Culture Versus Institutional Design
Independent board members, aligning pay incentives, internal controls, risk management, and so on. These corporate governance arrangements are no longer new concepts. Since the Cadbury Report in 1992, there have been innumerable publications, codes and laws on this subject.
Yet, despite these guides and exhortations, we continue to witness corporate scandals – Enron, WorldCom, Countrywide Financial, VW, Wells Fargo, to name a few. The 2008 global financial crisis exposed massive failures of ethics and leadership in finance, business and government.
Conduct and Ethics
The consensus is that many of these issues boil down to the lack of a culture of ethical behaviour. Many employees within organisations that purportedly subscribed to ‘best practice’ in governance, were in fact living a different ethical culture. They role modelled after their leaders. They were driven by the wrong incentives or they may have operated under undue influence.
In 1994 when the UK Nolan Committee published the Seven Principles of Public Life, the principles were considered “revolutionary”simply because the focus of the discussion was on behaviour and culture, not on process.
Today, the expectation of corporate boards to play an active role in ensuring corporate culture is explicit. The UK Corporate Governance Code, for example, states that the board is to assess and monitor culture. The ASX’s Corporate Governance Principles and Recommendations requires the board charter to include the role of the board to approve the entity’s statement of values and code of conduct to underpin the desired culture within the entity.
The reality is that ethics and integrity have always been part of the governance conversation. A significant challenge is that ensuring this “culture” is impervious to implementation and measurement.
In the financial services world, at least we are beginning to see this change. In 2015, the Group of 30 published the Banking Conduct and Culture:A Call for Sustained and Comprehensive Reform, reflecting a global regulatory agenda to pin down this slippery issue of culture. What is interesting is that regulators today have begun to use behavioural science to assess how institutions are treating consumer interests. An international survey has reported that 25 regulators from across the world are now using behavioural tests to check on customer outcomes.This is with the view to assess, understand and influence behaviour, so that they may achieve a greater impact on culture within organisations.
De Nederlandsche Bank, the Dutch central bank – now widely regarded as a leader in the supervision of conduct and culture – has established a comprehensive supervisory framework on behaviour and conduct. It has even placed organisational psychologists to observe boards and management in order to assess their regulatees’ organisational culture. The UK Financial Conduct Authority published a series of discussion papers on the very topic of transforming culture in the financial services. Supported by the Dutch central bank, the Irish Central Bank published the findings of its assessment of the conduct and cultural review of five large Irish retail banks. In April 2019, the International Organization of Securities Commissions issued a report on how financial regulators around the world are using a “culture measurement” to question customer outcomes.
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