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The return of ethical banking – why banks must put social purpose at the heart of their strategy

13 October 2015

The article at a glance

Banks that fail to adopt fully an ethical agenda will be vulnerable to long-term decline. That is the stark warning from researchers …

Banks that fail to adopt fully an ethical agenda will be vulnerable to long-term decline. That is the stark warning from researchers Jens van ‘t Klooster and Marco Meyer, whose new study argues that the banking sector needs to embrace an ethical strategy to retain the support of society.

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“There is a disconnect between what society thinks the role of banking should be and what bankers actually spend their time doing,” says Meyer, a doctoral researcher at the Philosophy Faculty at the University of Cambridge. His colleague and fellow researcher van ‘t Klooster agrees: “We feel that an important part of what is going wrong in banking is a failure to consider the social value of financial products.”

Meyer and van ‘t Klooster argue that addressing the ethical challenges banks face requires a change of strategy to both reflect the way banks do business and which puts a social purpose at their core. “We have been looking at what would allow industry professionals to connect their day-to-day activities to the public debate about banking,” says van ‘t Klooster.

In their report, Ethical Banking, published by Cambridge Judge Business School, they identify trust, organisational culture and social purpose as the key concepts that banks must use in reflecting on an ethical strategy, arguing that banks must strive to be worthy of trust rather than treating trust as a marketing tool. Banks should ask themselves what they want to be trusted to do, in what way, and by whom.

Ethical banking

In the wake of the global financial crisis and a series of scandals such as the rigging of foreign exchange markets and the manipulation of the LIBOR, banks have so far not sufficiently responded – if at all – to the public outrage over their behaviour, say Meyer and van ‘t Klooster. But, they argue, if banks are to weather high levels of distrust among customers, citizens and regulators, they must integrate ethical goals into their corporate strategy, or in other words, “address ethical problems in ethical terms”.

Getting the organisational culture right is important as it means employees share the practices, hierarchies, rules and incentives that help develop the right methods to deal with organisational problems. For all this, it is essential that banks identify their social purpose – what makes their existence desirable from the perspective of society. An account of social purpose must be built on a product-by-product basis and adapted towards the different needs of its stakeholders – whether customers, citizens or regulators.

“We were hoping to find ways for bankers to address what goes on in these big societal debates in their design of products and contact with customers,” says van ‘t Klooster. “The report gives banks an idea of how to make banking more ethical. Being ethical is not about doing charity on the side, but in the first place about selling products that make sense and actually benefit customers and society.”

Social purpose

One positive example highlighted in the paper involves Royal Bank of Scotland and NatWest. In 2014 the banking giants ended their credit card teaser rates – initial zero or low rates that rise dramatically after a certain period – saying they wanted to “earn back our customers’ trust”. “It is clearly possible to do this,” says van ‘t Klooster. “The strategy depends on finding a social purpose and thinking about the social benefit of the product rather than just looking for profit.”

Meyer warns that banks need to take these lessons on board as they are under pressure from tougher regulation and greater hostility from consumers and citizens in the wake of the crisis and the scandals. “If you don’t learn these lessons then you probably won’t be around for much longer,” he says. “The upshot will be that not only will the banks lose out but so will everyone else, because banks have a positive role to play.”

The Ethical Banking paper will be presented at The Cambridge Trust in Banking Conference being held at the London Stock Exchange on 20 October 2015, with thought-provoking debate and discussion from distinguished industry speakers and University of Cambridge Judge Business School academics.

Richard Hill, Executive Director of the Centre for Compliance & Trust at Cambridge Judge Business School, says the conference aims to identify “firm actions” that will establish a trusting relationship between the banking industry and its customers. “It will focus on what we as an industry can do to respond to the demands put upon us by society, customers, regulators and all the stakeholders who form the direct environment in which we work,” he says.

The University of Cambridge’s conference Trust In Banking: Expectations, Aspirations and Innovation took place at the London Stock Exchange on 20 October 2015.

Download Ethical Banking: The Key Concepts, the longer research paper written for Cambridge Judge Business School’s Centre for Compliance & Trust.

Learn more about research centres at Cambridge Judge Business School


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