A challenge for any compliance officer is meeting the ever-increasing expectation for shaping a company’s culture.
Speaking to an audience at the New York Federal Reserve this week, Jay Clayton, chairman of the Securities and Exchange Commission, shared his thoughts on that imperative.
“Culture is not an option,” he warned, referencing a recent discussion paper authored by the U.K.’s Financial Conduct Authority.
“Every organization has a culture and, in some cases, the firm’s culture is in fact a collection of many sub-cultures,” Clayton elaborated. “While the leaders of our financial institutions often are tasked with driving positive changes in culture, they must recognize they are not writing on a blank slate or, for that matter, a single slate.”
To effectively manage the business of your organization on a day-to-day basis and over the long term, “management needs to know what the culture of the organization is today, including the key drivers of that culture,” Clayton said. For example, a new strategic initiative is much more likely to be successful if it is designed and implemented in a manner that is consistent with, and leverages, the firm’s culture.
“Over time, whatever the cultural goals for your organization may be, the chances of achieving them go up dramatically if you understand where your culture stands relative to those goals,” he added. “In driving organizational culture, it is difficult, if not impossible, to get from A to B unless you have a clear sense of what A is.”
Clayton put a regulatory and enforcement spin on culture.
His example: a significant conduct problem occurs at a financial institution and the firm’s culture comes under regulatory scrutiny.
“Let’s take as given that both the firm’s management and the regulator want the firm to have ‘good’ culture, one, for example, that is consistent with long term shareholder, employee, customer, and societal interests as well as law and regulation,” he said. “In other words, we’re all trying to row the same boat in the same direction. However, if there is a disconnect between what management thinks the firm’s culture is today and what the regulator thinks the firm’s culture is today, agreeing on measures to enhance the culture will be very difficult.”
“I the regulator is convinced a firm has a cultural problem and the firm continues to fight that conclusion, tension is likely to be high and progress—which involves fostering mutual regulator-firm respect and trust—will be slow and costly all around,” he said.
Clayton went on to define culture as a “collection of countless internal and external actions.”
“Culture is collective,” he said. “While there is great importance in setting a positive ‘tone at the top,’ an organization’s culture is, in large part, defined by the countless daily actions of its people. Culture is not just what is said by management to the workforce, but what is done, [and by] what actions are taken, day in and day out, throughout the organization, with colleagues, customers, suppliers, and regulators.”
There are many familiar methods for communicating, monitoring, and reinforcing cultural objectives, Clayton said. These include compliance programs, policies and procedures, training, and personnel decisions.
“All of these methods are important and, in large financial organizations, essential,” he said. “I also believe these methods are enhanced by, and in fact, to be effective over the long term, require, a clear, candid, easily understandable articulation of the organization’s core mission.”
Clayton told the audience that there are many reasons why having a clear mission is beneficial to culture and improving culture.
“It fills in the gaps,” he said. “Organizations with the most comprehensive compliance programs and policies and procedures will inevitably encounter circumstances not contemplated by their policies and procedures. In those situations, what drives how people will act? The law and regulations? What if those also do not contemplate the situation?”
“More significantly, what if the law permits a range of actions with some that, while legal, can cause significant harm. In these circumstances, those on the frontlines, those making decisions, need a touchstone.”
When bad behavior occurs at a firm, key questions a firm should ask include whether the conduct represented a clear breach of the firm’s controls and culture as well as whether the firm’s remediation efforts, in addition to any controls enhancements, sent an appropriate and lasting cultural message, Clayton said.
“Do the controls now make it clear that lying is unacceptable and that communications around mark-ups will be monitored. And, were the offending parties dismissed or otherwise meaningfully sanctioned,” he said. “The actions we choose in these types of scenarios say a great deal about who we are—and what our culture is.”