Banks, eh? Easy to knock them, but what can we learn from their travails? Well, they illustrate perfectly how a. incentives drive behaviour, and b. delighting shareholders is unlikely to be a winning strategy in the long term. John Kay’s book Obliquity explores the principle that complex goals are best achieved indirectly, with examples of companies which achieved sustainable profitability by focusing not on their profit goals but on what their customers needed from them. Jim Collins, in Built to Last, made the same observation. He compared Merck with Pfizer, contrasting George Merck – “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear” – with the direct profit-focused philosophy of Pfizer’s leader, John McKeen: “So far as humanly possible, we aim to get profit out of everything we do.” During this phase, Merck made more money. Later, under different leadership with a more direct profit focus, Merck stumbled.

In the case of the major banks, I can’t see from here whether the focus was on shareholder profitability or on personal incentives, but it clearly wasn’t on customers (except to the extent that you need customers to buy things from you if you’re going to hit your targets). I don’t just mean at the top of the banks – every mis-selling scandal in financial services has been because large numbers of customer-facing staff have responded to targets to sell specific products, often with cash rewards for doing so. Full marks for a consistent focus through all levels of the organisation. Shame it’s one that exploits and damages customers. Both shareholders and employees have benefitted from this approach – but at the expense of customers. The evidence is that companies can get away with this for a while, even years, especially if their competitors choose to operate to the same standard. It would be nice to believe that eventually market competition ensures that the truth will out, but in banking at least it appears that, without financial regulators, it might not.

Comment | July 2012