Conduct risk and culture

Culture matters

“Culture” within the financial sector has received significant attention since the financial crisis. As we have seen in several high-profile examples, poor culture within the financial sector can and does have a significant impact upon revenue, reputation, regulatory relationships, employees, customers and clients. Andrew Bailey, Chief Executive of the Financial Conduct Authority, made a link between a failure of conduct and a failure of culture:

My assessment of recent history is that there has not been a case of major prudential or conduct failing in a firm which did not have among its root causes a failure of culture.

Culture clearly matters.

What is a company culture?

Culture is much more than a firm’s espoused values or mission statement. The FCA 2016/17 Business Plan defines culture as “a set of shared values and norms that characterise a particular organisation – the mind-sets that drive behaviours, in firms”.

The FCA’s Director of Supervision, Jonathan Davidson, expanded further, defining culture as:

the typical, habitual behaviours and mindsets that characterise a particular organisation. The behaviours are the ‘way things get done around here’; they are the way that we act, speak and make decisions without thinking consciously about it. And sitting underneath these behaviours or habits are mindsets inside people’s heads; the beliefs or values that people feel are important.

The Financial Reporting Council issued a report in which they explained corporate culture as:

a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders. These stakeholders include shareholders, employees, customers, suppliers and the wider community and environment which are affected by a company’s conduct.

There is a significant degree of overlap between these definitions. Both recognise that culture is more than a firm’s values but shapes, and is shaped by, the organisation, relationships and behaviour.

Like an iceberg, most of a company’s culture is hidden beneath the surface

It’s helpful to think of a firm’s culture as an iceberg. The visible tip of the iceberg represents the readily visible aspects of a firm’s culture: formal processes, procedures and frameworks that characterise and shape a particular organisation. This includes policies and business strategy, remuneration and governance structures.

However, with culture as with an iceberg, most of it is hidden beneath the surface. This includes the myriad

  • behaviours
  • attitudes and perceptions
  • informal agreements
  • “off-line” discussions
  • unwritten rules, codes and arrangements
  • relationships
  • individual stories
  • personal values
  • beliefs
  • and other psychological aspects

These aspects of culture are not written down, yet drive behaviour.

The more egregious examples of financial misconduct have shown that these hidden aspects can lead to influential sub-cultures forming within firms, for example, on trading desks, within teams or business units. These sub-cultures can have a disproportionate and devastating impact upon a firm and its customers.

Measuring and changing culture

Understanding interplaying aspects of an organization’s culture is fundamental

Once an organisation recognises the interplay between the explicit and hidden aspects of culture, it can view its culture through a risk lens to better understand its risk culture. This is fundamental to an organisation’s ability to manage its risks, achieve its strategic objectives and deliver cultural change beyond the boardroom—into business units, out to teams and ultimately through to customers.

There are two key approaches that organisations can use to begin measuring and investigating culture.

  1. The first examines the processes in place and relies on existing data sources such as policies, procedures, formal rules and frameworks.
  2. The second approach offers further insight. It typically takes the form of a series of senior-level interviews combined with focus groups and other assessments across the organisation.

These are useful tools to access feedback from a diverse portfolio of individuals across the organisation. Considerable thought needs to be given to the types of questions asked, how they are tailored to the organisation and the issues being evaluated.

If performed properly, it allows an organisation to capture perspectives across the firm, which can be the key to effecting a concrete evaluation of the firm’s culture.

A “good” culture?

By measuring culture, business leaders can proactively identify previously unrecognised pockets of poor behaviour

The intention is not to presume what a universally “good” culture looks like, but to empirically examine how organisations think about culture and to develop actionable work-streams that make culture a visible and manageable issue within the organisation.

Culture is unique to every business. It is not static but a mixture of explicit and hidden elements; the formal procedures and informal beliefs driving behaviour. Business leaders can apply techniques to measure culture and proactively identify previously unrecognised pockets of poor behaviour that are negatively impacting their organisational culture. When exposed, leaders can utilise a host of risk management drivers to change the firm’s culture, from recruitment, incentives and remuneration, training and education, to changing governance and reporting structures.

Value from culture

Managing culture is not easy and change takes time. It involves identifying and challenging the habits, routines and behaviours of individuals that make up an organisation. Some aspects of the culture may not be readily visible. But tackling and changing culture has become critical. Regulators have made culture a priority and their expectations around conduct and culture remain high. Trust and reputation must be restored and new talent must be attracted and retained within the financial services sector.  Using the right tools to identify and measure cultural characteristics paves a path towards managing and shaping the culture of an organisation.

Equipped with the right tools and a deep understanding of the prevailing situation, leaders and managers can drive and shape their organisational culture to create a risk infrastructure that creates value from managing risks effectively and efficiently. Just as they can create a poor culture that permits uncontrolled risk taking and destroys value, so too can business leaders create a culture that promotes and encourages controlled risk taking and innovation to deliver positive customer outcomes and greater company value. The FCA’s Davidson notes a “strong conduct culture which builds consumer trust in firms and markets and inspires employees is in the economic self-interest of the firms and their shareholders.” This is an unprecedented opportunity for firms to embrace a positive risk culture and create value from culture.

About Jagdev Kenth

Jagdev Kenth is Director of Risk & Regulatory Strategy in Willis Towers Watson’s Financial Institutions Group…
Categories: Employee Engagement, Financial Services | Tags: , ,

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