Can boards leverage culture to create value?

Early March is when bonuses tend to be paid out in the financial sector when staff members are rewarded for personal and company performance. In early March of this year, UK regulators criticised the performance of one foreign bank for failing to improve its anti-money laundering (AML) and compliance controls, warning that this could jeopardise its access to the UK after Brexit. This was only a few weeks after the same institution suffered an IT failure that stopped its CHAPS payments for several hours. Not good from a performance perspective, and a worrying time for those at the firm expecting something extra in their pay packet.

So far, not so unusual - incumbents with legacy systems and processes often struggle to ensure resilience as regulatory expectations increase. However, the costs of getting things wrong can be eye-watering. In this case the bank had tripled the number of staff in its anti-financial crime division since 2015 and pledged ?4 billion to improve its controls. These costs, together with associated reputational damage and profits hit by fines, remediation, and write-downs for businesses that were not performing meant that the institution's equity value was severely affected. These are costs that could have been spent investing in clients and competitive advantage.

How can culture play a role? The logic is clear. A healthy culture is one that recognises problems early and deals with them, so reducing their impact on customers and the markets. Perhaps less clear is what makes up a healthy culture: cognitive diversity and adaptability, ensuring that good ideas, even if at odds with the current received wisdom or status quo, are welcomed and considered constructively. But how to foster these? Some unexpected leadership characteristics are being shown to be key, such as humility in order to ensure such ideas are encouraged - and acted upon.

The reverse is a culture of fear, which impedes raising problems - such as flaws in AML processes or payments systems.

Whilst culture will be reinforced through the application of the Conduct Rules, the Financial Conduct Authority (FCA) expects that boards should be responsible collectively for setting and monitoring firms? cultures. Boards therefore need to ensure culture remains high on their agenda and be able to demonstrate how they satisfy themselves that the firm's culture does not cause harm.

With this in mind, how many organisations are investing in a better understanding of the conduct that underpins their culture, i.e. how it impacts the firm's long-term performance, and how to measure and so manage it? Not many, it seems, as such an investment must be driven, or at least approved by the board.

Mazar's research with INSEAD and Board Agenda into Board Leadership of Corporate Culture in Europe shows that only 20 per cent of board members believe they are spending the right amount of time addressing cultural issues, only 20 per cent say that the boards fully consider the desired culture of the business, while half say there are either significant gaps between strategy and culture or have not spent much time considering alignment between the two. If boards do not develop the skills to manage culture, how can management, or indeed every member of staff be expected to do so? Perhaps these skills should figure more prominently in bonus structures?


UK Finance has been running a successful Conduct and Culture Academy since 2018 with the aim of helping firms to derive value from conduct and culture. We have coached over 100 senior conduct leaders from across our membership to help them exceed regulatory expectations, and to embed the practical skills needed to effect the changes in conduct risk management and culture required by a regulated firm's board. We?ll be running two new cohorts in June and September 2020. For more information please download our brochure or visit our webpage.

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Conduct and Culture Academy, June - July 2020

The UK Finance Conduct and Culture Academy was launched in 2018 and four cohorts of UK Finance members (over 100 individuals) have already completed the intensive, fast-track programme. The fifth cohort launches in June 2020 with a sixth following in September. Both will provide senior managers with the practical skills needed to effect the changes in conduct risk management and culture required by a regulated firm's board. Delegates will develop frameworks, practices and behaviours which put customers and ethical values at the heart of decision-making, exactly as the regulator has asked the industry to do.

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