What does it take for banks and investment banks to excel? Obviously they need customers, products, capital, technology, sound strategy, good people and leadership. That’s tough enough to assemble, as is managing the balance between customer business and own-account trading. But the characteristic that bankers themselves talk about most as the one that distinguishes winning firms from the rest is even tougher to define and measure. It is culture.
Those with a strong, coherent culture tend to thrive, those without one to struggle.
What do bankers mean by culture? It’s a hard concept to pin down but they tend to look for a sense of shared key values, a common understanding of the type of behaviour that will be expected and the work habits employees must develop in order to progress.
Is a firm dog-eat-dog or is it truly cooperative; is it highly entrepreneurial and risk-taking or does it emphasize adherence to procedure; is the work ethic all-consuming or more balanced; are senior management accessible and open to debate or is the hierarchy fairly rigid; does the company reward those maximizing profit today and hang the consequences; does the firm’s own trading book take priority over customers’ interests; how close to the edge is it prepared to tread with regulators and accountants; does it strive to look after its people or does it churn and burn?
Partnership model
Having a strong culture isn’t the same as being nice to people. Think of the pre-flotation Goldman Sachs. This was the ultimate hard-driving machine where the senior partners reflected that the high divorce rate proved their all-consuming commitment to the firm.
As an employee you knew that if you messed up, the partner you reported to would whip out his calculator and figure how much you had cost him personally. Younger employees were tantalized by the prospect of the untold riches of partnership to drive them on. They dreamt of the day when they could trade in the Porsche for a beaten-up Ford, a symbol that they were now on a low partner’s salary while their future wealth piled up in the capital for the firm.
But senior partners mentored employees. And if you needed to assemble the risk committee to approve a huge bought deal bid, you wouldn’t be fretting to get anyone off the golf course. The senior partners would be on the desk for 18 hours just like you.
It wasn’t for everyone but it was a culture – a cult, some might say – that bred success. It was strong enough to survive the huge management turnover that immediately followed the flotation, although it has diminished in distinctiveness since.
A firm’s culture, like its brand, grows slowly with steady nurturing. It’s not something that can be simply mandated into existence.
That’s the difficulty Citigroup CEO Charles Prince is now grappling with. His response to the scandals that have engulfed Citigroup in recent years is nothing less than an attempt to impose a culture through fiat, to command the firm’s 300,000 employees – who have been drawn under the Citigroup brand through incessant acquisitions – to sign up to a shared set of responsibilities.
It’s a necessary response and a laudable aim. The risk is that it merely establishes a committee-based, bureaucratic system of controlling employees by limiting their esponsibility.
The lesson of recent years for the financial services industry, especially for the investment banks that profit by promoting M&A deals to others, is that the force most inimical to any firm’s culture is the urge to do large-scale transformational mergers.
Bound by shared disappointment
Think of an investment banking firm today that shows the kind of strong culture that Citigroup lacks and Lehman Brothers springs to mind. Its leaders’ shared commitment to the firm’s franchise was forged in the bitter disappointment of ownership by American Express.
It is a firm run by traders, who might have been tempted by a Goldman-like hedge-fund business model but have plumped instead for a customer-centric one. Its leaders are obsessed with risk management. This has produced a fixed-income business that has so far produced strong profits throughout the cycle.
It wasn’t tempted to maximize profits in its correlation book and hasn’t suffered as badly as others when the market soured. This earning power has given Lehman the chance to grow into equities and M&A.
It’s a tough and demanding place to work but its leaders have set a paternalistic tone. People there have faith in the leadership.
Investment bankers themselves are very sensitive to these intangible cultural issues. Once Goldman and Morgan Stanley were the employers of choice on Wall Street. In recent years they have slowly given way to Lehman, and to Bear Stearns, another firm with relatively stable leadership that has not done a transformational deal.
