DNB's supervision of behaviour and culture
One of the most important lessons that supervisory authorities and financial intermediaries have drawn from the financial crisis is that crises are not only caused by financial problems. Often, ineffective or risk-seeking behaviour by board members in particular can also be the source of multiple supervisory issues. Examples include a dominant CEO whose proposals and actions are not sufficiently challenged, or a management board taking ill-prepared decisions as a result of group dynamics. Situations such as these may lead to important risks not being recognised.
This is why DNB decided to add behaviour and culture supervision to its supervisory duties five years ago. A dedicated expert centre has been set up, comprising experts from a wide range of backgrounds – psychologists, change experts and governance experts. These specialists study board room effectiveness by observing and evaluating board meetings. They have conducted over fifty examinations, both at multiple financial institutions simultaneously, and at specific institutions with suspected risks. These examinations not only focus on behaviour and culture at the top; together with the Netherlands Authority for the Financial Markets (AFM), DNB also investigates whether organisations are able to achieve organisational and cultural changes successfully.
This forward-looking approach is a major benefit of this relatively new form of supplementary supervision. It aims to identify risks that may emerge from culture and behaviour at an early stage and take the appropriate measures to prevent these risks from materialising.
Our experiences with this form of supervision show that executive and supervisory boards are increasingly aware of the impact of behaviour and culture in the board room, and are taking steps towards improvement. For example, supervisory boards now remind executive boards more emphatically of their responsibility with respect to organisational culture, especially where this affects decision-making.
Existing structures and processes are being reinforced, for instance by organising more explicit opposition. One of the ways of achieving this is to involve control functions such as Compliance and Risk Management in the decision-making process more and at an earlier stage. The role of independent board members and the second and third lines may also be strengthened.
Another significant improvement is that behaviour and culture are now more strongly embedded into change and restructuring processes. Management boards now also regard these as part of their own duties and responsibilities.
Whereas supervision of behaviour and culture met with a certain amount of distrust and disbelief in the early years, it is now more broadly recognised as one of the elements of an institution's risk profile, and as an essential part of prudential supervision.
Although supervision of behaviour and culture is off to a good start and general progress is encouraging, the Dutch financial sector still has some obstacles to overcome. Financial institutions are still proving to be reluctant in carrying through fundamental changes to their operational management and organisational culture. This creates the risk that changes remain instrumental or superficial and consequently do not lead to sustainable and genuinely different behaviour.
Knowing that changes in behaviour and culture take a lot of time and attention, we want to call on institutions operating in the financial sector to accelerate the speed of change, and to enter into an ongoing public dialogue on the subject. Indeed, trust is an important precondition for adequate functioning of financial institutions. The public must be convinced that the changes have filtered down to the very core of institutions. If this fails to happen, trust in financial institutions will not recover, and the risks that went with the pre-crisis corporate culture will continue to exist.