A Sustainable Approach to Managing Corporate Culture in Financial Services

Most banks today realize that maintaining a healthy corporate culture is a crucial element in managing risk while accelerating performance. The question is, how can a financial institution, or any company, manage its culture such that core values are sustained throughout the organization, and the company is able to react and adapt to ensure the success and long-term health of the organization?Traditional approaches for measuring and managing culture have done little to predict and prevent bad behaviors and outcomes. A new approach is needed, one that can provide real-time monitoring of the culture, with mechanisms to drive culture in the right direction and in line with ever-evolving regulations.

How corporate culture can impair decision-making

Over the last two decades, the financial services industry has witnessed a number of well-known scandals and bank failures. While these issues are complex and multifaceted, employee culture always plays a role.

In one recent bank failure, regulators blamed the problem, in part, on a culture that favored deliberation over action, resulting in a reluctance by supervisors to take remedial action once they identified vulnerabilities. This slow reaction time was attributed to a corporate culture that, according to the Fed report, “was too deliberative and focused on the continued accumulation of supporting evidence in a consensus-driven environment.” This led to an impaired decision-making process and a reluctance to escalate issues.

This exemplifies the circular nature of corporate culture, if not closely managed. Whether or not a culture is explicitly defined, there is an unstated culture, based on unspoken standards and expectations. The perception of culture causes employees to reinforce what they believe the culture to be.

Post-mortem analysis is helpful only if the recommendations and warnings are acknowledged and implemented. After the 2008 global financial crisis, the Federal Reserve Bank of New York (FRBNY) commissioned an external review to draw on lessons learned from the crisis and make recommendations. Some of the issues identified in its Report on Systemic Risk and Bank Supervision seem still to be common themes in more recent regulator feedback:

1. Misaligned incentive compensation frameworks
2. Delay from a consensus-driven culture that smooths over complex issues

As the Fed notes, data shows that institutional attitudes—culture—can lead to institutional blind spots and contribute to vulnerabilities.

Why is culture critical in financial services?  

Corporate culture is absolutely critical in financial institutions for several reasons:

1. Performance results: A strong corporate culture fosters an environment that promotes high performance and aligns employee behaviors with the organization's goals. It cultivates a sense of accountability, collaboration, and innovation, which can drive superior financial performance and deliver returns for investors.
2. Risk management: Financial institutions are responsible for managing risk, which is essential to their long-term stability and success. A strong corporate culture can help to create a risk-aware environment, where employees are empowered to identify and mitigate potential risks and make decisions that align with the institution's risk appetite.
3. Decision-making: As noted above, culture impacts the decision-making process and the organization's strategy and ability to adapt to change. Culture shapes the values and beliefs that guide decision-making and influences how leaders prioritize goals and objectives.
4. Reputation: Financial institutions rely heavily on their reputation to attract and retain clients, investors, and employees. A strong corporate culture that prioritizes integrity, transparency, and ethical behavior can help to build and maintain a positive reputation, which is essential to their long-term success.
5. Compliance: Financial institutions operate in a highly regulated environment, and must comply with a complex web of laws, regulations, and standards. A strong corporate culture can help to ensure that employees understand their compliance obligations, and are committed to upholding the highest standards of regulatory compliance.
6. Employer brand and recruiting: Corporate culture plays a crucial role in attracting top talent in the financial services industry. A positive culture that emphasizes employee development, work-life balance, diversity and inclusion, pay equity and opportunities for advancement can help attract skilled professionals.
7. Employee morale and well-being: Financial institutions rely on their employees to deliver high-quality products and services to their clients. A positive corporate culture that aligns with employees' values and beliefs can foster a sense of purpose, belonging, and commitment, and promotes employee morale, engagement, and well-being. This, in turn, leads to higher productivity, creativity, and overall job satisfaction, creating a supportive work environment and reducing burnout and turnover.
8. Customer focus: Financial institutions exist to serve their customers, and a strong corporate culture can set the tone and help to create a customer-focused environment, where employees are committed to delivering high-quality products and services, and building strong relationships with their clients.

There is no doubt that corporate culture is especially important in financial institutions and critical to their long-term success and survival.

Can culture be managed?

Effective management of employee performance and culture can help to prevent crises from occurring. When employees understand the values and expectations of the organization and are held accountable for their actions, they are more likely to act in accordance with those values and avoid behavior that could lead to compliance or risk issues. A strong culture that promotes ethical behavior, compliance with laws and regulations, and accountability can also help to prevent wrongdoing.

It’s important to note that management of employee performance and the corporate culture requires ongoing attention and investment, and cannot be treated as a one-time fix. Organizations must continually evaluate and adjust their approach to ensure that it is achieving the desired results.

Measuring culture to date

In the past decade, several regulators globally began encouraging banks to conduct regular assessments of their culture. Some banks have even produced culture reports, including Bank of America, JPMorgan Chase, and Wells Fargo. As we, the authors, have been involved in preparing such reports, we know that, to date, measuring culture has been a challenging exercise. Organizations often must resort to leveraging backward-looking metrics (think reduction in conduct issues, past employee participation in volunteer activities, volume of compensation clawbacks) as indicators that their cultures are sound. 

Some of the common metrics used by banks to measure corporate culture include:

1. Employee engagement surveys: with questions about work-life balance, job satisfaction, career development opportunities, and management effectiveness.
2. Compliance metrics: such as the number of regulatory violations, the frequency of internal audits, and the success of compliance training programs. 
3. Diversity and inclusion metrics: such as the percentage of women and minorities in leadership positions, the success of diversity training programs, and the overall diversity of the workforce. 
4. Ethical conduct metrics: such as the number of reported ethics violations, the success of whistleblower programs, and the overall ethical culture of the organization. 
5. Performance metrics: such as revenue growth, profitability, and customer satisfaction. 

While these may all be important elements in a balanced scorecard, an obvious issue with such measures is that they largely fail to serve as predictors of bad behavior and outcomes. And it raises the question as to whether they are measuring the right things to really evaluate the corporate culture. They may be measuring symptoms of (some) culture problems, but ignoring the drivers of culture. Employees need to understand what your company's values are—but how do you measure whether or not they do?

A new approach: managing culture proactively

It’s clear that the industry and its regulators need to do more to foresee issues in controls, risk-taking, employment practices, etc., and not delay taking action to resolve them. But how do you ensure your organization won’t be susceptible to rampant misconduct or reluctance to speak up in the face of weak internal oversight? Having a code of ethics or mission statement is not enough. Every bank in recent history has had a code of ethics and yet that has not been sufficient to prevent a variety of scandals and bank failures. Having a mission, vision, and values is good, but useless if they are not lived in the culture of the organization.

The answer lies in the real-time monitoring and measuring culture, and providing mechanisms to drive the culture in the right direction.  

Culture measures need to be proactive and able to signal when behaviors are trending toward poor outcomes. Continuous monitoring is needed to anticipate lapses in oversight and risk governance. These metrics also need to be transparent to all the appropriate stakeholders in the organization, including the C-Suite.   

Here are some ways to both assess and manage the culture in your organization in real-time:

How should Financial Services link performance, culture, and rewards?

Financial Services organizations should think carefully about how they link performance, culture, and rewards, as these three elements are closely interconnected and can have a significant impact on the organization's success.

Firstly, it is important to ensure that the organization's culture is aligned with its goals and values, and that employees understand the behaviors and actions that are expected of them. This can be reinforced through performance management processes that are aligned with the organization's culture, such as setting goals and metrics that are tied to the organization's values and desired behaviors.

In terms of rewards, it is important to ensure that they are aligned with the desired behaviors and outcomes, and that they do not inadvertently incentivize negative behavior or excessive risk-taking. This can be achieved through a variety of methods, such as tying rewards to both financial and non-financial metrics, and ensuring that there are appropriate checks and balances in place to prevent excessive risk-taking.

At the same time, it is important to recognize that culture and performance are not solely driven by rewards, and that other factors, such as leadership, communication, employee engagement, and training, also play an important role. Organizations should therefore take a holistic approach to performance, culture, and rewards, and ensure that they are all working together in a coherent and aligned manner.

Finally, it is important to regularly evaluate and adjust the link between performance, culture, and rewards to ensure that it remains effective and aligned with the organization's goals and values. beqom’s Compensation Governance Process involves gathering feedback from multiple stakeholders such as Compliance, Risk, and Audit regarding employee behavior, monitoring metrics and outcomes, and making compensation adjustments as needed to ensure that the organization continues to operate in a safe, ethical, and effective manner. This also allows for easy reporting to regulators and removes the operational inefficiencies of gathering the above data manually.

Summary

Culture plays a significant role in shaping financial services organizations' behaviors, decision-making, and overall performance, making it a critical factor in their success. What once seemed impossible to quantify and control is now able to be monitored, measured, and managed in real-time across an organization using the latest technology. Organizations can now be far more proactive in operationalizing core values and preventing poor business outcomes driven by cracks in culture.