Banking industry: 'Shareholders are the owners'

Shah Md Ahsan Habib | Published: December 10, 2018 21:18:55

Leadership is an extremely complex and broad subject which can be tagged with a country, community, society or business entity. Leadership focuses on human qualities involving creation, imagination, expression, communication etc. that are expected in a person to lead or perform a job efficiently in a situation or position.  Business of banking or commercial banking is different from all other types of businesses in terms of ownership pattern, agency arrangement, and governance structure; and thus leadership should be perceived differently. Moreover, the performance yardsticks for banking, a highly regulated and supervised industry, are clearly different and associated with a wide array of financial, economic, and social criteria. 

The importance of leadership approach received renewed focus in the context of bank failures during the 2007-2008  global financial and crisis (GFC); and the relevant literature emphasises the need for change, and the need for willingness to create change.  Considering the changing need in the banking business to ensure competitive advantage, customer behaviour, technology and competition are rapidly evolving. Bank leaders must therefore be ready for challenges and should start viewing change as a norm rather than an exception.

In this context, identifying leadership approach is a key area to address that can be perceived from different dimensions. From the available published literature, the broad leadership approaches may be distinguished into: transactional approach; transformational approach; and   laissez-faire approach. All approaches have their own distinctive features, advantages, and disadvantages. Several studies point to the fact that a single approach cannot work at all times and in all situations. There is no leadership style that would be ideal for every situation. It would thus be inconsiderate to blindly adopt tools and actions that were successful in one setting to another one. With the time, the broad leadership approach of a bank should be changed in line with the changes in external and internal business environment. Moreover, more than one approach might be relevant at a certain time or in a certain situation in any institution or bank.

NEED FOR INNOVATION: To address future challenges of the banking industry in line with the experiences of the most recent financial crisis, the need for change and innovative mindset is recognised as an integral part of leadership approach. Today, banks should not ignore the need for innovation and change; and should mainly rely on participatory approach. A good number of banks fell prey to the financial and economic crises of 2007-2009, and governments had to undertake bailout packages to save many of these. However, a few banks performed brave jobs and recovered from the falling business mainly because of their leadership approaches and dynamic roles of the boards; whereas in some cases, leadership failed and there was no way but to intervene to save banks.

LEADERSHIP STYLE: Key findings of several studies show that an autocratic leadership style in banking has a destructive effect on a bank and its business. Furthermore, it has been established that there is no one best leadership approach, which can be generalised for the whole banking industry, and to select the best practice, it is recommended to analyse the situation of the business. In the context of the banking industry, emotional intelligence is a crucial requirement. Emotional intelligence is particularly contributory in 'group leadership' where a collective contribution of a group of co-workers is critical like in banking business.  It is associated with job satisfaction and efficient service delivery. Job satisfaction is associated with emotional experience which is defined as a positive or desirable emotional state resulted from the employee's job experience.  Several studies showed that a higher level of bank employee emotional intelligence has a positive effect on customer service irrespective of the location of the bank.

Banking is a highly regulated and sensitive industry where leadership approach should be seen differently.  To guide the banking industry, bank boards, and top and senior executives must deliver performance while complying with strict regulations and addressing risks.

Of all the businesses, banks and financial institutions became very sensitive and turbulent in the changing unpredictable business cycles. In spite of similarities in some respects, the leadership approach demand seeing from the perspective of banking core fundamentals that are clearly different from most businesses.

'Shareholders are the owners' - is a core business fundamental attribute. Shareholders take entrepreneurial risks, and deserve the right and authority to decide on the policy and strategic issues of a business entity. It is really possible to relate this concept with the banking industry completely? It is true that a bank is set up as an entrepreneurship activity. However, when a bank is established, it becomes part and parcel of an economy and numerous depositors become the major risk takers. Thus, banks are highly regulated. As crucial government machinery, central banks regulate and supervise banks mainly to protect the interest of the depositors and to restrict banks from undertaking excessive risks. Management of a bank practically performs the role of agents in the process of running the banks. The shareholders and the minority risk takers have the scope to play role in the banks' board and thus protect their interests. In such an ownership and governance structure, depositors are the true risk takers, and the central banks represent them. For successful running of the banks, one key objective of the central bank is to ensure sound corporate governance practices by maintaining a line between the bank management and the board.  It means, for sound and secured operation of a bank, it is crucial to play a role of leadership network by the top management and board, and at the same time, they must not violate the thin line between them. It is obvious that bank management, employees, and board members must show their due accountability towards the depositors in the process of undertaking any decisions and guiding or running the banks.  Motivating employees on this pursuit would work in forming right perception of the bank employees towards the depositors- the true owners and risk takers of the banks.

ROLE OF BANK EXECUTIVES: Agency problem might cause failure if not addressed. Bank executives perform banking activities as the agents. Behaviours of agents vary at the time of taking critical decisions in banks like borrower selection and using risk management tools. Seriousness of a bank manager on loan allocations and recovery efforts depends strongly upon the feeling of ownership of the bank and the fund.  Ownership feelings for banks and funds motivate a banker for following due and objective-oriented risk management in the process of addressing credit risk. The nature of banker-customer relationship is also an issue in this context. Bankers are expected to work to build relationship between a bank and the customers. Customers have to be a bank's client, may also be a banker's.

International standards-setting bodies and regulatory and supervisory authority of banks have contributed to developing 'board leadership' and sound management practices by guiding, supervising and enforcing compliance requirements. Prudential norms have always been critical for guiding banks and the following risk management practices. Restraining excessive risks and rational expansion are always critical for the sound leadership and governance approach in banks. Moreover, regulatory and supervisory authority or central bank is expected to contribute to creating the environment so that bank management may come up with due changes and innovations for sustainability. These leadership development roles may include and enforcement of supportive rules and regulations; incentivising innovation and modernisation; ensuring customers right and transparency; moral suasion for responsible and normative approach; pushing for the development of sound corporate governance practices etc. 

The global financial crisis and the credit crunch that followed put credit risk management into the regulatory attention, and regulators now expect more transparency in credit operation, thorough knowledge of customers, and even greater regulatory compliance under Basel regulations.

FINANCIAL CRIMES AND MONEY LAUNDERING: Growing financial crimes and money laundering have become a key concern for the policy makers and regulators throughout the globe. A flurry of regulations and compliance requirements came up as part of strategy for addressing growing financial crime and money laundering concerns. Central banks and global financial regulatory setup have imposed considerably stringent regulations and compliance requirements in recent years on the ground of enforcing anti-money laundering framework. Probably, compliance risk is the most critical one the banking industry is facing today. The growing regulatory load and greater compliance imposed considerable cost burden on the banks. In such a scenario, bank shareholders and boards may need to accept lower returns, as profit growth is required by harder regulations and rising charges for bad loans. In an institution like banks, board and top management may have little incentive in the short-term to undertake major cost incurring venture to address such vulnerabilities. Practically, the situation demands proactive and long-term strategy and leadership role of boards and top management for the sustainability of the banking industry.

In banks, group leadership and motivations are crucial to attaining the common goals. Even in a centralised decision making system, the lack of emotional intelligence might affect group outcomes at different places and thus the central goal and sustainability might be at stake. The board and top management should create an environment so that many of such failures can be transformed positively and thus ensures psychological safety to the employees. In such a scenario, employees expect emotional support and courage to overcome blows or shocks that make a significant difference. In many instances, such support helps colleagues or employees to undertake risk and initiatives for the betterment of the institution. A confidence in the leader offers the employees and colleague with huge motivation that my leader would support me in case of my failure and ensure the required environment to take me out of the trouble if any. Such a belief and confidence induces motivation and encouragement amongst the colleagues to perform better.  It is the sound leadership that can create such an environment and mutual trust.

To develop leadership skills amongst managers and other executives, some soft skill capacity development needs are crucial. Actually, people need criticism and praise, and both types of feedback are extremely necessary. Nobody should demand zero mistakes from the colleagues and at the same time one must admit mistakes in front of them, as a true leader learns from mistakes and encourages colleagues to learn from the mistakes. For the group work, leaders must have the courage and open mind to take the responsibility for his or her colleagues in line with the wonderful remarks of Arnold Glasow - "A good leader takes a little more than his share of the blame, a little less than his share of the credit." For developing such leadership qualities amongst bank managers and employees, it is important to make them understand the essence of considering emotions of the co-workers in pursuing the group jobs at all levels. Practically, it is the blend of technical abilities and soft skills like emotional intelligence that contribute effectively in the professional banking.

RISK MANAGEMENT: Today, banks cannot solely rely on the risk management or auditing functions to identify the risks. Capable managers/executives having leadership qualities must be placed in key roles that involve risk management responsibilities. Focusing on compliance is not good enough; the Chief Risk Officer must have a voice to drive.  Executives heading different departments and lines especially in the areas of risk management, compliance, credit review and internal audit must demonstrate similar sense of leadership. Network leadership in banks must act to handle uncomfortable business situation and difficult environment and there is a danger to move on with the status quo.  It is over-optimism that causes barriers to the leadership approach in risk management.  By contrast, good leaders welcome different points of views and are aware of potential risks and have the ability to make more informed decisions. The global financial crisis came up with the warning of irrational profit targets and irrational financial benefits of top management. Such aggressive behaviours caused collapse of so many banks during the crisis. However, it does not offer lessons for pushing down the profit targets and reduce the salaries and packages. It is not about slowing down and applying conservative approach in all situations. It mainly offers lessons for following more conscious approach to risk management and transparency; finding rationality in fixing profit targets and employee benefits; focusing on core banking business; having flexibility on conservative and dynamic banking approach in line with the business and economic situation.

Adaptation to the changing needs and customised innovation for a bank is the biggest challenge. For example, a bank's competitive advantage might be severely hampered without adopting the required technology to provide state-of-the art services to the customers, which should bring absent ultimate results in the form of better customer service, low cost and quick delivery. Recent literature identified regulations, legacy and culture as the three biggest challenges for banking today. The three barriers are intertwined in a vicious circle:  regulations stop banks from innovating; legacy systems stop banks from innovating; a risk-averse culture stops banks from innovating.  The study opines that three things work behind banking stagnation:  Management is unwilling to change systems because it is too risky; management is unwilling to place systems in the cloud because it is too risky; management is so focused upon regulation, that innovation takes a back seat. Practically, a courageous leadership takes the lead in changing and innovating by convincing regulator for due support.

Dr. Shah Md Ahsan Habib is Professor and Director (Training) at BIBM.







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