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A New Dawn?Harnessing Talent in a Ring-Fenced World

Of all the challenges raised by the Independent Commission on Banking’s proposals, the implications for people and talent management have received arguably the least attention. Yet these implications are profound, and will become increasingly critical to banks’ success in the coming years, as they plan, implement and communicate their ring-fence strategies.

The ICB and Human Capital StrategyHow will banks harness talent in a ring-fenced world? The importance of getting the people factors

right is underlined by the ring-fence’s fundamental effects on the key people-related drivers of business performance and compliance, including leadership quality and succession, organisational culture, talent management, workforce planning and employee engagement.

When considering the people implications of any business strategy or strategic organisational change, Accenture takes a holistic view of the people elements required to enable and deliver that strategy, across the areas of talent, organisation, leadership and culture - which we refer to collectively as the ‘human capital strategy’. In implementing the ICB’s proposals,

banks need to revisit all aspects of their human capital strategy in the light of decisions such as the location of the ring-fence and the structure of their support services. And while the ICB’s implementation deadline of 2019 seems some way off, the scale of the required change and its disruptive impact on employees mean banks should start considering the people issues and implications as a matter of urgency.

To help them do this, we have identified four key focus areas around people that we believe banks should prioritise.

Harnessing Talent in a Ring-Fenced WorldHarnessing Talent in a Ring-Fenced World

Ring-fencing raises host of questions…As banks assess the business implications of the ICB’s final proposals, they face a whole array of questions. And most of the answers they come up with will have major impacts on the way they recruit, develop, manage, reward and engage with their people.

Here are just a few of the strategic questions impacting a bank’s ability to understand and tackle the inherent human capital challenges brought by ring-fencing:

• Where should we draw the ring fence - which businesses stay in, and which go out?

• What new governance structures will be required within the ring-fenced entity?

• What is the optimal operational model for the support functions within and across the ring-fence?

• How can we redesign and differentiate the product offerings within the ring-fence, in order to satisfy the ICB’s proposed transparency criteria for easier switching and clearer consumer choice?

• How can we drive and ensure compliance with the new regulations after the separation of balance sheets?

…impacting human capital strategyThe ICB’s ring-fencing recommendations make it vital that UK retail banks to tackle issues in each of the quadrants of their human capital strategy: leadership, talent, culture and organisation, see Figure 1. For banks facing the scale and scope of change required, the temptation is to focus first on organisational structures and leave ‘softer’ elements such as culture until later.

However, that approach could well be a recipe for failure. Why? Because ring-fencing is not only about the organization, but about the way people in the industry think, feel and behave. Ultimately, banks need to create and instil the right culture to achieve mindset change - which is a bigger challenge than getting the organisational factors right. Simply putting the right ‘hardware’ in place will not change behaviour if people do not believe in it. So the people aspects need to be viewed and up-front.

Figure 1: Categories of banking activity under the ICB’s ring-fencing proposals

Harnessing Talent in a Ring-Fenced WorldHarnessing Talent in a Ring-Fenced World

Business Strategy

HR Strategy

Human Capital Strategy

Analytics

Leadership Talent

Culture Organisation

Leadership Talent What implications does the new rule on board composition have for the retention of top talent at the board and executive level?

What are the core leadership values the new board of the in-fence entity need to display to drive the new culture?

The composition of boards is crucial to the creation of new governance structures: for example, the ICB’s proposals say the ring-fence bank’s board must have only one member in common with the group board. Such restrictions mean succession management and maintaining senior executive ‘bench strength’ will become increasingly challenging and important. However, one factor that will not change is the crucial role played by line managers in sustaining and building employee engagement across the entire workforce during periods of structural and operational change - and also in making those changes deliver the targeted outcomes once they are in place. So communicating early and effectively with line managers to secure their buy-in, and ensuring they get the support they need from the organisational side to stay on message in times of uncertainty, will be key.

What technical, functional, and soft skills are needed to implement and realize the new strategy? Where are skill gaps?

How is the employer value proposition (EVP) affected by different operational models?

The new operational model will require a different mix of skills and capabilities, so talent management and workforce planning will be key to managing the implementation and operation of the ICB-inspired regulations. And the required structural and operational changes have strong implications not only for front-office staff, but also for the deployment and retention of key talent in support functions, whether these operate across the ring-fence or on one side only. To optimise the outcome, banks will need to understand how the ring-fencing will change their employer value proposition. For example, employees who joined a universal bank because of the breadth of opportunities may feel their career prospects are curtailed by the ring-fence. Talent development will also be important, to upskill employees for new roles and ways of working

Culture What is the target culture of the entity within the ring-fence and how does this differ from the current culture and the broader group culture?

How will employee engagement be affected by different operational models?

Without cultural and behavioural change on both sides, the ring-fence will not operate as it needs to. And since each of the new entities will inevitably develop its own new culture, the leadership should actively shape and guide that culture rather than standing back and seeing what culture emerges. If banks are to embody the new regulations in daily business operations after the separation of balance sheets, they will need to achieve and embed a culture of risk-prudency and compliance. An understanding of current cultural boundaries and values will help to determine the optimal ring-fence location and target culture - so it is a good idea to conduct a formal cultural assessment at an early stage.

Organisation What are the best governance models for entities within the ring-fence?

How can we create attractive reward structures after balance sheets are separated?

Realising the goals of the new regulations will require banks to implement and align new structures and organisational systems and processes, including reshaped reward structures and performance management. New ways of working and interacting within and across the ring-fence will be fundamental if the structure is to work in an effective and compliant way. Even if the bank adopts a ‘narrow’ ring-fence containing only the ‘mandatory’ activities, working across the ring fence will be very important for some roles. For example, a relationship manager may well be expected to service the same client with ring-fence products such as simple lending products, and non-ring-fence products such as FX hedging solutions. This will mean the RM representing both entities, probably leveraging shared CRM solutions and systems, and possibly sitting in the same office as colleagues on the other side of the ring-fence. This makes it vital to harmonise and align the two cultures (or customer-facing styles) on each side. Also, the new reward structures and performance management will need to be hardwired to support and foster the target culture on each side.

AnalyticsThe four quadrants of the human capital strategy are informed and interlinked by data analytics, supporting high-quality, consistent and co-ordinated decision-making across the business. Early and accurate mapping and benchmarking of leadership capability, talent supply chains and culture can help the bank prepare for the journey ahead.

Harnessing Talent in a Ring-Fenced WorldHarnessing Talent in a Ring-Fenced World

1. Behaviours modelled and exhibited by management

2. What leaders pay attention to, measure and control

3. Performance and promotion systems (i.e. rewards)

4. The criteria used for recruitment, selection and termination

5. Leaders’ reactions to critical incidents and crises that test the bank’s values

6. The bank’s formal and informal design and structure

7. Systems, policies and procedures that determine how work is done

8. Stories and legends about key people told throughout the organisation

9. Ceremonies, company celebrations, awards etc.

10. Formal statements of philosophy, principles and values

Levers for behavioural change to drive culture, engagement and mindset Accenture’s experience shows that the 10 most important influences on culture and values are:

What to focus on now: human capital priorities as ring-fencing loomsAs banks prepare their ring-fence approaches, we believe there are four human capital priorities they should focus on now to maximise their chances of success.

First, culture. To ensure compliance with new regulations after the separation of balance sheets, banks must create and instil a culture of risk prudency, integrity, and strong business ethics. This means mapping the current culture once the ring-fence is drawn, and defining the characteristics of the new culture to enable a gap analysis. The target culture must be supported by modified structures, operating models, ways of working, reward structures and performance management. As we highlighted above, the culture should be harmonised on both sides of the ring-fence, as any misalignment will cause problems for people and activities that operate across it.

While behaviour, culture and engagement are intangible and difficult to shift directly, there are numerous levers that banks can pull to influence them. Banks - like other organisations - are organic systems, and many elements influence the development of their culture, although experience shows that management manipulation often fails to produce the required results. The accompanying information panel lists the

ten most powerful levers for influencing behavioural change, which will in turn drive changes in workplace culture and people’s engagement and mindset.

Second, leadership and succession management. The bank will need new governance structures within the ring-fence, and must review board composition and succession management for senior executives in the light of the new rules. Steps to take include designing the new succession management strategy and using supply analysis to determine the ‘bench strength’ for senior executives. Senior management’s core leadership values and competencies should also be reviewed to ensure they foster a risk prudency culture.

Third, engagement. The as-yet unknown implications of the ICB recommendations may already be having an impact on employees’ perceived job security and engagement levels – particularly given their possible worries over how the rules will play out in the ‘grey zone’, where they may be interpreted in different ways. If banks are to continue to drive high productivity and retain the best employees throughout this time of uncertainty and future change, it is important to understand, anticipate and actively manage engagement. Effective change management, and regular communications to employees - including line

managers - are critical. These actions need to start now, supported by a review of the employer value proposition in light of the structural and operational changes brought by ring-fencing.

Fourth, new ways of working and learning. A gap analysis of the organisation’s current talent and skills and future post ring-fencing needs should be followed up with tailored development and recruitment. The new ways of working within and across the ring-fence should be promoted and supported through improved (and compliant) knowledge management systems. Skill needs and talent supply strategies for the support functions can be identified once the new operating models have been determined. In developing employees for new roles and ways of working, it is important to be aware that the regulatory environment will continue to evolve during the transition period up to 2019.

Conclusion: focusing on peopleAcross all industries, experience shows that major structural and operational change achieves its targeted outcomes, but only if the organisation successfully encourages and convinces its people to accompany it on the change journey and undergo the necessary change in mindset.

The scale and scope of organisational and culture change required by the ICB’s ring-fencing proposals is arguably unprecedented in any mature regulated industry. So getting the people aspects right will be critical if banks are to adapt successfully to the post-ICB world, and compete effectively within it over the long term.

While 2019 may currently appear distant, the disruptive effects of the ICB proposals on employees’ engagement and long-term career aspirations have already begun. If a bank does not take its people with it on the journey, they will either leave or impede change. Positive and early action to reshape the human capital strategy will ensure they stay on board - and contribute positively to making ring-fencing work in the years to come.