If you are worried that talk about a “culture of compliance” still falls on deaf ears, or has lost its impact through repetition, be aware that it remains a top-of-mind topic for regulators. Also, in a world where bad behavior can mobilize global backlash—as illustrated by the #metoo movement—a mere apology or PR offensive isn’t sufficient to spare an attack on your brand and bottom line.
The latest regulator to weigh in on the topic is William Dudley, president and CEO of the New York Federal Reserve. He delivered a speech on “The Importance of Incentives in Ensuring a Resilient and Robust Financial System” in March before the U.S. Chamber of Commerce.
“We need to recognize that an effective regulatory regime and comprehensive supervision are not sufficient,” he warned, blaming misaligned incentives as a contributing factor to the Financial Crisis “and continue to affect bank conduct and behavior.” Poorly considered incentives, in his view, fuel “bad bank cultures.”
“The record from the crisis and more recent years shows just how powerful incentives can be in driving firms and individuals to do things that are imprudent and/or unethical,” Dudley said. “Bad incentives can lead to conduct that not only generates large risk exposures and market excess, but also erodes trust and confidence in the financial system.”
Ways that a financial institution’s culture can be compromised, in his view, include compensation practices that reward volume and short-term performance over longer-term, sustainable returns.
The creation of millions of unauthorized accounts at Wells Fargo also reflected bad incentives. “Bank employees were compensated on sales volume with aggressive cross-selling targets without customers actually receiving beneficial services,” he said.
The “three pillars” of regulation, supervision, and bank culture must all play effective roles, Dudley added. “Bank culture sets the norms for what is appropriate behavior … Bank culture, in turn, helps establish norms in areas where regulation may be silent. Strong regulation and supervision cannot substitute for deficiencies in bank culture.”
The establishment of “too many bright-line rules” may prove counterproductive to the goal of encouraging good bank cultures. “As I see it, an organization’s culture gets into trouble when it equates ‘what is right’ with what is legally permissible, and when ‘what is wrong’ becomes viewed as what is legally impermissible.”
Dudley’s focus on culture and incentives meshes well with the highly regulated sector he oversees. For many companies, however, “culture” is not so easy to put into context. Corporate culture, in fact, is hard to define until it goes bad.
Backing that up is LRN’s 2018 Ethics and Compliance Program Effectiveness report, which argues that “many companies’ ethics and compliance efforts fail to generate good behavior and prevent misconduct.”
Among the report’s conclusions: “Recent sexual harassment scandals at corporations add urgency to the question of what kinds of ethics and compliance efforts deter and correct misconduct throughout an organization—and what kinds are ineffective, or even inadvertently reinforce unethical behavior.”
“We need to recognize that an effective regulatory regime and comprehensive supervision are not sufficient, and continue to affect bank conduct and behavior.”
William Dudley, president and CEO, New York Federal Reserve
LRN’s report also echoes Dudley’s observations with its own assessment that companies “with strong, values-based E&C programs—as opposed to those that are just based on rules—are much more likely to perform better financially.”
The report is based on research and a survey of 400 ethics, compliance, and legal professionals. Among respondents, 44 percent said their companies’ programs focus mainly on rules and regulations as opposed to values. The most effective ethics and compliance programs, LRN says, emphasize values over lists of rules and ensure that the company analyzes the root cause of misconduct, rather than simply punish misconduct.
Shanti Akins, founder and executive chairman of Navex Global, sees the #metoo movement and the fight against sexual harassment as a bellwether of corporate culture.
“Sexual harassment is not a compliance issue; it is an abuse of power issue,” she says. “It can also be a neglect of power issue. It’s what happens when good people in power stand by rather than intervene. For corporate leaders, intervention is a job requirement.”
In a more general sense, directors and the C-suite, she says, would benefit from empathy, Akins says.
“People sitting on boards have risen to very high levels in their career,” she explains. “You are typically sitting in a room where you are one of the people in charge and making decisions in a supportive environment of people with similar backgrounds, access to power, and resources. When you are in that environment, it can be very easy to forget what it’s like to be deep in the mechanisms of an organization, where there is a lot more structure in terms of having people above you.”
Directors and executives, Akins says, can suffer in their “sterile bubbles” even if that is not their intention. “It’s a symptom of the way board work is done,” she says. “You are not walking the halls of the organization that you have oversight of. In fact, in some organizational cultures they even shield the company from the board members. They don’t even want the board meetings on site because some of the information being discussed is so sensitive.”
Having directors and executives spend more time with employees is just one solution. “You could argue that maybe a little less time poring over numbers, taking a little time, away from all that and spending it with people in the company, while that sounds unconventional, might actually have a better return on investment,” she says.
“If you have a board member who hasn’t spent time with your salespeople, products and services, or pitches to a client, I don’t think they should be on your board,” Akins says. “I don’t see how they have a sense of your company, what makes it tick, and what you actually do in terms of serving your customers and your community.”
According to the National Association of Corporate Director’s Public Governance Survey, only 35 percent of directors say they have a good understanding of the mood in the middle, and just 18 percent of them indicate they have a good grasp of the health of the culture at lower levels of the organization.
That disconnect, and lack of empathy with a company’s many contingencies, is troubling, Akins says.
“Empathy is what allows board members to preempt crises, and to understand the subtle cultural cues that truly drive and prevent bad behavior,” she says. “This requires going beyond the boardroom and gaining proximity to the issue and the people involved.”
“Culture is like marriage. You need to constantly keep working at it,” says Bob Conlin, CEO of Navex Global. “What executives need to do to make sure culture permeates throughout the organization and people get it really starts with communication.”
While a focus on “tone at the top,” and tone at the middle is all well and good, Conlin reminds companies not to neglect “tone at the bottom.”
Compliance and ethics need to be company-wide, he says.
Conlin, at his own firm, seeks to supplement companywide training with more novel ways to reinforce the code of conduct. Employee passkeys, for example, are marked with a reminder of the firm’s core values.
There are also micro-learning efforts, short exercises on a near-quarterly basis that reinforce key values.
“You’ve got to train people on what to do and what to expect if they do it,” Conlin says. “It is important that employees know where they can go if they feel they are working in an unsafe or culturally deficient environment. Managers are trained on what to do if they are approached. You can’t just sit there and say, ‘There, there, it will all get better.’ ”
Managers and executives, he says, can never afford to lose sight of what it takes for employees to speak out or come forward. “Somebody really has to be at the edge of the line there,” he says.
Another key for reinforcing culture is celebrating successes.
Because measuring culture can be a somewhat amorphous task, Navex tries to put metrics to experiences. Twice a year, anonymized employee engagement surveys are administered by a third party. The data is later shared with employees at a town hall meeting. “Hourly employees sit in a room with executives to discuss what to do about the identified deficiencies,” Conlin says. Beyond those discussions, managers are urged to “keep an ear to the ground.”
“It is really important for corporations to be aware of what is happening in the organization,” he says. “It would be terrific to know that you have a wonderful manager who is getting a report of some cultural issue and is handling it well; but if it doesn’t roll up to the CEO or chief compliance officer, only half of the job is being done.”