The latest installment of Ropes & Gray's podcast series, Culture & Compliance Chronicles, explores company culture in times of crisis. In part one of a three-part discussion, litigation & enforcement attorneys Amanda Raad and Rosemarie Paul talk with three partners at EY—Katharina Weghmann, Maryam Hussain and Melissa Myatt—who focus on behavioral science and decision-making in the corporate context. The group considers what the research says about the drivers of firm culture, how companies and individuals make decisions, and how they're seeing this play out as companies grapple with the global pandemic. Throughout, they also touch on how regulators are responding to the current environment.
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Transcript:
Amanda Raad (Ropes & Gray): Welcome, and thank you for joining us on our latest installment of Culture & Compliance Chronicles, a podcast series that is focused on the behavioral sciences approach to risk management. I'm Amanda Raad, a partner in the litigation & enforcement group. I'm joined today by my colleague, Rosemarie Paul. Then, we have our special guests today from EY. We're all going to go around and introduce ourselves in just a moment. We all, of course, are dealing with coronavirus, COVID-19 issues in our daily lives. And now, more than ever, we think it's important to think about culture and think about how behavioral science theories can help in times of crisis, and how it can help with our culture. We've pulled together a really interesting group of professionals to talk to you today, including those that focus on the theories behind behavioral sciences and some of the academic research that has been done. We are also bringing a regulator perspective to the discussion, and then bringing lots of practical tips on how to apply these theories and hopefully some useful nuggets on how we can work through the times that we're living in today, and as we emerge from this, as we most certainly will. So, with that, I'm going to turn it over first to Rosemarie Paul to introduce herself.
Rosemarie Paul (Ropes & Gray): Hi everyone. I'm Rosemarie Paul. I'm a partner at Ropes & Gray. I was previously a senior solicitor at the Financial Conduct Authority. I've got a particular interest in the theory because financial regulators have been looking at culture as a priority to achieve compliance for some time. And this, I think, is particularly important at a time of crisis, so I'm looking forward to an interesting discussion. I'll hand over to Katharina Weghmann of EY now.
Katharina Weghmann (EY): Thank you so much. I really appreciate being here today with you and I really look forward to our conversation today. My name is Katharina Weghmann. I'm a partner at EY. I focus on integrity and ethics, and how we can measure ethical cultures and how we work with our clients to bring ethical cultures alive. So I look very much forward to being here today.
Maryam Hussain (EY): My name is Maryam Hussain. I'm a partner in the forensic practice at EY. I've spent the past 20 years of my professional life investigating major fraud and corruption around the world. So, I thought, when I saw an article in The Economist a few weeks ago that was entitled, "The Economic Crisis Will Expose a Decade's Worth of Corporate Fraud," I can attest to that from personal experiences of the previous financial crisis. I think there are things that are happening right now that we could be either preventing or detecting at an early stage to be in a better position when we come out of the crisis.
Melissa Myatt (EY): My name is Melissa Myatt, also a partner at EY. I've been working with life sciences organizations over the last 20 years in really helping individuals and leaders at the headquarters understand what's happening on the ground across their business, and the dynamics and the decisions that local leadership teams have to take. This has become a pretty hot topic currently as each of the countries are responding in their own ways to the rise of the pandemic and what that means in terms of how those companies can keep their own people protected, how they can keep their patients and customers and suppliers aligned and serviced, and also how they can help support the wider market. It's raising a lot of challenges, new decision-making, questions, and, in some cases, ethical issues, which is an interesting question to see those that are coping best and how that correlates to the strength of their existing culture. So it's a really interesting topic, I think, as we move forward, not just during this crisis but even beyond as we grapple with the new normal that we'll all be facing. And I think it's been a really great set of introductions across this group, everyone coming with a slightly different perspective and different backgrounds on this. And as we run through the topics, we're hoping to cover not just some of the research and practical issues, but some of the big debates we're hearing in the market today in terms of how to apply and how to get the best out of your culture. As we kick-off, we'll start really from the beginning and look at what the research is telling us around decision-making, so something that most leadership teams are doing on a daily basis now and largely in unprecedented times with limited information. I think the fact that most research shows decisions are not being made based on analysis or the rules is pretty interesting. I know, Maryam, you've done quite a bit of research around this topic. Do you want to talk to us a little bit some of the things you found?
Maryam Hussain: Yes. And actually, you alluded to it, about the fact that this is unprecedented times, of course, with extraordinary circumstances. Billions of people have been confined to their homes. We're all being bombarded by information. The future's uncertain. But we know from complexity science that under these conditions of disorder, as you said, our day-to-day decisions are not based on analysis of the rules or the information being given. More than ever, we're all making immediate, intuitive and instinctive decisions. And in an organizational context, the culture will hugely influence those instinctive decisions by every employee, so understanding how culture drives behavior really matters right now. And for some organizations, it might be the difference between surviving and thriving or not making it through this crisis.
Melissa Myatt: It's interesting, one of the companies I'm working with at the moment has traditionally had very much a culture of consultation and collaboration. And some of the feedback I'm hearing from them is how cumbersome that's becoming now as they've been working through this crisis over the last couple months, that decisions that used to take a day are taking weeks. And that sort of culture of consultation has created this real slow-down in decision-making in some ways.
Maryam Hussain: Actually, it's interesting because it contrasts directly with the clients that we were working with for 18 months prior to this crisis, where the starting point for that work with a cultural issue that they found which was detrimental to them, which was an excessive deference to hierarchy. And they were talking about how this was a strength in the crisis, but was holding back innovation and driving low employee engagement and consequently performance. And we worked, again, with 10,000 people across the organization to get qualitative employee experiences of the culture in a statistically valid scale to work out in what direction we want the culture to evolve. So I think the key points from that story and from your client's story is actually culture, or elements of culture, is not about having a static approach – it's about how do you make sure that you have a culture that's responsive to a changing environment in which your business operates.
Amanda Raad: One really interesting question, I suppose to think about is: When you have the luxury of time, where you're not in a period of crisis, where you can really think about and assess what your culture is, try to understand what your culture is, what you want it to be and how to advance it – that's one situation. And then, we're in this situation now where culture's so important and understanding it is so important, but we don't have the luxury of time – we have to keep moving and keep making decisions and hopefully do so in the safest way that we can and the most productive way that we can. What does the research say, or what are some of the thoughts on how to address that? Because there's this push-pull between needing to keep moving forward, obviously, and maybe not understanding enough about how to move forward.
Katharina Weghmann: I would love to piggyback on what you just said. I think this is a really important interdependence that you just pointed out between culture and productivity. I think productivity is one of the positive effects that culture can have, apart from others like innovation, collaboration and engagement of employees. And I think we need to recognize the fact that the resilience of people during this crisis, while working from home, and at the same time fighting also a global pandemic, is a huge stress in addition to the pressure that we feel when we make decisions like Melissa and Maryam have just pointed out earlier. So I think we need to take this into consideration also when we think about how we get through this crisis, so making sure that people stay resilient. And at the same time, also sensitizing them for the issues that Maryam has pointed out and making sure that we create a culture in which it would be safe to also speak up about those topics when they occur. And I think at this time of crisis, that is one of the most important topics that we should probably watch out for: to create spaces where people feel safe to speak about the issues that they're facing while working from home and having the pressures at home in the organization. And then trying to, at the same time, collaboratively going through the crisis by creating a space where we can talk about this. We can find agile ways of working together in which we are more outcome-focused and maybe also engaged in new ways of working, and making sure that we create habits that are healthy and facilitate honest communication about not only processes, but also topics that might help us to overcome some of the risks that Melissa and Maryam have pointed out.
Maryam Hussain: Just to build on that one, a direct point about what the research tells us. We know that we've evolved as pattern-based intelligences. At best, we take in about five percent of the information that's in front of us. And especially at the time where there's so much information flying at us, that specific point of, "How do you help people?" is, I think, making it simple and salient. What are the key things that you want your people to focus on? For one of our clients right now, one of their key focuses is to make sure that their supply chain is moving so quickly that they are extra vigilant in terms of the quality of the supplies that they are taking onboard. So, they've identified two or three things which are paramount for the organization and for their customers right now, and they're just going with those two or three simple messages across the organization to enable people to absorb the direction and implement it into their day-to-day working. I think this also stands the test for a person in normal circumstances as well, to recognize we don't absorb masses of information – we absorb a small amount, and then we match it against the last experience that we have, the latest pattern in our mind, and then we act accordingly. So keeping the messages simple, especially right now.
Amanda Raad: We've been working with some of our clients as well to think about identifying what those key messages or risks are that they should be focusing on right now. Certainly before the time of crisis, our clients had all worked together to understand the risks that their organization might face, but what those risks are and the priority of those risks obviously have now shifted. And, again, we don't have the luxury of time to do full risk assessments perhaps, but going through and identifying what are the most important things that we need to prioritize right now and simplifying that, as you suggest, to make sure that people are enabled to really focus on those risk areas, is something that I think is happening in real time now, which is a real positive.
Rosemarie Paul: I think it's particularly important now. Not least because the further away individuals are from each other, working from home in these particular circumstances, the easier it is for them to lose that connection with certain culture and values, and the compliance requirements slip or take the easy way out, sort of circumventing controls they know to be in place for a reason on the basis that it's "just for now" where they're having to realign their priorities. I think the point about keeping messages simple and prioritizing them is crucial to avoid that kind of slippage.
Melissa Myatt: I was just going to say that the interesting thing around this whole point about simplifying is most organizations really struggle to do that when they're not in crisis. The crisis is actually helping people focus. It's almost a singular angle of focus: keep our people safe, keep our business running. And I found it really interesting, certainly in our organization, but then I'm seeing it across a number of other companies, and you're reading about it in the press almost every day – new innovation, new ways of working, new ideas, new connections in the market coming up from people, almost having this singular crisis-response focus. But there's a huge amount of upside that we're seeing as well, with everybody almost globally on a same page, maybe for the first time in history.
Rosemarie Paul: I think that's right. I think there's a global realignment of priorities. And we can see that in the regulatory context as well, particularly in relation to the UK financial regulators where they're issuing huge amounts of information and guidance - , "Do the right thing. Consider your capitalization. Consider your employee welfare in the context of paying out bonuses." They're emphasizing that culture still needs to be prioritized, and ultimately, a culture that supports regulation helps to prevent harm to consumers and markets, which is really the whole point of financial regulation in this context.
Maryam Hussain: Building on that, Rosemarie, I think what's helpful about the guidance, as you pointed out, is principles-based, because on the other end of the scale, if there are lots of rules being issued at this time, if you over-constrain a system, you actually produce deviant behavior.
Rosemarie Paul: I think that's absolutely right. Regulators have relied on economic tools of influence, their rules and enforcement and signs, and now are acknowledging that behavioral levers are crucial in achieving that compliance and achieving the outcomes. The regulators are quite open about wanting to be focused on outcomes rather than processes.
Amanda Raad: I think that's useful to focus more on outcomes. And I think the values-based response is also really useful because so many siloed responses have been built up over the years. So with every rule or risk area that the regulators point out, organizations have, in time, tried to create programs and procedures to respond to that particular rule or risk area. As a result, what you sometimes end up with is a really segmented approach to thinking about whatever outcome you're working towards, which if you're seeking a good culture, building up a program that has 20-30 different policies and procedures under it may not ever tie together perfectly to work towards the outcomes you're looking at. And so I think, in some ways, this is a time—a fresh start—with permission, and even encouragement, from the regulators to say, "Really look at what you're trying to accomplish and how you're trying to get there, and does it make sense or not?"
Melissa Myatt: Building on what Amanda just said, it's not just the permission and encouragement from the regulators to think about this from a cultural-driven and a principles-based perspective, but the trickle-on effect to that is when there is the allegation or suspicion that something's gone wrong, how will compliance organizations, internal audit teams during internal or external investigations then assess issues when there aren't these specific rules to measure against, which is the traditional approach? What kinds of new data points or techniques or conversations need to be had with management to assess and understand the process they went through to make the decisions that they did? I think that's one of the interesting things that's now starting to emerge and a lot of organizations are looking at not only how do they apply some of the culture theory to motivating and building their teams, but also in terms of assessing the strengths of the decision-making, and the outcomes that they're achieving.
Rosemarie Paul: It's really interesting you raise that because accountability is running through it seems every part of regulation right now. I think the regulatory environment is such that there's an acceptance that with the benefit of hindsight, certain decisions might not have been made in a particular way, but the criticality around being able to evidence the process you went through so that you can look at it after the event, look at lessons learned and consider whether or not you'd approach it again in the same way in the same circumstances is really becoming quite key.
Melissa Myatt: I'm really interested in this as a topic and I can't wait for more research to come out about the effects of the agile methodology. A lot of corporates are implementing the concept of "agile," which, in effect, is moving decision-making down to the teams of people who are best equipped with the most information and expertise to make those decisions, so in effect, breaking down some of that classical hierarchy structure. And when you start shifting into that agile methodology and way of working at an enterprise level, that really puts a shift on that whole accountability point you talk about and what historically the regulators have looked at. And whilst, I think, in some ways, companies who have embraced agile are probably better equipped to navigate these uncertain times, it's also interesting to see how that will play out over time with the regulators' perceptions as well.
Rosemarie Paul: I think that's right. When you're moving decision-making down the chain, at least from a financial regulatory perspective, there is still an expectation that the person at the top of the chain remains responsible, understands what's going on and can be held accountable for that.
Maryam Hussain: I think that crystallizes sometimes in terms of the conversations at board level. My experience is the acknowledgement that one of the key factors that influences how people make decisions is the cultural environment. So what have you done at board level to make sure that there's a right culture throughout the organization and informed yourself that what you think is actually happening is the reality. Sometimes when that's gone wrong, it's referencing back to being able to evidence the process. Organizations have undertaken culture change initiatives, which treat cultures as an engineering problem where there's a cause and effect. And the reality, of course, is that an organization is not a machine, it's a complex human system – everything is connected with everything else, and so many of the connections are unknown. So, I'm finding that those conversations around, "How do we take accountability for the culture of the organization, and make sure that we are well informed and ensure that the culture's moving in the right direction," is acknowledging that some of the approaches that said, "Here's an initiative going from A to B, and we'll have three interventions and we'll change the culture," don't work. And you have to start with really understanding the present, and the present experiences and the stories of your employees and start from that starting point and make sure that you're driving the culture in the right direction through interventions that you have as a senior management team.
Rosemarie Paul: I completely agree. And I think that maybe setting out in your policy and weighing them up against the way people actually behave, I think investors, shareholders, regulators are all looking to see that gap narrow.
Maryam Hussain: To build on that, when there is misconduct, the number of times I've heard, "Well, of course this happened, but it was one bad apple far away," and it's hardly ever the case. Much more common is that there were individuals operating in a culture and a context which enabled them to justify what they were doing, otherwise they wouldn't have done it. So, in investigating things when they've gone wrong and misconduct, to really understand the root causes of that, so that that can be part of the thinking and the policy making moving forward – the reality of why things go wrong.
Amanda Raad: I really like that because I think one of the questions that people struggle with right now is: If culture's constantly changing and we know that certain interventions may or may not work, why would we spend as much time and energy on focusing on understanding our culture and testing our culture, especially right now when there are so many competing demands – why should this be a priority? I think what you just said, about really understanding, using things that go wrong as an opportunity to understand the culture and to think about interventions that may address whatever has gone wrong, that's a real value-add, and that's something that isn't soft and isn't something that feels like a proactive measure that might be nice-to-have. That's almost a must-have because otherwise, you can't design effective remediation and you can't make sure that you are operating in compliance with law, but also in a way that maximizes your business. So, I like focusing on sometimes identifying a problem area and making sure you use that to try to understand culture and to try to make modifications where necessary.
Maryam Hussain: Otherwise, you will end up having the same issues time and time again. So if you think you're saving time and effort, but not fully focusing on this, it's actually an illusion.
Rosemarie Paul: It goes to the point that you make that it is quite weird to have a genuinely isolated bad apple. In fact, most people will adapt to the values of the group and their ideas of what is right and wrong will be governed by that, rather than what's written in the policy. So getting to the heart of how people behave, what influences them and what they see around them, what behaviors are being rewarded, who they see as the people in power with influence and how they behave and lead become crucial to avoiding that bad behavior and achieving compliance.
Melissa Myatt: I would say it's not even just about bad behavior. It goes back to the conversation around productivity. And where you have weak or bad cultural dynamics, you also get stagnation, lack of innovation, people who don't work well together, and you see that really just affecting the overall success of the business or parts of the business because of that.
Amanda Raad: You also have lack of ownership or individual accountability in those situations and that's particularly challenging, I think, when you're trying to decide who holds ultimate responsibility for certain decision making. In those cultural challenges, everybody kind of points their fingers at each other and that can be a real struggle.
Katharina Weghmann: I just wanted to add that I think ever since the financial crisis, we can acknowledge the fact that the importance of the human factor and the importance of how people behave is really at the center of all the conversations that we have with executives. And I think it's also due to the fact that we can see a real paradigm shift in investors' behavior and also in how talent and the new generations coming into the workspace are making decisions about where they want to work, and investors in turn, also where they want to invest their money. And I think this really has changed the conversation as to how culture is being institutionalized and how executives are shaping the conversations inside their organizations and making culture a real contributor to their business. And what I think is fascinating is based on what all of you have just said, I think root cause as well as operationalizing culture is becoming increasingly important where the holistic perspective on human behavior is helping us to also in the future support individuals in their decision-making. I think it's important to emphasize that most people want to do a good job, most people are inherently good and they want to come to work and want to do a good job, even now in crisis. And I think what we see in most organizations, and Maryam, I think you experienced it in investigations, it's probably the most important in that context – many times, it's not a conscious decision that people are misbehaving or making a bad decision for the business. Many times, they're legitimizing their decisions because it's good for the company, or they were so much under pressure because of the way they're being incentivized or on the way their goal setting is being operated in an organization. So I think we need to acknowledge that most people want to do good and we just need to enable them through culture to make the right decisions. It's just they make inefficient decisions as we know from research.
Amanda Raad: Just following onto that, I think especially in remediation decisions, a lot of times remediation decisions are really individual-focused or employee-focused on what is the right thing that we can do to make sure this employee's behavior is changed, whether that is you're going to coach them, you're going to train them, all the way up to severe discipline, warnings and potentially separation from a company. And we do see over and over again in investigations having to discipline employees for the same issues and thinking about, and keeping in mind, that people generally are trying to do the right thing and that sometimes maybe we should be spending more time focusing on the cultural issue or the bigger picture or what is actually driving people to make these decisions when we're thinking about remediation instead of being so focused on individual-employee remediation. It's obviously an important part, but I think it shouldn't be seen in isolation – it should be seen in context with the bigger cultural drivers as well.
Maryam Hussain: Just adding one point to that is that quite often, the dynamic that's set is actually a conflict of interest, that that employee and potentially groups of employees, have been put in a position where there actually is a conflict of interest between what they've been asked to do and the other messages that the organization has given them about ethical behavior. So that root cause analysis needs to identify what is it that may have been relevant to this employee, but also to these groups of employees generally.
Melissa Myatt: I would say there's been a significant lack of focus on root cause and it's manifested in, Amanda, like you've said, around focus on remediating the decisions made by an individual as opposed to the context in which they were working. It's also just created loads of bureaucracy and layers and layers of controls. And organizations who have faced a lot of allegations or investigations, you can see that in the heaviness of their internal controls, and compliance and monitoring regimes they have in place.
Amanda Raad: The problem is, those internal controls now get in the way almost of reminding us that we have to ask the individual to help speak to them about what has driven them to a certain point or what might be contributing to the situation that they're in and the decisions that they're making because they're obviously a huge source of information. And if you're not careful, an investigation can be so focused on identifying what the wrong of what happened is instead of really understanding why, and the why is obviously critical.
That wraps up part one of our three-part discussion with Melissa, Maryam and Katharina from EY. Please stay tuned for part two where we'll discuss measuring culture, specifically how to drill down on the information we need and using data analytics as a tool. We'd like to thank our listeners – we appreciate you tuning into our Culture & Compliance Chronicles podcast series. For more information, please visit our website at www.ropesgray.com. And of course, if we can help you navigate any of the topics we discussed, please don't hesitate to get in touch with us. You can also subscribe to this series wherever you regularly listen to podcasts, including on Apple, Google and Spotify. Thanks again for listening.
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