New Coordinates Articles Details


Beyond the Culture of Compliance: Transparency and Accountability - Mary Frances Monroe

Mary Frances Monroe
New Coordinates
Spring 2018

Even as bank boards of directors and senior executives have awakened to the need to incorporate regulatory compliance into their corporate cultures, there is growing recognition that more is required to mitigate compliance risk. Namely, transparency and accountability should be promoted as core cultural attributes, if compliance is to take hold at every level of the organization.

Word Cloud with conduct, ideology, business, core values, moral, education, competence...etc

Culture of Compliance
Drawing upon lessons from the financial crisis, regulators have for some time emphasized the need for a culture of compliance, to prevent the inappropriate behaviors that led to multiple enforcement actions, record fines, and private litigation against banks and other financial services providers. More recently, the regulatory emphasis has been on the need to move beyond a singular focus on compliance to the integration of an effective compliance program with a company’s ethical culture. Boards of directors and senior management have heeded the call for an active and robust discussion of ethics and compliance at the highest levels.

Similarly, the admonition to set the “tone from the top” has expanded to include the consideration of the important role of middle management. Middle management can hinder the positive and constructive tone from the top and expose the organization to significant compliance risks if it establishes business line-level goals and incentives for staff that diverge from the stated values of the organization as set by its board and senior management.

Outside the Board Room and Executive Suite
Discussions of ethical behavior and compliance should not occur only at meetings of the board and senior management, but should also involve employees at every level of the organization. That is, ethical and compliance considerations should be part of the day-to-day dialogue of the financial institution, especially when changes to products, activities, and business lines are introduced.

Achieving a robust focus on ethical and compliance considerations in day-to-day operations may require different techniques or greater effort among various employee populations. This reflects the fact that culture is largely a local construct, which can vary widely across business lines, geographies, and departments or divisions. For example, branches that are remote from the head office, especially if not supported by strong and competent local management and robust compliance programs (including systems to detect and prevent inappropriate behaviors) may be hotbeds of non-compliant activities. Discussions about ethics and compliance need to occur both at the head office and local levels, consider the role of individuals across the organization, and address the pernicious effects of negative influencers and sub-cultures that can undermine organizational values. Negative influencers and sub-cultures are often hidden and can have a significant impact on the organization and its culture, as well as increase its exposure to regulatory and reputational risks. For example, recent regulatory enforcement actions have demonstrated the harm caused by groups of traders inappropriately sharing confidential and proprietary client information and engaging in trading and sales practices that disadvantaged their clients.

Beyond the Culture of Compliance
Moving beyond the culture of compliance should include a focus on the goals of transparency and accountability. Meeting the goals of transparency and accountability requires ongoing dialogue, as opposed to a point-in-time training exercise that is quickly forgotten when the daily pressure of business resumes center stage. Accomplishing these goals requires a dynamic view of the organization, which can be facilitated by technology, including social network analysis that identifies positive and negative influencers in an organization and pinpoints sub-cultures that are at odds with organizational values.

Culture of Transparency
A culture of transparency takes the mission statement, vision, and values of the organization from a plaque on the wall of the headquarters and places it squarely in the middle of a discussion among staff at all levels as to whether these guiding principles are reflected in the day-to-day operations of the organization. While the board and senior management are responsible for establishing and implementing the organization’s mission, vision, and values, staff at all levels of the organization are responsible for reflecting these principles consistently in business activities and interactions with customers, counterparties, regulators, and other stakeholders. To encourage this behavior, the goals that staff are expected to meet and the incentives they are provided must align with the desired ethical culture of the organization.

Adopting a culture of transparency requires communicating management’s strategy for implementing and operationalizing the mission, vision, and values across the organization and explaining how the goals and incentives designed by management align with these principles. Employees across the organization should be empowered to effectively and safely challenge situations that reflect that the strategies, goals, and incentives they are provided by their managers do not align with the organization’s mission, vision, and values.

This cultural shift allows management and boards to unearth unspoken assumptions, attitudes, interpersonal dynamics, and harmful groupthink that can facilitate negative influencers and sub-cultures within the organization and rationalize behaviors that are at odds with the organization’s guiding principles. At the same time, staff members are empowered to ask questions and seek clarification when they encounter grey areas of interpretation, and to surface practices that are inappropriate or suspect without fear of retribution or shunning.

Culture of Accountability
A culture of accountability clearly communicates the expectation that leaders at all levels of the organization—not just directors and senior management, but line managers as well—are responsible for managing the behavior of staff reporting to them. Managers have an affirmative obligation to understand what is happening on their watch in the areas for which they have responsibility. Managers have a duty to ensure that the goals, objectives, and incentives they set for their staff (e.g. sales, account opening, or new loan origination targets) are consistent with the organization’s values, most notably the fair treatment of customers.

The combination of a culture of transparency and accountability can facilitate a clearer delineation of the duties and responsibilities of managers and can help to prevent a situation where no one (or everyone) is tasked with a key responsibility. When responsibilities are not met, or misconduct is identified, a culture of accountability requires decisive and prompt action that is appropriately transparent and that communicates across the organization the consequences of a breach. Careful consideration of the depth of responsibility for a breach or misconduct can help avoid a situation in which an immediate low-level supervisor is sanctioned for the breach, but higher-level supervisors who may have known—or should have known—of the problematic behavior are absolved of responsibility and culpability. Accountability also means that when misconduct occurs or goals, objectives, and incentives are misaligned, managers up the chain of command from line managers to senior managers feel the consequences through meaningful downward adjustments to their performance ratings and, importantly, their compensation. True accountability is achieved when managers suffer direct and pecuniary consequences for activity that is at odds with the organization’s values.

Role of Technology
Returning to an earlier theme, what is the role of technology in developing a dynamic, ongoing assessment of organizational culture that incorporates transparency and accountability? Technology, including machine learning techniques, can facilitate network analyses that identify positive and negative influencers and sub-cultures within an organization.

Identifying negative influencers and sub-cultures can help surface goals, incentives, and managers that are incompatible with the organization’s mission, vision, and values. Positive influencers and sub-cultures can be recognized and acknowledged within the organization, and rewarded positively, to reinforce desired behaviors.

Of course, the design of these technological tools needs to carefully align with the culture of transparency, while also incorporating legal and ethical privacy considerations. Properly designed and socialized, technological tools have a role to play in enhancing the transparency and accountability of organizations and helping them to live the mission, vision, and values they espouse. Well-designed tools can help boards and senior management understand the culture and conduct that exists or is developing within the organization, and shape that culture and conduct to meet desired values and guiding principles. Through the use of technology, problematic sub-cultures can be identified and addressed proactively before regulatory and reputational risks crystallize. Ongoing monitoring can provide an early warning system of regulatory and reputational risks. Each of these benefits translates to a stronger, more resilient organization with a lower risk of litigation, regulatory fines, and reputational damage to its franchise.

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Treliant, LLC, Compliance, Risk Management, and Strategic Advisors to the Financial Services Industry and Consumer-Oriented Businesses, brings to you New Coordinates, a quarterly newsletter offering insights and information regarding pertinent issues affecting the financial services industry. This article appeared in its entirety in the Spring 2018 issue. To subscribe to our quarterly newsletter, please Contact Us.