The 2008 financial crisis didn’t just send global markets plunging, it also destroyed a great deal of public trust in banks and financial institutions as responsible stewards of the economic social order.
Efforts to avoid another such collapse have led regulators in the UK, the Netherlands and across Europe to direct increasing attention and resources toward what they view as the root cause of the crisis — namely, an industry-wide erosion of culture and ethics that led to a “social contagion” of irresponsible and risky business behavior.
Having largely failed to contain the problem by conventional means (regulatory reform, fines, sanctions, etc.), European regulators in the past few years have been experimenting with techniques from the behavioral sciences to help rebuild public trust in the financial sector.
During a recent panel co-hosted by Thomson Reuters and UK consulting firm Starling entitled, “Improving Trust and Culture in the Banking Sector,” several of Europe’s current and former top regulators, financial firm executives, and behavioral science consultants talked about the challenges of transforming an ethically compromised business culture into one that promotes and supports ethical behavior. They also discussed how machine-learning and data analytics (Reg-Tech) can be used to reveal hidden social and cultural dynamics that prevent ethical business cultures from flourishing.
Why is culture so important?
The focus on culture comes from a growing recognition that values such as honesty, integrity, and accountability must flow from the top of an organization in order for them to take hold in lower layers of management. “We’ve seen a lot of research that culture is important because culture drives conduct, and conduct drives trust, or lack of it,” says panelist Mathilde Mesnard, deputy director of financial and enterprise affairs at the Organisation for Economic Co-operation and Development (OECD) in Paris.
“A company’s reputation is part of its brand value,” she adds, noting that in the era of social media, it’s all too easy for customers to “punish and reward” companies based on their level of trust in its behavior.
According to panelist Martin Wheatley, former Chief Executive of the UK’s Financial Conduct Authority, the main culprit behind the economic collapse was (and to a large extent still is) a hyper-emphasis on delivering shareholder value to clients rather than treating customers with the integrity and respect they deserve. “CEOs get rewarded for delivering shareholder value, not on how they deliver value,” Wheatley says, which is how so many CEOs could justify their own behavior, regardless of the consequences to the system as a whole.
Leadership under the behavioral science microscope
In order to change a corporate culture, however, one must first understand it. Behavioral analytics has given regulators several new tools for assessing and measuring behavior in a professional setting. For example, the De Nederlandsche Bank (DNB), the Netherlands’ central bank, now has a team dedicated specifically to studying the relationship between behavior and risk in the country’s banks.
The team’s organizational psychologists observe a bank’s leadership as they operate over a period of several months in order to understand the organization’s entire social ecosystem.
Panelist Wijnand Nuijts, head of the DNB’s behavioral risk division, says that “85% of what we do involves executive-team decision-making, which has a huge impact on performance in any organization.”
DNB’s research covers five main areas of observation: leadership, group dynamics, communication, decision-making, and mindset. Interviews with the executive team and their direct reports are also conducted. Information gleaned from this process produces a deep contextual understanding of the human dynamics driving the bank’s decision-making, including “unwritten rules” of conduct that may be influencing employee behavior, explains Nuijts.
The final step in the process is presenting the findings to a bank’s leadership and making recommendations for improvement.
More trust through data analytics
Another company on the cutting edge of compliance and risk-management is Starling, the consulting company founded by panel member Stephen Scott. Starling’s proprietary Predictive Behavioral Analytics Platform uses sophisticated machine-learning technology to analyze a corporation’s culture through its data, creating what he calls a “trust map” of an organization. The most remarkable thing about this process, says Scott, is how often the data yields conclusions that are surprisingly counter-intuitive.
“We have this sense of human beings as rational actors, and that people do what they are incented to do,” Scott notes. “Get the incentive scheme right, and you solve a problem, right? None of the data supports that.”
Instead, what Starling often finds is that “org charts are inevitably wrong,” and that the most trusted people in an organization are rarely among its leadership. “They’re usually lower down in the organization,” Scott says, adding that knowing who these people are and how the “trust networks” in an organization work is crucial to understanding how to foster and manage trust throughout the organization.
Women in banking — where are they?
The panel ended with a short discussion of the conspicuous lack of women in positions of leadership in the banking industry. Participants were unanimous in dismissing the idea that women would naturally be more ethical leaders, but also agreed that more gender balance in the profession would lead to more diversity of opinion and healthier decision-making.
“Women are not magic,” said the OECD’s Mesnard. “It depends on which kind of women you bring in.” What is important from a leadership perspective is having a diversity of backgrounds and opinions in an environment that encourages “dissenting voices” to speak up and be heard, she adds.
Indeed, as noted by panel moderator Lindsey Rogerson, a senior editor with Thomson Reuters Regulatory Intelligence, the financial regulators themselves still have a long way to go in the area of gender parity: Of the 173 central banks around the globe, only 14 of them are currently led by women.