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Friday, 21 October 2016

A pragmatic approach to reform of banking governance and culture

Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: John Mellor, University of Leicester
Chair: Adam Bennett, St. Antony’s College, University of Oxford

What does it take for a bank to be well governed? In Michaelmas term, PEFM hosted John Mellor of the University of Leicester for a seminar on reforming banking governance and culture. Mellor’s headline argument was that the quality of bank governance is directly shaped by a bank’s culture, which in turn is defined by the purpose or objective that the bank sets itself. He used case studies of three well-known banks, Nationwide, Rothschild, and Barclays, to illustrate the determinants of high and poor quality bank governance.

While it is oft discussed, Mellor suggested that bank governance is in fact poorly understood. He argued that analysis of bank governance must begin with the bank’s board of directors, since the directors hold ultimate responsibility for the bank’s conduct. Governance, from the bank’s board downward, is influenced by both internal and external factors. Internally, bank governance is shaped by the ownership of the bank, its business model and history, while important external circumstances are the competitive and political environment and the structure of regulation.  One may be inclined to believe that all private banks share the same purpose, i.e. the pursuit of profit. However, Mellor argued that objectives in fact differ from bank to bank, and play an important part in shaping a bank’s culture. Mellor’s interviews with bank chairmen have highlighted that banks see their purpose in diverging ways. 

The director of Nationwide, for instance, one of Mellor’s case studies of a well-governed bank, described the bank’s culture as “customer first” and “profit optimization rather than profit maximization”. Mellor linked this to Nationwide’s clear purpose as a building society whose main business is extending residential mortgages. Though Nationwide also provides other services, the bank’s primary focus on mortgages has allowed a culture to emerge that prioritizes the customer. 

A clear purpose was also important in the Mellor’s second case of a well-governed bank: Rothschild. As a private partnership bank with a focus on corporate finance advisory services, Mellor identified Rothschild’s primary purpose as being the preservation of its brand, maintaining the reputation developed during the bank’s long history. 

Rothschild’s ownership structure also has an important influence on bank culture: as a private partnership the bank’s owners share unlimited liability, promoting restraint and encouraging the careful cultivation of the bank’s reputation. When asked, the bank’s directors describe the culture of the bank as characterized by teamwork. 

By contrast, Mellor described his example of a poorly governed bank, Barclays, as having lacked a clear purpose and having an ownership structure that had not encouraged adequate responsibility or restraint. Given the wide range of Barclays’ business and the sheer complexity of the institution, Mellor argued that the lack of a core purpose had undermined the culture of the bank and led to poor governance.

Seminar participants pointed out that this raised the question whether any global bank with a universal banking business model could be well governed, given the institutional complexity and diversity of objectives. However, Mellor contended that it was possible for Barclays to remain a large international bank with a greater clarity of focus. Other seminar participants offered examples of French banks, particularly Société Générale, as cases of universal banks with good governance. 

In pointing to a way forward in the reform of banking governance, Mellor called for a review of the legal, institutional and regulatory architecture underpinning the governance and purpose of banks. Though he was skeptical that regulation could wholly address the shortcomings in culture and governance, by showing the impact of ownership structure and bank purpose on culture and governance, Mellor highlighted the impact of legal and institutional structures on bank conduct. This remains a fruitful area for interdisciplinary research.

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