Some pioneering economists and psychologists have taken a closer look at how people behave — and the choices they make, such as in the workplace, to create a body of work called behavioral economics.
I am fascinated by this topic, and a colleague of mine at Thomson Reuters, Henry Engler, has been writing about it (see here and here), examining how self-interested impulses can be better monitored by others and hopefully better controlled by the persons working for and managing the business.
What we know is that this control mechanism doesn’t work as well on the trading floor — or that type of environment — when the cognitive load is high (screens flashing, math calculations and orders needing to be made in a matter of seconds — because the automatic part of the brain is on overdrive and the reflective side taking a backseat.
Companies may be able to develop programs that “nudge” employees in different ways, though, taking into consideration the cognitive load levels they are experiencing and the diversity of business environments that exist in one institution.
The Dutch Experiment
It goes without saying that the U.S. financial services regulatory environment is not like the Dutch one, in which the Dutch National Bank (DNB) can say that supervisors must not just try to identify and mitigate risk overall — but actually mitigate them in behavior and culture specifically.
American regulators have not articulated anything quite so bold.
The DNB holds surveys among staff at all levels, plus periodic interviews with executives and board members, plus sends a non-board member who reports back to the bank to meetings regularly, all toward assessing who makes the big decisions at the institution and the precise motivations behind these decisions.
In past examinations of the firm’s culture and ethics, the DNB found that decision-making was not always balanced, with some leaders ignoring the input of others, and with a number of them surrounding themselves with managers and staff members that conformed to their style and thinking.
This can foster “groupthink” and lead to an environment in which everything from constructive feedback to whistleblower-like reporting can be compromised, if not eradicated.
The idea here is to uncover the supervisory processes that can be detrimental to the business’s future outcomes. It does not mean taking action against a firm’s executives and board for poor governance after problems surface, including language about ethics and culture in one or more cease and desist orders (think of Wells Fargo here).
The DNB perspective is to have a supervisory strategy that is preventative — that seeks to identify and mitigate behavior that can lead to problems in the future.
RBS and the Behavioral Risk Team
Another example: The Royal Bank of Scotland (RBS) — one of the largest banks in the UK and ranked 29th globally in terms of assets under management. In 2015, RBS formed a Behavioral Risk (BR) team that operates under the bank’s internal audit function. (RBS actually tapped a former supervisor of behavior and culture at DNB to head up its BR team, Wieke Scholten.)
On a quarterly basis, the team looks for “hot spots” within certain business units — the sub-cultures that foster certain types of behavior in terms of decision-making, communication, acknowledgement and responsiveness — using confidential conversations, surveys, and independent observation.
They look at myriad data, such as absenteeism, internal investigations, and employee turnover rates in sections of the business, plus exactly what is happening on the working floor level. Their findings absolutely require the management of the group examined to put together a plan for mitigating the precise behavior risk identified by the BR team.
The follow-up element is critical, of course, and this is the note I’ll end on here.
Scholten and RBS senior manager Shweta Pajpani told Engler that they give management time to digest the BR team’s findings.
“But we make it quite clear we’re going to come back and follow up,” Pajpani said. “We look to see whether there has been enough of a shift to identify whether the group is moving in the right direction.”
Actionable findings based on behavioral patterns that are addressed before incidents, regulatory enforcement actions, and negative press coverage happens. Food for thought.
Julie DiMauro, pictured above, is a contributing editor of the FCPA Blog. She writes best practice articles and speaks about compliance and risk issues in the financial services sector as part of the Regulatory Intelligence group at Thomson Reuters in New York. Follow her on Twitter @Julie_DiMauro and email her here.