Knowledge Center: Article
Changing bank culture: Lessons from the financial crisis4/27/2016 Sarah Dahlgren
Losing their way
The financial crisis exposed the weaknesses in many financial institutions. It showed that some banks had lost their way. Customers were no longer the focus. Making money had become the objective, rather than taking care of your customers or clients, and doing what was right for them.
A number of financial institutions started designing things for a counterparty rather than the customer. Because the counterparty was often faceless, these banks lost the personal connections with their core stakeholder—the customer.
These banks gradually shifted their thinking from the traditional perspective of customers and clients to a trading perspective. Financial services in general might have lost sight of all of the stakeholders, even shareholders, in the decisions that they made.
There is some discussion about whether changes in the structure of some firms contributed to the problems. Some shifted from partnership-like structures to corporate structures as they went public, and some moved to emphasize their trading businesses; both of these shifts may have contributed to how the internal workings of the firm changed, and how the mind-set and focus changed.
One of the telling quotes from the crisis was about the music playing, and went something like this: “We’ve got to keep dancing until the music stops.”
There seemed to be awareness that risk was building up in the system, and yet nobody was willing to take that first step off. And so it was: “I’ve got to keep playing because everybody else is playing—otherwise, I’m going to lose.” It was go, go, go, and then the hammer came down.
The long road back
Since the crisis, many institutions have recognized that there is an issue with their internal cultures, and management behaviors. Understanding that you have an issue is the first step toward change.
Many firms have started culture programs. They may call them something else, but it really is about the internal workings of the firm—all the way from how they acquire talent, what processes they use, how they develop their people, what incentives and disincentives they use, and how they make all of that transparent. This goes to the top of the house. How do we make sure that we are walking the talk? We have seen organizations start to embrace that. Most organizations are probably within the first year or so of really implementing their culture-change programs, and we will probably need another year or so to see whether some of those changes have started to take hold.
I saw some of the biggest failures at the front line, the business line, which was calling the shots. The second and third lines of risk and compliance, and internal audit, were overridden by the business, which ran everything. The second and third lines of defense were coming in and saying, “But you have a risk here, you are building a risk here,” but they didn’t have strong enough voices.
One of the biggest changes post-crisis has been the growing importance and the respect that the second and third lines now hold in organizations. They have a seat at the table. They have a voice. And they have the ability to say what they think and to influence outcomes.
In driving culture change, financial institutions have started by defining what they want—in many cases by going back and restating their values, or recasting them, coming up with new ones. The starting point is, “What do we want?” and the next step is, “What do we have?”
In practical terms, culture and behavioral change is being introduced through management practices such as scorecards, which are used for compensation purposes (for annual pay raises and bonus decisions) and also as organizations are thinking more about things like promotions and career development.
The scorecards include questions such as whether employees are meeting objectives in terms of compliance, or have excessive audit findings. Climate surveys focus on whether issues have escalated, and what people do when they see unethical behavior.
It’s not just whether you are generating revenue, or generating business for the organization, it’s also whether you are doing it the right way. We have seen both the positives, where somebody clears all of those hurdles and gets rewarded, but also the negatives, where you are held back if you have excessive compliance or audit findings. We are seeing clawbacks of bonuses that should have been “X” but now they are “X-minus.”
But the big questions bank leaders are asking are, “Are we going forward?” and, “Are we going to see changes in behavior as a result?”
The next crisis: Not if . . . when
Organizations are trying to develop different metrics. While some existing metrics might be: “We don’t [appear in] any more headlines,” others might look at retention, or employee climate surveys, or an examination of what shareholders, stakeholders, and regulators are saying. There are questions about the type of metrics we should be looking at.
For example, the Dutch Central Bank has developed a great program using an array of experts: psychologists, psychiatrists, social workers, social psychologists, and organizational behaviorists. They do root-cause analysis, then look at organizational dynamics. It has been very successful. Supervisors around the world are learning from what the Dutch are doing, and trying to implement something similar.
The talent piece is difficult because it’s not the classic hiring process—a supervisor doesn’t usually hire an organizational behaviorist, or a psychiatrist or psychologist, to be part of their team to analyze the organization. But they are learning that they need to be willing to try something new.
Most banks recognize that [another crisis] will happen. It always does, and when it does, they want enough people around who know how to make the right decisions. They know that there won’t be a rulebook for whatever the next issue is. It’s going to be different next time, and you want people who are grounded and who are able to make those really hard decisions.
About the author
Sarah Dahlgren is the former head of the Financial Institution Supervision Group at the Federal Reserve Bank of New York.
This commentary is adapted from an interview with Heidrick & Struggles.