they are able to look you in the eye; they are able to give a presentation to other young people to tell them about their experience. About 80% also find that they want to go on to university. University is not everything, but it can be quite useful. Even if they did not want to go on to university, they have developed confidence.
The mentoring of potential CEOs at Chairman Mentors International is designed to share experience and to complement their own talent in whatever way they think is appropriate. For example, how to deal with boards and regulators, and how to take into account the needs of the wider stakeholder community, not just the shareholders.
The previous coalition government was keen. There should be much more interaction between government, education and business. For example, in the sciences there is close collaboration between pharmaceutical companies, and with technical companies, such as Rolls Royce, and universities. Those companies need individuals coming out of the universities who are skilled in specific areas. We have not been as good at that outside the technical areas. In California there is interaction between the universities and companies in Silicon Valley – we have to do more of that.
Nobody really knows at the moment. It is a result that surprised many people. I do not think people were ready for it. The country has spoken; we will now have to see what can be negotiated. Business will have to adapt to whatever new circumstances will be developed by government, together with business and the other countries in Europe.
This is a big question. There are parts of corporate governance which really are determined by companies and how their directors behave. Then there is corporate governance, the way that the FRC looks at it, which is on the basis of a code and comply-or-explain – it is not embedded in legislation.
The UK Corporate Governance Code has been enormously successful: it is highly regarded internationally. Even in Europe, the comply-or-explain principle has been adopted.
If you put forward something as a code, then on the basis of comply-or-explain, you can aim much higher than you can with legislation, because you allow companies and their directors to say: I do not comply yet, but I may be able to comply in the future. Or: I did not comply, but these are the reasons why. In legislation, it is much more binary. The flexibility that a code and the comply-or-explain principle give have been very successful.
At the same time, there are certain aspects of corporate governance that need to be improved, such as compensation. Explaining why people are being paid what they are being paid and being much more open about this. Compensation principles should be laid out much more clearly and simply, so they can be readily understood, rather than embedded in 11 pages of the directors’ remuneration report.
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