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March 11, 2019

Takeaways from Kevin Stiroh’s Remarks on Culture Reform

New York Fed Executive Vice President Kevin Stiroh, who heads the Supervision Group, spoke about corporate culture in the finance industry at a recent conference. He identified misconduct risk — or the potential for behaviors or business practices that are illegal, unethical, or contrary to a firm’s stated beliefs, values, policies, and procedures — as a major consideration for firms when it comes to risk management.

“Bad conduct threatens a firm’s resiliency by diverting management attention, harming a firm’s reputation, depleting a firm’s capital, and affecting the composition of its workforce.”

He also discussed the idea of “cultural capital,” an intangible asset that impacts what a firm produces and how it operates. He compared this asset to physical capital (like buildings, property, and equipment) or human capital (like the accumulated knowledge and skills of workers) and noted that while it’s intangible, “a firm’s cultural capital can be measured, assessed, and ultimately impacted in ways that can improve outcomes and enhance a firm’s resiliency.”

Further, he looked at ideas about misconduct risk and culture from the perspective of boards of directors, senior management, industry groups, and the official sector, who each might see aspects of a firm’s culture differently. The board of directors, for one, plays a critical role in a firm’s governance structure and culture.

“Corporate boards independently assess whether management is setting the right tone and hold management accountable for any gaps between a firm’s values and its actual business practices.”

He noted a broad consensus that “a board’s own culture matters; it needs independent voices, diverse perspectives, and opportunity for debate.”

Meanwhile, the core responsibilities of senior management — including strategy, operations, performance management, risk management, and compliance — are directly linked to the development of cultural capital.

“It is critical that there is alignment between the board, senior management, and middle and lower management on issues of conduct and culture, as employees take cues from their direct managers even more than the tone from the top.”

As for the official sector, there is an important role to play in guarding against the potential for industry-wide spillover if issues at one firm cause stakeholders to lose trust in the industry as a whole.

“To be clear, it is not the role of the official sector to set the internal culture of a firm — that responsibility lies squarely with the board of directors and senior management. Rather, the job of the official sector is to promote standards and practices that will mitigate misconduct risk and promote efficient and sustained financial intermediation and financial stability.”

Read the full speech.

Read the associated whitepaper ‘Misconduct Risk, Culture, and Supervision,’ co-authored by Stiroh with other New York Fed employees.

This article was originally published by the New York Fed on Medium.

The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


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