The banking industry has specific idiosyncrasies that make it tough for them to manage their reputation, writes Lukas Zihlmann in a piece for finews.first.
This article has been published on finews.first, a forum for authors specializing in economic and financial topics.
Banks depend on their reputation far more than other industry sectors do. In many respects, it is their most important intangible asset. Their name is frequently impacted by entirely different criteria given the products they offer can often be hard to differentiate.
Switzerland is considered a key international banking hub. It has two globally active major banks, several renowned private banks, and a network of regional and cantonal banks. By itself, that should be more than enough to make each and every Swiss citizen proud.
But it is not that simple. The media and society at large are very critical of banks. Deep public interest in the sector prompts near-constant reporting and commentary on a wide number of media and social media channels.
Banks are not the only ones who bear more heat from mishaps than any benefits they might reap from any positive action undertaken. The Swiss pharmaceutical industry and Nestle are more than aware of that phenomenon. But, still, the finance industry has a few specific idiosyncrasies, even peculiarities.
«The major banks usually find themselves at the lower end of any list»
If you look at how Swiss banks rate in domestic reputation rankings, one thing quickly becomes clear. There are two categories. The major banks usually find themselves at the lower end of any list while the cantonal and regional banks usually have better reputations and place higher.
To understand the difference, it is important to know how a reputation is formed and what the drivers behind a bank’s name are.
That can include the product and service offering, the ability to innovate, profitability, leadership, their role as employer, and the institution’s governance and ethics, which also comprises social responsibility.
When looking at these factors directly, it quickly becomes clear that differences in reputation don’t have all that much to do with service and innovation. A bank’s name is far more susceptible to factors such as management, governance, and ethics.
«It only becomes very problematic if that logic is not strictly followed»
The major banks pay a significant amount of their compensation through bonuses. Practically all employees benefit as much of it is allocated and budgeted as a form of standardized incentive-related compensation. It is typically paid out when certain basic performance levels and results are met as, at the end of the day, all employees should be able to participate from an institution’s earnings.
It only becomes problematic if that logic is not strictly followed. If the payment of incentive-based compensation leads to a group-side net loss at an institution, or when management refuses to accept a «no bonus» scenario and makes payments despite mediocre performance.
That is also usually the time when bank leadership maintains that its hands are tied, re-emphasizing the necessity of making such payments to keep employees on board.
With a grain of salt, many in society can probably get their heads around that, but they are unlikely to be able to really accept it. The 2008 financial crisis led to a general understanding that the major banks were system relevant and too big to fail. But the measures instituted seemed mainly aimed at limiting the entrepreneurial risk of their business. All this, taken together, is not particularly helpful in the context of bonus discussions and a bank’s reputation.
«When you are looking at it all just from a risk perspective, you can’t do it any other way»
Because of the importance of reputation, banks started to pay attention to it earlier than other sectors did. But they did this from a pure risk perspective by focusing on what potential pitfalls could potentially endanger their reputation. The assumption was that their status was largely intact and only needed to be protected.
That is roughly akin to a married couple trying to keep their relationship healthy by reacting to any potential dissatisfaction expressed by the opposing spouse and little else. It should not be much of a surprise if the same spouse suddenly wakes up one day to find his or her partner gone.
The same thing happens at banks. Boards and senior executives start talking about reputation after the damage has been done. When you are looking at it all just from a risk perspective, you can’t do it any other way.
«Some banks have realized this, and they regularly analyze their reputation»
What is the alternative? Even if a good reputation seems to be something very intangible, it can be measured and shown according to the individual factors that drive it. That all serves to make reputation more transparent and manageable.
This is also the foundation of real reputation management, which aims to build and keep a good reputation and not simply defend it with risk minimization measures.
Some banks have realized this, and they regularly analyze their reputation, specifically addressing the key issues important to diverse stakeholders. This not only helps their own reputation but also improves the image of an entire sector.
Lukas Zihlmann is the founder and head of the swissreputation.group in Zuerich. The company specializes in measuring and analyzing corporate reputations. Its methodology comprises a basis by which companies can build increased understanding with stakeholders, focus on the right strategic issues, and manage communication activities effectively so that they have a larger impact.
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