Why Corporate Culture Is Hard|Columbia Business School

Next week, Starling will issue the 2019 update to our annual Compendium, outlining global regulatory priorities and activities around bank culture and conduct risk management. (Please see our home page for download information)  

In a recent study, Columbia Business School Vice-Dean Shivaram Rajgopal and his collaborators report on an in-depth survey of senior executives, capturing their views on the importance of culture in the corporate space.  More than half of the respondents said that corporate culture is one of the top three drivers of value at their firms, and a full 920 percent also said that improving their culture would increase their company’s value.  Notably, the respondents were CFOs, treasures, and others in roles related to financial function — hard number types — rather than from roles where “soft stuff” like culture typically resides.  (e.g., HR)

Unfortunately, while nearly every respondent said that improving culture would improve firm value, only 16 percent said that their culture was where it should be.  The heart of culture, Professor Rajgopal contends, is in informal elements that are not written down or codified:  specifically, the company’s values and norms.  In order for a culture to be effective, the respondents agreed, the company’s formal institutions have to align with and support these informal elements.  This is a critical point, as usually the attempts to create change happen the other way around.  Check back next week for more on this topic as it applies to the banking sector.

Read the article: Why Corporate Culture Is Hard


The Conduct Risk Conundrum

Starling Team

Conduct-driven scandals continue to plague the banking sector, despite punitive fines in excess of $345 billion since the Financial Crisis, and attendant public outrage. Extensive regulation has been introduced in an attempt to prompt ethical behavior, and organizations have responded with reactive measures. What is needed instead is a proactive approach to the culture and conduct risk conundrum.

The global impact of misconduct

Misconduct and related scandals have been an unfortunate feature of the financial industry for decades, in every key financial market. Today, however, this challenge is receiving unprecedented attention: from customers, employees, shareholders, regulators, policy-makers, and society more broadly. Consider three prominent recent examples.

Perhaps most poignantly, at present, Australia has just endured a year-long investigation into misconduct among its banks, known as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. To say that the findings were upsetting is an understatement.

As detailed in its Final Report, released on February 1st, misconduct among the Australian banks in recent years has been fairly shocking in both nature and degree: charging fees for no service; plundering the accounts of the dead for “financial advice” and even life insurance (without hint of irony); and more. High profile hearings that preceded the production of the Report have led to public uproar, punitive fines, rolling heads, and a reshaping of the Australian regulatory apparatus.

Events in Australia take place against a backdrop of misconduct scandals in several other major markets. As the Commission’s Report was being released Down Under, in the U.S., the headlines were filled with news that Goldman Sachs might withhold or even claw back millions in remuneration awarded to senior executives, to include former CEO Lloyd Blankfein, following the “1MDB scandal” in Malaysia, which involved alleged fraudulent activity on the part of Goldman employees.

And, at about the same time, in Europe, eight global banks were accused by the EU Commission of collusion in rigging the sovereign bond market. Investigations continue but billions in fines are expected. Again, this comes as a consequence of alleged misconduct that leadership failed to prevent.

Misconduct in the banking and finance sector may not necessarily be a larger issue now than it has been in years past, but today attention to such concern certainly seems to have reached new levels and, more and more so, firm culture is looked to as an explanation.


How did we get here?

As former NY Fed president William Dudley has styled it, “Context drives conduct.”

While “tone from the top” may be an important driver of what employees believe to be acceptable behavior, the far larger driver is the behavioral expectation of peers. Tone from the top acts a bit like the speed-limit sign at the side of the highway. How fast one actually drives, however, is largely a function of how quickly the cars around you are moving. Firm culture operates in a similar manner.

The ability to manage conduct successfully therefore turns on an ability to properly understand the underlying cultural drivers of that behavior. As leading network scientist Nicholas Christakis offers in a recently published column, “Dishonesty, proscribed behaviors, and fraud may well spread via processes of social contagion, like all other observed human behaviors. It is not about bad apples; it is about bad barrels. People will behave in a risky manner when they perceive that their peers are doing similarly.”
In the last few years it has become increasingly clear that regulators understand this, and they have begun to call for “culture audits” as a means of proactively anticipating misconduct and, thus, off-setting the risk thereof.


The path to better conduct and risk management

If culture is to be managed it must first be made “visible” and actionable.

In a recent speech, the NY Fed’s head of supervision asked how data analytics tools might be helpful in this regard. “The potential of big data analytics to revolutionize approaches in many areas of business has been talked about for years, and is now beginning to become a reality,” he argued, anticipating that “we might see firms routinely leverage broader data to make stronger predictions about potential misconduct risk.”

Computational social science has much to offer us here. It is well established that interpersonal trust and perceived ‘psychological safety’ among employees and managers is key to creating high-performance teams within the workplace. Computational social science techniques allow us to measure and map these interpersonal trust dynamics, sifting signal from company data sets to produce heretofore unavailable insights into the drivers of employee conduct.

RegTech firms like Starling are putting these new computational capabilities to work, building tools that provide management with actionable insights by sifting through massive company data sets to distill “digital artifacts” that point to likely behavior and performance outcomes, with high predictive reliability.

Through such data analytics, company leadership is positioned to engage proactively to anticipate, and shape, culture and the behavioral consequences that impact the organization and its stakeholders.


Starling Advisor Martin Wheatley on Regtech Trends | Thomson Reuters

Starling Team

Martin Wheatley, former CEO of the UK Financial Conduct Authority and advisor to Starling, recently sat down with Thomson Reuters to discuss current developments in Regtech. Martin brings a unique perspective the space as the former head of one of the most influential financial regulatory bodies in the world.

Now active in the private sector, Martin offers insights into the opportunities offered by new technologies which can help solve long-standing problems in the industry. At the same time, there remain obstacles that slow adoption. Martin goes on to describe how many regulators, including the FCA, have stepped into this environment to set up sandboxes and otherwise to encourage experimentation.

This interview was originally published for Thomson Reuters subscribers on Thomson Reuters Risk Intelligence service.

Read the interview in full here: THE BIG QUESTION: Martin Wheatley, Former CEO, UK FCA


An Industry Shift is Required in Response to The Australian Royal Commission

The Australian Royal Commission into Misconduct in Banking, Superannuation, and Financial Services publicly released their Final Report earlier this week. Today, the Governance Institute of Australia (“GIA”) weighed in with their perspective on how the industry must respond to the report which caps a traumatic year of testimony and public scrutiny into the culture and practices of its members.

Recognizing the fundamental impact the industry has on the economy as a whole, the GIA notes that “How these institutions respond to Hayne’s report will be vital, because building long term stability and performance of the sector will determine the health of the Australian economy as a whole.”

At the root of the scandals and misconduct revealed by The Royal Commission is a common culture which treated compliance as a purely mechanistic exercise while failing to as the fundamental question which is “Should We?”. Instead, management teams across the industry chose to ignore clear warning signs because their activity was technically ‘compliant’. In the GIA’s words, “[Reform] cannot be based around an attitude of it being a ‘box-ticking’ exercise for compliance purposes.”

What is needed is a wholesale rethink of governance and the tools that executives use to measure and manage their cultures for accountability and to rebuild trust with the public.

Read the article: Royal Commission: Governance Culture of ‘Box-ticking’ is Over

Read the Royal Commission final report: Final Report – Australian Royal Commission into Misconduct in Financial Services


Starling Selected for 2019 Global RegTech 100 List

Starling Team

Starling Selected for 2019 Global RegTech 100 List

Washington, DC – Starling, an applied behavioral sciences RegTech company, announced that it has been selected for the 2019 Global Regtech 100 list. The RegTech 100 List recognizes pioneering companies around the world that are transforming compliance and risk management.

The 2019 list was compiled by RegTech Analyst, a specialist research firm, based on input from a panel of analysts and industry experts. The finalists were recognized for their innovative use of technology to solve a significant industry problem, or to generate cost savings or efficiency improvements across the compliance function.

For 2019, the panel considered applications from over eight hundred RegTech firms around the world, double the number from the year before. This reflects the massive growth in this sector as banks and financial institutions grapple with increased pressure from both the public and regulators. Since the beginning of 2016, over $4 billion has been invested in RegTech companies.

Starling approaches the problem of misconduct in a novel way that equips firms to anticipate risk and to be proactive in managing it. Through its Predictive Behavioral Analytics technology, Starling combines artificial intelligence with the latest advances in behavioral science and organizational network analysis to provide insight into where challenging behaviors are likely to emerge and how they will spread, contagion-like through a firm. Unlike traditional surveillance and monitoring tools that are intrusive and backward looking, Starling guides managers to identify root behavioral causes of misconduct and to monitor changes in near real-time.

“We’re pleased to be included in this year’s RegTech 100 List,” said Starling founder and CEO Stephen Scott. “Our predictive behavioral analytics platform positions management for proactive engagement where culture and conduct related challenges impair firm performance or result in operational risks. We expect the RegTech market to expand in the years ahead, as customers experience how tools like ours permit for the more timely, efficient, and effective application of scare management resources.”

A full list of the RegTech 100 is available at www.RegTech100.com. More detailed information on all companies as well as in-depth industry analysis is available in the Global RegTech Review.

Starling is an applied behavioral sciences company using machine learning and network science to build what it calls “augmented management intelligence” tools. Its Predictive Behavioral Analytics technology reveals the performance impact of relational trust dynamics within organizations. Based on this data, Starling’s proprietary algorithms generate actionable insights, displayed through intuitive and customizable dashboards, enabling business leaders to drive improved performance and desired culture – and to identify and mitigate behavior-related risks before they are permitted to cascade into crises

The REGTECH 100 is an annual list of 100 of the world’s most innovative RegTech companies. These are the companies every financial institution needs to know about as they consider and develop their mission critical RegTech and digital transformation strategies. The list has been updated for 2019 in the face of the new regulatory challenges financial institutions are facing. It will help senior management at compliance, technology and innovation divisions sort through all the suppliers and identify companies who are most likely to have a lasting impact on the industry.