Practical analysis for investment professionals
11 December 2013

What If Customers Came First?

This article by Robert Jenkins, adjunct professor of finance at London Business School and a governor of the CFA Institute, was originally published in the November 2013 issue of Financial World.

Financial firms serve stakeholders. But do they serve them equally? Can they? Should they? Here is a typical list:

  • Executive management
  • Employees
  • Shareholders
  • Customers
  • Communities
  • Society at large

In what order do you think boards ranked them in the run-up to the crash? Where would they rank them today? Of course, the answer is a matter of opinion. But, in the view of customers, they themselves have ranked far down the roster. Given the plethora of penalties for misconduct it would be hard to argue otherwise. The resultant breakdown in trust between financial services firms and those they claim to serve has placed capitalism in the dock. The fallout will shape the future of finance for years to come. What is to be done? What has been done?

Well, governments have rejigged regulations. Regulators have embraced a more active approach to “treating customers fairly.” Bankers are contemplating a code of ethics. Sir Richard Lambert is heading up a new body to create one.

What about investment managers? Interestingly, some parts of the industry are ahead of the game. The CFA Institute is the leading standards-setting body for the global investment profession, and members who pass a series of demanding examinations become CFA charterholders. The CFA moniker is highly regarded. There are now more than 10,000 charter holders in the UK and some 110,000 world-wide. Thousands more are in the pipeline. The CFA curriculum has long incorporated a code of ethics by which the investment professional should operate.

In 2005, the institute extended this sense of duty to the level of the money management firm with the introduction of an Asset Manager Code of Conduct. About 900 firms claim compliance with the code.

Recently, the organization went one step further and issued a Statement of Investor Rights. The purpose is to “advise buyers of financial service products of the conduct they are entitled to expect from financial service providers.” The objective is to help restore trust in the investment profession. To the extent these principles are embraced more widely, such a “Bill of Rights” might build confidence in finance more generally. It could certainly serve as a template for regulators and regulated. Will it? What issues does this raise?

At one level, the investor bill of rights is a motherhood-and-apple-pie statement of what clients should expect (and indeed used to expect) from their providers. For the cynical City of London financier, such declarations may appear childishly naïve — more worthy of the boy scouts than the old boy network. But, taken seriously, this is explosive stuff. Why? Because it moves the firm in the direction of putting the customer first — and first is not where the customer has ranked on the list of priorities of many financial firms.

The CFA’s démarche will be challenging to propagate but difficult to dismiss. First, it is the right thing to do. Second, it is desired deeply by the clients from whom we all earn a living. Third, the regulators are on the case. If the professions do not come up with effective codes of conduct, the authorities will do it for us. Fourth, the initiative is not an isolated one.

For example, a group in Australia has launched the financial equivalent of the Hippocratic Oath. Called the Banking and Finance Oath, it declares that “trust is the foundation” of the profession and “my word is my bond” — and that is just for a start. Saker Nusseibeh, the chief executive of Hermes Fund Managers, is (to my knowledge) the first UK CEO of a financial company to take the pledge. Many of the firm’s employees will, no doubt, follow his lead. Hermes sets a powerful example that is not easily ignored.

The question for boards is to what extent doing what is good for the customer is also good for the company. If the customer comes first, will the shareholder come last? And does “last” mean less shareholder value? Might it mean more? No company will put the problem so bluntly, but all boards should discuss the question. For the answer as to whether customer satisfaction is a nice-to-have, or a must-have and a key factor in building shareholder value, depends on the time frame selected for success. Great businesses endure because they grow and retain a satisfied and trusting clientele over time. Such strategies do not sit comfortably with maximizing short-term profitability (and related pay). Thus, better alignment with the interests of customers implies a longer-term investment horizon for the shareholder and, consequently, longer-term compensation criteria for executives. For many reasons (including concerns for financial stability), the regulators and lawmakers are pushing compensation policies in the same direction. Bankers,  with some exceptions, are pushing back. HSBC is one exception. Perhaps not coincidentally, HSBC has built an exceptional bank.

Returning to our list of stakeholders and the question of where they should rank, and where they will rank, there is reason to believe that the customer is moving up the list. Whether the client makes it to the top remains to be seen, but quite a few organizations are determined to give the client a boost. Whether this is seen by management to be good or bad will depend on its time frame for success.

Boards must decide — and shareholders must know — where stakeholders rank and why.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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1 thought on “What If Customers Came First?”

  1. Diamon says:

    Such academic ideas (Please take an oath Mr. Gordon Gekko) have not and cannot fix the problem of greed in finance. The way to do it is through Kotlikoff’s limited purpose banking, change the game, change the structure, that’s how you fix the financial system.Don’t just sit there hoping for Gekko to become a good guy by taking an oath, get real.

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