Day: October 2, 2017

Banco Real-Bnaking on Sustainibility

Banco Real-Bnaking on Sustainibility

BANCO REAL CASE Business Landscape: In 2005, Brazil’s economy is finally showing signs of recovery from inflation rates that were out of control, decreases in real growth, and a general lack of political direction which had plagued the nation for several decades. Taking office in 2003, President Lula immediately started making changes. With the reduction in foreign debt and government spending as his two initial goals, Brazil’s GDP experienced a marked improvement in 2004, growing by 5. 2%.

Although this was an encouraging sign of improvement, the Brazilian economy had been in peril for nearly 20 years; this would prove to be the first step of a long journey. Looking forward, the nation will need to focus on developing infrastructure (transportation, waste management, etc…) which is in direct conflict with one of Lula’s initial goals. Analyze the firm: Banco Real (BR) was founded in 1925, and was acquired by ABN AMRO in 1998. Its operations are along three business lines including Consumer and Commercial Clients (CCC), Wholesale Client Service (WCS) and Private Clients (PC) .

CC focused on activities like retail, consumer credit and commercial bank, customer service and small and medium sized companies, WCS was responsible for servicing large corporations, and PC was responsible for management of personal and family assets. Organizational structure was a mix of functional as well as business hierarchy. After the acquisition in year 1998, there was initial concern about a cultural merger, however, since ABN AMRO had some core values as part of the integration process, BR needed to distinguish itself from the competition.

Fabio Barbosa (FB), Jose Luiz Majolo (JLM), and Maria Luiza Pinto (MLP), the three leaders of BR, decided to bring new face to company’s business model by focusing on “value creation” (Exhibit 1). In this way, not only can BR offer additional value to customers, employees, and society, it can do so while differentiating itself from the competition by bringing ethics and social values in the business model. The process of reinventing itself started with self evaluation based on parameters set by the Ethos institute, followed by participating in seminars, which were organized by Friends of Earth, NGOs etc.

BR leadership also read socio-environmental evaluation reports of its competition. This paved the way for BR to establish its foundation of sustainability in the effort to distinguish itself from the competition. Being aware that these initiatives have to be implemented internally by company first, there were some initial challenges company had to deal with. Two events occurred to further their efforts; one in which a notorious alley just next to company was changed into a garden, and the other when BR sent the message to the outside world that it would be socially responsible in the aftermath of the Bond after Death incident.

In continuation of fostering the sustainability efforts, a new functional group was formed under the leadership of MLP in 2001. Its main purpose was to embed this culture inside the bank’s operations as well. Additionally, a customer focus strategy was launched in an effort to strengthen sustainability efforts. Its successful implementation was evident in May 2003 when FB met with a disgruntled customer to listen to her and resolve her concerns. On the business side as well there were some changes like a) introducing the micro-finance model, in which small loans were given to very poor people, in order to stimulate economic and social growth. ) launching the 3R’s and Diversity Campaign (discussed later in Key Change Drivers) and c) launching an ethical mutual fund in 2005. The growth of BR indicated that the effort to distinguish itself from the competition was paying off. By 2004, compared to other Brazilian banks, BR ranked top 6 in total assets (Exhibit 2), 5th in Net Assets (Exhibit 3) and 3rd in terms of return on investments (Exhibit 4). Additionally, BR was ranked second best place to work in banking industry. Key change dr1ivers: There were certain key change drivers that made Banco Real the 4th largest privately-owned bank in Brazil.

Banco Real needed to simultaneously focus on both its socio-environmental needs as well as its financial goals. Banco Real introduced a micro-finance model in which small loans were given to the most destitute members of the population for income-generating self-employment projects. It was a good opportunity for BR to start focusing on a new market segment. This also helped to create value by stimulating economic and social growth. Banco Real started the launching of 3R’s: reduce, re-use, and recycle in an effort to become more sustainable as an organization.

It started using recycling paper for office printing and reports as well as promoting the conservation of energy and water. BR realized that their employees were not representing Brazil’s population. In 2001, BR started a diversity program to concentrate on a broad segment of the population that has been neglected by BR and other companies. Through the establishment of the diversity committee, and a focused effort on increasing diversity within the organization, BR began to understand the importance and impact of diversity on customer relations.

In November 2001, BR Asset Management created an “ethical mutual fund”, which was an equity fund that took consideration of sound corporate governance and integrated economic-financial, a product that met the needs of socio-environmentally conscious investors. Key Issues: Banco Real had responsibilities and goals that made it questionable if it would be able to sustain its sustainability efforts. BR wanted to put its core focus on the concept of “Banco de Valor” (Bank of value) by promoting “value creation” with its employees, customers, and the society as a whole.

Banco Real’s social responsibility goal was hard to maintain. Keeping up with socio-environmental standards meant that BR would have to walk away from doing business in sectors that showed large socio-environmental threats, such as military hardware and asbestos production, or any harmful or illegal practice. Refusing business could give BR a bad reputation and scare away potential business opportunities. Another issue that BR faced was how to make sure that their socio-environmental matters would work with the company’s credit evaluation and risk management policies.

In addition to their usual financial credit screens, BR would send questionnaires every six months to examine the company’s social and environmental practices. This would cause extra work and can cause disinterest to the companies. Bank may have to walk away from business: “Socio-environmental standards meant walking away from some customers, refusing to do business in sectors that posed large socio-environmental risks, such as military hardware or asbestos production” (5). The bank’s big clients may not want to be subjected to a sustainability audit performed by the bank: “The biggest resistance came from those working ith large commercial customers, who were not always happy at being subjected to an audit; this was also where the greatest potential for uncomfortable situations could arise” (7). A key issue involves measuring the bank’s performance with its sustainability efforts. There is no set metric in evaluating whether this initiative has brought the bank a return in profit. Having their suppliers follow in the bank’s initiative: “Maria Luiza explained that the bank could make demands for legal compliance and transparency but was limited in its ability to force suppliers to go beyond this to full social responsibility” (11).

Would the changes that have resulted due to Fabio’s leadership change if he were to leave? “Another dilemma was how to strengthen the brand differentiation and business benefits BANCO REAL derived from sustainability, while at the same time sharing its experience externally with customers, suppliers, and competitors” (14). By encouraging its competitors to follow its business practices, would that affect their bottom line? Having more banks follow BANCO REAL’s sustainability initiative may decrease its margins but at the moment, the bank is incurring more costs in order to sustain their business practices.

If more banks required their customers to have sustainable business practices, this would drive down the costs and spread the word on the benefits of operating business sustainably. Would the bank continue to have the drive to continue to innovate to better serve its customers or would it rely on only on ideas that have been tried by the company and are still viable? : “The bank wanted to enlarge its portfolio of products with positive social and environmental impact and to grow the assets in the Ethical Fund. […] Fabio wondered if mindsets had changed sufficiently to seek and produce the next innovations” (14).

Recommendations: The bank needs to find the right fit with customers, employees, as well as suppliers in its endeavors to promote sustainable business practices with other firms. The company cannot hire people who do not believe in this idea. In order to hire the right employees, they must know the company’s values. Also for the credit risk analysis where company employees go out to client sites in order to improve the client’s business by making recommendations to become more sustainable, the employees need to be educated and have the personality to talk to these people. They must have an auditing standard approach.

Something like Sarbenes Oxly work in the realm of sustainable business practices. BANCO REAL can benefit by introducing beliefs systems as well as boundary systems into their company. Beliefs systems will allow employees to carry on their work and will allow them to strive to the ideas of the company, while boundary systems will let the employee know if he or she has gone too far in making a certain business deal or not. If the bank were to implement a plan to audit all of its business clients, they might have to result in relying on specialized employees who knew the industry the consumer was in.

This can lead to a problem of differentiating, which will lead to costs to increase. What the company can do is to continue to have these business units available and offer some kind of reward to the customer for meeting these requirements. Some clients may not appreciate being audited for the sake of being sustainable. It would be easy for the bank to require some sort of promise and at least see their business practices rather than a full blown audit just to see if the company meets the bank’s minimum requirements to be considered an employee.

The bank needs to set up its policies in dealing with companies that want to shut its inside workings out from the bank. BANCO REAL can reiterate its business proposition and refuse to service the clients. Employees will learn the business of sustainable practices and pass down knowledge to the next employee. There would be a learning experience where tacit knowledge can be transferred from one person to another. A best practices book can then be written in order to move the tacit knowledge to explicit knowledge for the sake of the client’s industry as well as the bank itself.

The company can continue to establish an ethical fund in order to show the country that performing like companies that operate in a sustainable manner will benefit in the form of a higher return than the stock exchange “In December 2004, over 3 years after its launch, the Ethical Fund was composed of stocks from 25 companies, had R$75 million under management, and had a 159. 5% return since its inception, compared to 112. 8% from Bovespa, the Sao Paulo stock exchange index” (8). Exhibit 1 Tripe Bottom Line Exhibit 2 Total Assets Ranking of Top 6 Banks in 2004

Exhibit 3 Net Assets Ranking of Top 6 Banks in 2004 Exhibit 4 Return on Investment ranking of Top 6 Banks in 2004 ——————————————– [ 1 ]. FNV Company Monitor Research Report . P 17 2006 by Instituto Observatorio Social, Sau Paulo ,Brazil [ 2 ]. Kanter, Rosabeth Moss and Ricardo Reisen Di Pinho. Banco Real: Banking on Sustainability. HBS November 17, 2008 Page 4 [ 3 ]. Kanter, Rosabeth Moss and Ricardo Reisen Di Pinho. Banco Real: Banking on Sustainability. HBS Nov 2008 Page 13 [ 4 ]. http://www. centerforsustainability. org/resources. php? oot=&category=228, accessed and customized on 30 June 2011 [ 5 ]. Data derived from 2004 financials data Page 11 from FNV Company Monitor Research Report. by Instituto Observatorio Social ,Sau Paulo ,Brazil and plotted on excel chart [ 6 ]. Data derived from 2004 financials data Page 14 from FNV Company Monitor Research Report. by Instituto Observatorio Social ,Sau Paulo ,Brazil and plotted on excel chart [ 7 ]. Data derived from 2004 financials data Page 16 from FNV Company Monitor Research Report . by Instituto Observatorio Social ,Sau Paulo ,Brazil and plotted on excel chart