Thank you, John, for your kind introduction. And welcome to everyone who is participating today from around the world.
Before I begin, I should note 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.
I lead the New York Fed's Governance & Culture Reform initiative, which aims to focus the attention of the financial services industry on organizational culture. Specifically, the initiative aims to reduce incidences of misconduct; promote healthier cultures within firms and across the industry; and to increase public trust in the financial services sector.
Today I'll discuss how we undertake our work; highlight a few key themes and learnings that emerged through our efforts last year; and then provide a preview of what's ahead for the Culture initiative.
First, through our continued events and engagement with multi-disciplinary experts, firms, and the public, we explore culture-related topics such as trust, psychological safety, and speaking up, as well as consider the intersection of financial services culture with developments like hybrid work or the rapid growth of technology and digitization. In recent years, we have produced a series of webinars and podcasts – which are available online – and this year on June 20th, we will host our first in-person culture conference since the onset of the pandemic.
Next, on the education and research front, we lead the Education and Industry Forum – the EIF. Our goal is to integrate ethics and commercial decision-making in the education of the next generation of the financial services workforce. To do that, the EIF develops case studies that highlight some of the ethical dilemmas that early career bankers may encounter in the workplace. The case studies and accompanying teaching guides, which are freely available, help instructors facilitate classroom discussions about how to practically address ethical issues when they arise. This year, the EIF will publish a new round of case studies that will cover – among other issues - communications with regulators, internal reporting systems, risk management, internal investigations, and cyber security.
Finally, we convene the Supervisors Roundtable for Governance Effectiveness, where we, along with regulatory agencies from around the world, discuss and share governance, culture, and behavior supervisory practices. Our collaboration with these agencies has yielded a suite of resources for supervisors to use in work focused on governance, culture, and behavior at firms.
Now I'd like to share with you some of the most compelling learnings from our work last year.
First, the past year has reinforced for us that through shared interactions, it is culture that determines how decisions get made and business gets done. As one of our webinar speakers stated, "decisions are socially produced."1 As individuals, we may not have access to all the data necessary to make the best decision. We need the knowledge, views, and queries of others – especially when dealing with the complex problems and issues posed by financial services. An effective culture, implied another of our speakers, is one which will "facilitate the necessary sharing of knowledge in a way that no individual could discover by themselves."2 Of course, one important pre-condition for such sharing is a work environment of psychological safety.
Another recurring theme that emerged last year was the importance of experimentation in bringing about culture change. Several of our speakers urged less focus on all-encompassing theories and more on practice, trial and error, and the gathering of data and experience within firms. It's experimental application that really matters, both for finding out how people in the organization are truly behaving and to motivate them to change.
To gain the most from such experimentation, we also learned that it is useful to begin by identifying individuals or teams that are willing to apply new values and skills to work challenges or opportunities that mean the most to them. "Go deep before you go wide,"3 advised one speaker. To be effective, experts advise targeting those who are open to change and give them reason to support it based on data drawn from their own concrete experience. Especially if these people are the hubs of social networks, they will be able to then help establish new norms and influence others.
Next, in choosing this cohort of influencers, consider that middle management is where culture change largely succeeds or fails. Middle managers have a special opportunity to be role models for change, given that they are more visible and consequential to junior staff than top management. Middle managers are also well-positioned to navigate a "transitional ground" between the parts of an organization resistant to change, and others that are advocating for it. I suggest we retire the phrase "the frozen middle" and recognize the power of middle managers as part of the solution to better culture change outcomes.
An additional lesson that was prevalent last year – relevant to effective knowledge sharing, experimentation, and the role of middle management in culture change – is the need for a learning culture. Mistakes are inevitable. They are part of being human and any organizational endeavor. Unfortunately, the reaction to mistakes by leaders can sometimes lead to finger-pointing. A better approach would be to acknowledge them, understand their context, learn from them, and not be overly punitive in response. Resolving mistakes in this way creates a more open environment, avoids incident-specific solutions, and can help an organization move from a culture of blame to one of accountability and collective learning.
Drawing on these lessons of the past year, we've selected the following three topics to drive our work in 2023:
First, we will continue to explore how the growing digital transformation of financial services business models affects culture across the industry. For example, we will consider how new entrants to financial services might influence decision-making within firms. We are also interested in learning from previous periods of transformation and their aftermaths, which often included manias for new products and services.
Next, we will look at the impact of financial and non-financial incentives on employee behavior. While compensation is the most obvious tool that can be used to motivate employees, it is not the only one – nor is it necessarily the most effective in the long term. We will delve into a wide range of individual motivations such as status and adherence to community norms, and how they inform individual and group behaviors.
Finally, we will delve deeper into learning cultures. Experimentation and a willingness to learn from mistakes is generally not a cultural norm in financial services. Yet there are industries that embrace it, even in the context of highly regulated and high-stakes environments (for example, medicine, pharma, aviation, and others). These industries aim to address errors and remain uncompromising on safety, while remaining open to the learning opportunities that mistakes and experimentation afford. We will look at what constitutes a learning culture and what these other industries can teach us about building cultures that balance innovation, safety, and learning.
Through our exploration of these three themes, we aim to draw out timely insights to help equip leaders as they work to build healthy cultures in the post-pandemic era. While much has changed in the world over the last few years, our work continues to reinforce the notion that poor behaviors and norms cannot simply be wished or ordered away. Instead, they need to be replaced with more desirable norms that account for complex motivations and influences. Through ongoing dialogue and partnership, fostered at forums like this, I'm determined that together we will continue to make strides towards healthier and more trustworthy cultures in the financial services industry.