Increased focus and investment around corporate diversity can serve as a key mechanism in addressing the banking conduct and culture challenge.

Research has shown that increased diversity and inclusion on the board and within business unit and functional teams can create a positive impact on group dynamics and increase overall employee engagement and collaboration, which are critical factors in implementing a successful conduct and culture transformation program at large and complex financial institutions.1 Diversity investment can help build firm reputation, improve governance and monitoring, and address groupthink and sub-culture issues.

US banking institutions are facing increased pressure and reputational risk from regulators and customers to demonstrate appropriate banking ethics, conduct and culture. In light of recent sales practice misconduct events, we are seeing US regulators sharpen their view on the implicit and explicit norms, practices and behaviors within financial organizations and how those practices could impact how the organization conducts business and addresses and manages potential failings.

Many banking organizations have defined a set of core corporate values at the top, but have struggled to embed a culture that incentivizes and encourages proper ethics and employee conduct. Only 11% of respondent banks in Accenture’s 2015 Global Risk Study reported having a consistent risk and conduct culture in place (Accenture 2015 Global Risk Study).2Overall commitment and investment in diversity can help bridge the gap between stated values and embedded culture. Our work with financial services firms across regions confirms that diversity and inclusion programs increase overall employee engagement and collaboration between working groups. These are critical factors in an effective culture change program.

In addition to helping translate stated values to actual corporate culture, other benefits of increased gender, race, ethnicity, and LGBT-identity diversity on the board and within business and function teams can help organizations address many of the conduct and reputational risk challenges:

1)      Increased Governance Engagement and Behavior Monitoring

Financial institutions with female and other diversity representation in leadership positions are connected with stronger governance and control frameworks, and are less likely to commit unethical behavior.3 A study focused on women in the boardroom of Standard & Poor’s 500 firms identified that boards with more female directors experienced higher participation levels in both board meetings and committee assignments and had tougher monitoring and incentive alignments.4 Diversity within the boardroom provides a richness of perspectives and ideas enhancing overall discussions and allowing for better decision making. Women in the boardroom also provide benefits to group dynamicsꟷimproving the boardroom culture and having positive impacts on the behavior of male board members (see Figure 1).5

 

Figure 1. Positive Impacts of Diversity within the Boardroom

Diversity within the boardroom promotes a richness of perspectives enhancing decision making and provides other positive impacts. In his book “Challenging Boardroom Homogeneity: Corporate Law, Governance and Diversity,” York University Professor Aaron A. Dhir found that having a woman on a company’s board can improve group dynamics.

Source: Women Directors Change How Boards Work, Harvard Business review, February 17, 2015

 

2)      Addressing Group Think and Sub-Culture Problems

The over $300 billion in fines since the financial crisis has dispelled the myth that misconduct is about just a few “bad apples” that exist within the organization (see Figure 2).6  Many firms have struggled to manage sub-cultures that develop within organizational silos (i.e. trading desk, business line) and operate outside of the stated corporate values. If left unchallenged, poor behavior can fester and become normalized within a sub-culture, exposing the overall organization to significant conduct and reputational risks.

Increased diversity within business unit and function teams can provide broader perspectives to problem solving and challenge groupthink. Research has also found that diverse groups are more collaborate and demonstrate higher levels of social sensitivity (Catalyst, 2013).7 This higher level of social sensitivity can serve as a mechanism to challenge poor behaviors within the group and can improve interactions and overall relationships with customers.

 

Figure 2. Sub-Culture Misconduct Dangers

The costs for misconduct are significant. Between 2008 and 2016, twenty of the world’s leading banks paid over $300 billion in fines for banking misconduct cases. In many situations, those incidents stemmed from individual trading desks and business lines acting outside the company values and policies. Other examples include:

Sources: ‘Banks’ post-crisis legal costs hit $300bn, Financial Times, June 7, 2015. Toyota Motor Credit to pay nearly $22 million in bias case settlement, L.A. Biz, February 3, 2016. FINRA’s Overall Sanctions: The Dramatic Increase in 2015, Smarsh, March 31, 2016.

 

3)      Improved Customer Relationships and Reputation

Investment in diversity and inclusion programs can also serve as a driver to build the banking institution’s reputation. According to the Reputation Institute’s 2017 study of over 100 of the world’s most recognized companies, corporate citizenship has continued to increase as one of the most significant overall drivers of reputation.8  Diversity program initiatives, including employee resource groups and non-profit partnership efforts, increase visibility in the communities the financial institution serves. The community efforts and commitment to workplace diversity and equality build public trust.9   And this trust and reputation are critical to supporting an institution’s resiliency. The Reputation Institute study found that firm’s with strong reputation are over twice as likely to receive the benefit of the doubt during a crisis to those firms that have a lower scored reputation.10

References

  1. “Why Diversity Matters,” Catalyst, July 2013. Access at: http://www.catalyst.org/system/files/why_diversity_matters_catalyst_0.pdf
  2. “Accenture 2015 Global Risk Management Study Banking Report: Paths to Prosperity,” Accenture, 2015. Access at: https://www.accenture.com/ca-en/global-risk-management-research-2015-banking
  3. “Women in the Boardroom and Their Impact on Governance and Performance,” R. Adams and D. Ferreira, October 2008. Access at:  https://www.responsible-investor.com/images/uploads/Women_in_the_boardroom.pdf 
  4. Ibid
  5. “Women Directors Change How Boards Work,” Harvard Business Review, February 17, 2015. Access at: https://hbr.org/2015/02/women-directors-change-how-boards-work
  6. “Banks’ post-crisis legal costs hit $300bn,” Financial Times, June 7, 2015. Access at: https://www.ft.com/content/debe3f58-0bd8-11e5-a06e-00144feabdc0?mhq5j=e2
  7. “Why Diversity Matters,” Catalyst, July 2013. Access at: http://www.catalyst.org/system/files/why_diversity_matters_catalyst_0.pdf
  8.  “2017 Global Reptrak – Most Reputable Companies in the World,” Reputation Institute, 2017. Access at: https://www.reputationinstitute.com/Resources/Registered/PDF-Resources/2017-Global-RepTrak-Most-Reputable-Companies-in.aspx
  9. Ibid
  10. Ibid

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