How (not) to define banking culture

The Group of Thirty has recently published a report entitled Banking Conduct and Culture. The Group of Thirty is a high-profile think tank covering global finance with members such as Paul Volcker, former Chairman of the Fed; Mark Carney, Govenor or the Bank of England; and Mario Draghi, President of the ECB. As the subtitle indicates, the report is meant as a “call for sustained and comprehensive reform”:

“There must be a sustained focus on conduct and culture by banks and the banking industry, boards, and management. Firms and their leaderships need to make major improvements in the culture within the banking industry and within individual firms.” (p. 11)

A lot about the report is to be recommended. It provides a good overview of current interventions to improve organisational culture in banking. It urges leaders of banks as well as regulators to move beyond lofty value statements, towards a firm integration of an ethical culture into banks. It does so by calling for a “fundamental shift in the overall mindset on culture”, and making ethics count when designing incentive structures, performance management, and promotion paths.

Alas, the report fails at providing a helpful definition of organisational culture. It fails in ways that some very old-fashioned conceptual analysis could have prevented. Here is how organisational culture is defined in the report:

“We define culture as the mechanism that delivers the values and behaviors that shape conduct and contribute to creating trust in banks and a positive reputation for banks among key stakeholders, both internal and external.” (p. 17)

It is a bit of a mouthful. Let us try and unpack some of its elements. The following four claims are all entailed by the definition:

1) Culture is a ‘mechanism’ which ‘delivers’ values and behaviours. — Seeing culture is a black box somehow ‘delivering behaviour’ presupposes a worrisome picture of human agency. Yet thinking culture ‘delivers values’ is altogether surprising, particularly in light of the next claim.
2) Values shape conduct. — If values ‘shape conduct’, one would expect them to be an input to or part of the cultural ‘mechanism’. Yet the previous claim has it that they are an output of culture. However that may be: It is certainly an empirical question whether corporate values shape conduct, not to be settled by a definition of culture.
3) Behaviours shape conduct. — This claim commits a fallacy as well, but it is the mirror image of the previous fallacy: Rather than settling an empirical question by fiat, it presents a tautological as a substantial claim. Behaviours are or constitute conduct. So there is no surprise that they also “shape” conduct. This is a mere play with words.
4) Culture contributes to creating trust in banks, and a positive reputation among key stakeholders. — Again, this claim attempts to settle by definition two distinct contentious empirical issues, namely how banking culture relates to trust in banks (by whom?, and regarding which issues?), and how it relates to reputation among stakeholders. But there is the additional shortcoming here. Culture should be a neutral term, not something that is, at least for banks, good by definition. We should allow for the possibility of a rotten banking culture, which, one might hope, will harm the reputation of the bank suffering from it.

But the definition is noteworthy for the claims it avoids to make as well as for the claims it entails. Jens van ‘t Klooster and I have argued here that there is a conceptual link between an ethical culture and the social purpose of banks. In short, we argue that in order to settle what an ethical culture for a given organisation would be, one needs to have an account of the social purpose of this organisation. Yet the definition by the G30 neglects to relate good banking culture to socially desirable outcomes. Rather, it appears that in their view, a good organisational culture is good in virtue of being good for banks.

The notion of organisational culture is hard to pin down. An attempt at definition should minimally serve the practical purpose at hand – for instance to serve as a basis for the empirical investigation of its impact on conduct, or as a starting point for developing policy recommendations. The definition of the Group of Thirty falls short in this regard.

In a longer draft version of the article suggested above, Jens and I distinguish different ways to define organisational culture as well as their relations to ethical outcomes. Contact us for a version of the draft.

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