You Can't Regulate Culture

Reading this article from the Wall Street Journal from January 2015 entitled As Regulators Focus on Culture, Wall Street Struggles to Define It I was struck by how out of touch management and regulators are in defining and creating a positive and effective work culture within the banking industry.

The problem with this focus and struggle with culture is that it is driven by a desire to avoid future regulatory problems rather than a real interest in creating an environment that is engaging for employees where they might actually enjoy spending a significant part of their daily lives.

Some of the typical things that have characterized bank cultures include being one of the last industries to have a strict dress code, oftentimes requiring a logo lapel pin to be worn at all times. Banks have typically had very hierarchical organizational structures where the running joke is everyone has a Vice President title. Banks have typically lacked flexibility in working time and location and have been rigid with other aspects of work environment.

Other things about typical bank culture is bank hopping. It is not uncommon for many in management at banks to have worked at several different banks within a 5 or 10 year span as that was the path to greater financial rewards. Taking a book of business to another bank is rewarded.

These aspects and more show up in turnover numbers. When I worked for a large regional bank in the 2000's the turnover rate for the entire bank of 20,000 employees consistently ran in the high 20% to low 30% range. This study on turnover rates in late 2012 showed that the banking industry as a whole had one of the highest turnover rates of all industries.

One of my favorite lines from this article says "regulators acknowledge that culture is a difficult thing to measure". This led banks to measure things like how often employees go to happy hour or how they score on a happy to grumpy ratio. This is measured by defining happy employees as those who say they are satisfied and are more likely to act ethically. Satisfaction is way different than engagement and being happy may just mean they are well paid - again incentivizing the very behavior they are trying to root out.

The article also mentions that the industry is spending millions on workplace consultants specializing in how to measure culture including the use of surveys to tease out attitudes around pay being the best measure of success. When I asked a friend in the banking industry, specifically branch management, about this he indicated that no one answered these surveys honestly because no one wants district and regional managers in the branch. The fear of additional scrutiny and oversight invalidated the results but made management feel better about how well they are doing with culture when in fact fear was driving the behavior.

According to the article, one consulting firm hired by a bank determined it was a red flag when employees used the term 'workaround' in internal communications because it indicated a willingness to bypass set rules or policies. If you have ever worked in a bank you would know it requires work arounds of large and unwieldy systems and bureaucracies just to serve the customer. Well intentioned employees now flagged as possible threats - sounds like a good culture inducing policy to me.



Perhaps what banks and regulators should focus on is reducing the amount of fear that exists inside the culture. If you want to improve the culture that exists inside banks start by changing the temperature. Constant pressure on results, expense reductions and growth has made your employees weary and vulnerable to pressures that lead to the very results you are being regulated against.

Another temperature control that should be turned down but isn't likely to change anytime soon is the atmosphere of control from management to employees. American Banker writing on this same emphasis on culture, but from the context of legal risk rather than regulatory risk, had this to say in regards to how to improve the culture at banks:

The proliferation of settlements in an array of financial markets in recent years makes it clear that banks must show they have made credible and persistent efforts to keep their people in line. They must be able to demonstrate that they have organized themselves into proactively watchful and compliant organizations.

That doesn't exactly sound like a culture I would want to work in - how about you? This attitude reminds me of a poster I recently saw on a local university campus. These posters were placed around the campus after a couple of high profile employee fraud cases.

The message that these actions send to employees is that we don't trust you and you shouldn't trust each other. I know that these organizations do this to provide air cover from regulators or litigators. They can point to these artifacts as proof that they did everything they could 'but a bad apple is going to be a bad apple and they can't possibly police every action of every employee every day'. But this attitude is precisely the problem.

To complicate matters even more, according to the WSJ article, JP Morgan measures the number of issues reported through its code of conduct / ethics line as an indicator of an improving culture has had in reducing 'adverse regulatory events'. The problem is that this is likely to only lead to pressure from management to not report or 'blow the whistle' on the very behavior they are trying to limit.

What a confusing mess of messages this industry sends its employees. We want to pay you well but don't be motivated by money, call our ethics line but not too much because that could indicate to regulators that we have a bad culture, serve your customers to the best of your ability but don't do workarounds from our broken systems as that might indicate you are doing something shady, and you should have happy hour to build trust with your co-workers but don't trust them because they may be perpetrating fraud against the company.

If you really want to change bank culture - stop trying to regulate or litigate it. Perhaps then people will want to work in your industry and a healthy culture will develop naturally.