Экономические науки/ 3.Финансовые отношения

Voitenko O.M.

Ternopil National Economic University, Ukraine

Transformation: building a new image of the financial services industry

The financial services industry is undergoing one of the most tumultuous times in its history and the consequence has been a precipitous decline in the public`s trust in the industry and in its leadership.

In a two week period in the fall of 2008, the U.S. witnessed the shocking collapse of several of its most seemingly stable and secure financial institutions. On September 14, Merrill Lynch entered bankruptcy and was quickly acquired by Bank of America. The next day Lehman Brothers filed for bankruptcy, was split up, and portions of the former firm were purchased by Barclays. The following week the nation`s largest savings and loan association was placed into receivership, ironically on the same day as that firm’s 119 year anniversary. The demise of Washington Mutual represented the largest single bank failure in American history. The landslide of financial failures started several months earlier when Bear Stearns, once recognized as the «most admired» securities firm in Fortune’s «America’s Most Admired Companies» survey was acquired by JPMorgan Chase for U.S.$10 per share, down from the 52 week high of more than U.S. $130 per share. Among them, these once stalwarts had almost 450 years of history, having previously survived other economic downturns, including the Wall Street Crash of 1929.

To cut a long story short, the financial events of 2008 will become a footnote in history. But in the meantime the industry is faced with a considerable dilemma – an overwhelming lack of trust.

Dutton (1988) describes business-related crises as a type of strategic issue that leads to a negative outcome unless corrective action is taken. She further argues that crises reflect situations that are critically important to an organization or industry and that they may be distinguished from non-crisis strategic issues because they are accompanied by time pressure and ambiguity. The more important, immediate, and uncertain the issue, the more likely it is to be characterized as a threat or a crisis. Pearson and Clair (1998) expand on Dutton`s definition, claiming that crises are low-probability, high-impact events that threaten the security and well being of an organization or an industry, and their respective stakeholders. They define crises as also being characterized by ambiguity of cause, effect, and means of resolution, and consequently require decisions to be taken swiftly. These, and other definitions of crisis, include three key elements: ambiguity, high stakes, and urgency − all of which help serve to distinguish crises events from other problems or challenges an industry and its leadership may face. Given these articulations of crisis, the financial industry has clearly experienced a major threat. At the outset of the economic collapse there was ambiguity in both cause and response, with industry leaders and government officials scrambling for solutions as the economy spiraled downward. Moreover, the consequences of the financial situation in the U.S. had worldwide implications, and therefore the stakes were extremely high. Finally, the situation required immediate attention and from an array of sources. Under these circumstances, effective crisis leadership is an imperative.

Crisis leadership is more than managing communication and public relations (PR) during a crisis. Crisis leadership even goes beyond the parameters of the risk management or operations roles. I argue that crisis leadership is about building a foundation of trust not only within the industry, but across the industry’s stakeholders as well. Effective crisis leaders then use that foundation to prepare their organizations for difficult times, to contain crises when they occur, and most importantly to leverage crisis situations as a means for creating organizational change and innovation. It is, in fact, those industry leaders who recognize that crises events can be a catalyst for positive change, and who have the wherewithal to act toward that end, who will propel the financial industry forward.

«Today`s low levels of public trust, rather than signaling a capricious public or no-win situation, may represent opportunities for game-changing solutions that can lead to greater efficiency and value creation.» [2, p. 6].

Trust is built and sustained in part by the potential for reward when mutually understood expectations are met, and by a fear of negative consequences (i.e., losing clients) when those expectations are not met. In this way, trust can be interpreted as a market-driven, economic calculus derived by weighing the potential outcomes of creating trust relative to the cost of destroying it [8]. Organizational and industry reputations are built largely on this calculus. Stated simply, when one party does not follow through in a competent and predictable manner, trust in the relationship is eroded. The financial industry is suffering from a lack of perceived trust. In recent months, the industry`s clients have questioned the judgment and decision making of its leaders and their capability to manage in a transparent manner. Moreover, stakeholders (retailers in particular) feel unduly burdened by the consequences of the industry‟s actions. In blunt terms, stakeholders of the financial industry feel betrayed.

Betrayal is an actual or perceived breach of trust, and the economic crisis can be interpreted as a betrayal by retail customers, credit issuers, investment banks, and more. Betrayals are experienced both cognitively and emotionally [8]. Cognitively, the violated party attempts to rationally process the significance of the violation and its ramifications on self and others. When the betrayal tips a certain threshold the relationship is severed. In addition to the rational processing of betrayal, stakeholders also respond emotionally to them. The violated party experiences feelings of despair, hurt, anger, and potentially a desire for revenge. Taken together, the consequences of betrayal can be severe enough as to debilitate progress at precisely the time when forward momentum is necessary.

Betrayal can be categorized as intentional or unintentional and can vary in its impact. Yet, even minor betrayals can prove problematic for both the betrayed party and potentially for the relationship. Betrayals hit at the core of what is important – a set of firmly entrenched values, assumptions, beliefs, and expectations (VABEs) about how people, organizations, or industries should behave. When behavior contradicts or is somehow inconsistent with our VABEs we view that behavior as a betrayal regardless of whether it was an intentional or unintentional act. When we perceive a VABE violation our tendency is to draw a set of negative conclusions about the source of the betrayal. Those negative conclusions subsequently lead to negative feelings, which then manifest in negative or unproductive responses. When the negative response is directed back to the original source we refer to that as revenge, and revenge has the potential to create an infinite loop of unproductive behavior.

Building institutional and industry wide trust is not easy, but because of itscentral role in image and reputation management creating an environment characterized by trust is a worthwhile pursuit. For the financial services industry to be perceived as trustworthy, ethical, and high performing in light of the financial crisis it must develop the capacity to respond to, learn from, and generate positive outcomes even if the crisis is perceived to be one of its own making. To do so requires that the industry demonstrate integrity, positive intent, and clear capabilities [3].

Underlying the three pillars of trust (integrity, positive intent, and clear capabilities) is the need for mutual understanding and transparency. In working with executives on building trust I highlight (if they do not) the significance of mutuality, because with it comes a recognition of risk and vulnerability for all parities in the relationship. Some reseachers [12] base their definition of trust on the concept of mutuality, stating that trust is a «relationship of mutual confidence in agreed upon performance, honest communication, expected competence, and a capacity for unguarded interaction.» Leaders must work together to clarify the mutual values, goals, expectations for performance, and communication standards. Not only must leaders identify mutuality within the industry but also with their clients, regulators, and the general public. Doing so can help foster a sense of identification with each party. When there are common values and goals, customers and clients are more willing to believe that a firm or industry has their best interest at heart. Likewise, when a firm or industry identifies with the goals and values of its stakeholders they will be more deliberate in doing what is in the best interest of those stakeholders. When there are no mutually held values, assumptions, beliefs, or expectations, the perception of imbalance in power, risk, and vulnerability pervades, and trust cannot flourish under those conditions.

References

1. Brockner, J. B., and E. H. James, 2008, «Toward an understanding of when executive see crisis as opportunity,» Journal of Applied Behavioral Science, 44, 94-115

2. Business Roundtable Institute for Corporate Ethics, 2009, «The dynamics of public trust inbusiness – emerging opportunities for leaders,» Special Report, Arthur W. Page Society

3. Covey, S. M. R., 2006, The speed of trust, Free Press, New York, NY

4. Dutton, J. E., 1988, «The processing of crisis and non-crisis strategic issues,» Journal of Management Studies, 23, 501-517

5. Gabarro, J. J., 1987, The dynamics of taking charge, Harvard Business School Press, Cambridge, MA

6. James, E. H., and L. P. Wooten, forthcoming, Leading under pressure: from surviving to thriving before, during and after a crisis, Psychology Press, New York, NY

7. Kotter, J. P., and L. A. Schlesinger, 1979, «Choosing strategies for change,» Harvard BusinessReview, 57, 106-114

8. Lewiki, R. J., and B. B. Bunker, 1995, «Developing and maintaining trust in work relationships,» in Kramer, R. E, and T. Tyler, eds., Trust in organizations, Sage Publications, Thousand Oaks, CA

9. Mishra, A., 1995. Organizational responses to crisis, in Kramer, R. E. and T. Tyler, eds., Trust in Organizations, Sage Publications, Thousand Oaks, CA.

10. Mitroff, I., 2005, Crisis leadership: planning for the unthinkable, AMACOM, New York, NY

11. Pearson, C. M., and J. A. Clair, 1998, «Reframing crisis management,» Academy of Management Review, 23, 59-76

12. Reina, D. S., and M. L. Reina, 1999, Trust and betrayal in the workplace,Berrett-Koehler Publishers, Inc., San Francisco, CA

13. Weiner, B., 1985, «An attributional theory of achievement motivation and emotion,» Psychological Review 92, 548-573