NEW YORK — The conversation around “culture” has shifted over the years, as have the challenges that many financial organizations face, especially in the era of rapidly moving social media, still developing technology (think AI), and more empowered groups within the organization (think #MeToo).
Culture is no longer a “soft” and unmeasureable topic but rather the foundation for an organization’s business model that impacts areas such as hiring and retention, client relationships, and business development.
Thomson Reuters’ Legal Managed Services and Regulatory Intelligence businesses brought together 100 or so banking executives, regulators, data scientists, and technologists for its fourth annual program entitled “Bank Culture Reform & Behavioral Science” on April 9.
Our panelists for the first part of our discussion included Michael Held, General Counsel at the Federal Reserve Bank of New York; Bonnie Jonas, Co-CEO of Pallas Global Group; Mirea Raaijmakers, Senior Program Manager in Culture Risk Assessment at ING; and Martin Wheatley, former CEO of the UK’s Financial Conduct Authority.
Examining the Concept of Culture
We kicked off the discussion with an examination of how the concept of “culture” within the financial services and banking community has changed over the years, especially in the eyes of regulators. No longer some vaguely defined, feel-good motto centered around “caring about the customer” — culture has to become a living and cared-for part of an organization’s business model if the organization itself is going to remain viable and successful.
Fortunately, many financial institutions seem to understand that. “Federal regulators, as a class, are very happy to see the attention and progress that cultural issues are receiving at the board level and in the C-suites of many financial institutions,” said one panelist, adding that regulators themselves are helping influence this. “Generally, regulators are very excited on the level of take-up on this topic.”
It’s been really interesting to see the change in the discussion over just four years. When we started this series, there was a high level of cynicism on whether true culture reform could be accomplished. Also, the conversation was almost entirely focused on what the regulators were focusing on vs. what companies should be doing so that they have an organization focused on doing the right thing. No doubt there continue to be cynics and people who check the boxes, but we have seen steady growth in organizations tackling culture much more as an existential opportunity/threat vs. as a compliance issue.
So, while the flame was lit by the global economic meltdown and subsequent moves by the US Federal Reserve, the UK’s Financial Conduct Authority (FCA), and the like, it seems that some banks are carrying a more comprehensive ethical torch. It’s not altruistic — it’s good business.
Experts in the session talked about data that absolutely supports the proposition that companies that have positive, ethical cultures perform better. Companies are now being buffeted by forces, such as strong societal movements and fear of reputational damage, being able to hire and retain talent, etc. that are influencing the debate for reasons other than meeting legal requirements.
“You want to satisfy regulators, of course, by being proactive, but not overly so,” said another panelist. “But as culture itself tends to be a hornets’ nest of difficult and nuanced issues, trying to identify trends or predict where things are going adds another layer of complexity to it.”
Of course, the question for the panel then quickly turned to what can companies do to create better cultures? What should be done, and how will it affect the institution overall?
Trying to Get it Right
One panelist said that they’ve observed an uptick in “people and companies trying to get it right” around cultural issues by doing things like participating in benchmarking or surveys across the industry, creating and implementing best practices or codes of conduct, and having serious discussions firm-wide about misconduct risk. “It’s often not easy, but I am heartened by the commitment being shown by boards and management towards striving to understand what the culture is within their institution and make adjustments accordingly,” the panelist explained.
Further, you are seeing something that previously was unheard of: CEOs bringing in behavioral scientists such as psychologists or sociologists to assess and help improve the organization’s culture.
Another panelist who had experience with a psychologist being brought into the boardroom, said despite the visitor’s lack of industry knowledge, the strategy isn’t as crazy as it sounds. “They don’t need to know about banking,” the panelist noted. “They need to know about people.”
That’s why it’s so important to get an outside perspective, especially one grounded in science and data-driven methodology — these professionals can see trends and detect problems that management may be too close to really notice. And, as the panel discussed at length, you don’t want regulators dictating the standards and the lines-to-not-cross for your organization’s culture. Too often, as several panelists attested, that will give the signal that bad behavior can exist right up to that line, even if it could potentially result in reputational damage to the institution.
Finally, a key question was raised by a member of the audience: Who is the final arbiter of proper organizational culture? The firm? The market? Society as a whole?
One panelist favored the latter. He said that after banks’ role in the financial crisis was examined, there was a strong call from society in general to repair the broken financial system. “Too often, however, that repair stopped with the balance sheet at many banks,” he explained. “While stronger institutions tried and are still trying to mend the culture within the banks that led to the problems in the first place.”
I guess that’s where the debate stands now. Financial institutions are clearly seeing the value of creating and encouraging an internal culture of ethical behavior — to the delight of the regulatory class — but in some cases are still struggling to understand the best way to do so.
In my next blog, I will examine what the second panel had to say about whether employing behavioral science, including tools such as data analytics and artificial intelligence, holds the key to more meaningful reform of bank culture.