culture - hard to build, easy to destroy, or

Culture: Hard to Build, Easy to Destroy - Or?

AGENDA

1. Culture

2. Culture in Financial Services

3. Case Study

4. Conclusion

2Culture: Hard to Build, Easy to Destroy - Or?

Culture

CULTURE - DEFINITION & CONDITIONS

Culture• Culture is the unique dominant pattern of

shared beliefs, assumptions, values, and norms that shape the socialization, symbols, language and practices of a group of people.

• “Culture is the soul of the organization — the beliefs and values and how they are manifested”.

• “Think of the structure as the skeleton, flesh and blood and culture as the soul that holds the thing together and gives it life force.”

Necessary Conditionsi. shared by the vast majority of members of a group or society;ii. passed on from generation to generation; iii. shapes behaviour and perceptions;iv. helps members solve problems


CULTURE – BENEFITS & DRAWBACKS

Culture’s Five Basic Functions• Defines Boundaries• Conveys a Sense of Identity • Generates Commitment Beyond Oneself • Enhances Social Stability• Sense-making and Control Mechanism

Culture has Limitations• Barrier to Change

o Culture is slow to change • Barrier to Diversity

o Culture seeks to minimise diversityo Can embed prevalent bias and prejudice

• Barrier to Acquisitions and Mergerso Most mergers fail due to cultural incompatibility


CULTURE IS NOT VISIBLE

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Observable elements of culture

Un-observable elements of culture

• Practices• Language• Symbols• Stories

• Norms• Values• Assumptions


1st Step: Recognise Your Culture(s): the core values or dominant (primary) values which are accepted throughout the organization.• Dominant culture: expresses the core values that are shared by a majority of the

organisation’s members• Subcultures: tend to develop in large organizations to reflect common problems,

situations, or experiences

2nd Step: Plan to Change Your Culture• Top-management act as role models and set the tone through their behaviour• Create new stories, symbols and rituals to replace those currently in vogue• Select, promote and support employees who espouse the new values • Redesign socialization processes to align with the new values• Change the reward system to encourage acceptance of a new set of values• Replace unwritten norms with formal rules and regulations that are tightly enforced• Shake up current subcultures through transfers, job rotation, and/or terminations• Get peer group consensus through the creation of a climate with a high level of trust

CULTURAL CHANGE


Culture in Financial Services

REGULATORY FOCUS ON CULTURE

“Culture remains a key driver of significant risks in every sector and the root cause of high-profile and significant failings. It impacts on individual

behaviours which in turn affect day-to-day decisions and practices in the firms we regulate. Culture is therefore both a driver, and potential mitigator, of conduct risk.

“We continue to focus on the culture within financial firms, and will hold management to account where cultural issues lead to internal controls that

fail to promote and support the right outcomes for consumers and the market”

“Boards have a critical role in setting the ‘tone from the top’. We expect them to take responsibility for their firms’ culture, ensure it remains high on firms’

agendas and that this tone is replicated throughout the firm”.

“Senior Managers need to ensure that their firm’s business processes, people and other drivers of culture support and reinforce the

culture they want to embed”.


“We define culture as the mechanism that delivers the values and behaviours that shape conduct and contribute to creating trust in banks and a positive reputation for

banks among key stakeholders, both internal and external.”

“There must be a sustained focus on conduct and culture by banks and the banking industry, boards and management. Firms and their leaderships need to make major improvements in

the culture within the banking industry and within individual firms.”

“Piecemeal approaches are not good enough. Aspirational leadership statements by bankers must be matched by effective and disciplined implementation programs.”

BANKING CONDUCT AND CULTURE


The What: Banks should specify their cultural aspirations through a robust set of principles and fashion mechanisms that deliver high standards of values and associated conduct consistent with the firm’s purpose and broader role in society.

The How: Banks should work to fully embed the desired culture through ongoing monitoring and perseverance, drawn from four key areas:

1. senior accountability and governance, 2. performance management and incentives, 3. staff development and promotion, and 4. an effective three lines of defence

CULTURAL FOUNDATIONS


REFORMING CULTURE

“Reforming the culture of banking is necessary to support the long-term health of our financial system. Without good culture shaped by appropriate incentives, we can’t have the consistent good conduct we should expect and deserve”.

“We cannot continue on the present course. We know this, the public knows this and so do many in the industry. Continuing instances of misconduct highlight the need for attention to this issue and raise the question of whether the largest firms are “too big to manage.” I remain convinced, however, that when the will is there, meaningful improvement is possible”.

William C. Dudley, President, President and CEO of the Federal Reserve Bank of New York


QUESTIONS FOR THE BOARD

• How is the board modelling the firm’s desired behaviours and values when interacting with management and staff ?

• How does the board’s actions and behaviours support and advance the firm’s desired culture?• Has the culture of the firm been independently assessed?• What were the results of that assessment?• Is culture a regular feature on the board and audit committee agenda?• Does the board hear from key employees, such as business line managers, to obtain insights into the

company’s culture, subcultures and team-specific issues?• Does the board engage with external stakeholders such as customers, suppliers and regulators?• Do the firm’s stated values match the actual experiences of customers, employees, suppliers?• Does monitoring/reporting captures data on key indicators including employee feedback, customer

complaints, employee training on culture issues?• Is data analytics used to gain insights on culture?• Is the information from internal and external audits being fully utilised (since these generally touch

many parts of the firm and are exposed to a variety of cultural indicators)?

“The most critical decisions are generally made by the board, and what the board is and isn’t interested in has ramifications through an organisation”.


ROLE OF SENIOR MANAGEMENT

“The senior management is responsible for creating a culture where everyone has ownership and responsibility for doing the right thing”.

The Senior Management Team (SMT) should ask:• Do employees know the firm’s values, and what they are expected to do in their day-to-day work to

ensure that the firm is ‘living’ these values?• Are employees given clear guidelines about what is expected of them, including training about what

to do if they come across an issue or need to make a decision that is not clear to them?• Does SMT make employees aware of any learning's where poor conduct has been identified?• Is the expected conduct and behaviour embedded in the firm’s policies, procedures and systems?

SMT should pay particular attention to:• Recruitment, training and rewards• Clear expectations of behaviour• Communication and whistleblowing

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“Tone from the top means ensuring the values are cascaded down and understood throughout the firm so that the ‘tone from the top’ is reflected in the ‘mood in the middle’ and

not lost as white noise”.


POOR CULTURE = CONDUCT RISK

Conduct: “Strateg y or business model, causes or has the potential to cause, customer detriment and/or negatively impact market integrity”.

Conduct Risk is a key area of focus for regulators everywhere with the UK, Australia and the USA leading the charge

The focus is on how the business is run, rather than how it is controlled.

Europe increasingly sees Conduct Risk as a Systemic Banking Risk


CONDUCT RISK IS NOT …

Firms shouldn’t think of conduct as:• Defined by Regulators: each firm must

determine what it means• Defined in Terms of Appetite: by

definition it must be “zero”• Values Statements: must be hard-edged

and embedded in the business • “Tick Box” Compliance: “soft risks”

e.g. behaviours, choices and values• Not limited to Product Mis-selling:

competition abuse, IT, cybersecurity etc. • Customer Satisfaction & Experience:

is not the same as being treated fairly • Preventing Innovation: its about trust,

risk management and accountability


Instead firms should focus on:

CULTURE = OWNERSHIP OF OUTCOMES

Senior Managers are now accountable for culture and good customer outcomes:• Decisions and conduct that falls within their areas of responsibility: the

FCA has found cases where the specifics of senior management responsibilities were not clear or firms had limited the scope of responsibility to particular activities by focusing on how the relevant senior manager discharged his or her responsibilities, rather than what he or she was actually responsible for. Neither situation is acceptable to the regulator.

• Ensuring reasonable steps are taken for the decisions made by individuals in their areas are appropriate: the FCA has found firms seeking to limit the responsibility of the overall senior manager of an area by allocating some of the responsibility to a subordinate. The FCA is clear that this will not be acceptable. "If you delegate leadership and decision making, you are still accountable for oversight of those managers".

• Ensuring that individuals working at all levels in areas of responsibility meet appropriate standards of conduct and competence. "In view of the importance of standards to the conduct culture of the industry, FCA supervisors will be paying close attention to how senior managers discharge this responsibility".


Case Study

VISION AND VALUES

Vision: “We want to satisfy our customers’ financial needs and help them succeed financially.”

Values: “Our values should guide every conversation, decision, and interaction. Our values should anchor every product and service we provide and every channel we operate.”

1. People as a competitive advantage2. Ethics3. What’s right for customers4. Diversity and inclusion5. Leadership

Brand• Relationships that last a lifetime• Expertise and guidance to help our customers make confident decisions• Going the extra mile to do what’s right


RETAIL BANK REVENUE MODEL


STRATEGIC PRIORITIES & GROWTH


SALES PRACTICES SETTLEMENT

• In September 2016, Wells Fargo reached agreements with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC) and the City of Los Angeles regarding its sales practices.

• The amount of the settlement was $185 million:o CFPB = $100 million o City of Los Angeles = $50 million o OCC = $35 million

• As part of an extensive third party review commissioned by Wells Fargo covering activity back to 2011, over 82 million deposit accounts and nearly 11 million credit card accounts were examined: o Roughly 2% of the accounts reviewed (1.5 million deposit accounts and 565k credit card

accounts) were identified as accounts that may not have been authorized, i.e., Bank could not rule out the possibility that an account was unauthorized and therefore included that account in a further review to determine any fees to refund

o Approximately 115k of these accounts, or 0.12%, of the 93 million accounts examined (100k deposit accounts and 15k credit card accounts), had incurred a fee and the Bank has refunded $2.6 million to those customers (an average of $25 per account)


CEO RESIGNS & ACTION TAKEN

• Extensive review (via a third party consulting firm) going back to 2011; the review included consumer and small business retail banking deposit accounts and unsecured credit cards opened during the period reviewed.

• Refunded $2.6 million to customers for any fees associated with products customers received that they may not have requested

• Disciplinary actions, including terminations of 5,300 managers and team members • Investments in enhanced team-member training, monitoring and controls including:

o removed product sales goals in the retail banking business, effective 1/10/2016 o instituted mystery shopper program with a targeted 15,000-20,000 annual branch visits

• Strengthened performance measures that are tied to customer satisfaction, loyalty and ethics• Instituted automated confirmation emails to customers within one hour of opening any deposit

account; the Bank is also sending an application acknowledgement and decision status letter after processing an application for a credit card


Press Headlines

BANK CEO HELD TO ACCOUNT


https://www.youtube.com/watch?v=xJhkX74D10M

Conclusion

LESSONS LEARNT

• Continuity. To deliver an appropriate culture, banks need to ensure there is a continuity in values. Engaging in constant culture change, a refreshing of values and ethical rebooting programmes might make nice headlines, but are likely to be counter-productive.

• Consistency. An underlying culture needs to be consistently reinforced through a wide range of routines, rituals, artefacts, symbols and architecture in the organization. It also needs to be consistent with the business model. Banks need to ask how all elements of employee experience might reinforce or detract from a particular culture.

• Ensuring accountability. Banks have placed great emphasis on senior leadership driving cultural changes, but there were some concerns among stakeholders that senior people in banks had not been held accountable in the past. At a minimum, Chairs and CEOs need to be demonstrably accountable for culture.

• Tone from the top is not enough. Most banks have the right tone from the top. However, some stakeholders are concerned about messages getting lost in the middle. Managers need to constantly ask whether their culture change programmes are making the experience of front line staff better or worse.


• Improve the experience of front line workers. The way front line employees are managed has a direct impact on the way customers are treated. It also has a big impact on how staff make decisions when faced with an ethical dilemma. Employees need to be supported and engaged if they are to implement this new culture.

• Pick up on small problems before they become big problems. Many of the best banks have systems which allow staff throughout the organization to routinely log small problems. Similarly, whistle-blowers who raise serious concerns in banks should be protected and should not fear reprimand or reprisals as a result of their actions.

• Voluntarily admit problems and make up for them. Public trust in the banking sector remains low. Part of this is the widespread perception that banks will only communicate failures and make up for them when they are under pressure from the regulator. Banks need to do more to highlight the top issues which raise customer complaints and explain what actions they are taking to tackle the root causes of these complaints.

• Shareholders shouldn’t just want short term returns. Senior management’s duty towards shareholders is not to maximise shareholder value, but provide sustainable value for shareholders through doing the right thing.


LESSONS LEARNT

• A range of metrics is required. Use metrics to capture input, process and output aspects; measure cultural processes using metrics which capture how culture is lived and its impact on customers and other stakeholders.

• Measuring employee attitudes is not enough. Measuring staff attitudes using annual employee surveys is an important annual indicator, but it is unlikely to give banks a detailed understanding of how culture works in their firms. More detailed approaches should look at behavioural aspects of culture.

• Ensure that sales metrics aren’t simply relabelled. In some cases sales targets unofficially live under a different name (usually targets for identifying customer needs) and become the focus of gaming. Clarity is needed to root out any vestiges of an aggressive sales culture.

• Generational change and leadership development are needed. Changing the underlying assumptions about banking will take time. Recognise the importance of leadership development in changing the culture, not only at the top, but throughout the organization.


LESSONS LEARNT

• Focus on substance, not just image. We know that culture change tends to fall flat when surface level changes clash with deeply held assumptions in the organization. To make culture change work, banks need to ensure that surface level changes such as newly espoused values, new branch design, new rituals, and protocols are linked with underlying values. For genuine culture change to occur, it is vital people do the right thing, even when no one is looking!

• Overhaul product design processes and consider how they generate revenue. Failures in product design processes have been at the heart of numerous mis-selling scandals. Banks need to overhaul their product design processes to focus on designing products which help people manage their money and achieve their financial goals.

• Reconnect with the purpose of banking. This does not just involve making money for shareholders. It involves considering the wider social and economic purpose of banks. Banks need to clearly answer the question: why do we exist? Having a clear response to this question, which people throughout the organization buy into, is necessary in order to build a more sustainable culture and rekindle trust.


LESSONS LEARNT

Tony Moroney | Managing DirectorBerkeley Research Group, LLC6 New Street Square, 15th Floor | London, EC4A 3BFD +44 (0) 20 3597 5167 | M +353 87 2556947 [email protected] | thinkbrg.com

The views and opinions expressed are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees, affiliates and clients. All graphs are illustrative only and should not be relied on.

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