The purpose of this report was to analyse the banking sector and identify current CSR (Corporate Social Responsibility) and sustainability challenges which it is facing. Whilst also providing recommendations to overcome some of these challenges.
Research for this report included a review of literature such as journals, books, articles and industry publications.
The major findings for the report indicate that challenges are unavoidable at all levels and that the banking sector is faced with greater difficulties than before to meet demands of stakeholders. Based on this it is only possible to solve such challenges through the use of various leadership theories and practices.
The purpose of this report is to:
· Define the banking sector at a local and international level.
· Analyse CSR (Corporate and Social Responsibility) & Sustainability challenges which banks are facing at various levels through various literature and resources. Specifically for the local and international level.
· Analyse relevant theories and practice to provide a recommendation for the CSR and sustainability challenges which the banking sector is currently facing through a leadership perspective.
2 Defining the banking sector
The banking sector is comprised of corporations which are engaged in financial intermediation within an economy. This means that organisations such as merchant banks, commercial banks, savings banks and credit unions operate to accommodate for this need. Further to this the banking sector is part of the financial sector and carries the greatest share of the financial system thus influencing largely financial intermediation. For the banking sector this means that it is always trying to be in line with reaching certain financial objectives (Lanzeni 2004); (Henry 2010) and (Elliot 1986).
2.1 Local: Australia
At the local level it consists of local and foreign banks operating whilst also having a banking system which is competitive, well developed and liquid (Levine et al 2010). At present the Australian banking sector is dominated by four major banks: Commonwealth Bank of Australia, National Australia Bank, Westpac banking corporation and New Zealand Banking Group (Deo et al 2007).
Of these four major banks the Australian government has implemented a policy which prevents a merger from happening to safeguard competition thus forcing these banks to remain competitive through various different methods (Lynch 2008). Based on the analysed evidence Australian banks are the ‘best capitalised in the world’ with this being due to them prudentially managed whilst also utilising best international practices ABA (p. 1, 2011).
At the international level banking is a highly regulated industry although this varies from country to country. In order for international countries to be at a high level of standard they are forced to follow a set of global bank capital standards called Basel II although some banks are already slowly adapting to Basel III. By doing so they are able to achieve higher levels of competency which can mean that they are able to gain opportunities in various countries rather than their own whilst it can also mean that customers are treated better (Wigan 2011).
In countries such as America banks are prohibited from owning non financial companies whilst in Germany they have historically owned major stakes in industrial corporations. Whilst in Japan banks are, usually the centre of a cross share holding entity known as the Keiretsu (Megginson and Scott 2008). Collectively it could be said that these differences in banking have been put in place to facilitate each countries own needs for its various stakeholders.
3 sustainability challenges
The findings from the research indicated that the banking sector has been slow in considering sustainability challenges even though their risk can have an impacting role on the economy. Although certain sustainability challenges surfaced multiple times, that ranged from pricing to social (Jeucken and Bouma 1999). Specifically these challenges were:
· Managing risk;
· Implementing socially and environmentally sustainable management practices.
3.1 Managing Risk
Managing risks, which is controlling environmental and social issues plays a great challenge in the banking sector for sustainability. Specifically this is a challenge as it affects the overall survival of banks whilst it can also impact on various objectives (Harvey 2008). At the same time it can also be assumed that it affects a banks reputation.
Within a local and international level, risks have varied from direct legal risks which have been posed by third parties and government for things such as negligence and liability whilst other risks such as financial and indirect have also surfaced (IFC 2007). Based on these risks a probable chance exists to affect customers through a decline in their collateral as banks may face foreclosure or alternatively the customers themselves can be the very ones who affect the bank itself through a lapse in handling environmental and social considerations (Louisot and Rayner 2009).
Although some of these risks are greater than others it was identified by banks in the 2005 IFC survey that reputational risk was the most damaging whilst credit risk followed (IFC 2007). Based on this a recommendation for leaders to face such challenges to remain sustainable is to focus on continuously scanning various areas of operation for threats and opportunities that could impact the organisation (Louisot and Rayner 2009). In particular banks should record and assess risks, generate operational appropriate responses and monitor the effectiveness of such scans.
Further to this the utilisation of various communication and public relations staff could also be used within this approach as they evaluate stakeholder perceptions and expectations. By doing this, employees are then able to transfer, various knowledge to management to better make assessments and actions of various matters (Louisot and Rayner 2009).
Regulation is a form of government regulation which subjects banks to follow certain requirements, restrictions and guidelines. For banks this means that they need to abide by these rules if they are to operate (Putnis 2010).
Based on this regulation is a sustainability challenge for banks because regulations are constantly changing and thus banks need to keep up with relevant regulatory reforms which are in place to protect them and its customers.
Within Australia regulation is an important feature as it brings a common understanding between governments, regulators and those within the banking sector who are regulated. In order for Australia and the international banking sector to remain sustainable having recently undergone the GFC it is required that they be able to meet regulatory changes which are presently being redefined. Specifically this is due to it needing to avoid weaknesses which have been previously demonstrated (Henry 2010) and (IMF 2006).
As such a recommendation for banking leaders to meet this challenge would be to follow the new G20 reforms of the regulatory architecture which would in return strengthen the global financial system and lead to less problems in the future. Although this is seen to be a disadvantage to those struggling countries as they are not able to follow such procedures as they aren’t within the G20 by those countries that can they are then able to aid and assist those weaker countries thus ensuring that the banking sector does remain sustainable (Tucker 2010).
In particular the countries which are able to meet such a challenge they would be able to strengthen the global standards for bank capital and liquidity. Although implementing such a reform would need to be tailored appropriately for each country so as to get a balance between financial stability and rising costs which are associated with regulation. Whilst, it also means that banks need to meet minimum requirements, supervisory reviews and market disciplines (Henry 2010).
3.3 Implementing socially and environmentally sustainable management practices
Implementing socially and environmentally sustainable management practices means to utilise social and environmental management systems to better overview and manage the direct impacts of its operations (IFC 2007). For the banking sector at a local and international level this is a constant challenge as it is always faced with a trial and error dilemma to strike a balance which works for them and its stakeholders / customers with these errors posing risks to the bank’s assets and reputation.
Based on this a recommendation for leaders is to utilise a social and environment management system (SEMS) which is a process to assess the social and environmental risks and opportunities arising from their clients business activities. By utilising such a system it ensures that sustainability plays a part in all of the organisations decision making processes including portfolio analysis and credit assessments. At the same time it also enables the banking sector to view socioeconomic and environmental issues comprehensively thus allowing it to move beyond complying with regulations (IFC 2007).
Issues however are apparent with the SEMS system in that it needs to become a part of a banks overall management system which can be costly and utilise some of its required resources. Whilst it also may, interfere with its already existent strategy for achieving sustainability (Nash 2001). Although despite these consequences, by utilising such a system it can be assumed that the banking sector will be better placed to create long term value for its stakeholders and customers.
4 CSR challenges The findings from the research showed that the banking sector found Corporate Social Responsibility (CSR) challenges to be relevant to what it needs to do to perform better whilst some banks from various countries found that it is beyond what they are able to achieve (Wolf and Barth 2009). As such it was found that the greatest challenges being posed are:
· Corporate commitment;
· Corporate strategy;
4.1 Corporate Commitment Corporate commitment which is a means for the banking sector to manage their reputation with the market through considering their ‘operational activities and how to best represent their corporate culture’ is done so through the use of communication ABA (p. 4, 2007). This means that it doesn’t just disclose operating and financial performance but it also highlights how it is being committed to its shareholders and customers. Specifically it communicates how it expects to perform over the long run whilst also highlighting any possible changes it may be making to remain committed (ABA 2007)
This is a CSR challenge at both a local and international level as stakeholders / customers may not always be willing to hear certain things thus this then becomes a management challenge as it needs to utilise different methods to handle such differences to ensure that it is CSR. If not banks are probable to facing increased regulatory and legal obligations (Ingves and Riksbank 2007).
(ABA 2007) Based on this some recommendations for leaders to overcome such issues from a practical point of view would be to:
· Enhance corporate governance to respond to business risks: managing risks appropriately and being able to respond to emerging issues to enhance overall performance.
· Better understanding business performance: Benchmarking market positions against competitors and its own targets to provide better value to its stakeholders.
· Attract and retain quality employees: By doing so banks are able to enhance employee retention and motivation and overall produce better employees to reach corporate commitment.
· Conducting an ongoing dialogue with stakeholders: To better manage investor and public relations.
4.2 Corporate Strategy
Corporate strategy which is making appropriate actions relating to risks and opportunities is a CSR challenge as conditions within the banking sector are always changing. For instance issues such as, social and environmental are forever re-occurring (Wolf and Barth 2009). For the banking sector this means that banks need to be alert and act appropriately towards various situations (Sarel and Marmorstein 2006).
At Both local and international levels corporate strategy is utilised to protect the interest of its own customers and to adhere to new regulations being set by the government (Baldwin and Cave 2002). Based on this a recommendation for leadership to better face corporate strategy challenges is to utilise a systematic theory approach. Specifically this entails having a system which is focussed on managing its customers whilst also its environment or playing a greater part to it. By doing so it places banks in a position to manage both risks and opportunities (IFC 2007).
To utilise such an approach at both a local and international level the banking sector needs to be involved with managing the balance of short term and long term performance with regard to factors which involve the interests of shareholders and other stakeholders (IFC 2007). In accordance to this the banking sector stands a better chance at being committed to stakeholder engagement as part of its corporate social responsibility (Wolf and Barth 2009).
Corporate performance which is showcasing an organisations performance based on not only monetary means but also community needs is a challenge to the banking sector as it is faced with the management of many various customers (Donaldson 2009).
Based on this a recommendation for leadership to better manage and highlight performance is to utilise a triple bottom line reporting method. By doing so it will be able to capture a broader range of measure for organisational success at an, environmental, social and economical level (Wolf and Barth 2009).
At present banks are mostly reporting an assessment of prospects, future trends and sustainability. Whereas through the Triple bottom line reporting system banks are able to disclose to its shareholders and other stakeholders information which they are forced to report under various state and federal laws (Wolf and Barth 2009).
Although it should be noted that due to the triple bottom line reporting system still being new there are still some issues which may prevent the banking sector from utilising it appropriately. Specifically with reporting indicators there is a lack of imprecise performance criteria and standard whilst there is also a lack of guidance on reporting intangibles and compatibility of organisational performance (Birch et al 2003).
Irrespective of this by utilising this system it would ensure that banks are not disclosing anything from their customers whilst it also means that banks are forced to perform better as such information becomes available (Wolf and Barth 2009). Overall this would ensure that they are in line with meeting CSR challenges.
This report analysed the banking sector at both a local and international level and looked at the challenges which were faced for both sustainability and Corporate Social Responsibility (CSR). It was found that the banking sector overall performed in much similar ways regardless if it was at a local or international level with this being largely dependent on set out government laws and regulations and customer demands.
The report also learnt that challenges have only become noticeable recently as the banking sector has for a long time been stable despite the global financial crisis. At the same time this has also been due to the government having some control over banks whether it would be through a bail out or actual monetary investment.
Through the literature it was found that re-occurring challenges which the banking sector was constantly facing were those concerning the management of regulations and sustaining its overall performance. As such it was found that for those banks which don’t face such challenges that their operation is minimised or becomes obsolete. Further to this it was also found that Australia performed 4th best in the world and thus its stability serves as a benchmark for those other international countries.
Based on the literature and relevant resources recommendations which were made were done so based on a logical and cost effective reasoning. Specifically recommendations which were looked at were done so thoroughly to see if it would be of benefit for the future or if it could remain to be sustainable.
Overall it was found that the banking sector still needed to assess its own future through the utilisation of various systems and approaches. Whilst at the same time it also needed to be more considerate of government initiatives and its own stakeholders / customers. Although individual international countries could have of been looked at in greater detail however it was quite difficult to do so as many countries faced the same situations thus international countries were used collectively.
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