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May 2022

Culture & Conduct Risk in the Banking Sector

Why it matters — and what the
industry is doing to address it

Contributors

  • Preamble framing the report
    • GILLIAN TETT
      Financial Times Chair of the Editorial Board and Editor-at-Large (US). Author of Anthro-vision: A New Way to See in Business and Life
  • Ground Breakers with financial sector leaders
    • SUSAN AXELROD
      Chief Supervisory Officer, Merrill Lynch
    • ALEXANDRA CHESTERFIELD
      Head of Behavioural Risk, Group Internal Audit, NatWest
    • SARAH DAHLGREN
      past–Head of Supervision, New York Federal Reserve Bank
    • NANCY HARRINGTON JONES
      Chief Culture & Conduct Officer, Societe Generale (Americas)
    • CHARLES LI
      past–CEO, Hong Kong Exchanges and Clearing Limited
    • LES MATHESON
      Group COO, National Australia Bank
    • KANWALJIT SINGH
      Senior Program Officer, Bill & Melinda Gates Foundation
    • KATIE TAYLOR
      Chairwoman, Royal Bank of Canada
    • WIES WAGENAAR
      ABN AMRO, Global Head, Centre of Expertise for Behaviour, Ethics & Compliance Learning
    • AXEL WEBER
      past-Chairman, UBS, and past-President of the German Bundesbank
  • In Focus with financial sector regulators and policy-makers
    • SENATOR ANDREW BRAGG
      Chair of the Select Committee, Australia as a Technology & Financial Center
    • WAYNE BYRES
      Chair, Australian Prudential Regulation Authority
    • F. CHRISTOPHER CALABIA
      Chief Executive, Dubai Financial Services Authority
    • BILL COEN
      past–Secretary General, Basel Committee on Banking Supervision
    • JAMES HENNESSY
      Senior Vice President, Federal Reserve Bank of New York
    • FRANCESCA HOPWOOD ROAD
      Head of the Bank for International Settlements Innovation Centre, London
    • MARCUS LIM
      Assistant Managing Director (Banking and Insurance), Monetary Authority of Singapore
    • CHARLES LITTRELL
      Inspector of Banks and Trust Companies, Central Bank of the Bahamas
    • THOMAS M. NOONE
      Counsel and Assistant Vice President, Federal Reserve Bank of New York
    • TED MACDONALD
      Senior Technical Specialist, FICC Markets Standards Board
    • DR. STUART MACKINTOSH
      Executive Director, The Group of Thirty
    • SARAH RAPSON
      Executive Director of Supervision, UK Financial Reporting Council
    • CHRISTOPHER RICH
      General Counsel, FICC Markets Standards Board
    • PETER ROUTLEDGE
      Chief, Office of the Superintendent of Financial Institutions (Canada)
    • YOSHIKI TAKEUCHI
      Deputy Secretary-General OECD
    • JOY WANN
      Advisor, Bank for International Settlements Innovation Hub
  • Peer Perspectives leadership lessons from other sectors
    • MICHAEL ARENA
      VP Talent & Development, Amazon Web Services
    • ANTOINE FERRÈRE
      Global Head of Behavioral & Data Science, Novartis
    • DR. CHARLES F. MCMILLAN
      10th director, Los Alamos National Laboratory
    • TIMOTHY O'NEILL
      Senior Counselor in the Executive Office and member of the Management Committee, Goldman Sachs
    • RICHARD SPENCER
      past-Secretary of the Navy (U.S.), past-Vice chairman and CFO, Intercontinental Exchange, Inc. (NYSE-ICE)
    • OWEN WEST
      past-Assistant Secretary of Defense for Special Operations (2017-2019), past-Partner, Goldman Sachs
  • The Academy with world-renowned scholars
    • DIANE COYLE
      Cambridge (Economist), author – Cogs & Monsters
    • ROB CROSS
      Edward A. Madden Professor of Global Leadership, Babson College
    • ROBIN DUNBAR
      Oxford (Evolutionary Psychologist), author – Human Evolution: Our Brains and Behavior
    • SIR JOHN KAY
      Oxford (Economist), author – Greed is Dead
    • DAVID KIRON
      Editorial Director of MIT Sloan Management Review
    • EDGAR SCHEIN
      MIT (Social Psychologist), author – Organizational Culture and Leadership
    • KARIN THORBURN
      Norwegian School of Economics (Finance Research Chair)
    • BOB WARDROP
      Cambridge (Economic Sociologist), Director, Cambridge Centre for Alternative Finance
  • Good Counsel with prestigious legal scholars and practitioners
    • ADAM FINE
      Arizona State University (Developmental Physchologist), co-author – The Behavioral Code
    • BRANDON GARRETT
      Director, Wilson Center for Science and Justice at Duke Law
    • HIROKI HABUKA
      Lecturer, University of Tokyo Graduate School of Public Policy
    • TODD HAUGH
      Professor of Business Law and Ethics, Kelley School of Business, Indiana University
    • LINDA JENG
      Visiting Scholar on Financial Technology, Georgetown University Law Center
    • BRAD KARP
      Chairman, Paul Weiss
    • GREG MITCHELL
      University of Virginia School of Law
    • ARI REDBORD
      Head of Legal & Government Affairs, TRM Labs, past-Senior Advisor to the Under Secretary for Terrorism and Financial Intelligence, U.S. Department of the Treasury
    • DAVID ROUCH
      Freshfields (London), author – The Social Licence for Financial Markets
    • TOM TYLER
      Yale Law School, Macklin Fleming Professor of Law and Professor of Psychology
    • BENJAMIN VAN ROOIJ
      Professor of Law and Society, University of Amsterdam, School of Law, and Director of the Center for Law and Behavior
    • CIARAN WALKER
      Eversheds Sutherland (Dublin), co-author – New accountability in financial services: Changing individual behaviour and culture
  • Our View perspectives from our world-class advisors
    • DAMON CENTOLA
      University of Pennsylvania, Professor of Communication, Sociology & Engineering
    • GARY COHN
      Vice Chairman, IBM; former Director, US National Economic Council, past-Pres. & COO, Goldman Sachs
    • KAREN COOK
      Stanford, Ray Lyman Wilbur Professor of Sociology, past-Director of the Institute for Research in the Social Sciences
    • AMY EDMONDSON
      Harvard Business School, Novartis Professor of Leadership & Management
    • BETSY LEVY PALUCK
      Princeton University, Professor, Acting Psychology Chair, Deputy Director, Kahneman-Treisman Center for Behavioral Science & Public Policy
    • THOMAS MALONE
      MIT Sloan School, Patrick J. McGovern Professor of Management, founding Director of the MIT Center for Collective Intelligence
    • KEITH NOREIKA
      Simpson Thacher (Washington DC), past Acting Comptroller of the Currency
    • BARBARA NOVICK
      co-founder and past Vice Chairman of BlackRock
    • TOM READER
      London School of Economics, Associate Professor of Organisational Psychology
  • Closing Comments where to from here?
    • KLAAS KNOT
      Chair, Financial Stability Board, President, De Nederlandsche Bank and Member, European Systemic Risk Board

Key Takeaways

  1. Financial sector integrity is a national security interest – The extraordinary sanctions regime put in place by a majority of those nations that host the world’s deepest financial markets, upon initiation of the current conflict in Russia-Ukraine, demonstrates that the global financial system plays a critical role in national security affairs. The integrity of that system is thus seen to be a national security priority.
  2. Social concerns are business concerns – Past distinctions between ‘society’ and ‘the market’ are blurred in ways that present new challenges. Customers, employees, and investors raise an increasingly loud voice, insisting that firms and their leaders take concrete steps towards alleviating social tensions and imbalances — both those predating and those exacerbated throughout the covid pandemic.
  3. Culture and conduct challenges are governance issues – Culture is consistently seen as culprit amidst continuing risk governance failures among firms, as well as in troubling lapses on the part of the auditors and regulators relied upon to assure market integrity. Culture is thus considered to be a critical governance priority — for private and public entities equally — and particularly so in the financial sector.
  4. The Era of Accountability – As customers, employees, and regulators increasingly look to hold business leaders to personal account for damaging misconduct, in the wake of perceived oversight failures, industry overseers themselves are now facing heightened scrutiny from injured consumers, aggrieved investors, and irate legislators. Leaders confront a new era of personal accountability.
  5. Speaking-Up and Speaking-Out – Regulators are prioritizing firm cultures marked by psychological safety, with a view to creating conditions that promote ‘speak up’ behaviors among staff who witness questionable acts and decision-making. Firms failing in this will contend with employees increasingly ready to ‘speak out’ — externally — when speaking up internally appears unwelcome or untenable.
  6. Voting with their time – The “Great Resignation” shows employees to be seeking jobs offering three essentials: meaning, agency, and purpose. Meaning is found in work that allows for personal growth and connection with admired peers. Agency demands that employees feel directly able to effect change and outcomes. And purpose requires close alignment of personal and business goals and values — culture.
  7. Predict & Prevent – Reliance on surveillance and monitoring to detect and correct for misconduct is no longer viewed as an adequate standard of care; firms must demonstrate a reliable capacity to predict and prevent stakeholder harm. Firms are looking to AI to achieve “predictive alignment” between values and operations, so that their brand is burnished rather than tarnished in each stakeholder engagement.
  8. Business ‘resilience’ requires stable cultural girders – Disruptions to businesses and their supply- chains, triggered by the covid pandemic and now geopolitics, have placed a premium on firms’ ability to achieve and demonstrate ‘resiliency.’ This includes the resiliency that is contingent upon firm culture and human capital management, for which new formal disclosure requirements are being contemplated.
  9. “G is Key” – Environmental, Social and Governance (ESG) considerations have moved to the center of investment deliberations, reshaping markets and demanding of firms new priorities and related disclosures. While the E and S aspects get most press attention, a majority of institutional investors prioritize the G element, prompting demand for more predictively reliable risk governance metrics.
  10. Pricing non-financial risk – So long as the costs associated with non-financial risk are recognized retroactively, they can be waived off as a “cost of doing business.” However, as firms adopt cultural and behavioral metrics to price non-financial risk proactively, expectations will shift to forecasting and mitigating them, to the benefit of investors, insurers, regulators, and other stakeholders.