Corporate Governance Taskforce Report | Australian Securities and Investments Commission

Starling Team

On October 2cd, the ASIC released a review by their Corporate Governance Taskforce. This review was the first in a series of reviews  examining corporate governance practices. James Shipton launched this report with a by addressing the Australian Institute of Company Directors. You can find that speech here.

Globally, there is an increasing need to recognise the impact of issues around goverance, individually and collectively. There is also an awareness on the impact they can have on the  customers  and the industry as a whole.

The review revealed that boards were grappling to oversee non-financial risk. Their oversight was less developed than expected. This is in contrast to the approach to financial risk for these organizations. That appraoch well developed with metrics to assess success or failure.

They also found reliance on metrics that are ‘lag indicators’. The ASIC sugguests that boards develop more ‘lead’ and ‘proxy’ indicators for non-financial risks.

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Australian Regulator to Require Annual Declarations on Governance from Banks | Reuters

Starling Team

On Wednesday, Australia’s banking regulator said it will ask for annual declarations from financial institutions on corporate culture, conduct, and governance.  If concerns arise, they will conduct “deep dive” reviews

This move is part of a four-year plan to improve governance and build trust in the financial system after misconduct was uncovered in the sector. As conduct and culture risks grow, comapnies like Starling provide visibility into the hidden relational dynamics among employees that impede company performance and create invisible and systemic risks.

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New Zealand to Introduce New Conduct Oversight Regime | Regulation Asia

Starling Team

New Zealand’s government announced a new oversight regime for regulating financial conduct. With these new regulations, customers can expect fairer treatment from insurers, banks and other financial institutions.

Measures include a new conduct licensing system for inancial service providers. This includes requirements for them to meet standards of customer treatment and a ban on incentives for meeting sales targets.

Legislation to implement this regime is expected by the end of the year.

New Zealand’s regulators may look to the example of their neighbors — most particularly of course Australia, but also Hong Kong and Singapore — for lessons on the importance of behavioral science in the context of culture and conduct risk management

In case you missed it, check out Stephen Scott’s Regulation Asia article on culture and conduct supervision here.

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Machine Learning in Operational Risk White Paper | ORX

Starling Team

The Operational Risk Exchange (ORX) — an associative body made up by the heads of operational risk from among 100 of the world’s largest financial institutions — recently released a white paper on the use of machine learning in the management of operational risks. “We believe that the application of advanced analytics, including machine learning and artificial intelligence (AI), will be a core part of any future strategy for the management of operational and non-financial risk,” the authors indicate.

Operational risk is defined by the Basel Committee as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.” Such non-financial risks are, today, managed by human-intensive and time-consuming processes.

“The opportunities that machine learning techniques offer – from task optimisations and better use of resources, to cost savings and gaining deeper insights into data – are considerable, but often not used to their full potential,” the study reports.

The white paper identifies five specific opportunities for the use of machine learning to improve non-financial risk management:

  1. Freeing up valuable resources,
  2. Gaining deeper insights into data,
  3. Supporting business needs more effectively
  4. Developing greater challenge capabilities, and
  5. Benefitting from economics of scale.

 

Despite the obvious value represented in each of these opportunity sets, adoption of machine learning tools in the context of operational risk management remains slow, as firms contend with a set of internal and external challenges that inhibit experimentation with these new technologies.

But, as leading firms have discovered, “the application of machine learning and other advanced analytics holds promise to enable operational risk functions to help businesses implement strategies more intelligently, and to achieve their goals in a sustainable manner,” the report concludes.

Our customers have found this to be the case. Our Predictive Behavioral Analytics tools have helped leading firms move from hindsight to foresight in the management of culture and conduct related risks, to do more with less by allowing risk teams to operate with greater timeliness and efficiency, and to scale oversight and impact across their global footprints through the effective use of standard company data sets.

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Government Orders Google: Let Employees Speak Out | The Wall Street Journal

Starling Team

In February 2016, the NY Times ran an article by Pulitzer Prize-winning columnist, Charles Duhigg. Excerpted in large part from his terrific book, Better, Smarter, Faster, the article chronicled “What Google Learned From Its Quest to Build the Perfect Team.” The article emphasized a concept pioneered by Harvard professor Amy Edmonson, that of “psychological safety,” which she defines as a ‘‘shared belief held by members of a team that the team is safe for interpersonal risk-taking.’’

Where a workplace enjoys psychological safety, there exists ‘‘a sense of confidence that the team will not embarrass, reject or punish someone for speaking up,’’ Edmonson writes, and “a team climate characterized by interpersonal trust and mutual respect in which people are comfortable being themselves.’’

Duhigg’s article was widely read and appears to have been influential in bringing Edmonson’s research to the attention of many — in business and government — who have since focused some of their own attention on how trust dynamics shape performance within their own organizations. Or of those that they oversee…

Consider the UK’s Financial Conduct Authority (FCA), which has supervisory responsibility for the UK banking sector. In the last year or so, the FCA has emphasized the significance it places on assessments of psychological safety in the workplace at the firms it oversees. This is part of the regulator’s increasing focus on firm culture as a driver of employee behavior. Where the workplace is not characterized by psychological safety, the FCA contends, employees will be afraid to say something when they observe unethical behavior — or worse. The FCA seeks to encourage a “speak up culture” https://www.fca.org.uk/culture-and-governance/psychological-safety.

It must be a bitter turn of events that, three years after Duhigg’s NY Times piece, it has now become necessary for the NLRB to order Google to permit its employees to speak their minds. Without internal trust among employees, “speak up culture” is lost. While that may imply increased “conduct risk” in the context of bank supervision, it is important as well for any firm that relies on “knowledge workers” to collaborate in the shared cause of promoting “innovation.” That is, it’s important for just about everyone, and particularly for those in the tech sector.

While the NLRB’s order may be justified, it is likely to be ineffective and perhaps even counter-productive. We know this thanks to our experience with whistleblower protection laws, which were beefed up in the US in the wake of the Enron fraud. Whistleblowers fear retaliation from management — rightly, experience shows. But more important perhaps is the ostracism of peers.

Without peer support for their actions, employees will be reluctant to speak up, whether this is to report a wrong or to offer the critical creative ideas that lead to innovation and improved firm performance. With such peer support — that is, with trust — they can transform their organizations. As such, an appreciation for the importance of workplace trust dynamics is essential, both to mitigating downside risk, and to capturing upside opportunity. Google may need to relearn this.

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