This essay is being published from the New York Fed by a guest writer as part of Reforming Culture and Behavior in the Financial Services Industry: Progress, Challenges, and the Next Generation of Leaders. The views of the author are his own and are offered by the New York Fed to contribute to discussions on this topic.
Bank balance sheets are much more resilient than a decade ago. Yet a lack of trust can be a major drag on the intangible asset of reputation for banks. Once lost, trust is hard to rebuild, and the presence — or lack of it — is an increasingly significant differentiator among banks. Approaches to boosting bank culture will inevitably differ, but cumulative experience highlights four major areas for attention.
First, a dedicated board committee may be a powerful input to the process, with a remit in respect of culture akin to that of the Financial Risk Committee on “hard” financial risks. Outside directors should be closely attentive to the commitment, and the CEO and senior executive team should show conviction in handling cultural matters at the board. They should be encouraged and expected to visit business units and functions to “kick the tires” to assess how far the values set by the board are being embedded.
Second, the CEO and senior executive team are responsible for frontline delivery. The aim should be an environment in which working to foster the right behaviors is natural and the norm for every staff member, with the negatives of blame and enforcement playing as small a role as possible. A critical responsibility of the CEO is to ensure that a combination of trusted colleagues and dependable processes are in place so that he or she is never blind to cultural matters. Ignorance and a purported defense of “I didn’t know” are not acceptable.
Third, there is need for enhanced narrative reporting on culture. This should be substantive, outlining fully the values set by the board with an assessment of progress, presented with the same seriousness as the hard numbers in financial reporting. The obligation to publish earnings on a quarterly basis risks giving the board, the executive, and markets undue focus on the short term. A bank under pressure to show stronger performance will be induced to cut corners on cultural matters. This concern that mandatory quarterly earnings reporting may be inimical to a balanced focus on culture and the longer term led to abandonment of this requirement in the United Kingdom and European Union. I hope these major considerations will come to be given greater weight in the United States.
Fourth, stewardship: the interests and obligations of most institutional asset owners, and thus their fund managers, are medium- to longer-term concerns. This point underscores the need for asset owners to ensure that their interest in sustainable performance is reflected in the mandates that they award. These should call for a focus on financial performance to be complemented by a focus on the sustainability of a bank’s culture, with assessment of the capability and commitment of the chairman, board, and CEO and the credibility of the board’s report on progress being made. The ultimate objective would be for the fund manager to indicate supportiveness for a board that is demonstrably on the right cultural track or a signal of dissatisfaction where it is not. The ability of even larger fund managers to engage appropriately and effectively with a board will be enhanced where this can be done through collaboration with other holders. Ways of doing this should be developed proactively.
Board ownership of a bank’s culture is inalienable, but both shareholders and supervisors should be ready to exert influence. One key responsibility of the supervisor is to communicate to the chairman and board its continuing keen interest in good behavioral outcomes.
For boards, executives, shareholders, and supervisors alike, the task — like keeping fit — has no end point, and sustainable bank culture demands substantial proactive attention on a continuous basis.
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.
