Post on 20-May-2020
Assessing Culture in smaller firms How the “behavioural regulator” sees it
Dr Roger MilesFaculty Lead, UK Finance Academy
Association of Financial Mutuals
June 2019
First glance
What is a “behavioural regulator”?
What is a “Culture Audit”?
Do we have to do it?
…so, what does “regulated good behaviour” look like?
Where do we even start with that?
Where do they get their agenda from?
We understand our culture. We’ve just got [15- 150] people who we know are all good folk.
We’re all fine, right?
What information do we need?
Based on 600 evidence-based studies of unethical behaviour, it was clear the banks were wasting their money on… expensive and unproven programs peddled by consultants to address "risk culture".
“It’s like hitting a nail with a cucumber,” Prof. Capezio said. “A lot of it is faddish and there is no science behind it… it is decoupled from the real risk factors”.
Australian Financial Review, 8th May 2019
Actually, I agree!
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Why do regulators care about Culture?
Because…
• Politics! • Crash aftermath: electability; fear; blame-transfer
• Push back public mistrust • Mission; crash aftermath
• Evolution: Large tribes must delegate governance• Can’t agree; appoint rule-makers (Fukuyama)
• Model failure: • ‘Econometric regulation’ failed; cue the behavioural approach
• What that means…
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Cultural ills the regulator wants us to address
• Misaligned incentives – rewards for mis-selling, etc
• Negative ideologies – misplaced loyalty to team or brand
• Moral evasion – reasoning it away; harm seen as remote, irrelevant
• Selective attention – “attachment” to poor compliance processes
• Governance groupthink – denial, lack of challenge
• “Contagious” rule-breaking – socially condoned
• Overconfidence – won’t be detected; fines feel trivial
FCA: Beliefs, Biases and Morality in OP24, Dec 2016 r@DrRMiles.com ©
“The challenge to classical economics (regulators): understanding normal people”
Based on: Prof. Colin Camerer, CalTech BE conference, Pasadena, 4th June 2003
because alsoRisk analysts are not
normal peopleExperts* don’t
understand how
‘normal people’ think
* incl. regulators
i.e.
‘Normals’ are not
risk analystsbecause
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Culture supervision pre- and post-crisis
Kellermann, De Hann & De Vries, in Supervision of behaviour and
culture – prudential supervisor of the Netherlands (DNB), 2016-7This vsn 30-May-2019
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Culture works differently in small groups
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Max. ‘tribe’(relationships each of us can maintain)
= 150 people, approx.
Various ‘models’ for Culture…
Cultural Web (Johnson & Scholes); Arete (Steinholz); Leadership Styles (Ivey); Myths of Human Nature (Adams; Schwarz & Thompson); CultureScope (Nabeel); Four types of organizational culture (Quinn & Cameron); Profile comparison (O’Reilly, Chatman & Caldwell)
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Keep it simple: Questions and challenges
What do we wear?How do we address each other?
Are we bossy or participative?
Tall, narrow, hierarchical? Broad, flat, open?
Do we impose central controls?Or have local autonomy, distributed?
Do we start every week with a team meeting?Do audits ever spur us to change?
How do we talk about that time when we…?
What are we here for?
This vsn **2-June-2019 revised + simplified
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“What good Culture looks like” to the regulator
Based on FCA’s Five Conduct Questions (edited):
To what extent…
• Do we watch out to find when anything’s not working as it should?
• Do managers lead good culture – “the way we do things here”?
• Do we help people improve conduct in their role?
• Are SMs overseeing ethical decision-making?
• Do we call time on anything that undermines good behaviour?
Adapted from: William Coen, Secretary General, Basel Committee (April 2016);
FCA ‘key questions’ guidance 2017-18r@DrRMiles.com © 3-Jun-2019
“Tell me aboutthe time when…?”
Finding the right MI for CultureExample: Asking better questions
r@DrRMiles.com ©This update: 3-Jun-2019
Lazy indicator
Training attendance (%)
Better indicators
How are you now applying the learning
points, back at your desk?
Better MI questions (more examples)
Basic question Better question
Adapted from: R Miles, © ThomsonReuters-GRC, 2014
Is the firm’s risk culture aligned with its
values, and clearly communicated?
How do we measure the gap between the values / culture
we claim to have, and actual behaviours happening at
each level? (Board, managers, front line?)
Do we involve risk management in product
development?
How early in product development do we involve
risk managers?
Do our people understand that they need to
be conduct-compliant?
To what extent do all staff understand that their
personal “good conduct” is what keeps our
customers bringing in business, and our owners and
regulators happy?
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Old and new ‘health indicators’
Classic indicators
• Capitalisation
• Efficiency
• Solvency
• Profitability
• Valuation
New indicators
• Reflexivity
• Cognitive diversity
• Psychological safety
• Moral courage
• Social licence
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‘Culture approach’ adds business value
• Think customer obligation,
• not team / business obligation• and don’t ‘outsource your ethics’ to Compliance (etc)
FCA’s Psychology and Beyond briefings, 2017
People like to maintain self-image
of being a moral person:• nudge them towards this
Reset cultural norms to allow for constructive criticism• “what people like me think” (social proof, conformity)
• challenge misplaced “higher loyalties” (reciprocal rule-breaking)
• disrupt any patterns of “benefit” from rule-breaking
If customer consequences seem remote:• reduce ‘distance’, highlight real effects
• focus responsibility (SMR+), not diffuse
Reduce load:• physical fatigue
• cognitive depletion from ambiguity, complexity
This vsn 3-Jun-2019
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The future of Culture reporting: 3 views
• Leadership styles (Ivey)
• Purpose and fit (CultureScope)
• Netflix Culture
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Behavioural factor analysis(Example: “Speak-up”, analysed by gender)
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Netflix Culture - main lessonGood news for small organizations!
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Assessing Culture in smaller firms How the “behavioural regulator” sees it
Dr Roger MilesFaculty Lead, UK Finance Academy
Association of Financial Mutuals
June 2019
Thank you. Questions?
r@DrRMiles.com ©