Stand back for the cultural backlash, says ex-Citigroup managing director Peter Hahn: banks need to focus on the long term.
Investment banks and firms all have unique cultures, generally thought of as trading (risk taking), advisory or 'process' cultures. The guys in the most trouble today had process cultures at the top and trading cultures on the floor - a seemingly obvious recipe for disaster.
With banks indulging in navel gazing, as well as headcount reductions and strategy reversals thanks to the credit crunch, culture is likely to be one of the things to come under the cosh in 2008.
Many banks have learned the hard way that positive cultural aspects are hard to build and easy to destroy. In the ideal scenario, a firm creates cultural cohesion in which staff work together, feel part of the organisation and - most importantly, perhaps - care about its future beyond this year's bonus.
In today's typical scenario this doesn't happen. I've also found that some international banks foster dual cultures amongst their home and international staffs.
From partnership to 'get rich quick'
To understand where many banks' cultures are today, you have to look back in time, over a few decades. Whether at partnership investment banks or merchant banks or the corporate finance units of corporate banks, a long-term culture prevailed well into the 1980s - even after many converted to public ownership.
At the partnerships, the desire to make partner - combined with partners' own capital tied into the firm - served to align personal and firm long-term goals. For the corporate finance units in banks, the long climb to senior management and the reward and prestige of leading the largest institutions served the same purpose.
Yet I wondered early on in my career in a corporate bank whether the 10 officer levels between me and the CEO were worth the time, or if I should just focus on making money the fastest way I could. I'm admittedly old school, but 15 years later as a managing director, no one working in my department was interested in being the CEO.
For the most talented it was 'how can I get enough cash to retire at 40'. More than anything, this change occurred as firms focused ever more on current year earnings (over risk) and similarly aligned goals - big bonuses, now. Reduced firm loyalty to employees, perhaps most often resulting from industry consolidation, didn't help.
The credit crunch is a type of cyclical cleansing for the banking system, an opportunity to rid itself of excess and refocus on risk and return. It should be a time for shedding non-core, smaller and distracting business where leading positions are not attainable.
Ultimately, the market swallows the write-downs and the successful firms to come determine a winning long-term strategy and re-align goals.
At the same time, everyone needs to realise that pay should be based on long-term rewards for all levels of management. Will this happen? Unlikely.
A long-term employee culture won't come easy - a first effort for many banks should be focusing on a limited number of businesses where it becomes obvious that 'this is the place to be' - for it presents the best opportunity and the firm is in it for the long term. But alas, with the new Sovereign Wealth Funds (SWFs) throwing money at bad bank managements and strategy, necessary reform and cultural change seem less likely than ever.
I wonder if SWF shouldn't sometimes stand for 'Silly With Funds', for whilst in the short term they are delaying cultural change, in the long term it has to happen and they will be footing the bill.
Peter Hahn is the Foundation for Management Education Fellow at London's Cass Business School. Prior to joining Cass, he was a managing director at Citigroup where he was also senior corporate finance officer for the UK.