Analysing business performance in financial services

Simon BittlestoneSimon Bittlestone, Managing Director, writes on markets and economics

A report previewed in the media last week, from governance specialist Nestor Advisors, draws some interesting conclusion about the leadership of Europe’s largest banks. It will show that the proportion of chairmen with banking expertise stands at only a little over 50%, almost unchanged since 2007.

The Financial Times’ John Plender, in an excellent article, pointed to some clear problems with this situation, including persuasive examples of unskilled chairmen whose companies came to grief, and the tendency of less-skilled non-execs to conservative behaviour in the face of onerous regulation. This suggests that some of the potential value of the European financial services sector could remain untapped; from a macroeconomic point of view, that would be hugely damaging.

In the global marketplace, a healthy finance sector is a prerequisite of success. In Europe, a surfeit of caution in governance and compliance can only have a chilling effect on the investment that Europe’s world-beating manufacturing, creative, luxury and professional services sectors need to thrive. Equally though, we have seen the consequences of a cavalier or uninformed attitude to risk. And being informed is, in many ways, the key.

The global economy is more volatile, technology more capable and marketplaces more competitive even than in 2008 – banking leaders cannot hope to understand the full scope of their organisations’ finances unaided. And it would be folly for them to assume their institutions are safe simply because they are compliant on paper.

Understanding business performance in financial services is harder today than it has ever been, and the standard range of indicators can only ever tell part of the story. What’s needed is better, more focused analysis that seeks out underlying variances, hidden risks and concealed trends, and enables finance leaders to react intelligently to regulation, risk and opportunity.

Though greater expertise on boards might help achieve the right balance of risk and caution, today’s institutions are now so complex that even industry veterans cannot hope to analyse an organisation’s assets and liabilities without tools to help them explore the story behind key data points, and interrogate their wider implications. The standard monthly and quarterly management cycles cannot begin to offer the level of insight that is required.

In the UK at least, banks have just had an impending regulatory burden reduced considerably (in the shape of new ‘ringfencing’ rules), and one of our largest is moving to install an investment banking specialist as its CEO. Commentators have noted an easing of the ‘banker bashing’ mood in the political establishment. The industry has an opportunity, both to prosper and rebuild its status as an engine of the economy. But, in order that the lessons of the financial crisis are not just learned, but implemented, banking industry leaders must do more to make sure that they properly understand the risks and opportunities their organisations face.

If banking in Europe is to be everything it can be – that is safe, profitable, and supportive of the economy – then executive and non-executive leaders will need the best analysis available to them. Not only that, but they will need analysis that facilitates collaboration and common understanding of business performance, regardless of whether those on the non-exec side have experience in the industry, or not.

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