No one expects a fallen Master of the Universe to say sorry. But academics say an apology — for all the litigation risk it entails — can be the basis of revitalised confidence and trust.
With global markets paralysed by the inability to rely on a counterparty, and as trust and accountability form the kernel of debates about effective regulation, some say a slice of humble pie now can help ensure bankers earn trust in future.
Several studies in the United States have shown doctors who openly apologised for their mistakes actually reduced their risk of being sued by patients or their families, apparently because the emotive response persuaded people to trust them.
The bankers’ journey to restoring complete trust and confidence will be tricky but is ultimately necessary, said Daniel Diermeier, professor of regulation and competitive practice at Northwestern University’s Kellogg Management School.
”Financial service CEOs are not exactly known for their humbleness … arrogance is almost part of the necessary portfolio you have to have to make it to the top,” Diermeier said by telephone from the United States.
One case he cited in comparison was US domestic airline Southwestern Airlines, which faced intense media scrutiny in 2005 after one of its passenger planes skidded off a runway, killing a six-year old boy.
Within hours of the accident its CEO told a news conference: ”there are absolutely no words to accurately state our grief and our sorrow over the tragedy”.
Newspapers quoted analysts praising his response as potentially setting a new standard for how airlines would deal with crisis.
After a drop of 1,5% immediately after the crash, Southwest’s share price climbed by 3,5% within a few days and by March 2006, was 11% above pre-crash levels.
”[Financial services show] a totally different attitude,” Diermeier said. ”Because the products are complicated, there’s a sense that you are smarter than everyone else and aggressiveness is valued.”
Feeling horrible
Since one of the first major bank collapses of the current crisis — Britain’s Northern Rock in September 2007 — the failed institutions have demonstrated degrees of contrition.
Richard Fuld, CEO of collapsed Lehman Brothers, notably told US lawmakers earlier this month he took full responsibility for his actions and felt ”horrible about what has happened to the company”, but insisted he shared the blame with regulators and Congress.
The entire management of Deutsche Bank have pledged to forgo bonuses this year, following Morgan Stanley CEO John Mack last year.
But so far — perhaps on legal advice — actual apologies have been thin on the ground. Steven Friel, a litigation partner at solicitors Davis Arnold Cooper, says his phone has been ringing ”more often than in a long, long time”.
”Actions speak louder than words,” he said. ”To the man on the street to know that someone has forgone their bonus would be as good as an apology.”
”As soon as you start admitting liability or suggesting any culpability on your own part, you open the door to legal claims. I would not advise that anyone goes so far as apologise for their actions.”
In Britain, the CEO of regulator the Financial Services Authority (FSA) was recently reported to have apologised. ”We have said sorry and I am saying sorry for our supervisory failings,” Hector Sants was quoted in media as saying.
But while his gesture may have been welcome, he was not directly responsible for bringing down an institution.
Unlike in Japan, where the culture of apology is established, it may seem naive to expect American or British banks to go hand-on-heart.
But Keith Skeoch, CEO of Standard Life Investments, Britain’s seventh-largest fund manager, said the value of saying sorry should be appreciated by looking at the cost of arrogance in the industry.
”It’s the price of arrogance that investors really get concerned about … It’s about making sure there is good engagement,” Skeoch said.
Diermeier argued that in a business which depends heavily on trust, an empathetic, transparent and open approach to the public, customers and shareholders can reap gains.
”The more your dependence on trust the more it’s important you understand its effect,” he said.
Fund manager Skeoch said sincere engagement is crucial in building and maintaining trust, and a company’s inability to respect shareholder views can be lethal.
Saying nothing is not really an option, said Diermeier: ”Silence is treated as defensive … if companies don’t say anything we assume the worst about them.”
Of course, the ”never apologise, never explain” dictum is not restricted to bankers. But few expect the current crisis to usher in a new dawn of humility in financial services.
However, the experts do see a precedent for slightly chastened behaviour, in accountancy.
”The real comparative case with financials is the accounting industry [which] went through this meltdown with Enron and Arthur Anderson,” Diermeier said.
”They have adjusted, not just in the way CEOs operate but the way they operate internally,” he said.
”There’s much more of an understanding and awareness of reputational risk. I think that’s something that will have to happen with the financial services industry.”
But — in a point widely echoed by others, Benjamin Ho, an assistant professor of economics at the Cornell Johnson School of Management, said apologies also have to seem sincere.
”A carefully crafted legalistic apology is of no use,” he said. ”To be effective, an apology must make the apologizer vulnerable, open either to the possibility of civil suits or other sanctions, or open to the appearance of incompetence.” – Reuters