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“This is Culture. This is Culture.” Risk Management of Culture in the Banking & Finance Sector



Ponder this: In his 2005 Commencement Speech to graduating students at an American College[1], the late American writer, poet and professor, John Foster Wallace, told the following story:


“There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says ‘Morning, boys. How’s the water?’ The two young fish swim on for a bit and then eventually one of them looks over at the other and goes ‘What the hell is water?’”


The point of the fish story, Wallace explains, is that we need to remain aware “that the most obvious, important realities are hidden in plain sight all around us, all the time”. They are ‘the hardest to see and therefore to talk about”. To ensure we stay conscious of them “we have to keep reminding ourselves over and over: this is water, this is water”.

______________________________


The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry[2], has shone a bright light on the critical role that organizational culture, the metaphorical water of the workplace, plays in two fundamental ways:


1. increasing or decreasing organizational Human Risk[3]; and

2. determining whether sustainable positive outcomes for all stakeholders, can be achieved.

However, despite the increasing talk about culture, many still grapple with:


- understanding what culture is exactly

- how to identify it

- how to create a desired culture

- whether culture can be prescribed or legislated and;

- as will increasingly be required, how to assess culture


The starting point for understanding culture, is understanding ourselves.

The human brain is a social organ and evolved to function within a matrix of other brains. Our neurological, physiological and ultimately behavioural responses are directly and profoundly influenced by our interactions with others[4].


As human social systems became more complex so too did the skills required to successfully navigate them. The ‘smart brain’, the prefrontal cortex, responsible for high-order cognitive capabilities such as judgement, perspective taking, theory of mind, adaptability, empathy, morality, behavioural inhibition, interpersonal skills, to name a few, actually increased in size and complexity as social systems, language systems and of course cultural characteristics, across the human species also increased[5].


The social matrix and the cultural contexts within which we humans operate today have continued to increase exponentially with the advent of social media, new family structures and an increasingly complex systems of organisational hierarchies in the workplace.

In the Royal Commission Final Report[6], Commissioner Kenneth Hayne considered the concept of culture within the workplace, stating that ultimately;


“Culture is about behaviours”.


Commissioner Hayne expands on this descriptor by referencing the definition of culture as provided in the CBA Prudential Inquiry[7], namely that culture encompasses:


“the shared values and norms that shape behavior and mindsets

within the entity”.


In light of our knowledge about the human brain, these definitions of culture make sense and are helpful. However, they are just the entry point for what needs to be a much deeper understanding. They create questions, the answers to which are far from simple yet must be explored if we are to:


· have a more practical understanding of what culture is

· understand how to assess culture

· change culture when it is not serving the best interests of an organization and its stakeholders


The 5 most fundamental questions around culture in light of Commissioner Hayne’s cited definitions and even before we consider the impact of culture on organizational policies or remuneration schemes or fraudulent behaviour, appear to be the following:


1. What determines behavior?

2. Whose behaviours are we talking about?

3. Is a leadership skills gap creating a high risk (and therefore expensive) vulnerability?

4. Can culture be regulated or prescribed?

5. What does the future of cultural risk management look like?


Question 1. What determines behaviour?

Human behaviour is a complex interaction of many things:

· It can be the raw, unedited observable output of internal factors such as personal values, multiple conscious and unconscious mental processes, motivations, reactions, rationalisations and biases.

· It can also be the edited, filtered, adjusted output after the imposition of an implicit or explicit intervention such as social judgement, a law, a code of conduct.

· It can be the result of one individual or a collective of individuals.

· It can be conscious and intentional or unconscious and unintentional.


The pre-eminent psychologist, Carl Jung, believed in a shared human unconscious which he termed the ‘collective unconscious’[8]. Jung believed that an individual’s unconscious was the product of collective human experience over generations and inherited by all of us in our genes. Perhaps this is a useful analogy for organizational culture?


In fact, this concept of a ‘collective unconscious’ being inherited in our genes speaks to Commissioner Hayne’s reiteration from the G30 Report[9] that:


“Sustainable cultures need to arise from, and be embedded in banks’ DNA


However, DNA is a blueprint for a range of potential traits and characteristics that may be expressed as and when needed to adapt to and navigate, the current environment to ensure the best chance of sustaining an organism[10].


Organisation’s need to be careful that only those inherited values, principles and goals from past boards, CEOs and their teams that sustain and serve the best interests of the organization and its stakeholders, in its current form and with its dynamic needs, are selected from the range available from its DNA. Culture is not a static, set and forget way of thinking or behaving and therefore requires ongoing awareness to ensure decisions and their outputs are made with conscious intent and not simply as a result of inherited habits.


Moving forward the goal should be creating a culture of ‘collective consciousness’ or even a ‘collective conscience’, that operates with intention and regular review to ensure culture is aligned to an organisation’s goals, value and principles.


Behaviour is also determined by our external physical and psychological environment, the “matrix” in which we operate and interact. Most behaviour cannot be understood outside of the context in which it occurs. Even the most basic forms of life are impacted by their environment. Professor Irv Konigsberg, one of the first cell biologists to master the art of cloning stem cells, was famous for telling his students that when the cultured cells they were studying appeared to be ‘ailing’ or unwell:


you look first to the cell’s environment, not to the cell itself, for the cause.”[11]


An organisation’s environment, including how the organisation manages its people and what it demands from them, contributes to the behaviours of its people and in turn, its culture.

Being educated about the factors within our environment, our ‘matrix’, that impact human behaviour both positively and negatively, provides insight into the factors that impact culture. Fortunately, advancements in the humans sciences, particularly neuroscience provide us with evidenced-based insights into many of these influential environmental factors.


Question 2. Whose behaviours?

If culture is about behaviours, the observable output of shared norms, values and thoughts that create mindsets, exactly whose behaviours and whose shared values, norms and mindsets are relevant?

Presumably those of all employees within an entity.

However, when considering the issue of decision-making within an organization, the AICD’s recent guide to Ethics in the Boardroom[12], a collaboration between the Institute and The Ethics Centre, refers to the:


“board’s collective culture and character”.


This raises a number of questions:


· Does reference to the board’s culture here rather than the organisation’s or entity’s culture, suggest that there may be more than one culture at play within one organization?

· If so, is this a conscious decision by the leaders of the organization or does it suggest a kind of sub-culture sitting above that of the overall organisation’s?

· If so, then why and is it aligned with the explicit broader organizational culture and what are its values and principles?

· Who is charged with monitoring this sub-culture, and are there other sub-cultures in existence?


Recognising that culture is about behaviour and mindsets and that behaviour and mindsets are shaped by shared values and norms is useful - but only a starting point to a truly meaningful, constructive understanding of culture.


It is essential to be clear exactly whose behaviour and mindsets create the culture, or cultures of an organization and then whose are the most influential.


Question 3. Is a skills gap creating a high risk (ergo expensive) vulnerability?

If culture is about human behaviour and mindsets and leaders are responsible for ensuring a safe, healthy, ethical culture, the obvious question is:


How educated are leaders in understanding human behaviours and mindsets?


Further, how well educated are those increasingly charged with assessing an institution’s culture, such as regulators ASIC and APRA, in understanding human mindsets and behaviour?

Understanding human behaviour is no small matter. Whole academic faculties and professional disciplines exist to research and manage just this. The best neuroscientists, psychologists, psychiatrists, evolutionary biologists, behavioural scientists to name a few, spend their entire lives trying to unravel the mental processes of the human mind and its output, behaviour.


The task is made all the more difficult because the majority of thought that underlies human behaviour is hidden in a maze of unconscious default wiring full of cognitive biases and pre-programmed reactions resulting from our own personal experiences, values and belief templates.


Warren Buffet has been noted for stating the glaringly obvious, that:


“Risk comes from not knowing what you are doing”.


Unless boards, leaders, their teams and regulators are literate and confident on the topic of human cognition and behaviour, how can they realistically be expected to identify, manage and ultimately prevent risk arising from human mindsets and behaviours and the unhealthy, unsafe cultures they may be creating?


Question 4. Can culture be regulated or prescribed?

In the Royal Commission Final Report[13], Commissioner Kenneth Hayne echoed the G30’s[14] view on the role of legislation in creating and maintaining culture.

Commissioner Hayne stated that:


“Culture cannot be prescribed or legislated…behaviours in general are not amenable to legislation or regulation”.


However, this is not necessarily the case:


Ultimately, both the law and culture share a common passion: human behaviour.

Whilst the law cannot prescribe or legislate what people think or how people think, it can legislate how people behave. It can legislate to influence whether people act on their thoughts or not.


It is reasonable to say that in our society, behaviours on the whole, are in fact amenable to legislation and regulation. If not, the crime rate would be substantially higher.

Laws already regulate behaviours of both employers and employees in the workplace in areas that guide culture such as the Work Health & Safety Act (2011) & WHS Regulations (2017), the Fair Work Amendment Act 2013 and various Federal and State discrimination legislation.


In addition to State and Federal laws, the use of contract law between employer and employee to prescribe what ‘behavioural rules’ each party agrees to at the commencement of an employment relationship, may be effective in avoiding grey areas down the track with respect to what behaviours are acceptable and unacceptable by both parties. Gaps or misalignment between the values of an organisation and those of an individual may be identified and discussed upfront, allowing for the mitigation of potential incidents down the track.


Obviously, a common-sense approach needs to be employed whenever laws are imposed on behaviour however the benefits of leveraging the law in order to create and maintain the values and principles of the organisation and its culture, are potentially many if used to benefit both employer and employee.


Question 5. What does the future of cultural risk management look like?

Events over the past years in the financial sector have made it clear that “increasingly complex systems of regulation, surveillance and internal compliance”[15] are not the answer to creating, managing and monitoring safe, ethical cultures that produce sustainable positive outcomes for all stakeholders.


The risk management conversation around culture is therefore shifting from a process-based approach, an approach that leaders are familiar with, to one of an understanding and awareness of the human dimension of risk and recognition of the relationship between culture, human capital and positive outcomes for all stakeholders.


This is new territory for leaders in many industries and the financial sector is no exception. Education and upskilling of leaders and their teams needs to occur sooner rather than later if the inputs and outputs of culture, human mindsets and behaviour, are to be understood and managed.


However, the starting point in this transition must be raising culture to everyday awareness. It must be about mentally re-locating ‘culture’ from dusty organizational archives into the daily consciousness of leaders’ minds. It must be about understanding that culture, the metaphorical organisational water, is one of the most “obvious, important realities…hidden in plain sight all around us, all the time” even though it may be “hard to see”. It must be about seeing culture in everyday workplace situations, everyday interactions and communications, everyday decisions. It must be about understanding and “reminding ourselves over and over: “this is culture. this is culture”.



Author: Rachel is the Founding Director of Rachel King, Human Risk –a global small business dedicated to helping financial institutions mitigate their human risk and maximise the performance of their most valuable asset, their people.

https://www.rachelking.global



[1] https://www.youtube.com/watch?v=8CrOL-ydFMI

[2] Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

[3] https://www.rachelking.global/post/what-is-human-risk

[4] Cozolino, L. (2014). The Neuroscience of Human Relationships. New York: W.W. Norton & Company, Inc.

[5] Lieberman, M. D & Eisenberger, N. I. (2009). Pains and pleasures of social life. Science, 323, 890-891.

[6] Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

[7] Prudential Inquiry into the Commonwealth Bank of Australia, April 2018.

[8] Jung, C. G. & R. F. C. Hull, R. F. C. (1991). The Archetypes and the Collective Unconscious Collected Works of C.G. Jung. 2nd Edition. Taylor & Francis Ltd. Great Britian.

[9] G30, Banking Conduct and Culture: A Call for Sustained and Comprehenisve Reform, July 2015, 55.

[10] Meloni, M. (2014). The social brain meets the reactive genome: neuroscience, epigenetics and the new social biology. Frontiers in Human Science, 8(309), 1-12.

[11] Lipton, B. H. (2015). The Biology of Belief. Unleashing the Power of Consciousness. Hay House Inc. United States.

[12] https://aicd.companydirectors.com.au/-/media/cd2/resources/advocacy/governance-leadership-centre/pdf/2019/07486-2-adv-ethics-guide-report-oct19-a4-34pp-web-v2.ashx

[13] Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

[14] G30, Banking Conduct and Culture: A Call for Sustained and Comprehenisve Reform, July 2015, 55.

[15] https://aicd.companydirectors.com.au/-/media/cd2/resources/advocacy/governance-leadership-centre/pdf/2019/07486-2-adv-ethics-guide-report-oct19-a4-34pp-web-v2.ashx

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© 2017 Rachel King  |  HUMAN RISK