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Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Shruti J. Shah
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Bill Steinman
Contributing Editor

Why ‘conduct risk’ is rising in UK banking

The latest Banking Standards Board (BSB) report, an executive summary of the BSB’s annual measurement of the culture in UK financial institutions, has been recently released. The report, the third since the Banking Standards Board started its measurement exercise in 2015, highlights some newsworthy findings about conduct risk in the British banking sector.

Based on the ratings of 72,000 employees across 26 UK financial firms, the 2018 assessment highlights small but significant declines in critical areas of conduct. These declines, in the aggregate, show a pattern of greater risk.

Relative to the previous round, 2018 participants were more likely to report that unethical behavior may be rewarded in their organization; that people must flex their ethical standards to advance professionally; that employees may face negative consequences when they raise concerns about current practices; that colleagues may turn a blind eye toward inappropriate conduct; that business practices may be at odds with the organization’s values; and that the business focus remains heavily oriented toward the short-term.

Participants were also less likely to report that people in their organization act honestly and that employees go above and beyond to serve the customer. Across different types of financial institutions, the trend of declines in retail banking is especially noteworthy.

In these firms, respondents were less likely to agree that people in their organization act honestly, put the customer at the center of their decisions, and are encouraged to follow the spirit of rules. They were also less likely to report that their organization is open to external reviews, that it takes action on lessons learned, and that it promotes business practices aligned with the organization’s values. Finally, employees in retail banking were also more likely to indicate that people in their organization must flex their ethical standards to advance professionally and that unethical behavior may end up being rewarded.

While the negative changes observed in 2018 were not large, they paint the picture of a culture inclined to delegate dilemmas to employees.

The failure to address gaps between values and business practices, compounded by a lack of balance between pressing short-term objectives and long-term requirements for sustainable growth, can make the decision to do the right thing more difficult for employees. This is especially likely in organizations that, on the one hand, use incentives heavily skewed toward results to reinforce wanted behaviors and, on the other, remain unwilling to relent pressure to perform.

Faced with an increasingly narrower focus on the here and now and underlying choices that pit their personal interest against doing what is right, employees find it harder to put the customer at the center of their decisions and/or focus on the spirit of rules. In fact, pressure makes people progressively blinder to unethical conduct.

It might be argued that the increase in risk these findings suggest is not substantive given the 2018 declines were small. Yet, the yardstick of how big or small a change appears to be is not the soundest rationale to appreciate the implications of significant changes in culture scores, especially when they show as cohesive a pattern as they do in this case.

Putting Results in Context

Though every component in the BSB culture framework may appear to have similar importance, it is worth keeping in mind that the various measures tracked by the BSB survey have a different impact on conduct risk. Take, for example, the fact that more than 80 percent of respondents reported that their organization has meaningful corporate values/purpose and compare it to the finding that roughly half of the participants reported that they experience excessive pressure in their day-to-day work.

From the standpoint of ethical culture, values/purpose are an asset, while pressure is a liability. Yet, the liability, in this case, has a far greater influence on ethical engagement than the asset. We know this, for example, because only 38 percent of those invited to take the BSB survey participated in it. Thus, though people may find the organization’s values meaningful, they may not feel compelled by them, especially in the thick of things.

In contrast, it is harder for employees to ignore and/or control the constraining effect of pressure to perform — from lacking time to participate in an assessment that solicits their feedback to discounting the importance of an exercise intended to provide the organization with a stronger ethical foundation.

Culture Measurement Boost Tone at the Top

Importantly, the 2018 BSB assessment highlighted a significant gain in perceptions of senior leadership’s willingness to take responsibility, a finding that underscores the beneficial effect of culture measurement on tone at the top and leadership effectiveness.

Yet, this predictable gain is often shortchanged when it comes to deciding whether the organization should commit to and invest in culture measurement. The bias, in this case, is one of risk aversion — that is, a proclivity to evaluate first the costs of doing culture measurement, including the perceived cost of having to potentially confront a less than rosy picture.

Such bias can lead decision-makers to discount the advantages of measuring and monitoring the culture of their organization. Thus, leaders may end up ignoring the obvious truth that it is impossible to effectively manage risks that are not fully understood. And they may fail to appreciate the less tangible truth that the courage and inherent vulnerability of enduring discomfort in the short term to build real gains in the long term is a sign of ethical leadership that will hardly go unnoticed.

When it comes to understanding the link between culture and risk, the observed improvement in leadership perceptions should be evaluated in the context of the other findings.

In particular, the fact that employees’ views of leadership have improved while other areas of conduct have eroded offers a cautionary tale against the idea of banking on tone at the top to build the organization’s ethical orientation. Not only are senior leaders physically and psychologically distant from certain parts of the enterprise and many aspects of the organization’s life but, in some cases, subcultures may be more influential than the overarching tone. And though in most instances tone trickles down, it may take longer to do so if concurrent practices focus on very different priorities.

Ultimately, culture measurement, which is not about scoring but gaining awareness of the complexities that face the business, needs to deliver insights that can help leaders reframe key practices and day-to-day decision-making.

For this reason, the most important learnings may not be in the overall summary but in the story hidden by small changes and unassuming contradictions in the observed data points.

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