The clash of varying views of ‘culture’ among companies and financial regulators

June 14, 2016

By Todd Ehret, Regulatory Intelligence

(Thomson Reuters Regulatory Intelligence) – Culture, values, ethics, principles, and beliefs are all somewhat synonymous. Or are they? It depends on the setting and more importantly, the viewpoint from which one attempts to assess the philosophical concepts of right and wrong.

Tagged by Merriam-Webster as the word of the year in 2014, “culture” has become an integral part of the workplace. It’s also a top concern with financial regulators.

Corporations of all sizes and industries strive to create a workplace culture that helps them attract the right talent. Financial regulators, on the other hand, emphasize cultures of compliance, good behavior, ethical treatment of customers, the proper management and disclosure of conflicts of interest and overall adherence to rules.

Strategy consultants, human resources departments, and corporate executives are taking culture seriously. Meanwhile, recent college grads and young workers are seeking a career and work-life balance in an organization that fits with their own values. Each views culture differently. The meaning of culture may be up for philosophical debate, but from a financial services point of view, the regulators have given some guidance.

Below we review how culture can be seen differently and offer an overview on how firms are shaping or defining culture and what the financial regulators are expecting from firms.

Culture’s many definitions

Culture is best known as commonly held standards of what is acceptable or unacceptable, important or unimportant, right or wrong, workable or unworkable in a community, society, or in corporations. It is the set of behaviors, values, artifacts, reward systems, and rituals that make up your organization.

One can quickly sense a culture when visiting most companies — it is evident in people’s behavior, enthusiasm, and the appearance of the workplace.

Are people busy and working with each other, customers, or are they quietly working alone? Do employees get in early and leave late? Or does the parking lot empty at 4:30? Is the office beautiful and inspiring, playful like a rec center, solemn like a library, or is it messy and busy? Is there a sense of order or a sense of family? All these clues help diagnose culture and is what employees are gauging when considering a firm’s culture.

Different cultures in tech vs. finance

Technology giants Amazon, Yahoo!, Google, and Netflix are all well known for their unique work cultures. Amazon has been criticized for having a hypercompetitive atmosphere. At Yahoo!, CEO Marissa Mayer, who previously worked at Google has attempted to remake the culture of the firm. She has been criticized for lavish spending on free food for employees, but defended the practice as in line with industry norms for employee perks. The Netfflix culture manifesto “freedom with responsibility” is one of the most widely read documents on the internet. Netflix is also well known for its unlimited vacation policy and five-word expense policy, “Act in Netflix’s best interests.” Google has been rated repeatedly as one of the best places to work and is the envy of almost everyone in technology.

Companies everywhere are seeking to copy the cultures of these firms as they compete to hire the brightest young talent. Most of these companies are excellent at developing strategy. However, culture is the engine behind strategy. It’s not just how you act but how you treat each other, especially your customers.

In the minds of most individuals and companies, the thought of what we do and how we do it is what matters. Millenials especially like to be a part of an organization that matters or has a cause.

Since the financial crisis, bankers, brokers, and financial advisors were tarred and feathered by politicians, the media, and the public in general. Wall Street’s popularity plummeted and the industry is now seen by many as untrustworthy and lacking morals and ethics. In an attempt to reverse such a negative public opinion, financial firms have put forth their own image-repair initiatives, and the regulators are doing so as well.

What the financial regulators are saying about culture

The regulatory focus on culture began almost two years ago with a speech by President and CEO of the Federal Reserve Bank of New York, William C. Dudley. According to Dudley, “culture may be hard to see, but you can feel it.” He also said, “Culture exists within every firm whether it is recognized or ignored, whether it is nurtured or neglected, and whether it is embraced or disavowed.”

Other top officials at the New York Fed followed up, urging banks to repair their tarnished images by addressing culture. Other regulators joined in, with the Office of the Comptroller of the Currency focusing on compensation practices as well as culture issues.

Perhaps the loudest call for change came from a G30 study that blamed “subcultures within large banks” for widespread reputational damage, loss of public trust and concurrent fines, lawsuits and regulatory action. “The banking community as a whole needs to repair the damage done by failures in culture, values, and behaviors, and should tackle the challenge with renewed vigor and purpose to achieve tangible improvements in outcomes and reputation,” the report said.

The Financial Industry Regulatory Authority (FINRA) began focusing a few years ago on conflicts of interest, which also led to a focus on compensation practices. FINRA included culture in its annual exam priorities in January. The broker-dealer regulator quickly followed up a month later by announcing of a sweep exam focusing on culture. FINRA has been clear that it is difficult to take a “rules-based approach” that would enforce a common culture across firms. Rather, the focus of oversight is more like taking the temperature of a firm’s cultural efforts.

Last week, at FINRA’s annual conference in Washington D.C., Chairman Richard Ketchum, said the regulator was only in the early stages of its culture review. “While I can tell you that we have observed that many firms are paying more attention to their culture and how they manage conflicts of interest, there is still a lot of work to be done,” he said.

The goal should be to establish a culture that “puts investors first,” Ketchum said. Important steps to achieve such an atmosphere include avoiding “groupthink” and a “winner-take-all” attitude, as well as setting a “tone at the top” that encourages compliance and working on behalf of investors.

FINRA has stated that the culture initiative is not enforcement-driven and firms should not attempt to create a culture of what they think the regulator wants to see. There presently are no uniform guidelines.

Examples of Wall Street cultures

The retail-focused firm, Edward Jones has been on Fortune Magazine’s “Top 100 Places to Work” list for 17 consecutive years. The firm is known for its focus on individual investors and small town, single broker offices. The firm emphasizes a work-life balance and the firm’s emphasis on culture can be summed up as trying to foster a big happy family. Advisers are encouraged to always put the client first and run their branch offices ethically and profitably.

The firm emphasizes that the local branch offices need to be great places to work but that brokers also need to give back to their communities by making charitable contributions and working to make the communities a good place to live.

Bridgewater Associates is considered to be the world’s largest hedge fund manager with more than $150 billion under management. The firm and its founder and CEO, Ray Dalio, are known for delivering impressive returns for investors. It is also perhaps just as well known for its unique work culture, based on a management theory that calls for absolute honesty, accountability and “radical transparency.” The firm expects employees to openly criticize each other; gossiping or speaking behind one’s back is grounds for termination.

Dalio has responded to critics by saying that Bridgewater’s approach isn’t manipulative or cultish, but based on a powerful unifying culture. Bridgewater has delivered its impressive returns while avoiding regulatory trouble; a review of the firm’s SEC form ADV disclosure pages indicates a clean regulatory record, which is uncommon for a firm of this size.

Bridgewater’s exhaustive manual, authored by Dalio was leaked to the press by a former employee a few years ago and is now publicly available on Bridgewater’s website. It is required reading for all employees and applicants at the firm.

Last month at a panel on financial industry cultural reform sponsored by Thomson Reuters, a senior executive from JPMorgan described how the bank launched a firm-wide cultural reform process in 2015, involving thousands of employees.

Sally Dewar, managing director and risk executive in the bank’s regulatory affairs office, said the first step on the road to cultural reform began with industry-wide recognition that it was impossible to reconcile internal complacency over existing cultures with the headline-grabbing scandals such as those in the Libor and foreign exchange markets. Something further needed to be done.

To identify and articulate a culture that fit with the company’s thousands of employees across multiple jurisdictions and regions, Dewar said a massive project was launched in 2015, which included direct conversations with thousands of employees, which led to the identification of “cultural leads, cultural ambassadors, those individuals who were most displaying those cultural values of the firm as it stood today.”

In total, 1,600 such “cultural ambassadors” were identified, who then interviewed 16,000 staff members around the world on the culture issue. Some of the more basic questions included: how does culture impact the way your family and your friends see JPMorgan as an institution? What makes you proud to come to work as well as those things that you think impede the way you do business?

The challenge of reconciling differences and suggestions

As industries and companies compete to hire top graduates an attractive workplace culture is necessary. Also, as industrial sectors with varied cultures coordinate their activities or merge — such as the growing convergence of financial services and high technology — the need to need to find common ground on culture becomes vital.

In most cases, simplification seems to work best. Simplification can work on a large scale across the firm, as GE has done in recent years. It can also work on a small-scale, such as Netflix’s “best interests” expense policy.

But culture is more than just the casual dress codes, flexible work hours and ping pong tables for employees that some companies implement to lure new talent.

Compliance departments, in conjunction with HR and senior management must incorporate the firm’s culture message throughout and document the effort to show regulators that the “tone from the top” is very much the same as the “message in the middle.”

There is also a need to include culture or ethics into performance evaluations. Regulators will insist on seeing evidence of this, as well as evidence that a firm is actually practicing any culture initiatives it documents.

The difficult challenge ahead for financial firms is to repair the industry’s tarnished reputation and document for regulators that cultures are now free from conflict and the customer comes first.

(This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on June. 3. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters)

(Todd Ehret is a Senior Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence. He has more than 20 years’ experience in the financial industry where he held key positions in trading, operations, accounting, audit, and compliance for broker-dealers, asset managers, and hedge funds.)

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