Steer in the city

What's the difference between a no-claims bonus and a banker's bonus? You lose your no-claims bonus after a crash – Ed Aczel

What's the difference between a no-claims bonus and a banker's bonus? You lose your no-claims bonus after a crash – Ed Aczel

Jokes aside, banker’s bonuses have remained one of the most heated political and economic issues of recent times. During the general election campaign all three main political parties had manifesto commitments looking at bonus structures. The reasoning behind this, in part, is to ensure the excessive risk taking in the city that led to one of the worst financial downturns since the 1930’s depression is reigned back. This means putting an end to the cultures and strategies of short-term gain, which rewarded in high bonuses, led to the volatility that brought down the markets and institutions like Bear Stearns and Lehman brothers.

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The widespread anger directed to bankers has led to the hypothesis that by quelling bonuses, one can change the way in which bankers make decisions and take on high risk, ensuring a more stable market and therefore more stable investment returns. There is also less likelihood of the government having to bail out the banks at a cost to the taxpayer – a policy that has led to so much of the public anger being directed towards the bankers.

Protesters lynch a banker at the G20 protests.

So when the European parliament announced that legislation will be introduced so that bankers will only be able to receive 30% of their bonuses immediately in cash, the question that arises is will this work? Should we perhaps be looking towards another approach that could be taken to ensure that we eliminate the key issue in this debate. How to stop excessive risk taking, whilst ensuring the banking system remains in operation as a fluid and profitable industry.

The RSA’s Steer report, mastering our behaviour through instinct, environment and reason, gives hope that perhaps there is. By applying the steer approach to the city, there are two significant areas where its application could make a significant difference.

Firstly, using the steer approach in an environment where critical comments are needed in a supportive way would allow the banking sector to deal with one of the big problems it faced in the run up to crash.  Listening to people.  In businesses that make their money through risk, where the workforce has been brought up in a culture that has lived by the mantra “who dares wins”, those who voiced concern over excessive risk taking strategies were either laughed out, ignored or sacked. This meant that many who might have seen the crisis coming, and many did, remained afraid to voice their concerns amongst their fellow peers. Steer could help banks build and foster a culture whereby the frailties of individual judgement are checked without ‘personalising’ problems. This would allow banks and those employees who are meant to be managing risks deal in a more open manner with the staff taking them, therefore ensuring that both are working together rather than against each other.

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The second area is in changing the habitual thought process of many bankers. Having worked in banking myself, one could argue that risk taking, excessive risk taking that is, had become an habitual element of the thought process of most bankers in the industry. Steer would provide an approach to behaviour change which would enable these ‘habits’ to be questioned in an attempt to shift bankers thinking away from short term gain to more long term views of the market therefore bringing stability and economic growth.

Many decisions were made that should have been questioned and weren’t. And many banks, hedge funds and the like are still employing those same people who have made this their habitual routine. The film Wall Street whilst a piece of fiction highlighted the ease at which so many become embraced into the culture of high risk, high gain.

So, perhaps ‘steer in the city’ may be our long term solution to how we deal with living in markets that thrive on risk, people that profit from it, and behaviour that becomes habitual within it. Then perhaps we can regain our trust in part of our economy that is vital to our economic growth in the future years to come and rest easy that financial institutions will have engrained within them a new stable model of creating profits.

Thanks to Iain Winfield for the photo.