MichelleBaltazaris editor-in-chiefof
Money. Shehasworkedonvariousfinance
titlesincludingBRW(nowclosed)in
AustraliaandSharesmagazineinLondon.Measuring a bank’s social worth could save it from a billion-dollar headache
Focus on people, not just profit
W
hoever said some things cannot
be measured has clearly never
met an actuary. The Actuaries
Institute has produced a report suggesting
there is a way to avoid another royal com-
mission into financial misconduct.
The premise is simple. The board of any
financial services business, particularly
a bank, needs to measure what is seem-
ingly unmeasurable: how public goodwill
towards the business improves or deterio-
rates over time.
Instinctively, we all know what unac-
ceptable business behaviour looks like. But
apart from anecdotal evidence, it’s been
very hard to pin it down in numbers.
The institute wants to change that with a
new way of thinking: treat social capital as
you would financial capital, and measure
it accordingly. It suggests a living docu-
ment called the Social Condition Report
(SCR) that measures social relationships
and risks, as a nod to an existing manda-
tory report, focused on finance, called the
Financial Condition Report (FCR).
The SCR would give banks a powerful
tool to avoid self-inf licted wounds caused
by focusing too much on money and less on
the people around it: investors, staff, suppli-
ers, banking customers and the public.
Unlike the FCR, which looks at hard
numbers, the SCR would look at identifying
key social groups (KSGs) as the data sourc-
es. The report proposes that boards and
senior management systematically meas-
ure the quality of its relationships with
the following: customers (retail banking,
wealth, business); employees; suppliers and
partners; shareholders; the public (ex-cus-
tomers, others); politicians and bureau-
crats; regulators; and the media.
Once those social groups are properly
identified, the institute suggests using
“signal analysis” and “relational analytics”
to rate the bank’s relationship with each
of these key social groups. Signal analysis
refers to the use of human signals such as
BANKING A Michelle Baltazar
smiles, frowns, fashion sense or even car
choice to predict human behaviour. But
these signals can be unreliable, so the SCR
focuses instead on other signals that are
processed unconsciously or are otherwise
uncontrollable. For example, the report
would look at connectivity (who people
communicate with), interactivity (how
they communicate) and vocabulary (the
language style they use when communi-
cating).
Signal analysis can also use social net-
work analysis, psycho-linguistics, machine
learning, artificial intelligence and other
methodologies, such as sentiment analysis.
Goodwill measure
The second metric, the relational analytics,
uses a tried-and-tested proprietary
framework that many UK companies
already implement. Put simply, it measures
the “distance” in the relationship betweentwo parties, to identify the signs of bad
practice being tolerated in certain parts of
the business.
It doesn’t end there. The report then
calculates the social goodwill measure,
which combines the weighted average
measure of the quality of relationships
across all key social groups to track
changes over time and whether interven-
tion is needed.
Restoring public trust
Employee culture is a key part of the
report. While focus groups, surveys and
customer feedback are useful, the role of
the SCR is to turn those qualitative assess-
ments into numbers that, just like the sig-
nal analysis and relational analytics above,
can be monitored over time. This has been
one of the missing links in existing risk
management tools that are popular today.
Worse, the institute argued that risk
assessments tend to be backward-look-
ing. By contrast, the SCR will focus on
forward-looking indicators that monitor
underlying risks rather than past outcomes.
For example, instead of rewarding a
bank for its record improvement on han-
dling complaints, an SCR could look at the
source of the complaints and how that has
changed in previous months, not years.
Ultimately, the institute says that while
it is common practice to identify risks in
a number of major groupings – financial,
credit, insurance, operational and strate-
gic– it is high time to add another grouping,
called social risks, to this list.
A scorecard built on social capital and
social goodwill might just be the circuit
breaker banks need to restore public trust.
The Social Condition Report – A Sugges-
tion for Financial Services Business is avail-
able on the website actuaries.asn.au.