Emerging Trends in Culture Reform: The New York Fed’s Perspective

March 22, 2022
James Hennessy, Senior Vice President
Keynote Address for 1LoD Culture & Conduct Deep Dive As prepared for delivery

Thank you, John, for your kind introduction. And welcome to everyone who is participating today from different parts of the world. Before I begin my remarks, I would like to state that the views I express today are my own and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.1

I lead the New York Fed's Governance & Culture Reform initiative, which aims to focus the financial services industry's attention on the issue of organizational culture. Our initiative has three specific goals:

    • To reduce incidences of misconduct;
    • To promote healthier cultures within firms and across the industry; and
    • To increase public trust in the financial services sector.

Three Emerging Factors

Over the past decade, my colleagues and I have seen a range of approaches to culture develop across the sector. In those firms that are most engaged on the issue, there has been an evolution in their understanding of how to assess and influence the norms and behaviors that drive decisions in their organizations.

Let me highlight three emerging factors that have deepened the study and analysis of culture. I am sure all of them will be explored during your discussions today.

First, we see the increasing use of behavioral science to better understand ordinary human behavior. Such science begins with the insight that humans are not simply rational actors – at least not if by "rational" we mean something narrow, economic, and mechanistic. Rather, our thinking and decisions are driven by a multitude of inputs and motivations, some "rational," some "irrational," through both conscious and unconscious mental processes. Another important insight of behavioral science is that humans are fundamentally social animals. That is, our individual identity and actions are strongly influenced by our need to be a member of a group. We look to our group – usually those most immediate to us – for approval. This has important implications for the creation of norms within an organization and expectations around conduct.

Second, it is notable how culture "data" seem to be ever-expanding and becoming more reliable. In addition to traditional surveys, rapid changes in technology, including the use of artificial intelligence, big data, and network analysis hold out the promise of accurate, real-time information about the state of an organization's culture and the possible identification of future trouble spots in a firm.

These two factors – the use of behavioral science and more voluminous and reliable data – are helping to support a third development, which is the growing maturity of culture assessments or audits. In my own view, the most useful kinds of assessments require a few key elements. Most importantly, along with information gleaned from culture surveys and the new sources of data I just mentioned, I am a strong advocate for the "human touch" in cultural diagnosis. For example, through direct behavioral observation of groups, culture auditors are able to gather evidence, using all their senses, about how decisions are made and work gets done in an organization. Likewise, conducting interviews with individuals about their experiences can yield insights into the norms, unspoken rules, subcultures, and underlying mindsets in an organization. There is, as you'll no doubt hear through the course of the day, a great deal more to be said about culture assessments. But I believe these methods involving careful, human listening can play a crucial role in helping to reveal the root causes of conduct and culture problems.

Given these advances in our understanding of human behaviour, the availability of new forms of data, and the maturing of culture audits, I do wonder why firms haven't started to govern culture more systematically. Most firms have departments to address all kinds of other risks, but very few (with some notable exceptions) have central teams to comprehensively assess, intervene, monitor and report on behavioural risk. If this approach became more widespread, maybe it could help the industry prevent issues from arising, rather than trying to fix them afterwards.

Update on Culture Initiative Activities

Let me turn now to describe the work of the New York Fed's Culture Initiative, its areas of particular focus in the coming year, and suggest some issues for your consideration along the way.

Our work is organized into three broad categories. These include "Awareness & Dialogue," which refers to our public events, such as webinars and podcasts, that continue to shine a spotlight on the culture issue and provide fresh insights from academics, the industry, and other experts; "Education & Research" through our Education and Industry Forum, which brings together representatives from business schools and firms to integrate ethics into educational resources and training of the next generation of the banking workforce; and "Governance & Supervision," which involves periodic meetings with regulatory agencies from around the world to share information on evolving practices. Across these categories of work, we have settled on three related themes that will underlie much of our efforts in 2022.

First, we are examining the meaning and importance of trust – in the financial sector broadly and within organizations. In fact, trust will be the topic for our first culture webinar of the year, on March 29th (register here). It's often stated that banks are in the business of trust, and yet we know that trust in the financial industry has remained low for many years now. But how central is trust to banking in the 21st century? We want to understand how it has evolved over time, how perceptions of financial sector culture contribute to trust in banks, and how trust matters – or does not – in our highly networked world.

Second, we are focusing on the impact of digitization on financial sector culture, including the influence of a greater share of technologists in banks. We are interested in the seeming contradiction between acting as a stable financial intermediary or fiduciary and the Silicon Valley mantra of "moving fast and breaking things." We also wonder whether cultural norms valuing demonstrations of intellect – the need to be "the smartest person in the room" – could hinder the understanding and governance of new digital products. Are firm leaders willing to ask questions that might reveal some misunderstanding of technology-enabled instruments, such as those offered on decentralized platforms? We all saw during the financial crisis what can happen when the risks and unintended consequences of complicated financial products are not fully explored because someone is afraid to ask "the dumb question."

Finally – and probably like all of you – we are trying to absorb and understand the cultural transformations driven by pandemic-induced changes to the way we work and interact with others. We're particularly interested in their impact on psychological safety and speaking up within firms. On the positive side, we have heard that, for some teams, working remotely or in hybrid fashion has helped de-emphasize hierarchy and power dynamics that can often loom large in person. Those same-sized Zoom boxes may be empowering some employees, creating space for different voices to be heard. Nonetheless, when interactions occur solely via a computer screen, it can be difficult to pick up on culture cues and the norms of an organization. This can leave people feeling lost, demoralized, and invisible within their group. It will likely take more time and experimentation to find the optimal conditions to support a culture of speaking up in the new work environment.

By focusing on developments in trust, digitization, and hybrid work over the next year, we hope to shed light on what is in flux, as well as what is foundational, in financial services culture. Gatherings like this conference, representing a growing community of interest and practice, sustain my belief that we are all becoming better equipped to understand and drive change for the better. Thank you for giving me the opportunity to share my thoughts; I wish you a very productive conference.

1 I would like to thank my colleagues, Stephanie Chaly, Toni Dechario, Tom Noone and Esra Ozer for their helpful contributions to this presentation.

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