At the annual 2015 RiskMinds International conference in Amsterdam, several of the Chief Risk Officers presenting at the event identified Conduct Risk as a key priority in 2016. Among the challenges cited were the difficulties in measuring the effectiveness of a firm’s underlying risk culture. During my RiskMinds presentation, I discussed my thoughts on what good culture looks like in practice and how to measure and communicate it.
Risk culture frameworks are plentiful—those from the Financial Stability Board and the Institute of Risk Management are especially useful. However, by their nature, these top-down frameworks leave out important local nuances and learned behaviours. They also don’t necessarily reflect the rapid growth of the conduct and culture agenda (see my post on this topic). The frameworks are often at odds with the latest standards and guidelines being set by other regulatory bodies. A summary of this pipeline of regulatory standards and guidelines is included in my presentation slides.
If we want to know what good culture looks like, we should be on the lookout for the following markers:
- Responses focused on the ‘spirit of the law’ rather than the ‘letter of the law’
- The use of customer, employee, and leadership behavioural touchpoints
- Data used to empower people and improve their behaviour within the organisation
Responding to the ‘Spirit of the Law’
Many regulators and financial institutions find themselves in a cycle of regulatory arbitrage and loophole closing. When regulators perceive that banks have “tunnelled under” regulations, as Andrew Bailey, the recently appointed head of the Financial Conduct Authority, once pointed out, regulators often tighten the rules, resulting in higher compliance costs for firms.
Yet banks can comply with the spirit of the law in many ways. In areas such as risk reporting, market abuse, short-selling, and digital sales and marketing channels, there are opportunities for banks to define higher standards which cost less than tick-box compliance. These opportunities can allow financial institutions to set standards for the broader industry and build trust with regulators. The effect on employees is to help create a mindset where high standards run deep across the organisation.
Culture is tangible—how is it measurable?
Culture is tangible, and visible in nearly every interaction within a firm. To observe it, we first need to recognise what are the behavioural touchpoints for customers, employees, and leadership. My RiskMinds presentation brings this to life (see slide 6).
Many customers first experience a company’s culture through its marketing promotions. Once they research the product and proceed with a purchase they might consider employees’ attitudes and actions during the transaction (did they simply want to sell to me or were they genuinely concerned with helping me?). Over time, customers may also consider the product’s return on investment and price (did I receive a fair exchange of value?).
For employees, their first exposure to a company’s culture is during the recruitment process (did the recruiter explore how I sell or train, or was he/she simply concerned with my previous sales performance?). Over time, they see how the bank promotes learning, provides compensation (was I rewarded for selling to the right segments, or just my totals?), and manages performance and accountability. At these touchpoints, employees not only observe and experience the firm’s culture, they are also influenced to behave in certain ways.
Similarly, other groups such Business Unit leads and Board members experience and influence culture in tangible ways. These touchpoints are measurable and this data is powerful.
In the second part of this post, I will explore how empowering people to make better decisions can help firms measure and improve their culture.
 “UK banks should face threat of being broken up, says FSA,” The Telegraph, November 19, 2012. Access at: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9689204/UK-banks-should-face-threat-of-being-broken-up-says-FSA.html