There has been no shortage of deeply damaging scandals affecting the financial services sector in recent years, all of which can be linked to governance and cultural failings. Andrew Bailey, who recently moved from CEO of PRA to lead the FCA, has on numerous occasions spoken on the importance of corporate culture and has stressed that "the culture of firms...is of the utmost importance to regulatorsi".
The FCA is putting significant resources into its "most significant work-streamii" on culture: extending the new Senior Managers Regime (SMR) to all FSMA-regulated firms in 2018, revealing not only the importance that regulators place on improving corporate culture, but also the importance that the FCA places on SMR in achieving this. An increased emphasis on culture can also be observed in European regulators, for example the European Banking Authority (EBA) places responsibility for overseeing both risk culture and corporate culture with the boardiii.
A healthy corporate culture is vital to the long-term success of firms across the financial services sector and it is clear that board action on culture can no longer be dismissed as "a nice to have".
Although boards are spending more time discussing culture, values and expected behaviours than ever before, the Financial Reporting Council (FRC) identified that most boards recognise that they should be doing more in this areaiv. The question we hear most frequently from Chairmen and Chief Executives is "how can we can we oversee culture in a practical and pragmatic way?"
What should boards be doing now?
Getting on top of corporate culture is a challenging, complex and continuous process. Defining, embedding and monitoring a target culture has to reflect changes in business strategy, leadership and the wider market context in which the organisation operates. However, there are many achievable steps that boards can take to embed a healthy corporate culture.
1) Put culture on the board agenda
Firstly, boards must recognise that a healthy corporate culture is more than a must-have to protect against failings; it is also a valuable asset that is a source of competitive advantage. As such, boards should put culture firmly on their agenda and give it the attention it deserves.
The FRC identifies connecting purpose and strategy to culture as key to achieving a healthy corporate culture. Culture considerations should be integral to the board agenda and to every, key decision-making process, from strategy development and strategic decision-making, including M&A, to remuneration and nominations decisions.
Firms that have embraced explicit monitoring of culture are finding that not only are they able to embed more robust risk-taking behaviours but are also able to enhance organisational performance. For example, focusing on individual accountability is promoting faster decision-making while breaking down organisational silos and promoting collaboration is leading to greater innovation.
2) Discharge individual responsibilities in relation to culture under SMR
SMR and its insurance equivalent, the Senior Insurance Managers Regime (SIMR) cements personal responsibility for a firm's culture at senior manager level for the first time. Chairmen and CEOs need to be able to demonstrate that they are "leading the development of a firm's culture by the governing body as a whole" and "overseeing the adoption of culture in day-to-day management" respectively. Firms are increasingly identifying an executive such as the HR Director to support the Chairman and CEO in relation to culture.
Boards should also consider these key questions when performing an assessment of their approach to corporate culture:
3) Assess, leverage, and enhance existing activities
Boards should look at what they are already doing to develop and embed a healthy corporate culture and to assess how well they have done so, including how effectively existing activities support the board to achieve this. Most firms already have work underway in embedding conduct risk, monitoring conduct rule breaches under SMR and SIMR, reviewing remuneration frameworks and balanced scorecards and optimising the approach to talent, diversity and succession. Firms need to ensure that these disparate projects are aligned and support each other in embedding the desired behaviours.
Boards should look to leverage existing management information (MI) that provides insight on the firm's culture. Most firms have extensive sources of information that can be drawn upon; the challenge is to distil these effectively for the board. Chairmen and CEOs increasingly want explicit MI as part of their "reasonable steps" in discharging their SMR and SIMR prescribed responsibilities.
We have a multidisciplinary team of specialists working together to provide support to financial services firms on culture, including experts in governance, regulation, risk culture, human capital and succession planning.
We have significant experience in delivering cultural change programmes and on advising boards on the implementation of SMR and SIMR. For further information and to find out more about how Deloitte can support your firm, speak to one of our experts.
i Andrew Bailey speech: Culture in financial services-a regulator's perspective, 9 May 2016.
ii Speech by Jonathan Davidson, FCA, 12 July 2016
iii EBA Draft Guidelines on Internal Governance, 28 October 2016
iv "Corporate Culture and the Role of Boards", Financial Reporting Council, July 2016
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