The financial services industry appears to be in a permanent state of turmoil, with damaging headlines appearing almost daily. So perhaps it’s not surprising that for the first time ever, not one financial services firm is among the top 20 Best Companies for Leadership.
The top 20 companies in the study excel in more than leadership; they have delivered better shareholder returns than the S&P 500 every year of the study. There are important lessons for every business in the examples they set. But it seems no one in financials services is listening.
Yes, the industry is still recovering from the financial crisis, with more restrictive regulation and – for most firms – more stringent risk management processes. These factors have contributed to lower business volumes, fewer opportunities and reduced profitability.
But every company in every industry is facing serious market challenges. The real differences lie in how companies are addressing them.
The Best Companies for Leadership have responded by embracing innovation. They have committed to disciplined practices aimed at creating a culture that supports innovation:
• Focusing on client needs, because commercially meaningful innovation requires an understanding of customer needs;
• Seeking broader perspectives in their workforce because different points of view are essential to innovation;
• Becoming more agile and empowering employees to respond to challenges;
• Promoting collaboration to fuel innovation by bringing together different perspectives.
Most financial services firms trail the top performers in all these practices, starting with customer focus. For example, employees at 90% of the best companies spend “much time discussing customer’s future needs;” the same is true for only 63% of financial services organizations.
Similarly, 90% of the best companies encourage employees to “learn outside their area of expertise” – outpacing financial services firms by almost half. Dow Chemical, one of this year’s top 20, provides high-potential managers with what the company calls “out of body experiences” beyond the typical career path, including cross-functional and international assignments, to broaden their perspectives.
All the best companies evaluate leaders on agility, and take “clear action when a leader is not collaborating, even if he/she has strong business results.” FedEx, also in the top 20, rewards collaboration by basing its bonus program on enterprise-level measures, not those of a particular operating company. Financial services firms lag in both practices.
The sector also trails in other measures of leadership. For example, in an industry that relies on trust – a quality in short supply following the financial crisis – you would expect firms to be focused on strengthening loyalty and relationships.
But fewer than two-thirds of financial services organizations “evaluate and reward leaders based on their ability to build excellent relationships with their peers,” while 95% of the best companies do. Financial services firms also fall short in leaders with “the ability to generate personal and organizational loyalty.”
This last result – a shortcoming in an advanced leadership competency– highlights what I believe is the fundamental reason financial services firms are not among this year’s top 20.
Once, financial organizations were known for their apprenticeship model, which developed many strong executives. But in recent years, the industry has rewarded managers who have delivered results through superior analytics, or by leveraging legacy assets (e.g., balance sheet, distribution). Their emphasis shifted away from strong leadership capabilities.
This model worked as long as business opportunities were derived from profitable intermediation opportunities and well-understood analytical innovations. But with those channels constricted by the downturn and the resulting structural changes, firms need to develop dramatically different client-centric approaches to the marketplace, keyed around trust.
This is a challenging shift requiring solid leadership. It demands leaders who can inspire their teams to create new solutions and introduce organizational capabilities that will reinvigorate internal and client relationships, and ultimately lift profitability.
In that context, the firms that re-invent themselves first will be positioned to prosper when positive conditions return.
Jean-Marc Laouchez is global managing director for the financial services sector at Hay Group, which annually publishes the Best Companies for Leadership.