Culture changes at banks come and go, but many fail. How Barclays plans to pull this off.

By Gary M. Stern

FORTUNE – Most corporate annual reports specialize in self-promotion and accentuating the positive. But the 2012 annual report of Barclays reads like a mea culpa.

When Barclays (BCS) was fined a whopping $453 million by regulators in the U.S. and U.K. based on allegations that the bank manipulated the Libor rate -- which affects the prices banks charge each other to borrow money and influences fees for various loans and home mortgages -- CEO Antony Jenkins vowed to overhaul and shake up the bank's culture. Of course, Barclays wasn't alone. UBS (UBS) and Royal Bank of Scotland were fined in the interest rate-rigging debacle.

The opening pages of Barclays's 2012 annual report are clear and explicit about what must be done: "Changing Barclays culture is a critical component in rebuilding trust and real change is required."

Transforming the culture of a financial services company like Barclays from one where flouting rules is pervasive to one where bankers follow regulations is no simple task. Traders are rewarded for taking risks, not playing it safe, so getting them to tow the line and follow protocols can be tricky.

Mark Burton, a London-based managing director at Barclays and global head of learning and leadership, says that breaking rules at Barclays wasn't "widespread and systematic. Some very critical decisions were made in the wrong way by a small group of people. The reality was that the organization had lost its way.

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"We had to change the emphasis on short-term results over doing the right thing," Burton asserts.

Transforming the attitude at the bank involves several key steps, Burton says, including setting clear standards of behavior for all employees, creating a leadership academy that provides mandatory training for executives, and inculcating the Barclays Global Curriculum for every employee to develop leadership skills across the enterprise.

Involving the staff in leadership training is critical to making these values stick, says Jon Harding, London-based head of culture and values at Barclays. In fact, the bank's entire 140,000-person staff is undergoing values training. "If you look at successful change that has taken place in business and elsewhere, they involve the masses of people in the process," Harding says.

But most employees opt for a banking career to make money, not to consider the proper way of doing business. "Helping people achieve their ambitions -- in the right way" is noted as Barclays' core purpose. "You may achieve an outcome, but if you don't do it in the right way," Burton says, "there's an effect on how you're reviewed and your career progress."

In 2012, Barclays slashed pay and bonuses of employees to the tune of $445 million to send a message that their conduct had become unacceptable. "The board recognized that pay had become excessive, and it determined that shareholders receive an increased share of profits," Burton says. Incentives for overall compensation at the investment bank were slashed by 20%.

After performing strategic business reviews of 45 businesses in 2013, Barclays decided to extricate itself from the structured capital markets. Its review concluded that it "will not engage in complex structures where the primary objective is accessing tax benefits, which is incompatible with our purpose." Moreover, branch employee compensation was altered and is now based on client service, not sales. Burton says that this new code of conduct will be incorporated into twice-a-year performance reviews that will influence employee pay and bonuses.

Make no mistake, change is hard, and it will take years for these tweaks to become integrated into Barclays's culture, Burton notes, "The goal is simple. Make Barclays the go-to bank for all our stakeholders." Yet he admits that it needs to make major strides to regain customer trust.

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But skeptics aren't convinced that Barclays -- or any financial services company -- can create a widespread ethical culture shift while it piles up profits off of previous misdeeds. "Banks are entrusted with acting on behalf of someone else instead of enriching themselves," says Kevin Jackson, author of Virtuosity in Business and a professor of law and ethics at Fordham University's Graduate School of Business. Jackson says a bank's challenge is to introduce "a sense of fiduciary duty among each and every player in the investment value chain."

To build an ethical culture, banks need to establish "client welfare" or seeing things from the client's best interests, as the number one priority of every employee, Jackson suggested. That would lead to a "renunciation of self-interest; instead putting professional standards and values ahead of individual advantage, ahead of brute profit," he says.

Maryann Bruce, consultant, former president of Evergreen Investment Services, and board member at Allianz Global Investors says, "You can't have a CEO or executive team mandate the change and hand it over to HR and marketing and then cascade down the company." The most effective way to undergo a successful culture change is to involve the entire staff. "The more you're involved, the more ownership you take. It's human nature," she says.

To give the change project resolve, reward systems must be altered, and not just involving compensation, Bruce suggests. Instead of banks' concentrating on rewarding rising sales figures, they must devise metrics that take into consideration adhering to compliance regulations.

"Change in culture doesn't happen overnight. It takes time," Bruce notes. If employees who resist ethical behavior leave, that's a good thing. New hires should be chosen based on their ethics as well as their performance, she suggests.

When banks treat integrity as foundational, it forms the starting point of establishing an ethical culture, says Jackson. "An attorney who has forfeited the basis of their reputation has forfeited their career. Not because they have broken laws, but more fundamentally, they have lost their honor."

Editor's note: A previous version of this story incorrectly stated that Citigroup and JP Morgan were fined in the wake of the Libor interest rate rigging scandal. Both banks were subject to investigations related to the Libor scandal, but they were not fined.