Banking industry: 'Shareholders are the owners'

Shah Md Ahsan Habib | Monday, 10 December 2018

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.

ahsan@bibm.org.bd

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