What can large institutions learn from smaller enterprises such as community banks? According to this Idea, reconnecting with communities in vital and lasting ways is an essential lesson — offering a logic that is the opposite to the ‘financial’ logic that has driven many organizations into difficulties. By reviewing the logic that drives your firm, damaging consequences in the future could be avoided.
Every organization is driven by some sort of institutional logic (i.e. ‘belief systems’ that define what is or is not accepted as legitimate behaviour). It is this logic that shapes individual identities and the organization’s mission as a whole. For example, start-ups work on a fast-growth, entrepreneurial logic; banks, on the other hand, are driven by financial logic. In fact, the latter is not unique to just banks; it is the core element of most market-based systems focusing on maximizing profits and shareholder returns.
Economic crises of not too long ago are evidence that financial logic taken to the extreme can eventually lead to damaging consequences. So, as institutions try to redeem themselves in the wake of recent scandals and recover from recession, what lessons can they implement to create a new kind of logic to avoid going through the same again?
IESE Business School’s Juan Almandoz thinks that ‘community institutional logic’ might be the answer — strong, affective and enduring ties among members of small, bounded groups (such as banks). Focusing on the US, his research suggests that smaller, community banks may be less risky than their larger counterparts, particularly during a crisis. One of the reasons why is because community banks tend to steer clear of riskier financial products, such as subprime mortgages or securitized debt obligations.
Crucially, community banks retain their connection to a sense of a higher mission, something absent in financial logic which puts money-making ahead of other considerations, like how the organization is serving communities and clients. Though they do of course incorporate financial logic too, social concerns are more important.
Acknowledging that regulatory failures have obviously also played their part in recent crises, Almandoz proposes that an ‘unfettered’ financial logic may actually have been the deeper cause.
Almandoz stresses that the key areas on which the success of community banking depends are the same for all kinds of companies. As such, the following may be broadly applicable:
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