15 May 2017 by Anthony Hilton
There is no hiding place when big data analysis rules, says Anthony Hilton
The financial crisis showed senior bankers how far behaviours and professionalism had slipped in the noughties, and one part of a widespread effort to reclaim lost ground was the launch of the Professional Standards Board, chaired by Lady Rice. She was, at the time, one of British banking’s most senior woman, and her involvement is a measure of how seriously the programme was viewed.
Much has been done in the years since. The Professional Standards Board has created a code which sets out the professional values, attitudes and behaviours expected of bankers. It has developed and implemented professional standards, and it is providing a pathway for bankers to meet and to maintain the relevant professional qualifications they need as their careers develop.
Its success is reflected in the numbers who signed up to it. Almost a quarter of a million individuals, 173,986 in the UK and a further 72,000 globally, had met the initial or foundation standard by the end of 2015, the date of the last full audit.
“Banks see the need to restore public confidence, yet they behave in ways that undermine all the years of good work”
Many thousands of these are expected to move on to take the higher standards for more senior staff, which are currently being rolled out, having been developed and made compatible with the senior persons regime brought in by the Financial Conduct Authority.
But now comes the sad part. The banks can see the need to restore public confidence and to put their weight behind programmes such as this. Then they behave in ways which at a stroke undermines all the years of good work.
Lloyds’ reaction to the trial and conviction earlier this year of a group of people involved with the HBOS business bank in Reading a decade ago is a case in point. It was an appalling tale of bank employees and outside associates engineering the distress and failure of small businesses, which came to the bank as clients, by systematically looting more than £250 million from them.
Lloyds knew what was coming – the development of the case has been common knowledge among financial journalists for years. There were also warning signs, in the courtroom accusations that HBOS senior management knew about the fraud years ago and sought to cover it up, and similar accusations that the bank, and subsequently Lloyds, came down excessively hard on victims of the fraud, in spite of these allegations.
With guilty verdicts looming, it was clear the bank would have to make a major effort to rehabilitate its reputation, and yet when the opportunity came for it to admit its mistakes, and to make free and open restitution to its many victims, the bank failed miserably in every respect.
The initial result was a further media storm which forced a foot-dragging rethink by the bank. The deeper consequence was that 10 years’ work to restore integrity, including the efforts of Lady Rice and the 250,000 people who have gone through the professional standards programme, were effectively undermined in 10 days by the reaction of Lloyds’ senior management.
“One has to wonder if a revised code, with a different emphasis aimed at nudging boards in a different direction, will actually achieve very much”
This is relevant to the Financial Reporting Council’s current review of corporate governance, undertaken to decide how it should develop in the future. The existing code has had its successes and failures, but what the Lloyds case underlines is that no amount of fine words about behaviours and ethics in a code will bridge the gap between what boards and senior management say, and what they actually do, unless the people at the top really mean it, all the time.
One has to wonder if a revised code, with a different emphasis aimed at nudging boards in a different direction, will actually achieve very much. It may sort out small issues, but it is questionable if it will actually be effective for the big problems, the ones that really cause public concern and where, to be effective, boards would have to make changes that hurt.
However, this is not as defeatist as it sounds because technology may shortly come to the rescue. We are on the cusp of an era when analysis of big data will transform the way fund managers invest. We are getting to a point where it will be possible, not only to prove or disprove that companies with diversified boards do better than those without, but by how much and over what time horizon.
Similarly, we will soon be able to measure the effect on performance of all the other measures – carbon footprint, customer satisfaction, recruitment, retention and morale of employees, and so on – not by the use of internal data collected through the usual channels by the company, but by monitoring and analysis of its external impacts.
A couple of examples will suffice. People in the logistics business obviously see first hand which companies are doing well and which products are languishing, but they are only now beginning to capture this data in usable form. When they do, it will provide an unmatched source of business and economic intelligence on market trends and levels of activity.
Second, there are a growing number of social media sites where employees past and present discuss what it is like to work for a company, and with the right algorithms these can be used to provide measures of changes in employee morale and culture, which, in turn, can be linked to whether or not a business is under stress.
In a few years’ time this kind of analysis and monitoring will be commonplace and will govern the allocation of capital. The links between genuine good governance and performance will become explicit and the underperformance which follows from a failure to follow best practice will be obvious and penalised by the market. Comply or explain will become comply or suffer pain.