The beginning of February saw the end of one of the largest fraud trials in the UK. It followed a six-year police investigation into a £245 million fraud which culminated in six people, including two former HBoS bankers, being found guilty of various charges, including fraud, corruption and fraudulent trading.

In his sentencing remarks, his Honour Judge Beddoe summarised the case: "It primarily involves an utterly corrupt senior bank manager letting rapacious, greedy people get their hands on a vast amount of HBoS’s money and their tentacles into the businesses of ordinary decent people […] and letting them rip apart those businesses, without a thought for the lives and livelihoods of those whom their actions affected, in order to satisfy their voracious desire for money and the trappings and show of wealth."

At its core the case involved a HBoS banker, Mr Scourfield, who was responsible for helping ailing small businesses between 2003 and 2007. In return for the bank’s support, Scourfield insisted on the businesses using the services of a specific consultancy, QCS. QCS's owners, Mr Mills and Mr Bancroft, paid bribes to Scourfield for the referrals. QCS submitted inflated business cases for additional finance on behalf of the businesses that it was supposed to help. Scourfield approved the loans in the full knowledge that the business would not be able to repay them. Mills and Bancroft benefited through high consultancy fees. When the businesses were unable to repay the bank loans, QCS took control of them, stripping assets or selling them for nominal amounts to companies that Mills and Bancroft also controlled. Scourfield bypassed weak or inadequate internal controls at the bank, approving clients' credit positions without appropriate scrutiny from above. Scourfield, Mills and Bancroft spent the money they had obtained on expensive holidays, jewellery, sex parties and high-class prostitutes.

HBoS customers complained to the bank, some even reporting their concerns to a fraud office in 2007. The bank’s regulator may also have been informed, according to some news reports. In 2009 there was a BBC Radio 4 investigation and a parliamentary debate about the connections between Scourfield and QCS. The police investigation did not commence until 2010. The bank eventually wrote off £245 million in loans.

The need for a good understanding of culture

Once again, an egregious case of misconduct at a financial firm has served to remind us how important it is for firms to assess the culture within their walls. Poor culture can and will have a significant effect upon revenue, reputation, regulatory relationships, employees, customers and clients.

Culture is much more than the 'values' that a firm espouses or its mission statement. Culture shapes – and is shaped by – the organisation, its relationships and behaviour. Jonathan Davidson, the Financial Conduct Authority's director of supervision, has described culture as “the typical, habitual behaviours and mindsets that characterise a particular organisation. The behaviours are the ‘way things get done around here’; they are the way that we act, speak and make decisions without thinking consciously about it. And sitting underneath these behaviours or habits are mindsets inside people’s heads; the beliefs or values that people feel are important.”

Think of a firm’s culture as an iceberg. The visible tip of the iceberg represents the readily visible aspects of a firm’s culture - formal processes, procedures and rules that characterise and shape a particular organisation. This includes policies and business strategy, remuneration and governance structures.

However, most of a firm's culture (as with an iceberg) is hidden beneath the surface. This includes myriad types of behaviour, attitudes and perceptions; informal agreements, “off-line” discussions, unwritten rules, codes and arrangements; relationships, individual stories, personal traits, beliefs and other psychological quirks. These aspects of culture are not necessarily written down, yet they are the fundamental causes of behaviour.

These hidden forces can lead to influential sub-cultures forming within firms, teams or business units and can have a disproportionate and devastating effect upon a firm and its customers. Scourfield formally operated within the same culture as the rest of the bank. Yet as the investigation showed, he and his colleagues also operated within a sub-culture; of greed and corruption, breaching trust, abusing power and circumventing already weak risk controls. The relationship between the explicit and hidden aspects of culture is fundamental to an understanding of culture and for an organisation’s ability to manage its risks, achieve its strategic objectives and make cultural changes beyond the boardroom, reaching into its business units, out to its teams and ultimately through to its customers.

Measuring culture

Culture is unique to every business. It is not static but a mixture of explicit and hidden factors; the formal procedures and informal beliefs that, between them, cause behaviour. Business leaders can apply various techniques to measure culture and identify previously unrecognised pockets of poor behaviour, such as the actions of Scourfield, that may be damaging their organisations' cultures. When they have exposed the problems, such leaders can change the firm’s culture by means of recruitment, incentives and remuneration, training and education, governance, new processes and controls, or the removal and reporting of those who are found to be engaging in illegal activities.

At Willis Towers Watson, we have developed a three-part model to help companies intervene properly in a number of key areas, influenced by an understanding of how they will affect the behaviour of employees.

• Data gathering – including employee surveys, psychometric assessment and incident/claims data. This can also include detailed qualitative interviews with appropriate people who have an interest in the outcome. Other relevant data may include broader HR information such as performance management and bonus history, feedback from customers, or findings from audits or regulatory reviews.
• Linkage analysis –  to establish the main causes of unacceptable risks in areas such as employee engagement, leadership, pay, performance management, the nature of the ‘employee deal’ and 'manager relationships' or span of control.
• Action planning – to identify priorities for intervention that will improve culture at the firms as it relates to risks, re-aligning incentives with risk controls and eliminating incentives for bad/risky behaviour.

Such intervention is not limited to the HR arena, however. A firm that runs targeted linkage analyses can uncover deficiencies in governance, or in risk management processes, compliance or controls. When it tackles the areas in which its intervention is bound to have the most effect, it can improve risk culture and reduce the frequency and/or severity of incidents.  
 
These are useful tools with which a firm can access feedback from a diverse portfolio of individuals throughout its organisation. It needs to give considerable thought when deciding on the questions to ask, how to tailor them to its needs and the issues to evaluate. If it does this properly, it will draw people's perspectives from all over the firm. This can be the key to effecting a concrete evaluation of the firm’s culture.

Culture and clients

The management of culture is not easy and change always takes time but it is crucial. Regulators have made culture a priority and they have demanding expectations of conduct and culture. The financial services sector must continue to restore its reputation and rebuild trust with stakeholders, shareholders, employees and customers.

These last are, of course, crucial. It is easy to overlook the effect that a scandal might have upon customers and clients amidst the six-figure losses, cultural failings and lurid details in this and other cases of misconduct. The HBoS clients whom the scandal affected are now looking for some form of financial redress and some have waited a decade for a resolution. The consequences of such scandals are seldom just financial. His Honour Judge Beddoe summed up the effect on the victims.

“The harm for which you were individually and collectively responsible can of course be quantified in cash terms, but cannot be so in human terms. Lives of investors, employers and employees have been prejudiced and in some instances ruined by your behaviour. People have not only lost money but in some instances their homes, their families, and their friends. Some who would have expected to be comfortable in retirement were left cheated, defeated and penniless.”

* Jagdev Kenth can be reached at jagdev.kenth@willistowerswatson.com