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Banking on Culture: The Key to a Safe and Sound Global Financial System

//Banking on Culture: The Key to a Safe and Sound Global Financial System

Banking on Culture: The Key to a Safe and Sound Global Financial System


By: Roger W. Ferguson, Jr., Google, Former Federal Reserve Official

Roger W. Ferguson

Roger W. Ferguson.

Roger W. Ferguson, Jr. was recently named to Google’s parent company, Alphabet’s Board of Directors.  Ferguson will serve on Alphabet’s Audit Committee. His appointment was effective June 24, 2016. More about Ferguson below.

It’s been nearly eight years since the financial crisis hit, but banks still have some unfinished business to take care of: reforming their cultures. That’s the best way forward to restoring trust in the industry—and ensuring that banks can effectively fulfill their crucial role in the global economic system.

It’s clear that culture was one of the major drivers of the crisis. At many firms, there was too much emphasis placed on generating short-term profits—and too little on putting clients’ interests first or ensuring strong risk management processes.

To be sure, many banks have made important progress since 2008. Most have made bold assertions about their cultural aspirations and values. Many have refreshed or strengthened their codes of conduct. But there’s still more to do. For proof, look no further than the repeated scandals we’ve seen in recent years. They have inflicted damage on the industry’s reputation and they have had a profound impact on public confidence and trust. They’ve been costly in terms of fines, litigation and regulatory action.

Today, banks and financial services firms are near the bottom in global rankings of trust in industries. This cannot stand. Banks play a critical economic role across the globe, helping to drive growth, employment and prosperity. They must win back trust—because public trust in banks is the bedrock of a safe, effective and sound global financial system.

Given the high stakes for individuals, communities and nations—not to mention the financial viability of the banks themselves—restoring trust should be one of the banks’ top priorities.

How do they get to where they need to be? The first step is to commit to a far-reaching reform of their cultures.

They need cultures that put their customers’ interests first.

Culture is immensely important to any company. It creates a consistent framework for behaviors and business practices across the organization. Culture is what shapes the firm’s values and what leads its employees to behave ethically, even when nobody is watching.

Rules and regulations are important, to be sure, but they don’t hold a candle to culture. Indeed, the most ethical and responsible firms are that way not because they follow a fixed set of guidelines and rules, but because of how their people actually behave.

Banks need cultures that foster strong values and ethical behavior—and they need to act with urgency to achieve them. They have a clear roadmap for doing so. Last summer, the Group of 30, a forum of leaders in international finance of which I am a member, released a report, “Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform,” that outlines a vision for change. It can be downloaded from the G30 website at www.group30.org.

We believe most banks should aim for a fundamental shift in how they view culture.

They need to begin to see it as core to their business model—and key to their economic sustainability. Our report provides a series of recommendations for making culture a priority. They stem from a study we conducted of 70 bank leaders, board members and regulators in 16 countries.

Our advice covers areas like compensation, hiring, firing, whistleblower protections and board oversight. For example, we urge banks to make issues of conduct and culture important parts of the criteria for determining internal promotions and external hires. We advise them to promote diversity (of gender, race and experience) throughout their organizations as a way to improve values and promote ethical conduct. We recommend processes that help identify misconduct early and that provide for appropriate sanctions, including, if necessary, termination.

In reforming culture, strong leadership is an essential part of the equation.

The tone is truly set at the top. CEOs must make culture a priority, and they must be persistent as well as highly visible in their commitment to actions that ensure that their firm’s stated values and desired behaviors are understood, reinforced and reflected in promotion and compensation decisions.

CEOs should institute a thorough process for reviewing the bank’s brand and reputational standing with its stakeholders. It’s also vital that banks have a comprehensive set of indicators to monitor and assess individual and team adherence to firm values and desired conduct.

Boards of directors also have a key role to play. They must be closely engaged in ensuring that issues of culture and conduct are top priority, in monitoring cultural outcomes and in holding CEOs and senior leaders accountable for creating a strong, ethical culture.

Regulators, supervisors and enforcement authorities are also part of the mix. While they cannot determine culture or impose good behavior, they have an important monitoring role. They should be deeply engaged with banks, sharing insights about best practices with management and the board. They can help to identify serious problems that are not being adequately addressed.

Many banks are already engaged in reforming their cultures. Those that have been most successful to date share a common characteristic: they recognize that embedding a strong culture is core to their business model and its economic sustainability.

The firms that have been less successful are those that approach culture in a reactive and defensive manner.

They tend to view values and culture as simply the means to minimize future fines and enforcement actions.

The truth is that values and culture are structurally important to a firm’s long-term success and viability. In that regard, cultural reform is not just about good ethics. It also makes good business sense and is essential for ensuring a sound and healthy balance sheet. So banks have a vested interest in getting culture right.

At the end of the day, our vision is for a banking system that is focused on helping customers achieve their financial goals and banks that are committed to serving their communities and the economies in which they operate. We can get there—but only if culture is given its proper due.

Author Biography

Roger W. Ferguson, Jr., has served as President and CEO of TIAA and former Vice Chairman of the Board of Governors of the US Federal Reserve System. He is a fellow of the American Academy of Arts & Sciences, Chairman of The Conference Board and serves on the Business-Higher Education Forum’s Executive Committee. He holds a BA, JD, and a PhD in economics, all from Harvard University. Read more about his recent move to Alphabet Inc.