An important lesson from the credit crisis is that numbers and figures do not tell the whole story. Conduct and culture can harbour risks for the continuity of an institution. These risks are generally reflected in an institution’s decision-making processes.
DNB therefore chooses to focus on decision making for its first thematic examination The supervisor conducted this examination at seven banks, pension funds and insurers. DNB focused on concrete decisions, such as decisions on an investment, an acquisition or the institution’s strategic development. Two questions were at the core: is the decision-making process balanced and is it consistent?
Balanced and consistent
The focus on these two core questions emerged from the observations that directors should become more aware of the risks inherent in conduct and culture. Their decision making wasn’t always balanced and consistent. In a balanced process of decision making, the interests of all stakeholders are acknowledged and taken into consideration. An unbalanced weighing up of interests is usually the result of flaws in the decision-making process. In most of these cases there is a lack of risk awareness, or collective optimism and/or (overly) dominant management boards versus (overly) submissive employees. Inconsistent decision making, i.e. decision making that is not in line with the institution's strategy, usually stems from other causes such as opportunism, a strong short-term focus, and a management board that does not adequately propagate the corporate mission.
The examination and the interviews sometimes gave an immediate boost to awareness about the importance of conduct and culture in decision-making processes. Besides points for improvement, DNB also observed good examples at some institutions, such as:
- organising and formalising objections, by setting up participation organs
- consistent testing of decision making against the mission and objectives of the institution;
- conscious reflection on successors
- initiation of external coaching for the Management Board.
Round table discussions
In its supervision of conduct and culture, DNB has chosen a new approach. DNB seeks to play its part in enhancing awareness of the risks associated with conduct and culture. Directors must become more aware of the possible effects of their conduct or of the behavioural patterns existing in their institution. This awareness will not come overnight . Despite all the positive examples, commitment is required to ensure that culture and conduct are structurally noticed as elements that advance performance and integrity at financial institutions.
Conduct and culture will be given a prominent place in DNB’s supervision in the coming years, forming a valuable supplement to prudential and integrity supervision. But DNB not only wants to contribute through supervision; it also wishes to connect to and stimulate the financial sector in developing a vision on the importance of conduct and culture for the sector’s stability.
In November and December DNB will organise round table discussions with members of several management and supervisory boards. But that is not all. The intention is to develop closer cooperation towards a sector with a healthy corporate culture, revolving around the core values: reliability, integrity, consistency, balance and sustainability.