The interconnectedness that now typifies the global economy has forced us to reconceptualize ‘risk’. This is particularly important in an Australian context, where we are dealing with the impact of the Royal Commission into the Banks and Financial Services Industry. Executives are obliged to play a part in the resolution of this generational problem.
The findings of the Financial Services Royal Commission did not make for pleasant reading.
“There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management.” – Commissioner Kenneth Hayne
This report, without a doubt, was a low ebb in the life of an executive. Regardless of whether we were personally responsible for any of the damage it detailed, the Final Report labelled us all, if not responsible, then at least obliged to help turn the situation around.
This is a particularly pressing issue even if you disregard the Royal Commission. The nature of ‘risk’ – defined by John Taft (Vice Chairman of Baird) as unethical business practices and behaviours that have harmed individuals or the financial system as a whole – has been transformed by the global economy. The transactions we are involved in are more complex, so the impacts of misconduct can stretch far beyond what we can see and conceive.
These factors propel executives into a position of paramount responsibility. Through their actions, leaders impact culture. The approach your organization takes to dealing with risk is shaped by your attitudes and conduct. Therefore, this dangerous terrain can only be navigated with you leading from the front.
Thankfully, it seems like executives are responding. EY’s report entitled ‘Embedding Risk Culture and Conduct’ found that 89% of banks report an increased focus on non-financial risk. Moreover, 75% of firms are in the process of changing their culture. To ensure that we capitalize on this revolution, it is vital that executives understand the drivers of misconduct so that they can respond effectively.
According to Deloitte, in conjunction with the Centre for Regulatory Strategy, one of the most influential drivers of misconduct is a lack of accountability. If an employee breaches a standard of expected conduct, the message sent by a lack of penalty is that such behaviour is acceptable. In fact, it cultivates an attitude that the rules are only superficial and employees should find a way around them for the benefit of the organization.
This is accentuated by ‘growth at all costs’ culture. If outcomes, rather than following procedure, are incentivized, employees find themselves in a position where the only thing standing in the way of them and personal career progress is a rule that will not be enforced. Can we really blame employees for choosing to take the risk?
Therefore, above all else, executives need to implement a culture that puts emphasis on ‘speaking up’ when misconduct occurs. Your employees need to view you as someone who will accept and respond to wrongdoing for what it is – rule-breaking. That way, whistleblowers will not feel as if they are taking a risk by coming to you with information. Confidentiality complements such a process, encouraging employees to be frank with their suspicions.
Leaders must be champions for risk management. You are looked to as a personification of your organization’s culture. If you don’t make these strides, then nobody else will.
Self-evaluation is key to this process. As has been made unequivocally apparent to us in the findings of the Royal Commission, the problem is not the procedures we have in place, but the attitudes towards them. Executives should consider where their psychological and behavioural tendencies lean so that adjustments can be made. That way, you can become a manifestation of the culture you want to create.
The Complete Leader Program diagnostic is built to help our participants better understand themselves – their strengths and their weaknesses. Cultural change begins with personal change.