Reforming Corporate Culture in Financial Services Firms
$101 billion. As of 2016, that’s the total amount of fines paid by banks implicated in the mortgage bubble responsible for the financial crisis of 2008. While the federal government did find some areas of law-breaking, regulators also found that many of the actions that led to the housing crisis weren’t necessarily illegal — just violations of banking standards.
So how do we prevent another financial crisis? Many members of the government and the general public believe that better banking regulations in the form of stricter laws would prevent one. Some financial services experts disagree. They argue that effective laws take too long to ratify, and they are often a response to existing wrongdoing. What the financial services sector needs, they argue, is a culture that upholds basic financial ethics and standards.
Why Culture in Financial Services Is Important
With the current fines for financial sector misconduct at $275 billion dollars and rising, a multi-pronged approach is necessary to eliminate unethical behavior and restore trustworthiness. The easiest to implement are what one talk during the Federal Reserve Bank of New York’s October 20, 2016 conference, Reforming Culture and Behavior in the Financial Services Industry, characterized as “hard laws.” These are the laws, rules and regulations that the government and other regulatory bodies make for the financial sector.
There are also complementary “soft laws.” This term is used to describe ethical codes and corporate business standards that financial services firms establish and enforce through their own disciplinary processes. Soft laws are the most effective way to prevent burgeoning financial misconduct, but they are also the most difficult to implement. The only way to enforce these soft laws is through a company culture that demands competence, dependability, honesty and proficiency of every employee in every circumstance.
If the financial sector truly wants reform, it is only through a combination of hard and soft laws that future lapses in financial services standards can be minimized.
Building a Corporate Culture That Prevents Financial Misconduct
Having a detailed employee handbook and a corporate code of conduct isn’t enough to build your company’s culture. People respond to incentives, so it’s essential that your company is rewarding the behavior you want your employees to emulate. For an idea of how your policies can affect your corporate culture, consider these questions:
- Compensation: Does your company reward bad behavior by promoting and compensating workers who have high performance, even though they participate in legal gray areas?
- Consequences: Do the internal regulators within your company have the authority to impose significant consequences for unethical behavior?
- Reporting: Are workers who report misconduct lauded for their honesty? Do they experience positive reinforcement, not just protection? Do they ever experience retribution, even if it is unintended?
- Customers: Does your company assess each employee’s work through the lens of what benefits the customers you serve?
- Rules: Are you always enforcing the letter of the law? Or do you also enforce and protect overall principles that govern policies?
Ignazio Angeloni, a member of the European Central Bank supervisory board, suggested a series of six questions that every employee in the financial sector should regularly ask himself. Perhaps the most important question is this: Are you acting as you would if your actions were public? At its essence, your corporate culture should attempt to shine a light into every aspect of your business, so each employee feels as though they are working with oversight.
Many companies minimize breakdowns in corporate culture. They believe that a few “bad apples” were the source of any ethical breaches. While firing those implicated in significant misconduct is appropriate, the company forgets to address those employees who knew about the misconduct but ignored it. Their actions may not merit termination, but these workers demonstrate that silence is a prized part of the company culture.
Strong cultures can also become diluted due to poor hiring. Employees may have the skills to thrive in the financial sector, but they may not display the ethics and values necessary to uphold the necessary corporate culture. Rapidly growing companies are particularly vulnerable to cultural dilution and drift if they do not hire specifically for cultural fit.
Assessing Corporate Culture in the Financial Services Industry
If culture is the key to effective private regulation of the financial services industry, then your company must be able to effectively assess the existing culture regularly. Regular assessments can detect drift and allow corporate management the opportunity to correct underlying issues before they lead to misconduct.
Analytics-based technology can allow you to find out directly from your employees the strength of the company’s culture. The right analytics can also help you find out how your workers perceive this culture and the impact it has on overall performance. Before you begin interviewing, analytics can also tell you which job applicants are more likely to have the cultural fit you need for your company. By eliminating culturally unsuitable candidates early, you reduce the chance that you’ll hire someone who will tolerate a toxic culture in your company.
No matter what public regulations are passed to regulate the financial services industry, the financial services industry needs cultural safeguards in place to protect its reputation. Without a staunch culture that rewards professional ethics, your company could easily become implicated in the latest headline-grabbing misconduct charge.