As the nature of work changes so too has the nature of workplace risk. When considered within the context of a changing global labour market, it is not surprising that the banking and finance sector’s exposure to emerging non-financial human risk has increased. Specifically, what I refer to here is mental health risk and risk resulting from compromised decision making such as conduct risk and aspects of compliance and operational risk.
Progressive leaders must review and adapt their traditional approaches to understand and manage the changing nature of risk.
In mylast postI discussed the concept of human risk in relation to the banking and finance sector. This post examines why human risk needs to feature much more prominently on the radar of boards, leaders and their teams.
The global labour market has evolved in response to the rapid advancements in technological innovation which has enabled routine tasks, once carried out by humans, to be standardized, programmed, codified and automated.
What remains when the routine tasks are outsourced to technology are the non-routinetasks, tasks that cannot be automated - tasks that must be carried out by humans, specifically by the human brain and mind. These tasks increasingly require advanced cognitive skills and high level social-emotional skills to successfully navigate increasingly complex hierarchical workplace social structures and stakeholder relationships. These skills increase an individual’s all-important mental capital, a major component of total organizational human capital value.
The changing nature of work has two important ramifications for the already mentally intensive banking and finance sector:
Firstly, the re-direction of funds away from traditional spend areas that are decreasing in importance and towards investment in people. This is essential if leaders are to create and maintain a workforce that is capable of operating at a high cognitive and emotional capacity.
Secondly, non-routine tasks require far more mental effort from employees than traditional routine tasks. The repercussions of a continuous increase in the mental effort needs to be recognized as a red flag for a potential increase in consequential emerging human risk.
Upskilling the workforce: investing in people is an essential spend
In January 2019, the World Development published its report on The Changing Nature of Work[1]. The authors noted three types of skills that are increasingly important for ‘labour markets of the future’ and in turn, future productivity and profitability:
1. ‘advanced cognitive skills’ such as complex problem-solving and critical thinking
2. ‘soft skills’ or socio-behavioural skills such as perseverance, teamwork and empathy; and
3. ‘skills combinations’ that are predictive of adaptability such as reasoning and self-efficacy.
The authors of the report conclude that countries wanting to compete in the economy of the future will need to:
‘invest in their people with a fierce sense of urgency.’
If support for the applicability of this statement to the banking and finance sector is needed, a quick look to APRA’s Prudential Inquiry into the CBA[2]provides it. For example, APRA’s report points to a leadership culture lacking ‘intellectual curiosity’ and ‘critical thinking’ which limited the Bank’s ability to ‘anticipate and adapt’ to emerging non-financial risk. It also recognizes that social-emotional qualities that were missing from the Bank’s ‘DNA’ encouraged a ‘can we do it?’ rather than a ‘should we do it?’ approach to business revealing ‘ethical lapses’ in decision making of leaders and their teams.
Similarly, the Royal Commission Report[3]refers repeatedly to the role of behavioural drivers and relationship dynamics among boards and senior management, in determining both organizational culture and more specifically risk culture in financial institutions. It also identifies skills and knowledge gaps around the topic of human risk not only at the institutions but also in the regulatory authorities that oversee them. This gap is understandable given the changing nature of workplace risk however now that it has been identified, it must be addressed.
The Cost of Increased Mental Effort
Non-routine work requires significantly more mental effort than routine work because employees cannot rely on existing procedures, rules, heuristics, routines but instead, need to continually adapt to and innovate new ones[4]. Additionally, non-routine work of today particularly in the world of banking and finance, is highly relational and relationship skills also demand high levels of mental effort.
However, increased mental effort comes at a cost. The cost is mental stress and mental fatigue and in turn a potential increase in mental health risk and conduct risk. Stress and stress hormones wreak havoc on higher-order cognitive functions such as decision making, perspective taking, self-regulation, judgement, interpersonal relations and empathy[5],[6]– the very skills the sector needs to increase.
This relationship between mental effort and the quality and quantity of output has been recognized by governments for some time. In 2008, an article titled The Mental Wealth of Nations[7], a reference to economist Adam Smith’s much earlier The Wealth of Nations (1776), was published. It reviewed the findings of a study by the UK Government Office for Science that investigated what opportunities and challenges lie ahead for the global economy in the next 20 years.
The article highlighted the changing needs of a changing workforce, noting the:
“increasing importance of mental capital and mental well-being to a nation’s success given the changing demands placed upon workers.”
Making use of this knowledge: forward-thinking leaders of financial institutions:
· Will leverage the predictive value of this research now to prepare for the ramifications of the changing nature of workplace risk.
· Will use this knowledge to determine how best to allocate resources to increase the mental capital of their workforce, a critical component of an organisation’s total human capital value.
· Additionally, they will educate themselves and their teams to better understand and thereby mitigate against, consequential increases in non-financial human risk and the significant costs associated with it.
In Australia and perhaps even globally, all stakeholders - customers, employees, regulators, the legal community - are waiting to see how the industry responds to the recommendations of the Royal Commission around the identification, management and mitigation of non-financial risk with an expectation of real change. Progressive leaders will meet this expectation by adapting traditional approaches to reflect the changing nature of risk.
[1]The World Development Report, 2019: The Changing Nature of Work. World Bank Group.
[2]Prudential Inquiry into the Commonwealth Bank of Australia, April 2018.
[3]Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
[4]Rifka Maria Weehuizen, R. M. (2008). Mental Capital: The Economic Significance of Mental Health. University of Maastricht.
[5]Staal, M. A. (2004). Stress, Cognition, and Human Performance: A Literature Review and Conceptual Framework. National Aeronautics and Space Administration (NASA). Moffett Field, California.
[6]Sapolsky, R. M. (2004). Why Zebras Don’t Get Ulcers. The Acclaimed Guide to Stress, Stress-Related Diseases, and Coping.Revised Edition. St. Martin’s Press. New York.
[7]Beddington, J., Cooper, C. L., Field, J., Goswami, U., Huppert, F. A., Jenkins, R., Jones, H. S., Kirkwood, T. B. L., Sahakian, B. J. & Thomas, S. M. (2008). The Mental Wealth of Nations. Nature, 455:23, pp. 1057-1060.