Over the past two decades, financial services industry was time and again beset with major conduct failings, causing harm to companies themselves, their consumers and often, spilled into broader markets. This has created a prolonged trust deficit for financial firms, making them extremely sensitive about conduct risk and cultural bottlenecks. It is now widely recognized, by the market participants and regulators alike, that for markets to work seamlessly and firms to be successful, it is critical that they are seen as trustworthy and dependable. To create such trust, companies need to demonstrate they are working in the interests of consumers and the market. Good Governance and culture in an institution is seen as the foundation on which the products and services are delivered and therefore good conduct and an enabling culture is seen as crucial to the institution and its workforce as well as the consumers. More specifically a robust culture provides a base for further growth by creating confidence that the institution is managed in a safe and sound manner.
The collapse of culture in financial institutions during the global financial crisis and many isolated incidents thereafter demonstrate the importance of eight distinct characteristics of a strong culture and a sustainable business model.
- Tone at the top
A robust corporate governance framework creates a right environment for good conduct throughout the organization. The tone starts right at the Board Level. The tonal efficacy is reflected in a balanced and active Board of Directors exercising effective oversight over the activities of the Bank on a regular basis, while having access to necessary information and resources. Good practices at the Board level surrounding consumer protection issues, including effective committee structure, periodic reporting and transparency in decision making as well as mitigating emerging risks and managing conflicts of interests are all hallmarks of good governance. Decision making at the top, both in the Board oversight and day to day work of senior management must enable a general environment of good conduct and at the same time, devote special attention to appropriate management of products and services being delivered to customers. Customer centrality therefore must be well integrated in organization’s decision making process.
There are various criteria to understand the tone at the top.
To begin with the structure of the organization, its reporting framework, hierarchies, proper segregation of activities of risk takers and risk reviewers, maker-checker mechanisms are process efficiencies that can be built into the organization. Along with an independent Board , with sufficient presence of non-executive Board members impart strength to the oversight function.
The Role of committees (at board and management levels) are important and proper allocation of their responsibilities in their terms of reference is critical. To ensure that the Conmitties are functioning effectively, documenting their work through meeting minutes is necessary and so is preserving the Resolutions of the Board and reporting packs of all committees.
A clear articulation of the delegated authority limits provide accountability in decision making process and brings the necessary checks and balances, provided theb organization is mindful about over-centralization of power in the hands of a CEO. In any case, the top management should not ignore the end-users of their products and seek feedback through periodic customer surveys, social media feedback and formal complaints received.
- Policy framework
The Board exercises its oversight role through the framework of policies and procedures that set the contours of management action and the firm’s risk appetite. Reflecting corporate values, the policy framework guide consumer facing business line and back office functions to establish checks and balances within which firm and consumer interests are balanced and expectations of customers are successfully managed.
Any organization ( in financial sector or otherwise) shall benefit by looking into the following aspects: (i) a comprehensive Policy Framework for all client facing activities; (ii) a comprehensive policy framework is in place for back office processes that follows up with consumers or business lines that deal with them; and (iii) a policy to deal with potential conflicts of interest. Periodic review to keep this policies fit for purpose must be ensured.
- Code of Conduct:
An internal code of conduct for the employees to follow is often seen as a document with lofty ideals but little intrinsic value. While it may appear to be so, coupled with other components of conduct, the Code becomes a potent component to foster good governance. The Code typically outlines good behavior and practices that employees should follow in their day to day conduct of business both internally and externally. The prime focus of the Code of Conduct is to do business in the right way. The Code is linked to Bank’s overall mission, vision and objectives as it outlines the responsibilities of employees to stakeholders, customers and the wider community. The framework of the code is normally standard and outlined in the regulatory framework. It is important to make sure that the Code of Conduct is disseminated throughout the organization, there is a mechanism ( documented of course) to monitor implementation and adherence to the Code. To be on the right side of regulatory standards and industry best practices, the commitment to customers should explicitly be spelt out in the document.
- Personal Accountability and liability of Board and Senior Management
During the global financial crisis, many senior bankers were spared from personal consequences despite reckless actions designed to benefit themselves at the expense of the organization and economy. This created a huge uproar among the public at large , resonance of which was observed in parliamentary proceedings. In the post crisis world ( post-2008) after many Banks were bailed out using taxpayer money, the regulations were tightened to make firm executives personally accountable for their decisions. The regulatory disclosure and “fit and proper” requirements for approved persons and material risk takers worldwide was a clear signal to the effect. Many financial regulators implemented “ approved person” regimes requiring regulatory nod ahead of senior management recruitment.
As more jurisdictions introduce specific accountability regimes for senior managers and others continue to hold individuals to account for breaches of the rulebook, the regulatory focus on accountability, conduct and culture reached a new high. Any senior manager who is not informed and prepared on how best to mitigate their personal regulatory risk will be increasingly vulnerable to fines, bans and other sanctions and their remuneration subjected to “malus” and “ Clawback”. It is therefore imperative that financial firms monitor their personal accountability and liability framework closely , aligning with the emerging regulatory regime.
In this respect, the organizations often miss some crucial steps necessary to ensure smooth adoption of the requirements of personal accountability and liability. The first is to ensure, through periodic sessions, increase Board and senior management awareness of the requirements. The Corporate Governance policy usually details the role of Board and Approved Persons in promoting a culture of good governance, but communication on the issue can give added benefits. Similarly, the approved persons are made aware of their fiduciary responsibilities, their duties towards the organization’s clientele. The details of the rules must be disseminated across the organization, covering, commitment to law, transparency with clients, accepting and offering courtesies/bribes, dangers of misuse of bank assets and maintaining confidentiality of licensee information,
- Employee Hiring, Appraisal and Risk/ Reward Framework
The employee inclusion, retention and risk reward framework form the backdrop of the behavior pattern in an organization. To ensure good conduct of employees, particularly those in senior decision making roles, the human resource management framework should be alert enough to conduct proper scrutiny of past conduct of new employees during new employee onboarding process. Thereafter, care must be taken to establish performance management processes so that they are not excessively target driven and is designed to maintain a balance between performance and ethical conduct. The risk reward framework including the identification of high performers within the organization must be based on acceptable risk appetite aligned to strategic choices.
The employee performance monitoring and remuneration shall be based on, among others, clear policy on recruitment , formal mechanisms in place for: employee performance evaluation, to ensure that employee performance targets sensitive to consumer needs and appropriate conduct, Board oversight of the Remuneration Framework, an effective committee structure for responsible remuneration ideally independent of risk taking roles and periodic independent assessment of remuneration framework.
- Whistleblowing
Whistleblowing plays an important role in exposing poor conduct within the firm at an early stage. To ensure that wrongdoings and misconduct are proactively identified and acted upon, it is imperative that firms should put in place an enabling framework that encourages employees to speak up without the fear of personal consequences. A robust framework of whistleblowing – policies, oversight, independent monitoring, anonymous reporting and appropriate dealing with reportable concerns, all go a long way towards promoting a culture of good conduct within the organization.
The Board must be mindful to ensure that the organization has documented a clear policy on whistleblowing, effective internal arrangements are in place for disclosure of Reportable Concerns and of a range of communication methods are available to the whistleblower including the option of anonymity. It is important to articulate both the rights/ obligation of the covered person reporting the event as well as rights and obligations of the implicated person.
- Awareness and Professional Development
In the age of artificial intelligence, the adoption of AI in an organization is reliant on employee skillset and understanding of business goals of the firm. Employee awareness and training is therefore critical for the attainment of a culture of conduct and ethics. It is imperative that the training plan of the firm is not focused on skill development alone but is designed to enhance the ethical performance of employee. Ideally, there should be structured training programs for directors, senior management and all relevant staff to ensure they are equipped to carry out their tasks.
The key elements for this framework are the design and content of training plan, balance of performance training and conduct training within the organization.
- Conflict of Interest Management
Avoiding or managing conflicts of interest is at the heart of preserving the interest of the customers. Without adequate mechanisms to manage conflicting interests, companies are at a serious risk of financial loss, regulatory breaches and reputational risk. Such reputational damage is often the result of institution’s inability to serve the interests of its customers and in not fulfilling the promises made to bring business in the first place. Some elements of a robust control framework include: Board oversight of conflicts of interest and abusive related party transactions; removing conflict of Interest in Committee structure, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest, adequate and timely disclosure to its shareholders , ensuring that Related Party Transactions are performed von an independent, arms-length basis, avoiding insider trading ( where applicable), regularly reviewing conflicts of interest in Vendors and Third Party contracts and clarity in escalation and resolution procedures.
While the eight pillars mentioned above are all critical components of good governance and culture, these must be woven into an integrated framework as part of the overall enterprise strategy. Devoting attention to the synergies of the above aspects of governance can give significant benefits to organizations in terms of a confident assured Board, a responsible senior management, engaged employees and higher customer satisfaction and trust.
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