May 11, 2016

Janet Johnstone: On SMR and Corporate Culture Continuum

Janet Johnstone

Janet Johnstone

I read a magazine article this week which stated 55% of respondents to a survey on the UK Senior Managers Regime (SMR) think it won’t be effective. I find this statistic surprising.

To me, SMR is really about holding up principles of good corporate governance.  Good corporate governance – transparency, respect, responsibility, controls – is paramount to good business.

I think the point respondents may have been alluding to is what really drives conduct and behaviours is the culture of a firm. Not rules alone.

Some might say ‘poor culture’ is at the root of the reputational issues banking faces today.  Public trust was waning even before the financial crisis and so, in many ways, one could argue the regulators had no choice but to ramp up regulation to try and address culture and trust issues.

Banks need to be ‘trust-worthy’ again.  And banks need to be considered trustworthy before they earn the right to be called trusted.

In my mind there is a culture continuum that is interesting here.  At one end, society will breed a few bad apples.  Usually individuals who are pre-disposed to doing the wrong thing regardless of the industry they work in.  It’s these bad apples which damage the reputation of our industry the most, as they appear in the front-page news.

Further along the continuum you have people who innocently made a mistake.  I think we need to be careful these people are not treated the same as the bad apples.  It’s ok to admit you made a mistake.  And it is important mistakes are recognised and escalated quickly, allowing for the issue to be speedily and appropriately addressed.

If we don’t do this, we run the risk of creating a fearful environment where innocent people make the wrong decision, covering up their mistakes, and in turn, risk sliding down the continuum to join the bad apples.

An environment characterised by fear has a number of second-order negative consequences. We stop short of delighting our clients, we infringe our ability to attract the best talent. We leave opportunity off the table, and leave our shareholders wanting.  And for society, banks will stop short of being protectors/creators of capital and drivers of economic growth.

Psychological studies show that children flourish when they are given boundaries.  In many ways, adults are like that too.  It almost feels safer as by knowing what the rules are, you can define your sandbox a little better and work creatively in a clearly defined space, safe in the knowledge that you know your boundaries, responsibilities and if something goes wrong, you know what to do.

We would all love to see the Senior Managers Regime be successful and effective; addressing cultural change and providing the rules of our industry ‘sandbox’.  Regulation and the way a company is run are two sides of the same coin.

We need to have people feel proud to work in the banking industry again.  Where people can say they are a banker, say who they work for and be proud to do so.  If our leaders don’t feel proud, why should anyone else?

The UK Senior Managers Regime came into effect on March 7, 2016.

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