December 16, 2019

Earlier this year, chief compliance officers from the world’s largest carmaker, Volkswagen AG, Swiss pharmaceutical giant Novartis, and U.S.-based auto parts manufacturer, Tenneco, took part in the fourth such annual series on conduct and culture, moderated by Stein Berre, senior vice president for supervision at the Federal Reserve Bank of New York.

This time, the focus was to examine what the financial sector might learn from companies outside the industry, all of whom have endured their own share of past problems, and who are working to find innovative ways of limiting bad behaviour while also giving employees a sense of purpose in their companies.

Among the insights and themes that resonated for the audience, comprised largely of financial compliance and risk professionals, was the necessity for senior management to admit when failure occurs – a trait that even after numerous scandals is rarely seen today among leaders of global financial firms.

“You can debate over whether it’s perceived correctly or not, but you have to acknowledge that there is a trust issue” the chief compliance officer at Novartis said. “If you are only in a defensive position, that is not a good start.”

The willingness to acknowledge wrongdoing or misconduct when things go wrong is a problem that has plagued many large financial firms since the crisis. The tendency among executives is still to characterize such behaviour as one-off occurrences. The typical public message is that we want to “get the matter behind us” as quickly as possible.

Rules vs norms in driving ethical culture

The chief compliance officer at Volkswagen, stressed that rules and controls have a role to play, but the overriding objective should be to give employees guidance and certainty.

“It’s important that the rules are not very extensive and complex but are made in a way that one knows what is being asked of you. And then rules also need to give people guidance and certainty. Rules should not be created to put a burden on people, but rather they should establish the framework and give guidance for people in making their lives and decisions easier.”

Still, employee adherence to rules remains important, as well as the consequences for those who find ways around them. What steps management takes in the aftermath of an employee problem is equally critical.

“What’s also important in cultural change is the management of consequences. If you are issuing rules and there are no consequences if someone is not abiding by the rules, then that is not effective.”

Being consistent in the application of rules and having transparency over why certain individuals might be let go because of bad behaviour, is another important aspect of managing cultural change.

Empowerment vs policing

The part that compliance plays in cultural change, however, should ideally go beyond the typical “policing” role often seen in banking. Compliance should be more employee-centric, working alongside business heads to help them achieve their objectives and empower staff to carry out their responsibilities.

One way compliance can become a more positive force for change is in working to improve the “speak up” culture for employees, an area where, again, banks still struggle. According to recent findings by the UK Banking Standards Board, which included 72,000 employees across 26 banks, almost 60 percent of those surveyed who reported having spoken up last year said they were either unsure (19 percent) or felt their employer had failed to listen to them (40 percent).

Notably absent from the discussion by the three compliance chiefs was any mention of employee surveillance or monitoring, terms often heard by compliance officers in financial firms.

One participant pointed to the important role that middle management plays as ‘risk sentinel’ in influencing culture, an observation that many have also made regarding large financial companies.

“You need to get middle management involved. Middle management is really important for the culture of the company because they tell employees how the game is played; they set the tone.”

Redacted from an article by Henry Engler, a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence.