Podcast: Bank Notes

Our most recent season of the Bank Notes podcast examines the unique challenges and opportunities facing veterans in the labor market, building upon research from our Equitable Growth Studies team. Previous seasons focus on how to build cultures of curiosity and learning in the financial services industry; trust, technology, and the new workplace; the norms and mindsets that contribute to ethical decision-making; community development efforts in Puerto Rico; and the unique financing needs and challenges of small businesses.
Veterans in the Labor Force
Episode 01
Veterans in the Labor Force
Amy Amoroso, Raji Chakrabarti, Misty Stutsman Fox, Chris Hale, Claire Kramer-Mills, Jonathan McLeman, Matthew Pavelek, Mark Scott, Rosie Vasquez Maury
Veterans are 22% more likely to be out of the labor force than comparable non-veterans, according to New York Fed research from May 2023. In this episode, experts working across the military-connected population speak to the reasons behind the participation gap, also debunking some of the most widely held misperceptions surrounding career paths within the military and the outcomes and experiences of military service. Additionally, they introduce listeners to educational and vocational opportunities unique to veterans and military families, and new research from the New York Fed points to developments from the past year.

Nathaniel Kressen 00:06
Welcome to Bank Notes, the podcast from the Federal Reserve Bank of New York. This episode, we're focusing on veterans in the labor market, with a particular focus on equity. Since May 2023, one team in our research department has been studying trends in areas like earnings and employment across different subsets of the population.

Raji Chakrabarti 00:27
I'm Raji Chakrabarti, the head of Equitable Growth Studies and the New York Fed. We seek to understand differences in economic outcomes across different demographic, socioeconomic and geographic groups. We want to ensure equitable growth, not just overall.

Nathaniel Kressen 00:44
Not just overall growth in the economy, but equitable growth. Understanding how the economy is functioning, not just for the average of all households, but across different segments of society. One of the ways that Raj and her team look at this data is by veteran status. Here she is describing her team's findings from May 2023.

Raji Chakrabarti 01:05
75% of veterans were employed, compared to 79% of comparable non-veterans. Our relevant question here is, do veterans have lower employment rates because they're looking for jobs, but can't find them: that is, they're unemployed? Or because they aren't even looking for jobs: that is, not participating in the labor force? We find that overwhelmingly, the answer is the latter. Relative to a comparable non-veteran, a veteran is about 22% more likely to be out of the labor force.

Nathaniel Kressen 01:45
A veteran is about 22% more likely to be out of the labor force. Which begs the question, why? We spoke to those who live and breathe veterans issues to try and figure out why this is, and uncovered a picture that is more nuanced and complex than we anticipated. I'm your host, Nathaniel Kressen. And this is Bank Notes: Veterans in the Labor Force. The views expressed here do not necessarily represent those of the New York Fed or the Federal Reserve System. To begin with, the Fed research itself offers two explanations.

Raji Chakrabarti 02:30
Interestingly, we found that the differences in education and disability status largely explained these labor market differences. We found that veterans are seven percentage points less likely to have a college degree and are over 50% more likely to experience a disability.

Nathaniel Kressen 02:50
So, to summarize what Raji is saying, veterans are less likely to obtain an advanced degree beyond high school and are more likely to experience a disability. Put together, these two factors pretty much account for veterans' lower labor force participation. One of these two factors is, unfortunately, a bit easier to understand: disabilities. This same Fed research shows that veterans are 50% more likely than comparable non-veterans to suffer from a disability. And, because every active service member is required to pass a physical exam, that greater share can more or less be attributed to their time in the service. As for how disabilities impact veterans' participation in the workforce, simply put, it varies. Veterans receive a disability rating when they transition out of military ranging from zero to 100%. That rating not only determines the benefits they receive, it also places restrictions on whether or how much they're allowed to work and still receive those benefits. The fact that veterans are less likely to pursue higher education is a bit less straightforward. Research from the Institute for Veterans and Military Families consistently points to education benefits as one of the top motivations for service.

Rosie Vasquez Maury 04:08
Education benefits: it could be for themselves, it could be for their spouse, it could be for their kids.

Nathaniel Kressen 04:14
This is Rosie Maury, Director of Applied Research and Analytics at the Institute for Veterans and Military Families.

Rosie Vasquez Maury 04:21
I've seen a number of veterans that, you know, pass that on to their kids and are like, "I'm good, but I want to make sure that my kids can go to school as well."

Nathaniel Kressen 04:29
So, it may not be a matter of whether or not education benefits are being used. Some veterans may be gifting them to another member of the family.

Jonathan McLeman 04:38
So, there are a couple of factors of reasons why veterans don't pursue higher education.

Nathaniel Kressen 04:44
This is Jonathan McLeman. He is a cyber risk specialist at the New York Fed, as well as president of our Veterans Resource Network.

Jonathan McLeman 04:51
One of it is, they feel like they already have it. They've been trained. They've done courses within the military that they think are pertinent, but they don't necessarily apply one to one to what employers want. So from that, you also have a sense of, now I'm in a situation in which I have to restart everything. I have to restart learning the LSAT, if you want to be a lawyer, or the MCAT, if you want to be a doctor. And those are difficult, who has, like, if you don't have the opportunity, when you get out, and essentially the resources to be able to do it, it's very hard to transition to a school that you want. It also leads to a lot of predatory practices, unfortunately. One of the things that has happened for a number of years is for-profit colleges preying on veterans and being able to have an incentive to enroll veterans, but then not giving good outcomes. And that has been proven in Congress, and they've passed legislation, and you can maybe potentially go back and get your GI Bill if there was fraud and things like that. But it leads to a distrust in the system, which leads to veterans, oh, no, I'm not going to do that. I need to get a job right away. I need to go do this. And then they take whatever it is that's available to them, right? So, in terms of the amount of obstacles? Do you necessarily know how to read a contract? Do you necessarily know what all of these provisions are, on how to get what you need? How to get the health care you need, how to get all of those different benefits, as soon as you get out? No, not necessarily. And that's a difficult situation for someone who's just out of high school, who has been earning a paycheck, who has had all of their meals associated with the military, had all of their housing associated with the military. You now have to do all of those things yourself, and figuring that out is it's a huge challenge.

Nathaniel Kressen 06:53
Now, there's a lot that Jonathan covered right there, so we're going to start with the first one he mentions: skills translation. Veterans get considerable training while they're in the military, and it goes beyond specific tasks to include qualities like leadership, teamwork, accountability, and a mission-driven mindset. But those may or may not be readily apparent to prospective employers.

Chris Hale 07:16
My name is Chris Hale, I'm the CEO of Viqtory. And we are a company, a marketing company that matches the military community with civilian opportunity.

Nathaniel Kressen 07:25
That's Viqtory spelled V-I-Q-T-O-R-Y, and they assemble a number of resources for the military-connected population, through online publications like GI Jobs and Military Spouse Magazine.

Chris Hale 07:37
When I got out of the military, I felt like, you know, I was pretty well-trained. I felt like most of my peers were, you know, personally, people that did well in high school. We went to good schools, service academies difficult to get into, and served in the military and had great experiences, leadership opportunities that, you know, most people don't get opportunities to have until much later in life. I was 25 years old, and I was put in charge of a squadron aircraft division with about 50 or 60 sailors in it. And that's common, right? For, for very young people to have that level of leadership and people responsibility. And when we got out, we found out that the private sector just didn't really understand what we were all about. And, you know, and I felt like, well, if that's the case for me and my peer set, what's that like for, you know, the vast majority of veterans who didn't have some of the educational opportunities that I had? And we went out to change that broken veteran narrative.

Nathaniel Kressen 08:36
The so called "broken veteran narrative" that Chris mentions here refers to the perception that most, if not all, veterans are mentally, physically, or otherwise negatively impacted by their military service. It's not something that we anticipated coming into the conversation surrounding veteran employment. But it was echoed time and again as a crucial factor. Here's Jonathan once more on how this perception plays into finding a job.

Jonathan McLeman 09:07
There have been decades of perception of what military service is like, and what military, what are military outcomes, and the mental health of veterans. And I know we talked about, very specifically, in the economic reports about disabled veterans. So how does that include mental health awareness? How does that include the PTSD numbers? How does that include the depression numbers? How does that include this? And the more worrying part, not just to the individual, the outcome of the individual veteran, is how does the employer view a veteran's mental health? Can you go into an interview saying that you were in Fallujah, can you go into an interview saying you are in Helmand Province in Afghanistan, and you are part of convoys that hit IEDs every other day. Sorry, IEDs: improvised explosive devices, and have them not think that you're mentally affected? Now, do they want that in their company? Hopefully, the answer is yes. But a lot of times people just default to the thing that's easy. You know, it's interesting, because not everybody understands the veterans as a community.

Nathaniel Kressen 10:26
This is Matthew Pavelek, president of the National Veteran-Owned Business Association.

Matthew Pavelek 10:31
Or as we call it, NaVOBA. Frequently, our perception is curated by the media we consume, and the stories that we hear, especially on a community at large. We know individual vets, many of us. We don't know the veteran experience. So, one of the things that I was looking at, when I was at the University of Kentucky in the PhD program in communications, was media coverage of vets. What I, what I found when I was researching this phenomenon is, this was right about the time that Afghanistan officially became America's longest war. So that would had to have been somewhere around 2014 timeframe, I was looking at the negative outcomes of service, what I call the broken hero or damaged goods syndrome. And so at the time, there were 0.0015% of people that had served in theater were actual deaths on the battlefield. 0.052% of folks were battlefield casualties. And as much as 12 to 13% of folks had diagnoseable PTSD and other mental health issues. But at the same time, so you're seeing something that's happening in about 15% of all cases, right. So 85% of the folks were not, they did not die, they were not wounded, they were not casualties, they did not have any mental health issues or anything else. Because of what I said before, just the sheer volume of people that are there. Not every one of them is a door-kicking Marine, a lot of them are doing, so many more of them are doing other things. And what we saw is in 85% of cases, when media was telling the story of the veteran experience, it was homelessness, unemployment, traumatic brain injury, PTSD, substance abuse, domestic abuse, all of these negative outcomes of service. So what I knew to be true anecdotally, I was able to validate statistically: that the mirror opposite of reality was being reflected in what our media was telling our folks about. And I don't fault journalists. It's, you know, the, the deviance criteria, which makes something newsworthy is partly why the "Dog Bites Man" phenomenon, right? If it bleeds, it leads. And so journalists trying to tell the true cost of sending our young men and women to war and what that human cost is like... But, there's a negative aspect of that when that's all you focus on, because then people tend to get this perception that that is everybody's experience.

Nathaniel Kressen 12:55
So, there's a disproportionate narrative that emphasizes the negative and follows veterans into the civilian workforce. But to what extent does it affect their economic opportunities? We turned to two experts in this space, who have been studying the economic realities of veterans for decades.

Misty Stutsman Fox 13:12
So, Misty Stutsman Fox, Director of Entrepreneurship and Small Business at the D'aniello Institute for Veterans and Military Families.

Nathaniel Kressen 13:19
That's the Institute for Veterans and Military Families at Syracuse University, which brings us back to Rosie.

Rosie Vasquez Maury 13:25
Yeah, Rosalinda Vasquez-Maury. Rosie. I never go by Rosalinda. A day, a week, a year, doesn't look the same. So, I oversee the research portfolio and any given year, honestly, we're working on a number of different research projects. So it's whether it's the impacts of military lifestyle, veteran entrepreneurship, transition, employment opportunities, it's a whole host...

Nathaniel Kressen 13:51
To give a very top-level snapshot because, truly, there is no shortage to the work they do, the focus of the IVMF falls more or less into two categories: training programs for the military-connected population in subjects like small business entrepreneurship, and research that informs that programming, the programming from other organizations, and policymaking for the veteran space at large.

Misty Stutsman Fox 14:13
Because I think there is a lot of myth-busting that needs to be done in this space. I think that there's a lot of work that can still be done.

Nathaniel Kressen 14:23
We asked about the myths that Misty and Rosie find themselves busting as part of their work, and the answer did not surprise us.

Rosie Vasquez Maury 14:31
So, there's definitely a lot out there. Number one -

Misty Stutsman Fox 14:34
The broken veteran.

Rosie Vasquez Maury 14:35
The broken veteran. I would say what you did in the military is what you want to do post-military life.

Nathaniel Kressen 14:42
This second myth, it turns out, has just as much of an impact on veterans' economic opportunities in the workforce. The idea that what they chose to do in the military is what they are most well-suited for, or even want to continue doing. Which is a limiting view, and not only because people's interests tend to evolve and change past the age they were when they first enlisted. One common misperception is that most jobs in the military are even combat-related.

Rosie Vasquez Maury 15:10
I mean, I guess this is part of the misconception about the military: not everybody is in combat, and not everybody was an infantry. And certainly even the military have a number of jobs that we won't even, that we don't even think about.

Misty Stutsman Fox 15:23
I've seen ranges, and I think it just depends on what's going on at the time, but the infantry is only about 15% to 20% of the Army, if you think about it. So, just at any given time. I do think there's a lot of people that think, "Well, if I go in, I'm gonna have to be in the infantry," or, "If I go in, like, I'm a frontline person." In reality, most people are not that person.

Rosie Vasquez Maury 15:46
Yeah, but I will also add a caveat to it, as well, is that I think it also depends on when you served, as well as, as the service experience is different. I mean, certainly it's important that there's this general misconception, and we certainly don't want to pinpoint or stereotype any one individual, but also acknowledge that for some, and certainly, they might be in a different, they might have had a different experience, in general, certainly, if they were in heavy combat.

Nathaniel Kressen 16:20
There is yet another myth out there, that colors veterans' entry into the workforce, and it has to do with who's enlisting in the first place.

Matthew Pavelek 16:28
One of the other things that people don't necessarily take into consideration is, 75% of the population can't serve in the first place.

Nathaniel Kressen 16:34
Once again, Matthew Pavelek.

Matthew Pavelek 16:36
Whether it's the criminal background history, the drug screening, the physical limitations, and then the ASVAB test, that's the Armed Services Vocational Aptitude Battery. So everybody has to have a certain level of aptitude to be able to to go there. So, for all those factors combined, only 25% of people can actually serve, that aren't going to be, you know, eliminated during that process. And out of that 75%, that 25%, these are the folks who, for the last 47 and a half years, that have chosen to do it voluntarily knowing they're going to put themselves in a position that could potentially be hazardous to their life. And so that volunteer aspect of wanting to serve something greater, coupled with all of the things that eliminate people that couldn't be eligible in the first place, then you put training and everything else on top of it, I think a lot of people really understand the value of working with veterans.

Nathaniel Kressen 17:23
With Viqtory's publication of GI Jobs magazine, Chris Hale disseminates career and industry insights, mentorship opportunities, and stories of resilience and success from across the veteran population. We asked him what stands in the way of veterans in the labor force.

Chris Hale 17:40
I'd say the two things that are really still existing out there that are impediments, are skills translation and cultural differences.

Nathaniel Kressen 17:49
Skills translation, as in what Jonathan touched on earlier.

Jonathan McLeman 17:52
You need to be able to take all of the specific activities you did and translate it into what the employer wants.

Nathaniel Kressen 18:00
Misty shared a story about one veteran whose effective skills translation not only landed him a job, but a boss firmly in his corner.

Misty Stutsman Fox 18:07
I think a lot of folks will sit there and say, "Well, I drove a tank, and so how's that going to help me at a bank, maybe, or something like that?" And, you know, I actually heard a story once of a, of a HR person at Bank of America, sitting down and he was on fire, because he had just been able to recruit someone that he was super excited about who literally was a tank driver. And he was like, you know, at first, there was this entire idea that he might have to convince a higher-up around, like, "Look at all these skills." And, he was like, in reality, it didn't take convincing, because it was so easy to say, "Here are all the skills that he had to do in order to read the instruments and do exactly what he needed to do, to get this thing from point A to point B. And this is why a person that was successful at that is going to just kill it in this role. Because if he can do all of this, this is a walk in the park."

Nathaniel Kressen 18:59
So, skills translation is really a skill in and of itself that veterans can learn to employ, positioning the strengths that they already have in the best possible light and furthering their opportunities in the workforce. Cultural differences present a bit of different challenge. Veterans leave behind a way of life that's built around structure and mission and community to enter a civilian world where those central tenets they're used to may prove much harder to find.

Chris Hale 19:26
On the veteran side, you know, you're tip of the spear, you're operating 24/7, you're always on call. You're often in in very arduous circumstances. You know, but you're with your team, right? And it's all about the team and there's just a high level of esprit de corps and camaraderie and love of your teammates. Conversely, when you get out of the military and you go into the private sector, people are there for the job for the most part. High-performing civilian cultures, I would argue, are really, you know, when if you were to compare them to a military unit, they're, they just don't stand up to the same level of passion, and "We're fighting for something bigger than all of us," right? So, it's just really difficult for civilian employers to recreate that sense of purpose and passion, despite trying to do so. And so, I think veterans feel that, and they feel there's an emptiness that's involved in that culture, on the other side of it. And I think that it's difficult to bridge that gap. And frankly, it just takes time. It really just takes time.

Misty Stutsman Fox 20:37
The folks that do well with transition are the folks that treat it like a new mission, in that they come out with a plan, they sort of know what resources they're going to go to first. Folks that flounder a bit, right, is... there is a sense of purpose. And there's a sense of "This is why you're getting up every day." And there's a sense of "Here's what your eight to five looks like" every day, and it's not as grey. There's not, you know, there's no one out there, someone telling you kind of exactly what you should be doing. And there's a very kind of ranking order and an organized chaos, if you will, and then you get out into the civilian world. And it's not organized chaos, it's just pure chaos.

Nathaniel Kressen 21:17
The challenges facing veterans in the labor force are significant. There are also opportunities.

Matthew Pavelek 21:24
One program that nobody seems to know anything about, but is a tremendous opportunity, is called the SkillBridge Program. So, the Department of Defense will keep an active service member on for the last six months of their service and pay for their salary, their benefits and everything else. But they get to go and work essentially as an intern for a for-profit, or for any enterprise, in the private sector. So the companies that hire these folks essentially get a full-time employee at zero cost to them. There's no cost to anybody but the taxpayer. So there's really no loser there because that person has already decided they're not going to reenlist. Or they're coming to the end of their service anyway, and looking to retirement. This program allows them to use that last six months of active duty time to their advantage. And it's such a financial advantage to the employer, especially because you're getting some healthy, strong, dependable drug-free fit leader that's coming out of the military to come and work for your company. So that's something that I could not more strongly encourage folks to look into if they're eligible for that, to get some of that real world experience before they even officially leave the military.

Mark Scott 22:30
What DoD, Department of Defense, has, is a fantastic Transition Assistance Program. That's something that has become robust over the years. And so, when somebody goes to transition now, they can start anywhere from 24 to 18 months out with different webinars, different counseling sessions, and some might raise their hand say, "Hey, I don't want to work for somebody else. I want to start my own business, be self-employed, or they can use the big term: I want to be an 'entrepreneur.'"

Nathaniel Kressen 23:00
This is Mark Scott, speaking to us from Mississippi State University where he heads up one of the roughly 30 Veteran Business Outreach Centers located around the country.

Mark Scott 23:09
Veteran Business Outreach Center. We commonly is, you know, anything with the government you have to have an acronym so we commonly go as a VBOC, okay? And this year, we expanded from 22 to 28. We're sort of regionally based. We have some structure, but we each have our own personality, because we're in different regions of the country. Different needs, if you will.

Amy Amoroso 23:31
You know, what's fascinating about that, is that individuals can come to us at zero cost. We don't charge a thing.

Nathaniel Kressen 23:38
And this is Amy Amoroso, who heads up another VBOC in New York State.

Amy Amoroso 23:42
We are grant-based program. Right now our full funding comes from the U.S. Small Business Administration. So we are funded fully by the U.S. government to provide this program on the entrepreneurial side to our veterans and their families looking to start or scale, grow any type of business, any industry.

Nathaniel Kressen 23:57
To drive that home, this is mentorship and training at no cost for small business owners at any stage of their development. And anyone from active service members to veterans to military spouses and families are welcome to take advantage. There are, in fact, a number of resources out there for veterans looking to start or scale their own small business. And we've included a link in the episode description that will take you to a list of some of the recommendations from our guests, as well as other information like the Fed research at the center of this podcast. There are two programs that we want to highlight here: APEX Accelerators and the Veteran Institute for Procurement. Both of these programs specialize in training veterans on how to win and manage government contracts as suppliers, knowledge that can be leveraged for potentially greater returns in the private sector.

Matthew Pavelek 24:46
So to date, everything that the government has invested in training vets about entrepreneurship has told them to sell to the government. So, vets are aware of those opportunities, but what they don't understand is the opportunities in the private sector radically dwarf the federal opportunities, just because of the sheer volume of potential customers. The federal government, there are 23 federal agencies with procurement budgets that exceed half a billion dollars annually. The Fortune 1000 alone lets you know that there are more opportunities in the private sector. There are 39 corporations on this thing called the Billion Dollar Roundtable. They spend more than a billion dollars a year with diverse companies, not just in procurement, with diverse businesses.

Nathaniel Kressen 25:27
Running a small business, of course, comes with its own set of challenges. The Federal Reserve Small Business Credit Survey looks at exactly that, tracking economic conditions, financing needs, and access to credit for small businesses across industries and demographics. In 2018, the Small Business Credit Survey looked at veteran-owned businesses in particular. Here's Claire Kramer-Mills from the New York Fed.

Claire Kramer-Mills 25:53
In some ways veterans are, are not atypical, right? They're experiencing challenges that many small business owners experience. One thing, though, that I will say, that I think is really important to note about, about veteran-owned small businesses. The data that I've seen, regarding kind of reentry, and you know, from vets, is that only about 50% returned to the community that they were part of before, before their service. And I think an underappreciated aspect of small business ownership and success is the social ecosystem. And having connections within your community, the tacit knowledge that you can get from other businesses that you're familiar with. The coaching, informal and formal. It could be formal mentoring, but it's also just, "Hey, I've got a problem. I'm encountering this issue, what did you do about it?"

Amy Amoroso 26:52
The resources that are there, to me, it's more of a trusted value. You know, who can we trust when we get out? Who can we trust when we're in? What's our brothers and sisters looking at? And where's that camaraderie? So what we do and kind of going back to one of the first things that we talked about, and touched on, is providing that ecosystem for them. So we try to pull them into our network. Just at the end of this month, actually, I'm providing an open forum for individuals to come in and talk about whatever they want, you know. I'm not plugging anything to them. I just want them to tell me what their issue is. And I'm going to give them direction that they need to go in.

Nathaniel Kressen 27:26
The Fed report from 2018 also showed that veteran businesses have a harder time accessing financing.

Claire Kramer-Mills 27:32
What we learned was that, you know, vets have significant challenges. Some, some big challenges are weak credit history, lower credit scores than might qualify for good terms and conditions. And by that, I really mean just affordable credit. Your credit score, and the number of years that you have, you know, credit, a credit relationship, matters when you need financing for a business, to either start it or to grow it. And that can be problematic if you're sort of not in the prime credit zone, because that means that essentially, you're going to pay a higher cost to borrow the dollars that you need.

Nathaniel Kressen 28:20
At the start of this episode, we looked at veterans' labor force participation rate, and dared to ask why it lagged that of non-veterans. We spoke with those who've made it their life's work to champion, educate, and empower veterans, and heard back that it is just as frequently the intangible factors as the tangible ones that shape their outcomes. One year after that initial release, Raji and her team continue to watch the data, and while the participation gap did narrow in February of 2024, it widened again in March and April. The takeaway? As with everything we heard with this podcast, veterans' experiences in the labor market are mixed, and there remains work to be done.

Raji Chakrabarti 29:07
Veterans form an important part of the fabric of our society. Understanding the differences is critically important to start thinking about solutions.

Nathaniel Kressen 29:28
Special thanks to all of our guests for their time, their passion, and their expertise. All of the data and resources we covered can be found using the link in the episode description, and we'd ask that you consider sharing this episode with anyone you know who might benefit from listening.

Banking Culture Reform: Building Cultures of Curiosity and Learning
Episode 01
Success Through Failure: The PreMortem Method
Gary Klein
Cognitive psychologist Gary Klein has spent his career examining how decisions get made across real-world scenarios. He is well-known for creating the PreMortem Method of Risk Assessment, a risk management exercise that helps project team members imagine potential problems upfront, rather than examining shortfalls in hindsight. This episode digs into the how and why of Klein’s premortem practice, what differentiates it from other strategic tools, and the challenges of integrating a culture of curiosity into established ways of working.

Scott Young 00:01
I do think we can build things into meetings and agendas and processes that not only allow space for curiosity and discussion, but actively try to foster it.

Gary Klein 00:14
One of the most important contributions of a premortem is to help create a culture of candor in a team, where people aren't afraid to say things that might be unpopular.

Wieke Scholten 00:26
What I also try to do in organizations is to normalize it to talk about things going wrong, because things do go wrong. And that's fine. It's realistic. I love the word realism at work, things go wrong, we look at it, we learn from it.

Michael Hallsworth 00:41
If you just assume that you're in a meeting, and the point of the meeting, is to come up with the best solution, and then deploy it. That is a different mentality from saying, we don't fully know. And we know that details matter. So, we're going to try a few different things and test them. That requires some openness to the idea that you don't know.

Preston Cline 00:59
The bottom line here is what really matters. It's not the data that matters. It's the narrative that matters. As a leader, it actually doesn't matter so much what you think went wrong and went right. What matters is the story that your people are telling themselves tomorrow, about the team, themselves, and you.

Jeremy Brisiel 01:18
This is Bank Notes, Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

Toni Dechario 01:28
Hello, and welcome to season three of the banking culture podcast, part of the New York Fed's initiative to drive awareness and change in financial services culture. This season we'll speak with experts on how organizations can build curiosity and learning mindsets into their cultures. We'll explore tools that are immediately useful in the information that they uncover, but at a deeper level, their repeated use can create a culture that treats mistakes as opportunities for improvement versus moments that instill fear. My name is Toni Dechario and I'm with the New York Fed's culture team.

Toni Dechario 02:01
So welcome, Gary, thanks for joining us today. I'm hoping that for those in our audience that aren't familiar with your work, could you briefly introduce yourself?

Gary Klein 02:11
Yes, I'm Gary Klein. I'm a cognitive psychologist. I've been working in the field of naturalistic decision-making for several decades trying to help people understand how decision-makers actually function.

Toni Dechario 02:27
Can you describe briefly what naturalistic decision-making is?

Gary Klein 02:31
Right, so naturalistic decision-making is the study of how people make decisions in real-world environments, as firefighters, nurses, physicians, pilots, military officers. Naturalistic decision-making community studies them, tries to understand where they get in trouble, what their skills are, how they develop expertise. And these, you can see it as a contrast to studying decision-making in a laboratory, where you give college sophomores tasks they've never seen before. But then you don't understand the effect of experience, and you don't see how it plays into it. And the naturalistic decision-making community, there's several 100 members around the world, goes out and doesn't limit itself to the laboratory, but has to learn different domains in order to, to get in sync with the experienced people who are making really difficult decisions under time pressure and uncertainty. The naturalistic decision-making was started in roughly 1989. So, it's been going over 30 years. A number of books have been published, and anybody who's really interested can attend, there's a naturalistic decision-making association that you can join. And the next conference is going to be held in New Zealand at the beginning of July 2024.

Toni Dechario 04:16
Sign me up, I want to go. So, in this season of the podcast, one of the things that we want to delve into is how to improve decision-making by building cultures of curiosity and learning and encouraging curiosity and learning in an organizational culture context. Can you maybe start off by describing why it's important to intentionally build cultures of curiosity and learning?

Gary Klein 04:48
Basically, the situation we face keeps changing, technology keeps changing, challenges keep changing. The routines that we've learned, don't apply the way they used to. And so, if you're not continuing to learn, then you're going to get trapped. And one way to learn is to notice things that aren't working the way they used to, to wonder about what you could do better. And that's the essence of curiosity. So, curiosity is an essential ingredient for organizations to move forward.

Toni Dechario 05:30
What are some obstacles to building cultures of curiosity? What, what gets in the way?

Gary Klein 05:35
So, the, the problem is there's just lots of barriers to curiosity. It's very easy to just sit back and say, yes, we want organizations to promote curiosity. But the fact is, they're organizations. And curiosity leads to insights which are disorganizing. So, there's a natural tension between like, what we're encouraging curiosity, and a smooth-running organization, especially for the managers in the organization, who want to carry out the tasks within a timeframe, within a budget. And now you've got people on your team, who are curious who are coming to you and say, “Hey, you know what I just noticed? If we do this, we can really improve our product. We can make all kinds of great changes.” And you're thinking, “Oh my gosh, how much time is that going to add? What if it doesn't work? What are the risks? Do we just stick with a game plan and not make any of these kinds of digressions?” So, there's all kinds of pressures within an organization not to be curious, but to just hunker down and perform the tasks as they were originally described. If you're working with a vendor, then there's a schedule of payments. And now you're going to go to your vendor and say, “By the way, we're changing our plan, and we're moving the whole timeframe, that's going to change.” And the vendor is thinking, ”Well, how am I going to get paid? How am I going to pay my employees? Because everything seems to be up for grabs.” If you want to train people in various kinds of an environment, you think we would encourage curiosity. But the way instructors work, I should say, “I'm an instructor, I'm supposed to give this platform lecture, I've got an hour to give the lectures, I've got all the PowerPoints to get through. And now you want me to encourage curiosity on the part of the people, you want them to ask questions, and I'm looking at my watch, am I going to get through the PowerPoint? Can we just hunker down and follow the script?” You see the barriers.

Toni Dechario 07:52
Presumably, if you're in a large organization, senior management would love for people to be offering up things they've noticed, suggestions for improvement that are inconvenient perhaps for the people that they're reporting directly to, but ultimately are going to improve the bottom line right, are going to improve how things work going forward. So how do you kind of overcome that obstacle of the person who is immediately inconvenienced by, by that curiosity, by that speaking up?

Gary Klein 08:24
I'm not sure it's that easy to overcome that inconvenience, because organizations always say we want to encourage innovation. And we want to encourage creativity. We want to encourage insights. But for the reasons I described, insights are inconvenient. And discovery is inconvenient. And people just want to do their job. And you think that they would be oriented towards the bottom line. But the bottom line is kind of distant. That's something that the finance people have to worry about. I've got to worry about getting my projects done within this schedule within the resources. And yet, it may be a better way to do it. But that's risky. I don't want to incur that risk. I mean, I'm just sort of putting my –

Toni Dechario 09:20
Yeah, I this is how it's always worked.

Gary Klein 09:22
This is the way it works. And that's why that organizations are just very risk averse. And, you know, they may have a policy, let's have a consensus decision-making framework, though, that everybody has a chance to weigh in, which always sounds harmonious, but it's really terrible. Because if you use consensus, that means everybody on your team gets a veto. And I guarantee there's going to be at least one person on your team who's going to be unnerved by what the new direction might entail and is going to resist so you're gonna have lots of, lots of barriers to curiosity, and innovation.

Toni Dechario 10:13
So, you either end up with the lowest common denominator…

Gary Klein 10:14

Toni Dechario 10:15
…or worse than what you described, people kind of don't veto, because they, they, they go along to get along.

Gary Klein 10:24

Toni Dechario 10:26
So, one of the, one of the, you're known for a number of specific tools in behavioral science, that help actually build more curiosity and learning into organizational cultures. And one of them is the premortem. And I want to make sure, to be able to talk to you about the premortem. Can you describe what that is?

Gary Klein 10:47
The premortem is a technique for evaluating plans, even as you’re, you're beginning to carry them out, as a form of risk management. And I have to be honest, I never expected the premortem to be any kind of popular technique. We just started using it in my company and then I published a short article on it in The Harvard Business Review and my, my friend, Danny Kahneman talked about it at Davos and, and now are doing premortems all over the place. So, the way premortem works, here's how we started: we, we generally in my company at the time, this would have been in the 1980s, most of our projects went very well. But not all of them. Some of them failed. Not terribly, but disappointingly, when we said, after the failures, let's, let's do an after-action review, let's see what went wrong. And then one day, I felt, why are we doing this at the end of the projects? Why don't we do it at the beginning of the project and imagine what might have gone wrong? So, we started in our kickoff meetings for projects and started this premortem routine. And the way it works, is you have your team assembled around table, and you’ll have been going for an hour or two. This is your kickoff meeting, that's usually where we do a premortem. And so, everybody knows what the plan is, they know what their role is in the plan, that's all nicely nailed down, and you say, now we're going to take the next 20 minutes or so maybe, maybe half hour, usually no more than, than that than 20 minutes. And we're going to do this premortem. And in the premortem, I tell everybody, now, relax, everybody lean back in your chairs, you've got a piece of paper in front of you. And I am looking into an imaginary crystal ball, I actually do have a crystal ball someplace. But we just have people imagine that I'm looking at the ball. And it's now six months from now, or a year, whatever is the appropriate time frame, and I'm looking in the crystal ball, and oh no, this project has failed, it's been a disaster, it has been a fiasco. The people on the team, when they pass each other in a hall, they avoid eye contact, because it's so painful. So, I want all of you to understand that this crystal ball is infallible, the project has failed. Now, I want each of you to take two minutes and write down all the reasons why it's failed, starting now. And then they start writing and I hold them to the two minutes, then they're writing like crazy about what caused the project to fail. And then time's up. And now I go around the room to see what people have written. And I record what they have, if it's virtual, I'll do it on a virtual whiteboard, while if it's in person, I'll do it on a real whiteboard. And we go around the room and each person puts what's at the top of their list that hasn't been covered. And we start with the project leader to indicate what's at the top of his or her list, and then we go from there. And that's how a premortem works. And we've done research on it. And the premortem technique seems to significantly reduce overconfidence and seems to do a better job of that than other comparable techniques like you know, pluses and minuses or just general planning. Here's why the premortem works so well. It's because the crystal ball is infallible. So that changes your whole mindset. And now, if you just ask people at the end of a planning session, let's sort of get a step back, does anybody see any problems? All the pressure is on people not to see problems, because you don't want to disrupt harmony. And in fact, you may not see problems because you've spent all this time getting ready. You're all enthusiastic. So, the premortem gets you out of that mindset. It changes the mindset. And you say, okay, it's failed, why could that be? And it becomes a competition. The people writing things down, they want to come up with items that other people haven't thought of, that are reasonable and worth worrying about. So, this before, if you come with criticisms, you're getting in the way of the harmony of the team. Now, people are competing with each other to come up with plausible problems that haven't been discussed anymore. And that's how, that's how you show you're smart and experienced by the kinds of criticisms you can come up with. Now the premortem works awfully well. And some people have complained to me that it works too well because you have a team that's all ready to get started. And now you're doing this premortem to reduce their overconfidence. So, we added another step at the end, where we say now that we've done this premortem, let's do a backup exercise. Look at all the problems that we've listed. And I want each of you to think about what you can do individually to try to reduce many of these from happening. What can you do? I'm giving you another two minutes to come up with them.

Toni Dechario 17:03
Why two minutes? Why is it two minutes each time? How'd you land on that?

Gary Klein 17:08
Yeah, one minute was really frustrating for people, because they'd always be writing when I'd say time is up. And if it's more than two minutes, a lot of people would have run out of steam, and they're just sitting there. And I want the premortem to be filled with energy. So, two minutes seems to work. And most just about all the teams that I've seen people, a few people are finishing before two minutes, but most people are, are still writing, but they're about done. So, two minutes empirically seems to be the right amount.

Toni Dechario 17:43
And because the way I understand it, that what you described is very specific. And these are some very specific steps that you want to follow, you want to make sure that you say, the crystal ball is all-knowing, and the project has failed. This is not a hypothetical, it's happened. That kind of frees people up to, with my understanding of what you've described, to think in that way gives, it gives them kind of a free pass.

Gary Klein 18:12

Toni Dechario 18:14
I wanted to ask you about the order, in that you described, in that the project manager speaks first. Why is that?

Gary Klein 18:23
One of the most important contributions of a premortem is to help create a culture of candor in a team, where people aren't afraid to say things that might be unpopular, and the project leader has to set the tone for this in the premortem by coming up with a good criticism right off the bat. And that way, the, if the project leader doesn't do that, hasn't done that, then it reduces his or her credibility. So, they've got to show that they're willing to take this risk. And that will free up the rest of the, of the participants to take that risk. So, the project leader really has to set the tone. And in all the premortems I've run, they always have, because there's a part of us, even though we love the plan, or we want it to succeed, there’s a part of us that kind of excited to see, to think about how did it fail? And intellectually, it's like fishing, and this is just this wonderful bait. And everybody goes for it. Because it's a, it's a liberating experience.

Toni Dechario 19:41
Yeah, it's kind of fun.

Gary Klein 19:42
Yes, it is.

Toni Dechario 19:43
To imagine what's happened.

Gary Klein 19:45

Toni Dechario 19:46
Yeah. Yeah. How long? How long does a premortem take?

Gary Klein 19:53
Twenty minutes or so and the reason is, we respect people's time. And we will, we know that kickoff meeting, people are taking time out of their schedule. We don't want to overdo it. I have a friend, Bryce Hoffman, who runs these as part of his red team sessions that go for two days. But you know, say he has clients who were willing to spend that amount of time on trying to insert this into their very ordinary routine of organizations and twenty minutes seems bearable.

Toni Dechario 20:39
You said that generally do this at a kickoff meeting. So, does that mean, kind of after you've laid out the bones of a plan, before you start executing the plan?

Gary Klein 20:51
And the reason for that is that you can do the premortem, most effectively, everybody knows what the plan is. So, you know, you wait until the plan is described, and the roles are assigned, everybody understands it. And now you're in a much more knowledgeable place, doing an effective premortem.

Toni Dechario 21:13
And what kinds of projects lend themselves best to this tool?

Gary Klein 21:19
I think this tool would work for any kind of project, especially one where there's a schedule where something is supposed to be delivered at a certain time. And you can have a team of people who know each other, but I've also done it with teams of people who were just meeting for the first time. I've had friends do it with organizations that were about to be reviewed by government agencies, and they wanted the review to go well. And so, they had a plan for how they were going to describe their work. And they said we'd better, this is too important. Let’s do a premortem, just, just to make sure we're more, we're more prepared. And so, they use it there.

Toni Dechario 22:15
And you mentioned that one way in which a premortem is different from red teaming, for instance, is that it's much shorter, tends to be much shorter. Are there other kinds of distinctions between running a premortem versus other types of kind of forward-looking analyses like red teaming or like, kind of, red hatting, playing devil's advocate?

Gary Klein 22:42
So, I believe that the premortem is included in some of the red team activities, I think the army had included the premortem, and Bryce Hoffman includes the premortem, his red team activities. The premortem has caught on because people resonate to it. They don't feel their time is being wasted, quite the reverse. Organizations get to a point where people become nervous if they are too, in too much time pressure to get started. And they haven't done a premortem. It's like driving, that you realize you forgot to put your seatbelt on and, and all of a sudden, you're feeling unsafe because you have, you’re now in a risky, riskier space than you wanted. A devil's advocate is a technique that I like, but I'm not completely up on the research and I may be wrong about this, but my impression from some of the research I read is that the devil's advocate technique, where you appoint somebody as the official critic didn't have much of an effect. Because as the article I read speculated, that it didn't have much of an effect, because if I appoint this other person to be the critic, that means I don't have to be the critic. And when the person raises criticism, I don't know if I, if I necessarily need to believe that, are these, are these real criticisms that the person experiences? Or are they just playing a role? I don't know if they're sincere. So, I don't, I don't necessarily take their criticism all that seriously. The premortem works because people are coming up with where people are going to be the ones who are carrying out the plan. And they're, if they have criticisms, they're genuine ones, they're coming from their own concerns. They're not just making things up, because that's the role they're playing.

Toni Dechario 24:51
Right, and you get, you get the ideas of everybody in the room, as opposed to one person who's been assigned this role of poking holes.

Gary Klein 24:59
Right? Everybody's in it together, right?

Toni Dechario 25:02
Yeah. Yeah. Yeah. You mentioned different types of teams that conduct premortems. Some of them know one another. Some of them don't know one another that well, necessarily. And you also mentioned that people kind of get used to this and start to come to expect it feel uncomfortable if they don't do it. And those all sound like kind of markers of culture, and how premortems impact culture. And I was hoping you could talk a little bit about what you think the broader cultural impact is of having a practice of conducting premortems.

Gary Klein 25:41
You are promoting a culture of discovery. You’re promoting a culture where people expect to hear things that they hadn’t thought of before. As I mentioned before, you’re, you're trying, you're promoting a culture of candor, where people are saying things that ordinarily might have been unpopular. Well, now they're given permission to say it, and they're given respect, if they come up with ideas that hadn't been heard before. You're creating a culture where people are listening to each other. And as such, sitting back and saying, “Well, I wish I had thought of that!” And you're appreciating the, the intelligence and the experience of their colleagues based on what they're hearing because too often we don't get a chance to see our colleagues’ minds at work. And the premortem showcases that so those are the cultural changes that I think the premortem has achieved.

Toni Dechario 26:55
Yeah, that's interesting. Do you have any examples that you can share of, of times that you've seen any of, any of those things happening?

Gary Klein 27:06
The only examples are from my own companies, where people become used to the premortem technique. And, and I'm for the opportunity that offers them to learn from each other. So, I feel it's had a positive impact on other companies where, where I'm, where we've been using it and where I get to interact with people on a daily basis. I haven't studied follow-ups of other organizations so, I really don't have any evidence of that. I hope it would help them. But I can't claim that it does.

Toni Dechario 27:58
Because what I find interesting that you described from a cultural perspective, is how because everybody in the room has to say something you might be surprised by what someone that you didn't expect. You didn't have preconceived high expectations of who comes up with something that actually changes potentially the outcome of your project or whatever it is that you're working on. I think that's a really interesting kind of cultural implication that opens people's mind up to the fact that there are things they haven't thought about. In a way that I don't think I think we have that many opportunities to do sometimes. Exactly. Yeah. Yeah. Okay, well, I want to talk a little bit more about the premortem before moving on to a couple of other tools that you've pioneered. Importantly, I want to ask about the conditions that you think need to be present in order for the premortem to be successful. So, we've talked about kind of the specifics about how to conduct a premortem, you want to, you know, make sure that you've established that the crystal ball has said that the project has failed, there's no question that it's failed. Everybody gets a chance to talk. We take two minutes to write down our thoughts, the leader goes first. And importantly, to kind of build confidence back up at the end, we talk about how we can mitigate some of the problems that we identified. But all of that assumes a particular environment that will allow for those conversations to take place. So, can you describe some of the conditions that you want to make sure, are present before conducting a premortem?

Gary Klein 29:44
I confess, we don't worry about it that much. I've never seen a premortem fail. It's just too engaging. People get into the exercise. And I once was doing a workshop at Columbia Business School. And people were making sure that nobody was looking at what they had written, they were really eager. I and I think that's one of the reasons it's become so widespread in so many communities, including Wall Street.

Toni Dechario 30:22
Hmm, that's so interesting, because I was expecting you to say, you know, hierarchy can get in the way, or a lack of psychological safety can get in the way, but you've never seen one fail.

Gary Klein 30:32
A lot of people say, don't be afraid to speak your mind. But you'd be an idiot to take that seriously. Because you know that there can be repercussions. So, so you're, you're going to be very guarded. But with a premortem with, with the leader going first and voicing a possible problem that nobody had mentioned before, that sets the stage. And that instead of saying, I want you to feel psychological safety, you're now demonstrating that, you're now living it.

Toni Dechario 31:09
And in fact, the thing that people are afraid of is not coming up with a problem, right? As opposed to a normal day-to-day life afraid of raising a problem. Yeah. Yeah. Really interesting. So, I wanted to talk to you about a couple of other tools that you've worked with. I know that you used to work with military quite a bit. And you work with simulators, which, like premortems, are kind of a form of practice, thinking about issues that do come up, issues that could come up. You also use a very specific tool in your business called shadowboxing. Another form of practice. Maybe you could describe shadowboxing, how it works. What are the benefits? What are the potential drawbacks?

Gary Klein 32:09
Back in the mid-80s, my research team discovered how people actually make decisions under time pressure and uncertainty. Our model is called the recognition prime decision model, and we've written books about it and many articles, and our research, we did research with firefighters, that was extremely convincing. A little over ten years ago, I was having lunch with a group of firefighters in New York. And one of them, a guy named Neil Heinz, who's now retired, described a method that he was starting, he had done his Master’s on. And I said, that's the method that I've been looking for decades. And that's the shadowbox method. And what happens with shadowbox is you put people in tough situations where they have to make decisions, these are simulated situations. And shadowbox is a way for people to see the world through the eyes of experts, without the experts having to be there. So, I might put you through a situation. And I stop the action. And I say, at this point, you've got these four options of what you could do. Rank order, which option you would choose first, second, third, or fourth, and write down your reason. But it's not just about causes of action because we might continue the scenario and stop it again. And I might say, at this point in this scenario, you've got three goals to pursue, rank order, which are the most important, second, and third, and write down your reasons. And then we continue the scenario, no, stop it again. This time, it might be about information, here’s five pieces of information, which will be the most valuable for you to get? Now, we've also a small group of experts, three to five people who have lots of experience and are widely respected, they've gone through the same scenario, as you and I. And they've done their ranking of the options and the goals of the items of information. They've ranked them themselves. And they've written down their reasons for why they ranked them. Now we've taken what they've done. And we combined it. So, we have an overall ranking from the experts. And we synthesize the rationale, who, what they wrote down. And we've combined that. So, when you say, here’s my ranking for these four courses of action, and here's my reasons, right away, I can give you feedback and say, here's what the experts ranked, and you want your ranking to match the expert. That's the game rank part to match the expert. The real training, when I show you, here are the reasons that the experts came up with. And you look at what they saw, in the same scenario you just have been reading, you look at what they came up with. And you compare it to what you came up with when, you say, “I never noticed that, I never thought about that. I never made that inference. I never worried about that.” And so, you're expanding your mental model, by seeing the world through the eyes of these experts. But the experts don't have to be in the room, they've already done their work. That's always a bottleneck for training, is when do we get access to experts? Here, you do it upfront, and one short session, and they're done. And now I'm providing their expertise to you. And you're getting to become smarter and more sophisticated. We've done research and we find that after a half-day of this training, people match the experts by about 25%, their matches are 25% higher than when they started, that in a short period of time, having an impact on their decision-making skills.

Toni Dechario 36:26
What is that changing that they can so quickly make better decisions after having had this experience?

Gary Klein 36:37
Major thing is changing is their mental model, they're getting smarter. They're appreciating of factors that they might have otherwise ignored. They're appreciating relationships that they otherwise might not have noticed. And they're, they're doing it and in a training environment. So, they're not as, they’re not being evaluated. We’re not claiming the experts are perfect. We’re saying, you may disagree with the experts. But they're respected for a certain reason, you will need at least need to see what they, what they put down, what they were noticing. Another thing it's changing is their minds, that they might have a certain mindset about what they need to do. I'll give you an example. I work with police. One of the mindsets we needed was that we were asked to shadowbox to change is for police officers who believe that they needed to get compliance from criminals and even from the public. And the way to do that is through intimidation. I'm a police officer, you'll do what I say. That's the kind of immediate respect that I, that I demand. And I have weapons to back that up. Well, yes, you can get, you can get our cooperation through intimidation. But that has negative consequences. And we found that there were, in the police and military, there were people who are extremely skilled at getting voluntary cooperation. And I remember one police officer telling me he used to try to get it use intimidation, but he didn't think it was working the way it was he wanted it to. And now, every time he deals with a civilian or a criminal, he has a mindset that he wants that person to trust him more at the end of the encounter than at the beginning. And that changes, that moves him out of an intimidation mindset into a trust-building mindset. So, we can create shadowbox exercises, where people get a chance to see how the experts would handle it, and what they might do to try to build that kind of trust. Those are the kinds of changes that we think are possible with this kind of shadowbox training.

Toni Dechario 39:16
That's so interesting. And so, you're able to kind of mimic the, the mindset and the thinking of whomever the expert has been that, that created the shadowbox responses or that the expert responses. Do you think? Who should the experts be? And I'm asking this specifically because much of our audience is in financial services. And so presumably, the CEO perhaps, or a member of senior management would want to kind of set the tone for how people are thinking. So, it does matter who the expert is. How much do people have to kind of buy in to the expertise of the expert?

Gary Klein 40:09
They don't have to buy in. But they have to at least listen to be open. If you are CEO wants to be experts. Well, maybe the CEO isn't that good. But there's an advantage of the CEO taking the role of the expert, is it lets the rest of the team calibrate with the CEO and know how the CEO thinks about things. And that's different from the CEO giving lectures and say, here are what my priorities are. That's different from seeing how the CEO is ranking options when they've got to make tough tradeoffs.

Toni Dechario 40:51
Yeah, I think that would be very helpful. Okay, we just have a couple minutes left. I have, I have two last questions. I'll combine them. Hopefully, hopefully, that, that won't be too much. But the first is, do you have thoughts on other suggestions for creating cultures of curiosity and learning? And also, do you have recommendations for further reading? Or listening or watching that people can do on these topics?

Gary Klein 41:24
Great question. So, what can you do to create a culture of curiosity, there's a number of things that you can do. One thing that you can do is shadowbox exercises that break people out of their existing way of thinking and put them in environments they hadn't encountered before and try to move from there. And we, I was just very inspired by a trainer that I met once who said when he was early on in his training career, he thought the idea of training was to wait for people he was training to make a mistake and then slammed them. That's how he'd been trained. That's what he thought he was supposed to do. And after a decade or so he realized that's not happening any better. And now, if somebody makes a mistake, he wonders, why did they make that mistake? And he asks them, and it becomes a joint activity. And, and so he, by his, his own, his own orientation to be more effective, changed his mindset. Well, you can, you can use training techniques for trainers. That's one thing you can do. I have others, but I don't want to miss your last question, which is about books that people can look at because there are books. And this is a shameless and self-serving bias. I would be negligent if I didn't mention my own books. So, I just came out with a book, Snapshots of the Mind published by MIT Press in 2022. Whereas the first book that I authored Sources of Power, How People Make Decisions back in 1998, I have a few other books, but people who are interested in my work, those are two good places to get started.

Toni Dechario 43:26
That's wonderful. Thank you. I think that that wraps it up.

Gary Klein 43:30
Thank you very much for the opportunity. I really enjoyed the conversation.

Toni Dechario 43:35
For more conversations like this, as well as publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Episode 02
If No One Listens, No One Speaks
Wieke Scholten
How can organizations avoid reinforcing mistakes or bad behavior? Why is it crucial for upper management to understand the daily realities and social norms at a localized, team-by-team level? And how might removing the pressure surrounding results actually lead to better outcomes, including meaningful systemic improvements? In this episode, behavioral risk expert Wieke Scholten walks through the ins-and-outs of turning negative events into positive opportunities for learning.

Scott Young 00:01
I do think we can build things into meetings and agendas and processes that not only allow space for curiosity and discussion, but actively try to foster it.

Gary Klein 00:14
One of the most important contributions of a premortem is to help create a culture of candor in a team, where people aren't afraid to say things that might be unpopular.

Wieke Scholten 00:26
What I also try to do in organizations is to normalize it to talk about things going wrong, because things do go wrong. And that's fine. It's realistic. I love the word realism at work, things go wrong, we look at it, we learn from it.

Michael Hallsworth 00:41
If you just assume that you're in a meeting, and the point of the meeting, is to come up with the best solution, and then deploy it. That is a different mentality from saying, we don't fully know. And we know that details matter. So, we're going to try a few different things and test them. That requires some openness to the idea that you don't know.

Preston Cline 00:59
The bottom line here is what really matters. It's not the data that matters. It's the narrative that matters. As a leader, it actually doesn't matter so much what you think went wrong and went right. What matters is the story that your people are telling themselves tomorrow, about the team, themselves, and you.

Jeremy Brisiel 01:18
This is Bank Notes, Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 01:28
Hello, and welcome to season three of the banking culture podcast, part of the New York Fed's initiative to drive awareness and change in financial services culture. This season we'll speak with experts on how organizations can build curiosity and learning mindsets into their cultures. We'll explore tools that are immediately useful in the information that they uncover, but at a deeper level, their repeated use can create a culture that treats mistakes as opportunities for improvement versus moments that instill fear. My name is Toni Dechario and I'm with the New York Fed's culture team.

Toni Dechario 02:00
Today we're joined by Wieke Scholten from BR Insights. Welcome Wieke.

Wieke Scholten 02:06
Hi, Toni.

Toni Dechario 02:08
Wieke, could you start off by briefly introducing yourself for those that aren't already familiar with your work?

Wieke Scholten 02:15
Yeah, of course. Thanks. I'm Wieke Scholten. I'm a social and organizational psychologist. And I work in behavioral risk management in financial services. So, which is bit of a new field, I guess, in upcoming still upcoming field, where you look at current behaviors in an organization to prevent future problems. And I have my own practice in behavioral risk called BR Insights based in the Netherlands, but working globally.

Toni Dechario 02:47
Wonderful, thanks, Wieke. This season, we're talking about how to use intertemporal thinking to build curiosity about our own behaviors and decisions. My first question for you is, why should we care? Why should organizational leaders focus on creating a learning and curiosity-based culture at all?

Wieke Scholten 03:06
Well, I would think there's actually, at least two reasons, one that we know is that if you create a learning culture that improves your performance, which I guess is a really good reason to look into that innovation, it helps with your agility of your organization. But it also prevents problems and future issues. And that's really the work that I'm often concerned with is in risk management or behavioral risk management. So there, we know that learning culture helps you to prevent future problems. And who wouldn't want that? Right?

Toni Dechario 03:48
Right. Specifically, you've done a lot of work on error management, and how organizations handle errors, what perceptions are like about errors within organizations. Can you talk a little bit about why it's important to have an open approach to errors specifically? And how the attitudes towards errors impact outcomes?

Wieke Scholten 04:12
Yeah, I think there's just, so I'm an organizational social psychologist, and from a behavioral science perspective, it's very clear, there's lots of experimental research that shows if you have an open response to errors, that that helps your performance and prevents those issues. So not so much what I encounter sometimes in organizations is also the thinking that it's more comfortable, or that we create an open environment, because we feel better when we can talk about problems openly. You don't have to be worried about consequences or shame. And yes, it's more comfortable. But more important, it actually helps your performance and helps prevent those problems. And for that you need to have a structured look at what went wrong.

Toni Dechario 05:11
I want to talk to you a little bit about terminology. I think that you're pretty specific about the terminology that you use. Can you describe what terms you use and why you use those terms?

Wieke Scholten 05:25
Actually, when you look at that, that psychological theory that I just referred to, their error management approaches is often used in terms of that terminology, referring to learning from things that went wrong. So that's also the academic literature I use in my work in financial services. However, when I use the word error in our industry, often it's associated with operational errors, for instance, so it's more about operational risk or operational errors. Well, I think it's really important and interesting to discuss things going wrong more widely. So, this could be about somebody making a mistake. Yes, it could also be an operational error, but it could also be a decision that you made that turned out differently than you thought up front. So, to really make that wide definition, I always make sure that I explain a little bit when I talk about things going wrong. It entails all of that. You know that Professor Amy Edmondson who is very known for her psychological safety work, just published a book about this as well. So how to learn from mistakes, but she actually distinguishes mistakes from discoveries, which I think is very interesting. So, she says, when it's unknown territories or in there's no knowledge yet, we better call it discoveries and not so much mistakes. Because then if you don't know it, when there's no knowledge yet on what to do, how can it then be a mistake? So, I think that's also where she tries to, let's say, experiment with different terminologies to make it more comfortable for people to talk about things that go wrong at work. So yeah, I think terminology in that sense, is really important to make it more comfortable and safer for people to discuss it.

Toni Dechario 07:24
That idea of treating something as a discovery also seems to reduce stigma, I would think, around something that's gone wrong. I guess not only reduce stigma but turn it on its head and turn it into a positive.

Wieke Scholten 07:39
Exactly, yeah. And, yes, turning it into a positive because you want to look at the opportunity, almost that that the thing that went wrong, also offers in terms of looking forward. But what I also try to do in in organizations is to make it normalize it almost to talk about things going wrong, because things do go wrong. And that's fine. You know, like, it's realistic. I love the word realism at work, things go wrong, we look at it, we learn from it. But we do actively learn from it instead of just fixing it and moving on? Yeah, and another thing, I think on terminology, which I think is important, is that how we deal with things going wrong at work is rarely the same within an organization. So, when we look at learning culture, and we just refer to, I think it's important to acknowledge that that learning culture differs per subculture. And that has to do with one of the basic principles in social psychology, is that we're social creatures. And even though we think we are individual and rational thinkers, we often think and act primarily as group members. So those groups at work. So that's about the team's work in, the areas we work in, the departments, the groups we identify with at work are often very local. And what we know is from research and practice is that how we deal with things going wrong at work also differs per area. So that means it's really difficult to say we have a learning culture in our organization. It is really about finding out sometimes, what helps and hinders us to learn from things going wrong in those, let's say pockets, those local climates or subcultures, we like to say, and I think that matters, because if you want to then create a learning culture, yeah, you have to first have a bit of a local view to know how to do that.

Toni Dechario 09:52
And how would you describe kind of different subcultural approaches to mistakes?

Wieke Scholten 10:02
So, I then strongly rely on what we know from experimental research as well. And in the Netherlands, there's a group of researchers at Vrije University, for instance, who have on quite some research on this. And they think in four approaches, really, that you can distinguish when you look at a group of people in how do they deal with things going wrong? How do they respond to that? And those four ways can be plotted on two axes. One is the extent to which things that go wrong are acknowledged or accepted as part of professional reality. So, is that acknowledged that things go wrong at work? Or is it forbidden? The other axis is around the extent to which these things going wrong are responded to actively. So, do you sit back? Or do you take action? So going to those four approaches, and where teams differ in three of them actually, we know do not lead to better outcomes for organizational outcomes in terms of performance or mitigating risk, right, the risk of poor outcomes occurring. So those three that are not effective, one is ignore and deny, sometimes called denial. So, there is a low acknowledgement. So, it’s very much we ignore that it's there, we don't discuss it, it's not part of what we talk about. It's not part of our reality at work. Hence, also the, let's say, adverse implication in terms of conduct is that if you don't discuss things that go wrong, you can't learn from it. So that's quite easy, easy to understand the denial approach. Second, you can also have a team where it is, again, low acceptance, but paired with a taking action instead of sitting back. So that's not a denial, but more of a blame and punish approach, you would say. And for that, we also know that the conduct implications are, by the way, universal, this happens globally, these are very well researched, behavioral impact of when you respond, for instance, as a leader, as a colleague, to something that goes wrong at work with blame, that people start, tend to cover up their actions as a consequence. So, there's less visibility of things going wrong. And from a learning perspective, that is obviously not good news. You can have higher risk of poor outcomes, you can't see it, you can’t pick up on it, but also, from an innovation and performance perspective, people will not, you know, will be more reticent to try new things. And third, let's say, approach to watch out for is the approach where a high, then a high acceptance is paired with sitting back. So yes, there's acknowledgement that things go wrong at work, which is a good thing. Because denial and blame or punish approaches do not, are not categorized by that, but it's paired with not doing anything. So, we call that sometimes 'accept and justify' type of approach. From a conduct implication, you could almost have, let's say, a slippery slope effect. You call that in psychology, where you are, where you are exposed to things that go wrong, but are not really dealt with actively or learned from, then we get used to those incidents, and it can also spiral out of control. So especially in unethical conduct, that could definitely be a problem. So, to go to the most effective way, actually to deal with things going wrong at work is then where you may have guessed it, yeah, you combine a high acknowledgement that things go wrong at work. It happens every day. I probably messed something up already two times in this podcast, right? So that happens. That’s what we do, we're people, but pair that with an active response, so I'm not sitting back but learning from it. So, identify and learn it's sometimes called or high error management if you take the academic term. And we actually there's so much science showing that leads to great organizational outcomes. So, it's really the smart thing to do. Next to that that high acknowledgement is more comfortable. It's also smart. But that means that you also have to let go. If you want that in your routine, it means that you need to let go that a zero-tolerance approach is effective. And I find that especially in financial services, or in markets area, where I do my work, sometimes, it's still fear is sometimes used to create the better outcome. So, it's zero tolerance, and really pushing towards that zero tolerance is, is still common. And I think there's nothing wrong with aiming to deliver to excellence. But as long as there's a realistic acknowledgement that things sometimes do not go as planned. And if that happens that you don't respond harshly, because that does not drive performance, it actually has many adverse effects. And I think there's too much known health and negative impact of fear. And I think that was what, also what a great academic guest, on the last conference, the New York Fed had organized on culture last June. So, Professor Giselle Antoine of Washington University talks about her research on fear and shame, for instance, and, and those emotions are part also of our professional life, you have to manage that in a smart way, I think. Yeah, and it also means, of course, to then learn from mistakes actively. So, you have, you could say, as, for instance, a leader making the same mistake three times is not accepted. So, we have a high acknowledgement that things can go wrong. But that doesn't mean everything is now allowed and, you know, we can do what whatever.

Toni Dechario 16:21
I love a good two variable graph, where I can locate myself on a scatterplot. I think that more often than not, I think that that low acceptance, that mistakes are gonna happen. As well as kind of low action on mistakes that do happen, I think that is a pretty common place to be. So, if you know I'm leading an organization and have identified, you know, a subculture to be there, what do you think is the more important axis to focus on first?

Wieke Scholten 16:58
So, I would start with acknowledgement that mistakes do happen. And even if you're then still passive about it, let's say sitting back then turn up, how you then learn from them. Yeah, I did read yesterday, some research on what happens if employees do not, do not see that you actually take action? So, they have to keep, for instance, in Speak Up research you see that a lot, for them to keep raising issues, or document, for instance, incidents, they need to believe that something is done with it. If that isn't the case, it will go down very rapidly.

Toni Dechario 17:35
Yeah, yeah, we actually, in our first season of the culture podcast, spoke to Mikael Down of the former Financial Services Culture Board, and he talked about how their research had discovered how futility, he described that as the idea of futility and how, how much that drives behavior and how much that kind of stops people from acknowledge, talking about things that have gone wrong. Why do firms fail to learn from things going wrong? What are some of the common hindering mechanisms that you've seen?

Wieke Scholten 18:12
So as a psychologist, I can't help answering this question from, from, from very much in a psychological way, probably, but it is, I think the first point to make is that there are two basic psychological mechanisms that we all have, which is have the need to belong, the need to belong to a group. And, and the need to be seen as good and successful or to do good. We all have these, like this part of us. And that means that I believe that owning up to something that you've done or have not done resulting in something that was not desirable at work, could hurt the group you belong to, or hurt your reputation in that group. And that is threatening. It's one of the scariest things for us as people. So, it could lead to exclusion, which is a very prime primary fear we have, or we don't want to be excluded, right? So, we are naturally wired to want to avoid exclusion or blame. And we also do not want to see ourselves as not good. And that those two make it so difficult to own up to your mistakes. Self-justifications, also very known, so we just talked a bit about shame and defensiveness. Self-justification is very strong tendency we all have, you know, you hear people say this also in your personal life, right when something goes wrong, we often say, I did not intend to do it. And there's also a great book, I feel called Mistakes Were Made, But Not By Me, I've, I've got catch myself quoting it time and time again. It's by Tavris and Aronson with also lots of juicy examples, also from politics, lots of examples. But it's really going into that tendency to self-justify and all the reasons why we do that. But to counter that basic human tendency to self-justify and not own up, we have to create, I guess, in organizations’ professional context, that encourage people to do so anyway. So, to sort of overcome that tendency. And I think that is that it's quite difficult in organizational contexts where, for instance, there's a legal paradigm. So, for example, I heard a Dutch lawyer say a long time ago, by the way, but after financial crisis 2008, 2007, he said in a newspaper, look, as a lawyer, what you want is to contain a problem to make and to make it small. So, you, you want to say this person messed up, and we fired him or her. It was a bad apple, we got rid of the person. We fix the problem. They're there with, we fix the problem. And we continue, we have nothing to learn, that it was really the legal response to things going wrong, which is makes it more difficult to really start talking about mistakes.

Toni Dechario 21:21
I think that's a huge obstacle. And if you're kind of just blaming it on a person, then you can move forward without ever fixing the thing that really was underneath at all. So actually, since we're there, I want to, I want to talk to you about root cause analysis. I think that root cause analysis can be very difficult for organizations to really, to get right or get as much out of as, as they, as they could. So, can you talk a little bit about root cause analysis and kind of what are some common practices that characterize effective root cause analysis as a way to examine things that have gone wrong, learn from it, and get better?

Wieke Scholten 22:09
I think first so practically, what you need to do I think is first to decide on what occurred offense are we going to do an RCA on? Because I don't believe that everything that went wrong, you need to do an RCA on, a root cause analysis, apologies I call an RCA, right? So, I think you know that you chose the wrong color of the carpet, you don't need to do an RCA on and please don't do RCAs because you said you're going to do RCAs, it's because I also think that is not a good reason, and probably also a waste of your time as an organization. So, we need to decide well thought through on what occurs that justifies for us an RCA. And I would deploy this in that sense risk-based in terms of sort of what is the risk of us doing something like that again? Or what is the risk of that occurring, again, will it hurt us as an organization or customers? What is the societal impact? And in that sense, then it's almost impact and likelihood analysis, or assessment that can guide your decision on should we do an RCA yes or no? And if so, what type? So that is step one, then step two, is really to decide on what root causes to explore. What, what I see in practice is that lots of organizations do not include a behavioral perspective. I was talking yesterday to somebody who is doing work in a retail bank. And he said, and it was about, let’s say, quality of decisions that relationship managers made. And he said, we have it covered Wieke, we don’t need a behavioral perspective on this or root cause analysis, because it’s really the process and it is the system. So, we changed the process, and we changed the system and we’re fine. Or I came into a business once where they said, oh, you don’t need to look here because we had bonuses, but we took them away. So, there’s no incentive anymore to do something that is not right. So, whilst we know that bonuses are, is only one element of that could drive certain behaviors, it could be one of the root causes. Sure, but I think that behavioral perspective is often a blind spot. And I think so that is really an advice I would like to give in this podcast as well include a behavioral perspective because everything that goes wrong in an organization also has behavioral root cause.

Toni Dechario 24:42
At the end of the day, I imagine, you know, there might be a systemic, or a systems, I should say, reason for particular behavior. And so at the end of the day, you may end up needing to change a system, but the behavioral kind of the behavioral analysis helps you see where kind of those behaviors are stemming from and which systems might be driving them, as opposed to going straight to some of the systems you described, you know, as opposed to going straight to comp and thinking that that's going to resolve everything.

Wieke Scholten 25:14
Exactly, I think, then there, it's to the step from, oh, we change the process, or we change the system to then the outcome will be better always goes through people's actions. So, you have to have a view of what to then change indeed, in terms of the process, but also, or the system, but also the elements of that. And you could also we call that often drivers of behaviors, right? Where you can distinguish more formal drivers, so anything on paper, or anything that you can almost touch, that may drive behavior. So, these are systems, processes, procedures, incentives. Sometimes they are also called organizational drivers of behaviors. But you also have social drivers. So those collective beliefs, social norms, psychological safety. Yeah, the dynamics between teams, assumptions that people have all of that are more social drivers of behaviors. You also have individual drivers: think of fatigue, stress, people, experience, contextual drivers at market developments, the regulator. I mean, I'm also, I've also worked at a regulator, so I know what type of regulatory behavior can also result into behaviors in organizations. So, all of that, I think that is in terms of good root cause, effective root cause analysis, tries to have a wide like there's, there's fair chance in terms of what type of root causes can we think of, and include behavior. So not what happens now how do we do things here? And what aspects of how we do things here were okay also causing the occurred offense, but are also present today and could lead to future events? Because I do think that's where the learning comes in. Right? That is really what that deep dive often entails. Really resulting into these are the behavioral patterns and drivers that you can address to prevent those future issues that we can learn from that were underlying the occurred offense, but that we can also change to prevent future events. Whilst that session that I refer to in terms of a root cause analysis, that's really where you go and sit in a room. And here, what I see in the industry sometimes is that that is almost done by people are involved that weren't really involved in the incident that already occurred offense that you want to do conduct a root cause analysis on. So, you don't have the right people in the room.

Toni Dechario 27:54
Is it, why don't you have the right people in the room? Is it that the senior managers are all invited in as opposed to the people who are on the ground? Why do you think that happens?

Wieke Scholten 28:04
Sometimes that's the case, senior leadership that who were involved are now too busy to, you know, spend two hours of your day to really invest in learning from this. This is also where you see leaders differ greatly. There are leaders out there that really understand the value of this right and go in there and be there themselves. But there are also leaders who say, you know, it's something that needs to be done. So do it for me almost, or people that represent areas but weren't really involved. So, my advice would be to really involve those who were involved in that, that event, and ensure you have all of them actually in the room, preferably physically is also my experience, then not to take too long. Like I said, don't dwell on it, but make it action. Don't sit back. But yeah, really, first, I think, step one, gain a mutual understanding of the event. But then really, not so much, I think this happened, but more what happened really, factually. Who was involved? What happened from almost a timeline. Step two here, then what kind of root causes can we distinguish? They're taking in those different categories that we discussed, the potential root causes, so diverge, scope wide. Step three is then converge. So, what are all those root causes? What are the ones that had the most impact and with the highest risk to cause recurrence? So those are two questions, right? Which one is at the highest impact, and which ones are still here and could cause recurrence of such an event? That is actually also your, almost your risk assessment of what our current root causes that are still current today. And then step four is then to what do we need to do ahead to address these root causes so that recurrence is prevented and then take those actions. Really decide who's going to own these actions, follow up, that I think is really important.

Toni Dechario 30:15
One of the things you touched on, was the importance of leaders really taking part in this and being active. And I'm wondering if you can expand upon that a little more from the sense of the work you've done on accountability regimes. How has the introduction of accountability regimes in your mind influenced the ability of leaders to kind of take ownership of things that happen under their watch? And how has it changed behaviors in your mind?

Wieke Scholten 30:51
Yeah, so I think here, there's really something to gain in the way we implement these regimes, right. And I think it definitely impacts the way leaders keep engaging about in conversations about things going wrong. So, and I think that what we know about behavior is currently not sufficiently taken into account when implementing these regimes. So, the risk is that leaders could start avoiding liability, right, by not wanting to know about what is going wrong in their organizations. And that, I think, is a real threat for performance and again, also for risk events happening. So, you, you want senior leaders to be curious about what is happening in that operational reality, what is happening in the core, at the core phase of my organization, not what I say at the top. But what happens in reality, that realism again, right. So, you want them to be curious about that. And I think, therefore, it is important when you implement that regime. And I think regulators, again, have, for instance, a role to play, but also firms, senior leaders in firms themselves to almost choose to take it that way, and to have that conversation with authorities as well, to aim for a process-based application. So instead of these regimes, being more outcome based, so meaning that you ask organizations and senior leaders to evidence their efforts to prevent problems instead of asking them to evidence that nothing went wrong, because that's not realistic, there will be things that go wrong, it will drive defensive behavior or drive motivation of indeed not wanting to know that reality. What senior leaders need to have is a certain degree of trust that the steps they undertake to prevent problems in the organization will be fairly assessed by authorities. Because that’s often what these regimes say. You need to take sufficient steps to prevent problems. But what will, will the steps that you have taken be assessed fairly? That is really what you need to trust as a senior leader to be able to feel, don't feel bad, don't freeze up almost. So that expected fairness or expected unfairness is something in the implementation that you really need to manage. And I think what we do know from behavioral science is that expected unfairness has adverse effects on learning, sure, but can also drive rule breaking behavior, even so it can drive incompliant behavior, if you don't manage that.

Toni Dechario 33:42
We're almost out of time, so, I just want to ask you one last question, which is, you've mentioned a couple of resources during the course of this conversation. And I'm hoping that you can give us the names of those resources again, and any other resources, whether it's books, or lectures, or podcasts or things that are out there that people can refer to if they want to know more about this kind of thing.

Wieke Scholten 34:07
Yeah, great. Yeah, I think, well, I mentioned indeed, that book Mistakes Were Made, But Not By Me.

Toni Dechario 34:13
I love that title.

Wieke Scholten 34:14
Yeah. And the subtitle is actually Why We Justify Foolish Beliefs, Bad Decisions And Hurtful Acts. And what I love about that book is, by Tavris and Aronson on self-justification, but also really on that intention piece. Right? People have the best intentions. But to learn from it, it’s almost irrelevant, right? That those intentions were great. Because you can, how can, how can we say, I think that's fascinating, "I just did something wrong. I did something wrong. I messed up. And it doesn't really matter whether that was my intention or not, it happened.” And owning up to that is, I think, how do we do that, as people I think is utterly fascinating. Then The Right Kind of Wrong, the Science of Failing Well, is that new book of Amy Edmondson that I have to admit, I haven't read fully yet just partly. But I love it already. So, I'm like, yes, get that one. And then lastly, the book I love most of all, I think it's called The Moral Organization. That book is written by Naomi Ellemers and Dick de Gilder. It was also published this year like Amy's book as well, and actually perfectly explains all of the mechanisms that we've been talking about today, from error management approaches to moral climates and concrete ways to improve them. So that would be my tip.

Toni Dechario 35:40
Thank you, Wieke, thank you so much for all of your tips today.

Wieke Scholten 35:45
Thank you, Toni.

Toni Dechario 35:47
For more conversations like this, as well as publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Episode 03
How to Fix What’s Not (Yet) Broken
Michael Hallsworth & Scott Young
In this episode, behavioral science experts Michael Hallsworth and Scott Young of the Behavioural Insights Team discuss why it is important for organizations to examine their operational frameworks and systems, in order to better assess how established processes and environments may be impacting the work of their employees. They also share recommendations for reducing the overconfidence bias, overcoming entrenched ways of thinking, and fostering a culture of transparency.

Scott Young 00:01
I do think we can build things into meetings and agendas and processes that not only allow space for curiosity and discussion, but actively try to foster it.

Gary Klein 00:14
One of the most important contributions of a premortem is to help create a culture of candor in a team, where people aren't afraid to say things that might be unpopular.

Wieke Scholten 00:26
What I also try to do in organizations is to normalize it to talk about things going wrong, because things do go wrong. And that's fine. It's realistic. I love the word realism at work, things go wrong, we look at it, we learn from it.

Michael Hallsworth 00:41
If you just assume that you're in a meeting, and the point of the meeting, is to come up with the best solution, and then deploy it. That is a different mentality from saying, we don't fully know. And we know that details matter. So, we're going to try a few different things and test them. That requires some openness to the idea that you don't know.

Preston Cline 00:59
The bottom line here is what really matters. It's not the data that matters. It's the narrative that matters. As a leader, it actually doesn't matter so much what you think went wrong and went right. What matters is the story that your people are telling themselves tomorrow, about the team, themselves, and you.

Jeremy Brisiel 01:18
This is Bank Notes, Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 01:28
Hello, and welcome to season three of the banking culture podcast, part of the New York Fed's initiative to drive awareness and change in financial services culture. This season we'll speak with experts on how organizations can build curiosity and learning mindsets into their cultures. We'll explore tools that are immediately useful in the information that they uncover, but at a deeper level, their repeated use can create a culture that treats mistakes as opportunities for improvement versus moments that instill fear. My name is Toni Dechario and I'm with the New York Fed's culture team.

Toni Dechario 02:00
So, I'm here today in New York with Michael Hallsworth. And we are joined by phone by Scott Young. Both are with Behavioral Insights Team Americas. And I'd ask each of you to briefly introduce yourself, Michael, maybe you can start.

Michael Hallsworth 02:15
Sure. My name is Michael Hallsworth. I'm the managing director of the Americas for the Behavioral Insights Team.

Scott Young 02:21
And I'm Scott Young, I also work with Michael at the Behavioral Insights Team, and I lead our engagement with private sector clients.

Toni Dechario 02:27
Thank you. And again, welcome. So maybe we could start off, Michael, you can just describe to us what for those who don't know, the Behavioral Insights Team is and what you all do?

Michael Hallsworth 02:37
Sure. And we're an organization that takes findings from behavioral science, evidence about how people actually behave in the real world and apply it to real world problems. We're practical, we develop kind of interventions to say, how could you do something differently in your organization? And then generally speaking, we, we try and test it wherever possible, rather than assuming it works. We've been around for about 15 years. And we had this kind of interesting history, because originally, we were created inside the UK government back in 2010. And people called us the Nudge Unit, in relation to the book Nudge that came out, then it was sort of the kind of same thing, but now around the world and with a range of different organizations.

Toni Dechario 03:17
Thank you. And, Michael, I'm gonna stay with you for a minute. Because you've recently responded to some of the current challenges in behavioral science by publishing a manifesto for the industry. Can you describe briefly kind of what you're hoping to achieve with the manifesto?

Michael Hallsworth 03:35
Sure. So, I've been in the U.S. five years now, and I hadn't realized, still, the word manifesto has kind of weird connotations here. You know where I'm from, it's just like, a program of what you set out to do in the future. But putting that to one side, what we tried to do here was say, you know, as I just mentioned, this kind of current wave of playing behavioral science has been around for 10 to 15 years. And to be fair, it's attracted a lot of attention. Organizations all around the world have invested in it, they've created behavioral science teams. We're talking about some big corporate players. We're talking about Google, for example. We're talking about Walmart. We're talking also about governments, the United Nations, World Bank, a whole range of different institutions. And that's great, and a lot has been achieved. But I think also people looking at this, this development, this success would say, you know, could we have done more, are there missed opportunities? Arguably, a lot of what's been done, has been looking at changing details, the way in which something is done and saying, "Oh, it had this much effect," which is great when we need those kinds of improvements. But I think behavioral science can do more. It can also looking at bigger questions about how we set up our organizations, how we set up our regulatory systems, all those kinds of things. With the manifesto, I tried to take kind of criticisms that have come along with the success and say, "Here are 10 proposals for how we could do more with behavioral science in the future." These exciting things can make a difference in the future. And then try to make them real, try to say what you'd actually need to do.

Toni Dechario 05:18
One of the things that you talk about is applying a behavioral lens. What's the difference between a lens and a behavioral science tool?

Michael Hallsworth 05:27
Yeah, sure. So, where this is coming from is quite often, in the past, people have approached behavioral science, like it is a tool, you can pick up and fix a problem. And indeed, a particular kind of problem. Oh, this is a behavioral problem, get the behavioral insight, insights people and get the behavioral science tool and we'll fix, we'll fix things in this particular area. And yeah, there are things you can do with that tool. But it also, behavioral science can be a lens through which you see all kinds of problems. Right? It's a way of understanding the nature of the problem. I think that has some practical consequences, because it means you're not just going around doing changes all the time. You may say, well, actually, we don't need to change anything, or we're trying to sustain a behavior. We're trying to understand the problem in more depth, step back and say, what's our strategy, what's our approach here? Rather than let's go and nudge someone with a particular kind of tool. And so, I'm just trying to make that point. It's about deeper reassessment, I would say.

Toni Dechario 06:32
So, so one might argue that it requires a certain amount of curiosity, which is handy, because that is our theme, this season on the podcast. And so, we're thinking through kind of how do you build cultures of learning and curiosity. But maybe before we get there, we should take a step back and think about why we would even want to build cultures of learning and curiosity. Scott, I might go to you first with this question.

Scott Young 07:03
Sure. Well, I think perhaps the most obvious answer or reaction to why we would want to promote learning and curiosity-based cultures is that they're associated with continual growth and improvement. You know, there are cultures that are consistently improving and not remaining stagnant. But I think another important aspect of it is that these kinds of cultures are also pretty closely associated with environments where people are also willing and able to admit mistakes and recognize them, as opposed to feeling compelled to cover, to cover them up or hide. And, you know, one term that we use in behavioral science that some may be familiar with is the idea of psychological safety in the workplace, the idea that folks are comfortable, that they won't be punished, or won’t be humiliated for either speaking up, or, again, admitting when something isn’t right. And when it, when we think about conduct, I think there's pretty close connection there. Because, you know, in so many cases, if people don't have negative intent, but perhaps they do something, you know, something goes wrong, or they do something wrong, somewhat inadvertently. And then the question becomes, is that something that they can admit to and speak up and learn from? Or does it potentially become something that they, again, feel a need to cover up? And then perhaps we have a snowball effect, which leads to worse behavior. So, I think those two ideas are pretty correlated. And a learning culture can, can certainly help us in preventing small negative behaviors from growing and becoming much bigger issues.

Toni Dechario 08:53
And why do you think it is that most organizational cultures aren't naturally this way, aren't naturally kind of curiosity and learning-based?

Scott Young 09:02
Well, I think some of it is certainly inherent or rooted somewhat in human nature, you know, there are certainly issues of insecurity, and some fear that that all of us have as humans. But with that said, I think there's a lot of positive intent out there. I think most leaders, most people would like to have environments of this nature. But unfortunately, they often may default into more familiar patterns of behavior, the way things have been done previously, because again, that's often the easier path. And really, what I'm getting at is that, you know, it, to create these kinds of environments and foster them and nurse them really requires some real thought and work, you know, thinking about how everything from the mundane of how meetings are run. And you know, where and when and how people are speaking to you most importantly, perhaps, when we have challenges and problems, how they're discussed, how they're handled, and so forth. And are we reinforcing fears people may have? Or are we doing perhaps the harder work of creating some of that safety that may contribute to a more positive environment?

Toni Dechario 10:25
So, I guess the natural next question then is, what can behavioral science tell us about how to overcome or mitigate some of these dynamics? Michael, I'll start with you.

Michael Hallsworth 10:44
Yeah, sure. So, I think one thing to remember from behavioral science is that context matters and that people respond to what we call cues in their environment. So, this how habits are built up, you repeatedly kind of encounter something and you develop a kind of automatic response. So, the first thing is that telling people, what they should do is never enough, or rarely enough. Where you got to look at is what are the repeated things that people see and feel in their organization that will shape their behavior. And so, you need to look at processes. Some of these things can be quite mundane. But I know there has been work done, for example, about the ordering in which people speak at Federal Reserve minutes, for example. This can massively influence the course of conversation. These apparently small things, in terms of the, the ordering can lead conversations one way or another way, can lead to these kinds of self-reinforcing patterns and agreement, which lead to a different decision. And so, you can look at things like, how do we set up meetings, like Scott mentioned, to try to ensure that there aren't the self-reinforcing patterns of everyone ignoring, sorry, everyone agreeing with the person who speaks first or just being more mindful actually of that as a factor. I think there's various other things like, for example, when you're hiring, how do you compare between candidates. We know that looking at candidates on their own, can be less effective in terms of comparing between people with similar experiences and can actually lead to greater bias and potentially discrimination. So, the ways you can do it by comparing different parts of people's resume or experience together, so then, without seeing who has the most experience, you can say, this candidate seems better in this way. And you build up the kind of judgment bit by bit comparing each facet with each facet. That means that you get a better result when you hire someone. Another thing might be around, how do you, you know, how do you buy stuff for your organization? These, these may sound like mundane things, but they are really important. Do you, do you get the best deal for your organization, when you're procuring things, there are simple things you can do to get a better deal by making comparisons and prompts that the moments of purchase make it easier to get a better deal. So, I'm not saying you have to stand up as a leader and motivate everyone and give an inspiring speech. Yeah, that may be part of your job. You need to look at the prompts in people's everyday environments in organizations, and rethink those. How do people make budgets? How do people hire? And if you can change those, you may start to get the smaller changes that lead to bigger cultural changes.

Toni Dechario 13:32
Are there prompts that kind of help people exercise their curiosity muscle, their willingness to gather other perspectives to wonder about other perspectives?

Michael Hallsworth 13:45
Well, one very obvious one is time pressure and resource constraints. You know, if you have if you're goal directed, and you have a particular thing to do, that's normal. There's not much space for curiosity there. The other thing is a licensing by leaders. So again, if your whole set of a meeting is let's get this done, efficiency, and you've administered everything and memo-ed everything, and put everything in the agenda, that doesn't leave any room for curiosity, because curiosity, as I understand it, to a large extent, involves non-goal directed behavior to a large extent, your brain, not focusing on something, but instead opening up to connections. And that kind of associative mode of thinking is really different from a kind of fully engendered meeting. If you don't make space for that, it's not going to happen.

Toni Dechario 14:46
So, what kinds of things should you do to make space for that when the reality is, the people who are listening to this podcast are working in financial services firms, they have goals, they need to meet those goals, they have time constraints. What are some thoughts that you have on kind of how to create that sort of space, so that people can develop a habit of getting into a different mindset sometimes as they think about making decisions?

Scott Young 15:12
I do think we can build things into meetings and agendas and processes that, you know, not only allow space for curiosity and discussion, but actively try to foster it. So, you know whether it's certain prompts or time allocation and so forth. But, you know, again, building into the way we have our meetings, or we go through our design briefs, or whatever, you know, the issue may be that, you know, specifically indicating that this is what we're looking for, and, you know, promoting and actively fostering, you know, rather than the idea is to get through this agenda as quickly as possible, which is, you know, again, obviously understandable, and can be a default unless we consciously think otherwise.

Toni Dechario 16:04
And kind of normalize that process. Yeah, Michael?

Michael Hallsworth 16:07
I mean, one thing we do as an organization is test stuff, experiment, prototype. If you just assume that you're in a meeting, and the point of the meeting, is to come up with the best solution, and then deploy it, that is a different mentality from saying, like, we don't fully know. And we know the details matter. So, we're going to try a few different things and test them. And that requires some openness to the idea that you don't know. Because you may feel like as, I don’t know, as a professional, you're paid to know the answer, rather than trying to find it out through tweaking things or experimenting. And if you make a big, bigger point here, I think that mentality is quite often how we make policy as well. We tend to sort of consider all the options in the list, and then say, this is the best one, we're going to deploy it. But actually, when things get into the real world, there are unexpected events or details that you haven't fully thought through that require some thought so that certainty, that sort of lack of curiosity about how is this actually going to play out and contact the real world is potentially damaging. So, we use experimentation, we use prototyping, try and get some of that curiosity.

Toni Dechario 17:26
Yeah, we're also speaking with Gary Klein, who pioneered naturalistic decision-making, which is exactly that, like the real world is different from what's happening in a simulation. And therefore, you need to think about how people really behave. In real life.

Michael Hallsworth 17:42
Yeah, the real world is different from our expectations. We’re often over optimistic. You just look at major projects that always go over budgets. We've done quite a bit of work on reducing overconfidence in government, because a lot of the incentives are to think the happy thoughts, to reinforce that this is a great idea, boss, of course, it's going to work. And there are things you can do to say, well, actually, for example, if your, I loved the examples from infrastructure, you're running the Olympics, right? History shows the Olympics go 20 percent over budget, you take your budget, you add 20 percent on as a matter of course, it's called reference-based forecasting, things like that, to combat overconfidence. It's a major, major task, because it leads to these problems when we reached the real world.

Scott Young 18:33
Just to pick up on that, I think another real enormous contribution of behavioral science is making us aware of some of these biases or heuristics that can get in the way as we, you know, either look backward at past events, or we look forward and try to project. Michael spoke about overconfidence bias. There’s also things like hindsight bias, you know, our tendency to look back at something, and, and assume it was very easily predictable, of course, it worked out that way. And confirmation bias, the tendency to essentially find what you're looking for, right, to reinforce the things that you were looking for, as, as you look backwards. So, I think if we're more aware of these tendencies that we have, as humans, we can be more aware of them and potentially build into some of our processes and our thinking ways to mitigate them. And one thing that we do, we try to do as a matter of course, is the idea of premortems looking forward, to try to anticipate what could go wrong, not only as a matter of thinking ahead and trying to plan ahead, but also, I think, over time to kind of show ourselves that you know, we don't always predict outcomes properly. And you know, that reinforces the need to be open to more ideas and not fall into the trap of assuming we know everything. I know, Michael, you've spoken a little bit about premortems, you know, and the value of doing them in the manifesto and elsewhere. I didn't know if you wanted to speak more about that.

Michael Hallsworth 20:19
I mean, I'll leave Gary Klein to talk about premortems cause he, he created them. So, I think you've, you've got him, haven't you?

Toni Dechario 20:26
Yes, yeah. Yeah, actually, but I did want to ask you kind of on the, on the borders of premortems, and after-action reviews, which we'll also be talking about this season. What is it about using different time periods, like looking forward and looking backwards, as opposed to looking at today, that might be useful in gathering different perspectives and being able to kind of suss out potential issues. Was there something in the mindset of imagining a different time?

Michael Hallsworth 21:01
This is where I think about scenario planning. And, you know, the scenario planning as, as practiced by some companies like Shell has been around for quite a long time now. But my understanding is the point, scenarios are not predictions, right? They are ways of imagining the world. And people often think they're like predictions in like, this is what's going to happen. But actually, as an incentive, one of the big benefits is that process of imagining a different world, of seeing how the same driver, say, and the population growth or whatever, could lead to different outcomes. And that, I think, is the main benefit in terms of opening up ways of thought that can be quite path dependent, we just sort of say, oh, it's going to turn out this particular way. And that that way of thinking can be exacerbated by looking at the past, because what you're seeing in the past is the way it turned out. Scott referred to this in hindsight bias, you're seeing one version, and you don't see all the things that needed to have occurred, the chance events and so on, that led to this particular single outcome. And scenario planning kind of tries to open that up and pick apart the things that may have led there. And I think a final thing that I find quite helpful, is you take that one step further, and you think about how we're living in a complex system quite often, like a city, for example, where you have all these different parts, interacting in ways that we don't fully understand, quite often it kind of works. But what I think is incredibly interesting is to understand what are the kinds of rules of the game that mean that it works over the unspoken ways that people interact? In a city like New York, for example, the mean, collectively, we generate kind of outcomes, like, we don't crash into each other in Times Square. That I think is, is also about curiosity, and understanding the kind of unseen rules that we are using all the time in these kinds of systems. And I think if you can get there, that is actually, for me, a really key part of good policymaking as well. And you may have it in your organization, as well. What are the things, the tacit things people doing in your organization that make it work?

Toni Dechario 23:28
And these sort of really intentional conversations about what's happened in the past, and what were the specific elements that not everybody saw, but that were there, as well as what could potentially happen in the future, and it helps to crystallize.

Michael Hallsworth 23:47
Memory is biased quite often. There are many studies, to jurors, for example, about what they remember, and don't remember, witnesses in criminal trials. You can run experiments where people see a particular event, and then you, you can see what people remember, you can sort of change different aspects. And you can see patterns in what people remember. So, there are distortions of memory, that mean that we can have, two people can have very different understandings of the same event. And that's not particularly new insight. But I think if you don't bear that in mind, and you think about how you need to leave space for people to, how do I put this, if you’re talking about the past, you need to leave space, so people can match it to their memory as well. Rather than just sort of saying this is how it was, right, you also need to sort of give people space to, to buy into your story, matching it to what they remember.

Toni Dechario 24:52
That's interesting, I wonder about the also, you know, a lot of what we think about is ethical decision-making. And I wonder what the ethical implications of that are like, if memory is more distorted or less distorted, depending upon how someone feels about their own behavior in a given situation.

Michael Hallsworth 25:16
Okay, so there are self-serving biases. One of the most powerful things from psychology is that we act to preserve positive self-image to feel good about ourselves. If we are aware that we did something, and yet, we also have an image of ourselves as someone who doesn't do that kind of thing, that's unpleasant. It can provoke what we call cognitive dissonance. And that's like, actually feeling bad. And so, the famous idea is that you try and reduce that bad feeling. And you either do that by acting differently, and sort of changing your behavior to bring it in, in line with your self-image. Or you change your kind of attitudes and your beliefs. And you think about that thing it is, and you re-present it to yourself, and you say, “Well, actually, was it really a conflict with my values because of this, this, and this?” This is a very powerful post-rationalization we do to alleviate that unpleasant feeling we get.

Toni Dechario 26:25
So, an after-action review, or a post-mortem could be uncomfortable.

Michael Hallsworth 26:31
Oh, I think it definitely will be. So, then the question is, how do you anticipate that? How do you give people an outlet for that? How do you prevent them from being backed into a corner and defend their self-image by rewriting history? You need to give an outlet and a constructive way forward rather than that defensive corner.

Scott Young 26:52
I just add that it's a real challenge, right? Because, again, people will rational away, rationalize away negative behaviors and still hold on to the perception of themselves as fundamentally good people. You know, if you're looking to prevent negative behaviors, you may want to try to link those things to self-image, because it had a stronger impact on limiting people's tendency to do something. So, it’s kind of an interesting dilemma of, on the one hand, how do we allow people to make mistakes and recover from them, so to speak, and be open about them? So, they don't fall down a snowball’s path, so to speak, of covering up and getting worse. But on the other hand, how do we link negative behavior to negative self-perception so that there's a stronger, a stronger impact in hopefully reducing people's likelihood to commit even small behaviors that will reflect negatively on their self-image?

Toni Dechario 27:57
Part of the reason that I'm so curious about the forward-looking element of it and you each spoke a little bit to this is, you know, in the financial services sector, certainly we've seen over the course of the last decade and a half a couple of examples of a failure of imagination, leading to some problems. You know, who could imagine that house prices would go down? Right. And so, the kind of experimentation, Michael, that you were talking about, you know, I think could potentially be helpful in imagining is kind of previously unseen scenarios.

Michael Hallsworth 28:43
One thing that comes to mind, which may be interesting for your listeners, is increasingly use, people use agent-based modeling, which is basically where you, you simulate different people interacting with different entities, and you work out what are the different futures where people, the collective decisions go one way or another way. So, you, you kind of build it so each kind of individual person is, is making decisions, and then you see how they will interact. And now the thing about agent-based modeling is very interesting and powerful. And you can change different aspects and say, well, what happened if the weather was slightly different, does that affect how this collective behavior happens? And this is relevant for the economy, right? So, you can simulate different economic outcomes, like house price changes. What I think is really interesting is, a lot of these models have been based on our rational choice theories of behavior where people act in their best interest, they weigh the costs and benefits and make a decision accordingly. And what we're seeing on the kind of cutting edge of this is that you see models which are more behaviorally accurate, based on some of the things that we look at in terms of mental shortcuts, the fact you copy people, you don't weigh up the costs and benefits, you look what others are doing. And that's behavioral science infusing into agent-based modeling. And it can offer a really more accurate set of future thinking, scenarios really. So, you're not just going on what do we think will happen in the future and trying to create creativity, you're letting the model do the work, just more accurately, we hope based on what people actually do.

Toni Dechario 30:32
So, I want to move to a little bit of a meta question, Michael, which is we're thinking a lot about using forward and backward thinking, to improve decision-making. And I'm curious about what you learned from your own experience in writing that manifesto, which was a bit of an exercise in forward and backward thinking, you know, that might help this conversation.

Michael Hallsworth 30:57
Yep. So, some quick thoughts. First of all, is the hindsight bias thing that Scott mentioned, like, it's very easy, looking back to construct a narrative like this was all inevitable that people would be interested in this kind of thing. We'd be sitting here 10 years later. But I remember at the time, it wasn't like that at all. And we were very uncertain. It felt like risk, and we didn't really know if it would pay off. And, you know, maybe people will just won't be interested. But it's very easy to construct that narrative afterwards. At the same time, I felt that it was only from looking back on things that I could see what had happened sometimes. So, I think there was some choices that we made in our early days that influence the way that the field develops in like long-term way, focusing on testing, focusing on changing specific aspects of an organization or a service. So, I think that was really helpful in terms of looking back. Looking forward, I was just struck again, by the fact that I've spent like, a lot of my career like writing stuff, like, you're doing stuff, like, we do a lot of practical projects. But when I write stuff, it's like, here's what we should do. Here are some recommendations. I've been doing this for a while now. And just particularly here, I felt well, it's hard work, knowing what to do, and I think but we think we've got there, that's solvable. Actually, doing this stuff, make it a reality, living up to the ambitions here, it's just really hard because you, you publish the same report, and you go back to your day job, and all the same incentives are still there. All the same things that make it really hard for someone to be the first person to do things differently, are still there. And that difference between what I know we should be doing, and just the difficulty of making the first move was just really apparent to me. And it's really ironic, because that's what we focus on. Right and even knowing what I should do and knowing the barriers, I find it really hard to make some of these changes myself. And it's a humbling experience.

Toni Dechario 33:04
Because you're human.

Michael Hallsworth 33:05
Because I'm human, because you, if people will know when they're running organizations, you don't have complete freedom. People, some people who may work for you think you could do everything, but you can't. And that's really hard. Really hard trade off to make off. It's really hard to reconcile that in your mind, but it's true.

Toni Dechario 33:27
And doing it yourself, is that difficult getting a whole organization to move in a particular direction is nigh impossible. So, I'll ask the impossible, Scott, I'll direct this to you. What advice would you give to leaders who are trying to fundamentally change the culture of their teams or, or organizations or, or let's say the financial services sector?

Scott Young 33:54
I think maybe two main themes come to mind for me as I’m thinking about that. I think first message might be that, you know, as leaders, the common default or tendency is to think about changing culture from the top down, you know, and if I put forth the right core ideas, and I repeat them, and I make them visible, and that you know, and hopefully, of course, I embody them, and model them myself, that everything will flow positively downward from there. But I'd encourage them to also keep in mind that we can change culture from the bottom up as well. And that, you know, we can complement those top-down efforts by thinking very specifically about the behaviors that constitute an ethical culture and environment. And to focus on moving more people towards those behaviors, you know, whether it's moving from 50 percent to 60, or 80 to 90, but getting more people to consistently do those specific actions that we're looking for. And I think what we find, and we mentioned, I think, rationalization earlier, that behavior can change attitudes and culture as well. And that when, when people are doing something, they tend to adjust their own thinking to align with their behaviors. So again, I think that's another path to changing a culture internally. And then I'd say one, maybe broader theme is just, I think a lot of energy inevitably goes towards policing behavior, and you know, thinking and focusing on what I believe is mostly a minority of folks who have active negative intent and preventing wrongdoers from succeeding. And, of course, that's critical. But I think there's a larger opportunity around prevention. And that's, you know, speaking to the vast majority of employees in most organizations, most cultures that want to do the right thing. And I think they're, we often fall into the trap of thinking, we just need to persuade them more and give them more information, and that will make the difference. And sometimes that has the opposite effect of confusing and overwhelming people. And if we take more of a mindset of let's make it easier for people, let's help them do the right thing and make that the easier path, that's going to be more likely to, to move the culture and move the majority of folks to doing the things that that ultimately constitute the culture and the environment that we want.

Toni Dechario 36:47
So, we just have a few minutes left, I have a couple more questions. First, where do you see the most promising opportunities for applying behavioral science to the financial services world? Scott, I can I'll start with you on this one also?

Scott Young 37:04
Sure. Well, I tend to think of things in terms of what we call Win-Win-Win opportunities, which are the opportunities that have definite value to the organization, but are also positive for the people impacted, whether that's customers or employees, and ultimately benefits society. And tied to that, I think we look for areas where we have what we think of as intent-to-action gaps, where most people do indeed want to do the right thing, but they aren't necessarily doing it, whether habits are getting in the way or confusion or complexity. I think those are the areas that we can apply behavioral science, both ethically and effectively. When I think of which areas, you know, kind of fit that description for me, the ones that come to mind are compliance as an area where, again, we tend to sometimes overwhelm people with information and complexity. And I think there's an opportunity to, to simplify in many cases, to apply social norms, and to get more people, ultimately to the place they want to be, which is doing the right thing consistently.

Toni Dechario 38:18
Sorry, Scott, to interrupt you, but you said to apply social norms. What do you mean by that?

Scott Young 38:24
Well, that can be a couple of different things. But first off, in many cases, social norms can be in showing them that the majority of people are indeed, complying and doing the right thing. Sometimes it's easy to rationalize that nobody else is doing it. You know, anecdotally, because you know, of one colleague who, who also isn't, but in reality, you know, 80, or 90 percent of the people are doing the right thing, right. Another dimension of social norms, I, that I think of a lot in organizations is tapping into the power of teams or colleagues. So often, the communication and the efforts are all aimed at the individual as an individual. But we all know that our behavior within an organization is usually influenced by the group of people we work with. And sometimes there's opportunities to leverage that, you know, having people do something collectively, jointly, or even gentle forms of competition, our team versus others. I think there's a lot of power there that we can tap into. And we've seen it in fact, in work that we've done in organizations around things like employee health and wellness, as well as other areas. Another area and financial services that really comes to mind would be anti-fraud and cybersecurity-related efforts. You know, those are ultimately human issues. In most cases, it's a question of people following through on procedures, it's not just technology. And again, I think there's positive intent in those cases. And often it's helping people think before they act. And we've had success in integrating small interventions to help people become aware of things like phishing attempts, and to stop them or at least mitigate the likelihood of sharing information that they shouldn't and things of that nature. So, I think there's a lot of potential tied to fraud and cybersecurity as well. And then, of course, there's this huge host of people issues, kind of the third bucket that comes to mind, you know, everything from employee engagement and retention, and health and wellness and safety, to issues around diversity and inclusion and gender equality and equity as well. You know, some of the things we've been talking about today in terms of process changes and so forth I think can have enormous impacts, and indeed, have been shown to have enormous impacts on success rates and behavior tied to those issues as well.

Toni Dechario 41:01
It strikes me that a lot of these things, perhaps suffer from a similar issue, when you talked about how allowing space to exercise curiosity can sometimes be seen as like, time consuming and this is the way things have always worked. And so, this is a little bit of an annoyance that we have to kind of stop and listen to these things that could go wrong, it's never gone wrong before, why is it gonna go wrong this time. And compliance is often seen, kind of with the same, like, let's just get through it so we can get to the stuff that matters. And so that kind of emphasis on these processes are actually important. And here are the ways in which they can lend themselves to the bottom line, I think is something that behavioral science can kind of offer people that perspective. So, I think we just have a couple of minutes left I, I'd like to be able to ask more, but I'll wrap up with a final question, which is what recommendations would you have for those listening who’d like to learn more about behavioral science generally?

Michael Hallsworth 42:07
Well, one, one website that I read myself, one kind of magazine is, is Behavioral Scientist. It’s like, really, obviously, high quality is sort of like articles not just like about behavioral science, oh, this is interesting, but also, like relating it to current events and offering new perspectives on things. So, I would recommend people look at that.

Toni Dechario 42:34

Scott Young 42:35
I'd agree that Behavioral Scientist would probably be the first place I would start. One other one that comes to mind is Habit Weekly.

Toni Dechario 42:44
Did you say Habit Weekly?

Scott Young 42:45
Yes, it's a site and a newsletter called Habit Weekly, and probably a little bit more of a practitioner or applied angle to it. But also does a good job, I think of summarizing a lot of what's going on in the field, from research to case studies, and so forth. So that's another place that I would look to if I was looking to one or two resources. It's going to keep me informed and show me a range of things going on in this world and maybe point me towards areas to dive deeper.

Toni Dechario 43:20
Thank you both very much for being with us today. Appreciate it.

Michael Hallsworth 43:23
Thanks so much.

Scott Young 43:24
Thank you.

Toni Dechario 43:26
For more conversations like this, as well as publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Episode 04
When Mistakes Are Inevitable, But Not an Option
Preston B. Cline
In a high stakes environment where mistakes can be catastrophic, how can an organization plan for human error? When does shared expertise within a group prove most valuable, and when might it make more sense to foster cognitive diversity? Why do some after-action reviews successfully establish a consensus-driven vision forward, while others stir up feelings of shame, blame, and guilt? In this episode, Preston B. Cline, co-founder and Director of Research at the Mission Critical Team Institute, shares observations and best practices from working with teams in immersive, all-consuming environments where the margin for error is near zero.

Scott Young 00:01
I do think we can build things into meetings and agendas and processes that not only allow space for curiosity and discussion, but actively try to foster it.

Gary Klein 00:14
One of the most important contributions of a premortem is to help create a culture of candor in a team, where people aren't afraid to say things that might be unpopular.

Wieke Scholten 00:26
What I also try to do in organizations is to normalize it to talk about things going wrong, because things do go wrong. And that's fine. It's realistic. I love the word realism at work, things go wrong, we look at it, we learn from it.

Michael Hallsworth 00:41
If you just assume that you're in a meeting, and the point of the meeting, is to come up with the best solution, and then deploy it. That is a different mentality from saying, we don't fully know. And we know that details matter. So, we're going to try a few different things and test them. That requires some openness to the idea that you don't know.

Preston Cline 00:59
The bottom line here is what really matters. It's not the data that matters. It's the narrative that matters. As a leader, it actually doesn't matter so much what you think went wrong and went right. What matters is the story that your people are telling themselves tomorrow, about the team, themselves, and you.

Jeremy Brisiel 01:18
This is Bank Notes, Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 01:28
Hello, and welcome to season three of the banking culture podcast, part of the New York Fed's initiative to drive awareness and change in financial services culture. This season we'll speak with experts on how organizations can build curiosity and learning mindsets into their cultures. We'll explore tools that are immediately useful in the information that they uncover, but at a deeper level, their repeated use can create a culture that treats mistakes as opportunities for improvement versus moments that instill fear. My name is Toni Dechario and I'm with the New York Fed's culture team.

Toni Dechario 02:01
Today I'm joined by Preston Cline of the Mission Critical Team Institute. Thanks for joining us today. Preston, welcome. Can you start out by briefly introducing yourself and the Mission Critical Team Institute?

Preston Cline 02:14
Sure. I'm Dr. Preston Cline, I, my degree is, all my degrees are in education, Rutgers, Harvard and Penn. I run an applied research and education lab. Think about DARPA (Defense Advanced Research Projects Agency) or RAND. But instead of looking 20 years out, we look Monday. We specifically are working with what are called mission critical teams. These are teams that work in decision-making environments, about 300 seconds or less, where the consequence of failure can be critical or catastrophic. So, think NASA, think firefighting, think Special Operations, tactical law enforcement. And our role is just because you can do a thing doesn't mean you can teach a thing. So, we look specifically at what's called the tacit knowledge transfer problem, which is, you know how to ride a bike, but you can't explain it to me. And while that's interesting, it becomes very interesting if you hand a resident a scalpel on their first day in surgery. So that's, that's who I am. And that's what we do.

Toni Dechario 03:07
That clarifies that a bit. So, one of the things you've done is, you found some extraordinary similarities between mission critical teams, irrespective of what industry, you know, they're in or what they're doing, whether they're surgeons or astronauts or, you know, in the military. And there are probably quite a few differences between financial services teams and mission critical teams, certainly the kind of catastrophic, immediate catastrophic, consequences are probably different, but there are pretty, there can be pretty severe fallout from mistakes in financial services that maybe less immediate and less direct. I can imagine some similarities. There’s quite a bit of pressure, in many cases, there can be high adrenaline, there can be some competitive personalities who are used to being successful, are a few similarities, I can imagine. Would you be able to draw some parallels that you might see and some thoughts you might have about what financial services firms can learn from mission critical teams?

Preston Cline 04:14
Sure. So, let's just give some, some nomenclature and some structure to this. So, one, we're talking about teams, right, not individuals, and not groups, and it's important to note the difference, right? We're not talking about a group of individuals; teams suggest and require some interdependence. And so, we're not talking about a group of people that simply works together, that's not necessarily a team. And so that's, that's when we are talking about teams, let's just talk about some of the differences. And then I'll talk about what are the same. The difference is, is the teams that I work in, regularly work and are trained and educated to work in immersive or all-consuming context, evolutions, we call them. So, a surgery, right? You can't step out of surgery and have a cup of coffee, a hostage rescue, you can't press pause, and go running into a burning building, you've got to complete it right? And so, these are the things where they're doing this every day, in financial services, in your, this might happen a few times in your career, that suddenly there's a crisis, a disaster, and you're in the midst of it, and you're not done until there's a resolution one way or the other. And, and so, I want to sort of talk about that side of it. Keep in mind, that many of the things I'll talk about aren't going to be useful to you in your everyday lives. They are meant to, to sort of navigate and sustainably and successfully navigate immersive and critical environments. But here are some things that are, that are similar. One, we always start with the problem set. And so, when, when any team is looking at a problem set—and I'm going to be super generalized here—we often reference the Cynefin model by Snowden, many people will be familiar with that. And I'm not gonna get into the details other than to say he suggests that there are ordered and unordered problems. Ordered problems you can have contingencies for, and you can plan for, you can train for. And then unordered problems where you have to instead of building the contingencies, you're building the capacity of the team to resolve whatever shows up: alien landings, zombie apocalypse, whatever it is, we got somebody on our team that does aliens, right? And so, we have that capacity. And then once you do that, you have to start thinking about the human factors. And I'm doing this in order, as you'll see because they're all related. And so, for ordered problems, you can have an intact homogeneous team, not a problem, because they're very fast. They're very agile. They can finish each other's sentences, but those strengths work against them when it comes to unordered problems because they lack what we call cognitive diversity. Basically, it is to say you want as many tools in the toolbox as possible, right? And so, you want to be thinking about that. And then the next thing is technological change. We're all familiar with technological change, it's happening all the time. Where it impacts us directly, where the rubber meets the road, is the thing we call rate of learning. So technological change is only relevant in our world as it, how it impacts the human that's interfacing with it. And so, how can those humans adapt, evolve and leverage that new technology in an, in a fast and efficient way? And then lastly, the sort of cultural structural view is on information management. And this is a term I know gets used in your world a lot. And we use it a very specific way, which is to say, there are 24 hours in the day, that hasn't changed. But the amount of data information that we're all receiving on a regular basis has increased dramatically. And this is actually working against our natural work ethic. And the problem is, you're slowly creating a situation where it would be impossible either now or shortly to actually do all of the work. And so, we have to restructure, and we have to think about the cultural implications of that.

Toni Dechario 07:58
I want to follow up on the last thing you mentioned, which is kind of information management and the fact that we're overwhelmed with information now. And so, no matter how hard we try, how hard we want to do our jobs properly, we kind of can't, because we're just overwhelmed. What are some solutions to that problem? What are some ways in which you recommend people handle, teams handle that problem?

Preston Cline 08:20
Well, let's talk about the symptoms first, right? So, what ends up happening is, you get somebody with a, with this incredible work ethic, they’re getting overwhelmed from work. So, what’s the first thing they do, they give up on breaks. The second thing they do is they give up on meals. The third thing they do is they give up on sleep. They come in earlier, they leave later. That has an impact, meaning they're paying less attention to their team and their family. So, what ends up happening is, they burn through all of their mechanisms for resilience and sustainability. And by the time they raise their hand to say I'm in trouble, man, we are on a cliff. And so, I'm saying that because I want to let people know that are listening that if you're guilty of any of that stuff, you have to pause and just ask yourself, if you are telling yourself the lie, "Oh, it's just busy right now. But once this is over, it'll calm down." That world doesn't exist anymore. It's always busy. So, you've got to figure out a way to navigate the busy. So specifically, to your question, what we're seeing on some of the tech teams and, and other sort of cutting-edge organizations—you probably might be better versed in this than me, this is, this is anecdotal stuff that I've been on there telling you about —we're seeing really strict rules about when data can be exchanged. So, hours in the day, when emails and texts can be exchanged, or platforms such as Slack, Slack can be talked about. We're seeing breaks on weekends, giving people data-free weekends. And then we're also seeing some really innovative things that are happening with some teams where they're actually saying no data on Fridays. And some teams, what they do is they, let's say, you're on a floor, well everybody will put on a whiteboard or a post-it note in front of their cubicle or their office, they'll say, here's the problem I'm working on. And you just spend Friday walking around reading and talking to other humans and there are teams that say they get more out of that Friday than they do the other four days combined.

Toni Dechario 10:12
Okay, so, you know, I take it that we should just assume these days because of some of the circumstances that you already described, that everyone is stressed out and burned out. And that people aren't necessarily raising their hands as early or as often as we'd like them to be. And so more mistakes are probably getting made because people aren't sleeping, people aren't eating, people aren't, you know, taking care of themselves and taking care of their needs. And actually, that the theme that we're exploring this season in the podcast is how to build cultures of learning and curiosity but also build cultures that have a tolerance for mistakes and expect mistakes and understand kind of how to manage through mistakes and learn from them. And so, it sounds like the kind of environment for mistakes is hotter than ever. And I wanted to talk to you about some tools for how to practice acknowledging mistakes, raising your hands. And if you're open to it, I'd like to discuss a range of tools, if you have them to share. The initial one, though, that I wanted to talk to you about is the after-action review. You've written a lot about this; I know that you're very well versed in the after-action review. Can you just describe what, what it is?

Preston Cline 11:34
Sure, so. So really briefly, the way that humans make meaning of experience is both independently through reflection, but collectively through dialogue. That's how your brain works. You need to actually hear other people's perspective of an event that you went through, we've all had that experience where you went and did, went to a party, or you had an event or a crisis happened, and you're telling the story, and somebody goes, “Man, that is not at all what happened for me,” and even though they are right next to you, right? And this is why a socially constructed mechanism for making meaning of experiences really matter. And, and the, the bottom line here is what really matters, strangely enough, what we've found, and we've just released a paper in the Harvard Business Review on after-action reviews, if you're curious, is, is that it's not the data that matters. It's the narrative that matters. And so specifically, and I'll break, I'll go back and break down your question. But specifically, what I want people to understand is, as a leader, it actually doesn't matter so much what you think went wrong and went right. What matters is the story that your people are telling themselves tomorrow, about the team, themselves, and you. And if the narrative is “I suck, we suck, you suck.” Man, there’s not a lot of places to go from there. Right? There’s not a lot of learning. There’s just shame, embarrassment and recrimination. And we know from the data, that means that you’re losing connection and belonging, which means you’re going to have higher attrition, that math, the research on that is really straightforward, right? We know that teams will stay together longer if there's a sense of connection, belonging, purpose, and learning. Those things, right? You get those that that little formula, correct, people will bleed for you, but you get it wrong, people will leave. And so, one of the ways to do that, to get to your specific point, is after an event happens, especially where there are some emotions provoked, right, either some feelings of injustice or failure, or you didn't meet the target, or, you know, favoritism, whatever it is, we all have these things at work. But there's some discrepancy in how people feel about the experience afterwards. And so, there are two kinds of after-action reviews I’m going to talk to you about, and they’re used for different purposes. The first is the technical, historical after-action review, or debrief or hot wash. In medicine, they call it mortality and morbidity meetings, m&ms. Every, every elite team has some mechanism to do this. And the formula that's been going on since oh, I don't know how long, is basically this: you get a group of people together, you take off all rank, so everybody speaks. The people that do it well have the most junior person speak first. And there's a bunch of reasons for this seem pretty obvious, which is, if you don't do that, they won't speak A, because the risk is just too much. B, you're demonstrating that you value every voice and three, it gives you a chance as a leader to correct any misperceptions or mis-educated or mal-educative sort of things are happening. By hearing their voice, you kind of hear where their perspective is. And so, and the way it works is you get everybody together, and you just do three things, you get somebody to say, “What was the plan going into this?” So just, we all agree, and we all agree, “Yep, that was the plan.” Part two of the three-part plan, of our process excuse me is, “Okay, what actually happened?” And this is where narrative really matters. Tell me the story of what actually happened. And what you're going to find, and what we find is that if you do it well, and you can take ego out of it, the collective narrative is more holistic than the individual narrative. So, if it's only the boss telling the story, that's only the perspective from the boss. You really want the people on the ground telling the story because it really happened to them. Now, they may not see some things. That's why everyone has to, to be involved. And then the last one and a traditional one is, “So, what's the delta between our plan and what actually happened? So, what was that? What was the gap between what we intended to do and what actually happened, right?” And the universe gets a vote, all those things, uncertainty, chaos, all those things play a role. But so does, you know, error, so does mistake to your points, right. And one point I want to bring up and this was taught very profoundly to me early in my, my days as a wilderness guide, leading expeditions is, I had a senior instructor, rather famous person named Chris Horner, who, by the way, just is the second person ever to have summited all seven summits. So, congratulations to Chris. And Chris sat us all down and he said, “Hey everybody, let me ask you a question. How many of you, how many people here will make a mistake here today, some mistakes, spill a coffee, misplacing something,” and we all raise our hand. And he says, "Okay, so let's just think about that. If we're a group of eight, that means that our team at a minimum is making eight mistakes today, at a minimum, just because we're human. So, our choice is that we can either deny that and lie to ourselves or have a conversation about why those mistakes are happening. That's our choice.” And, and it's, and it's just this very practical, pragmatic, factual, sort of math problem, like you can either tell the truth or not, it doesn't change the fact that humans make mistakes. And granted, there are different kinds of mistakes. And there's a whole taxonomy of mistakes and errors and lapses, and oh, gosh, it goes on forever. But the simple thing is, does your culture allow for a conversation for error, or doesn't it? And I'll stop here by saying that in the teams that I work with, often the argument we're in is, I work with what are called no-fail organizations, right? Organizations, where you, you need the surgeon to save your daughter’s life, you know, this is a no-fail environment, you cannot fail at this job. However, that surgeon also has to train, which means that in order to train, in order to learn a function of learning is failure. That's literally how we learn, we make a mistake, and we adjust. If you look at, Zab might have talked about this earlier in the neuroscience of learning. But that's literally how we learn. And so, I'll just end by saying that a really healthy learning organization has a low tolerance for errors, meaning that they don't like them. And there's consequences for the wrong kind of error, but that they have a robust dialogue about it.

Toni Dechario 17:51
And that was Zab Johnson, who we interviewed in the first season from, from Wharton. I was struck by a distinction, which was, when you were talking about after-action reviews, you emphasized that the most junior person in the room should go first, to make sure that everyone's being included, to kind of amplify the importance of everyone's perspective and for the other reasons that you described. I'm struck by the distinction between that and another practice that we've been looking at this year, which is the practice of premortems. And you described a little bit of a premortem, when you talked about how your wilderness team was planning an excursion, and the leader said, we're all going to make mistakes, and how important it was for the leader to speak first and kind of create that safety for people to acknowledge that mistakes will be made. And I'm just kind of reflecting on that and wondering if you have any thoughts on who speaks when and what we should keep in mind and thinking about that as we practice these tools.

Preston Cline 19:07
Sure, and I'll just point out that the legendary Gary Klein, Dr. Gary Klein has done a lot of work on this. And so, if you're curious about this, I suggest to all the listeners go to listen to Gary, he's just an absolute legend.

Toni Dechario 19:18
And indeed, we're interviewing him this season.

Preston Cline 19:19
Brilliant, brilliant. And so. So, I will say two things. There is a premortem which is to say and it was really comes out of the automotive industry, which is this idea where you know, a car maker builds a car, they break, they take the first test version of that car, they put it in the middle of a huge room warehouse, they bring every single human who was involved in the creation of this car, and they hand them all post-it notes and say, “Tell me where this car will break, you've worked on it, tell me that when you were making it, where were the shortcuts that you necessarily had to make? The budget cuts, the choices, the decisions. Now in reflection, tell me just now where things will break.” And then what they would do is they take all the post-it notes, and where possible, they'd go back and preemptively fix those issues. Now, that's that premortem is one way to do it. Another way to do it is what's called red teaming. And so, you don't have that team do it. But rather, you have another team, an independent team whose job it is to just look for your weaknesses, look for your vulnerabilities, and just, just exploit them as much as possible. And that in some contexts, certainly in the cyber world, can be really efficient and effective. In both cases, however, just know that, you know, don't, you know, they always say that don't go after perfect, perfect and sacrifice good, right? Good enough is, is often what's required. And so, there isn't a perfect car, there isn't a perfect software. And so too often you get people that are like, “Well, we're not done.” Well, you’re done enough, right? And so, the leader really needs to know when the premortem, or the red team has accomplished the goal. And those need to be really clear, otherwise, man, it can turn into just an endless sort of thing.

Toni Dechario 21:05
Yeah, it’s an interesting balance in thinking about when a leader exercises his or her kind of authority, and when a leader tries to erase his or her authority to get that cognitive diversity, to get, you know, the views and to get people to speak up. So, one of the things you described with respect to an after-action review is that there's no rank in the room, but you're talking about the military, there is a major hierarchy in the military, you know, that for, for good reason, needs to be respected most of the time. How do you actually effectuate like, how do you make no rank in the room actually happen in people's minds when they're so used to respecting the hierarchy and respecting authority in something like the military?

Preston Cline 21:56
So, it's a, there's a technical answer to your question. So, if I, if I go too deep on this, just bring me back. But basically, when we look at homogeneous teams, or intact teams, and we look at heterogeneous teams, or non-intact teams, what we call tactical swarms. And I want you to think about trauma resuscitation where a group of people that have never maybe never met before, come together and within 300 seconds need to resuscitate somebody, right? So, in that case, there is a doctor who literally owns, legally owns that patient, that doesn’t change. However, if the doctor is one of the doctors that has to tell everybody what to do, they’ll run out of time. And so what we, what we talk about when we talk about, at the, at the most elite levels, we talk about swarming, which is to say, everyone owns the problem, there's still authority, you're still deferential to the person who owns the legal part of this, but you know your role and, importantly, you know when to step forward and when to step back, much like in a play on stage.

Toni Dechario 22:57
One quick follow-up on this hierarchy question, which is, you said, people kind of understand when to step in and when to step out. And that everyone has a say, you know, that those are the rules that are that have been established. But if you're operating not in a swarm team, not in, you know, one of these unordered teams that you talked about earlier, but rather a team that's been working together for a long time, that has kind of an established set of relationships and expectations, there could be more kind of well-worn grooves in fear of reprisal or, you know, sense of like, “there's no point” futility. How do you use tools like the after-action review to try and kind of fight those well-worn fears or grooves?

Preston Cline 24:04
So, there's this really interesting conversation I had with the Philadelphia Eagles, right before they won the Super Bowl. So, we were working with the players, and we were asking the following question, “Is it possible to win the Super Bowl in the absence of pure leadership?” Which is to say, could you win the Super Bowl just by having the right talent and the right coaches? Or is it required that in the locker room, you have pure leaders that are motivating, challenging, growing, teaching, and every single one of them and we talked to other teams too, said , “Oh, no, peer leadership is actually required.” Here's the problem. Professional sports incentivizes you, financially, not to actually help the person next to you, because they're gonna take your job, that's a real thing. And so there are players that have to actually independently take financial and career risks by committing to develop the people around them, even potentially at their own cost. Which is to say that, that the well-worn paths and cultural sort of norms you're talking about, are absolutely there and cannot be denied, especially in financial services, where we're talking about money, other people's money, your money and promotions, etc. However, if you look at the data, and this is not universally true, but in many of your teams, if you actually run the numbers on what happens if you're, to you financially, if your team is successful, as opposed to you, it usually ends up that you do better if everybody does better, financially and otherwise. And so, but that takes a certain amount of courage, that takes a certain amount of cultural friction, a certain amount of vulnerability. And a lot of folks are not prepared to do that. And that, you know, in the words of Dr. Mike Useem, here at the Wharton School, that's that leadership moment, right, that moment where you have to decide what are you here for? And I mean, holistically, existentially, what are you here for?

Toni Dechario 26:03
That's so interesting. So maybe the advice is, run those numbers. Help people understand that. If their team does well, they're gonna do well.

Preston Cline 26:10
Yeah. And not always true, right? I don't mean to be Pollyanna about this. Sometimes, independent people can do much better than the team. But there are many cases where that's not true.

Toni Dechario 26:22
So I have a couple of other kind of specific questions about after-action reviews. How do people get them wrong? What sort of mistakes are caused when conducting an after-action review?

Preston Cline 26:33
Yeah, so things you've, you've all heard about. Groupthink is a big problem. “This is the way we've always done it” kind of a thing. Egos can get out of it, people who have a particular soapbox, which they can't get off of, and they'll railroad the conversation, people that talk, people that don't. And so, some of the things that you really have to do is, you have to set some really clear principles, and that is you’ve got to share airspace. If you are, you should, you know, you should be listening as much as you're talking, probably listening more than you're talking, right? Especially if you're in a large group. Also teaching people to be concise in their communication. People will often get anxious speaking in public, and so they'll end up using a lot of time to get a simple point, and so, we have strategies where, when we are in an AAR, we encourage people, we give them pads of paper, and we say, before you speak, write down what you're going to say, just, just look at it and make sure you're comfortable with it. And then at the right moment, then say it and people will say well, you know, the conversation’s moved on. An after-action review, if it's relevant and important, the conversation has never moved on, that will always be important and relevant.

Toni Dechario 27:47
Mm hmm. That actually brings me to another question, which is generally how long would an after-action review be?

Preston Cline 27:52
Oh, yeah, not only how long but when. And so, in my world, let's say that you've just come off, let's say you were a federal tactical law enforcement team, think Secret Service, or FBI, and you've just come off of an all-night 24 hour, you haven't slept, and there's been a serious incident, someone got injured or something like that. Could you do an after-action review right then? Sure. But everyone's braindead because they're so tired. And so, there's a debate here, right? Because if there's trauma, they may not sleep, right? And that's, that's actually really bad for them. And so, there has to be a balance between are you doing an after-action review to make meaning of an event? Or are you doing an after-action review to process an extreme experience, so that people can make meaning of their own emotions, mourning, loss, everything else? Those are two different things, and they'll determine when you do it, but to answer the question, you want to do it within 24 to 40 hours of the event, right after is usually optimal. As I said, if people are okay. And then how long? So, the short answer to that is, however long it takes for everyone to speak and have their voice be heard and be able to say what they need to say, in a, in an efficient and effective way. So, in other words, really great teams can do these in 20 minutes, right? Like, like medical teams can do these really effectively in 20 minutes, because they have a lot of laps. And they know what they know what patterns look like. They know what dissonance looks like, they know what, you know what they need to pay attention to.

Toni Dechario 29:26
So, you mentioned medical teams, medical teams have, you know, very distinct things that they do, there's a surgery or there's a, you know, an emergency event, or a special ops team, you know, has an operation and then it's over, and they perform an after-action review. In the case of financial services, the discrete action, you know, isn't going to be as dramatic, probably. And also, maybe the lines around it aren't as clear. Do you have any recommendations about when it makes sense to conduct an after-action review?

Preston Cline 29:59
So, I’m not a person that believes in meetings for meetings sake. In fact, I think we do meetings way too much. However, culturally appropriately, and this is, this is difficult, especially with remote workers, right. But to have a regular session, and this is where I’m gonna dodge your question, because I would need to know the context and know the iteration. Sure, this is a weekly, monthly, quarterly, whatever it is, but really to get together and say, hey, we've just gone through this period, this week, this quarter, this month, right? Here's, let me tell you from a place of as a leader, here are some things we pulled off and did great. Here are some ways we didn't meet expectations. Let's just go around and talk about both. How did we pull off what we pulled off? Like, what did we do right? And then what can we improve on later, right again, so next month is even better?

Toni Dechario 30:47
What are some of the biggest misperceptions about after-action reviews?

Preston Cline 30:53
Yeah, or when they're done wrong, right, and that is when competition becomes more important than substance, when, when the strong man should be able to take a critique, so, what we're gonna do is just go into a room and hammer one another so we can show that we did it and be prideful of the fact that man that really sucked. That's a waste of everyone's time. It really is. Go join a football league or a rugby league. It'll be better use of that energy. You don't want to actually go in and just have a beat down. There's, there's no, there's no gain in that. Because again, the narrative is usually after that is, man, what kind of team am I working on? Man, this is really discouraging. And we see this at the most elite teams. And typically, what we see, when this starts to happen, that's kind of feeding on itself, this kind of circular firing squad, where every AAR is just a mechanism for people to scream at one another, we usually start to see high attrition. People will start to leave. And who leaves first, of course, is your best people.

Toni Dechario 31:53
You're actually segueing perfectly into the next thing that I wanted to talk to you about, which is the fact that, you know, research shows that we hold on to the bad, much more than that the good, and you talked about that a little bit earlier about kind of always hearing criticism, you begin to only hear that. And one of the kind of things that we are most motivated by is appreciation and kind of gratitude and the things that you said make, can make people feel uncomfortable. In a sense, criticism can, you know, kind of constructive criticism can be seen as a gift and kind of a form of gratitude and appreciation for somebody that you're willing to take the time to share with them how something went wrong, and how they could improve. But I think as humans, as you described with affect, it's really hard to take that in as something positive. And so, do you have any recommendations for the best ways to do that? And to use these tools as a positive tool, even though perhaps we're talking about things that have gone wrong?

Preston Cline 33:05
Yeah, there's, there is, I'll use my grandmother's technique, which I've always thought was absolutely brilliant when she was alive. My, my grandmother and I were very close, she adored me. And so, when I blew it as young people do, right, she'd walk up to me put her arm around me, and she says, "You know, I think you're just amazing." And I was like, "Yeah," and she's like, "Can you walk me through why an amazing person would do that?" Right. And what was amazing about that was, as a young person, what I found was, I wasn't coming from a place of shame or guilt, she was genuinely trying to understand why, with the expectation she had of me, that I would do that behavior. And I was in the position of trying to justify, rationalize, explain it. And usually I couldn't, right, and usually it was just youth and inexperience and whatever it was growing up, but it, it forced me to make meaning of the event, rather than to react to her judgment of the events. Now, she, this, this isn’t in, this isn't in isolation, she would then say, "You understand the standards in this family. Right? Moving forward, like, that's, that's not what we do. Right? You understand that?" So, she made clear what the standards were. But she made it my problem, not her problem. And I think that for getting people who are passionate learners, what we call weaponize their curiosity, right? They’re people that really want to do better, when you do it that way, when you say, "Look, I hired you. I think you’re extraordinary. I’m now having to defend you because of this or explain this. Can you explain it to me? Not from a place, I just need to understand what principles were you using, was it your training, was it that you, you have a different opinion about this? I actually need to know, because we do have standards, we have to move forward. And I need to have trust in both you and me, and me and you. And so, how do we do this forward?" And I find that from a place of advocacy and curiosity, well-intended people will get it and move forward. Now, that's the key thing, right? Well-intended people. We're not talking about toxic personalities. And just for the record, I know this has been gone over a lot. But the research on this, I think is really clear. The last I read was holding on to one toxic person basically cancels out your top three performers. And so, if you as a leader are not courageous enough to address or, in fact, remove a toxic employee, you will, in fact, suffer the results.

Toni Dechario 35:31
That's so interesting, especially from kind of a profitability perspective, and that you might have a higher, higher, the highest performer may bring in a certain amount of profit. But if you look at the next three highest performers, they're actually as a group, probably more valuable to you than the highest performer.

Preston Cline 35:45
100 percent.

Toni Dechario 35:46
So, we've talked a lot about kind of the individual implications of some of this kind of backward-looking thinking about how things have gone. Can you talk a little bit to the cultural impact that practicing this after-action reviews or other types of reflective thinking can have on, on a larger organization apart from that, you know, that a small team?

Preston Cline 36:12
Yes. So anytime that you’re in dialogue about behavior and process, right, you immediately will trigger a defensive mechanism in the people that created that culture, those processes or endorsed those behaviors. And because they’ve worked very hard to establish their expertise, they finally got the trains running on time, and now you’re in there talking about the upholstery or, you know, how the design of the trains, and they're, they're understandably like, "Whoa, what are you doing? And so, you know, it took me forever to get this right, why are you trying to break it?" And there has to be an honest conversation about, you know, the impact on multi-generational people within an organization that have an historical context about why certain things were developed, that happens, and you can't just dismantle that or disregard that, that actually really matters and have those hard conversations. And the truth is that the older you get, the harder that is. And so there are huge cultural implications, because you're messing with people's, you know, domains, you're messing with their worldview, you're messing with their narrative and their identity, as experts, as the people in authority that can't be questioned. And those organizations can be very fragile.

Toni Dechario 37:31
Yeah, and I would think that there would also be kind of normative implications of just engaging in this practice on a regular basis. And, and like building that habit. And, you know, you talked about how uncomfortable people are with expressing gratitude, for instance. But the more that you do it, the easier it becomes, right? So, I think that'd be kind of normative applications of like, this is just what we do. There's nothing personal, we do it all the time.

Preston Cline 38:02
Yeah, yep. That's absolutely right. Yeah. And to your point, like the feedback loop, what people find, as you probably well know, is that when you start getting into a practice of gratitude, me as an instructor, I am constantly, you know, part of my job is to tell people when they're not doing well and help them improve. But when they're doing well, I take great pride and as often as possible going you are crushing it right now. And you just see people that are under the gun or under the hammer or whatever it is suddenly light up, like, oh, man, somebody sees me. And that that simple thing of like, I see you, I see you working hard. Keep going, we got you. It's amazing what you can do for people.

Toni Dechario 38:39
So, we've been talking about after-action reviews. But I also want to talk about some other ways of reflecting on past experiences, on how things have gone. Can you describe the differences between, you know, an after-action review and a post-mortem or lessons-learned exercise? Or other kind of forms of reflection? Group reflection?

Preston Cline 39:07
Yeah absolutely. And so, let's think about roles, right? We think about the fact that if, if you're in Boeing, let's say as an, as an organization, and, and there's a mistake made with an engine, that's a real catastrophe, that's a potential catastrophe. So, you need to do a factual investigation that literally has to do with how did that happen? And that's unemotional, that's not and maybe blame will be found. But really, the intention is to find an old term that's no longer accurate, but the root cause, right? To go back, or the multiple, the multivariable, sort of factors that were involved. That's one important thing. But that is not the same thing as making meaning of an experience, right, which is to say, or to, or to make meaning of a particular event, right? And then the third one is to influence the narrative. So, so there's the factual one I just talked about with the investigation, why it happened, then there's the after-action review, and that's literally like I said, helping the team make meaning of, of the event. And then part of or separate than an after-action review is what we call a narrative inquiry, which is literally just asking people what's, tell me the story of what just happened, right? And you go around everyone, just tell me the story. Just don't embellish. Don't, don't speak for others just for yourself. Walk me through it. And what will happen in those, you know, in my world, which is often happens, people will say, oh, that's why you move from there to there. And they're like, yeah, what did you think? Well, I thought this other thing, right? And it's this, this way to calibrate people's expectations of each other, build trust and cohesion, and build that narrative. So that next week, when everyone's sitting around at the pub or lunch or whatever, and the incident comes up or the issue comes up, you say, the narrative in people's heads aren't like groaning and ashamed and embarrassed, but rather one of curiosity, which is, hey, yeah, I know, that was I remember the story of that event. And I know that our team is working hard on making sure it doesn't happen again. That narrative is a very different narrative, then, oh, I'm so embarrassed or ashamed that happened.

Toni Dechario 41:20
Something similar to that, in an earlier season of our podcast, we talked to Holly Ridings at NASA, who you know, and she talked about how this type of debrief thinking has become so embedded in NASA’s culture, that they can’t help themselves, they like debrief everything. They, they’ll go to a conference, and they find she said, they find themselves in a huddle afterwards kind of debriefing the conference. How does that happen? How does that process happen, where it kind of becomes embedded in everything you do, and it becomes a reflexive part of your organization?

Preston Cline 41:55
So, I’ve been working with teams and various, you know, I’ve led expeditions in all seven continents, and I’ve trained children, I’ve trained everybody. And I have this Preston’s Principle, which is ‘distance to puppy pile’, and know people listening are laughing. But I encourage you just if you have children, or you’re in sports teams, or whatever, and you’re meeting them for the, for the first time, just watch this phenomenon. When kids or people are meeting for the first time, there’s a certain amount of proxemics, certain amount of personal space. But as immersive events, as life happens, as crises are overcome, that distance closes. And if you watch kids, when their first day of summer camp and their last summer camp, it’s distance to puppy pile, because at the end of it, they, if there's a room where there's 50 chairs and one couch, all 20 kids are sitting on the couch together, on each other at the end of that summer camp, because they just don’t want to be physically separate. And good teams, you can actually watch this, they just want to be in proximity to one another. Because there’s trust and cohesion and support. It’s part of their identity. They know those other people get them, they can finish each other’s sentences, all these things at then, they also trust them to help make meaning of events. So, here at Wharton, I have a team that I love working with. And because this is, can be a foreign environment for me from time to time, I will literally do that exact thing, which I'll say, “Hey, guys, walk me through just what happened. I am not tracking what that just, just help me understand." And they'll teach me here's what you don't know. Here's, oh, thanks very much. And so, it's very, it's very heartening to me, and it's very confidence building for me to have those moments. But it takes time to build, and you have to together as a group overcome some adversity together for that puppy pile to really to start happening.

Toni Dechario 43:37
I love that. I’m going to think about puppy piles all the time now. I want to talk to you about training. A lot of what you do at MCTI is training related. Training can sometimes feel very separate from real life. And so, this is kind of consistent with what we were just talking about that that kind of question of embeddedness. How do you? Or how should our listeners think about embedding training on whether it's kind of speaking up, acknowledging mistakes, you know, addressing mistakes? How do you make that leap from kind of training into everyday life?

Preston Cline 44:22
So, interestingly enough, MCTI does less and less training these days, and we do more and more education, and management of experiences. And let me break down that, why that matters. Training is for certainty, education is for uncertainty, and experience is for reality. So training, we train for skills, which are based on rules, right? This is how you do this, this is how you'll always do this, right? Education is for uncertainty. And that's about principles. When this happens, here are some principles to guide your decision-making. And then experience is, this is what the world actually looks like and feels like. Here's how to think about that. And what you need is a feedback loop between your experiences and your training and education to say, am I updating it, because you constantly need to be updating it. We all live in a world where we need to learn new software, we need to learn new techniques. We're more aware of multiple voices and the needs of those voices, and how they add or detract from, from what we're trying to do. And that's a constant learning process. Again, learning only happens from a neurobiological point of view, because if it's going right, there's no incentive for you to change your behavior. So, you don't learn by success, because you're like, yeah, good, it went the way I wanted it to. However, if you're doing something is important to you, and you screw up, there's a huge motivation and incentive to change your behavior. And so, learning, mistakes drive learning, but only if you’re honest about them, and you can have honest conversations with your team about them.

Toni Dechario 45:56
That’s great. We only have a few minutes left, and I want to cover a couple of things. One is jumping back, actually, to something that you said, when we first started talking, that your description of training versus education being about certainty versus uncertainty reminded me of. You said that you can have ordered versus unordered problems and that for ordered problems, you are probably best off with a team that knows each other well, that can finish each other's sentences, that perhaps lacks cognitive diversity. And for unordered problems, you don't want that. And you describe swarms as being kind of groups of people who don't necessarily know each other. Why are groups that don't necessarily know each other better at solving unordered problems than ordered ones or vice versa?

Preston Cline 46:52
So, thanks for asking that. So really, in that particular case, it's not that they don't know each other, it's that they're homogeneous versus heterogeneous. And so homogeneous is all female Guatemalan banjo players, right, they all grew up together, they know each other, they know the rules, everything else. However, because of their limited shared life experiences, they just don't have a lot of other options they can investigate. A heterogeneous team is made up of, you know, a dude from Nigeria, a woman from Japan, a guy from North America, et cetera, et cetera, right, of gender, of race, of religion, of sexuality. And the reason that these matter is because they're proxies for cognitive diversity, which is to say, they literally think differently than I do. So, to say the obvious, right? We, you know, this is well researched. But Toni, if we're walking down a city, a city road at night, a city street at night, you're actually navigating that space as a woman differently than I am as a man. Right? And you add gender, race, religion in there, and there's all, there's a complexity of thought patterns that go into the same exact experience, but because of life experiences, because of who we are, have to necessarily have to get navigated differently. And so, when it comes to an unordered problem set, I will really want to turn to you and go, “Hey, Toni, tell me what I don't know from your perspective growing up, living your life? How are you seeing this in a way that I’m just probably not and educate me on what I need to see.” That's why it matters.

Toni Dechario 48:19
Do you have any other suggestions for creating cultures of curiosity and learning? And then finally, if you could provide some recommendations for further reading or listening, you mentioned your HBR paper, if you could give us the title of that, while you're, while you're describing any other recommendations that you have.

Preston Cline 48:43
Off the top of my head, it is at the Harvard Business Review, just look up after-action reviews and Cline, I did it with Angus Fletcher and a good friend of ours from the FBI named Matt Hoffman. And then we also wrote a paper for the Journal of Orthopedic Trauma surgery on routine versus critical communication that’s been out recently. And then if you go to our website, we have, we have papers that we’ve released, we’ve scrubbed from the Joint Special Operations Command that we work with, we scrubbed those papers and started to release them to the civilian world. Some of them are going to be relevant to you, some of them will be not at all relevant to you. And so that that's some resources there. Can you just remind me of your first question, I'm sorry?

Toni Dechario 49:22
Yeah. But before I do that, I'm also going to mention that you also have a podcast that I've been listening to, an MCTI podcast which is fascinating.

Preston Cline 49:28
Yeah. And so, the TeamCast was created after COVID, from some requests from medical personnel that were really struggling, and they just wanted to know some lessons learned. And so, we interview astronauts, special operations, tactical law enforcement, fire, and it's all about, you know, lived experiences and what can we do better on Monday. And so that's really our focus.

Toni Dechario 49:49
Okay. And then the other question was other suggestions for creating cultures of curiosity, and learning from mistakes?

Preston Cline 49:56
Yeah, this is where leadership actually just really matters. You have to incentivize it, you can't punish it. You really want to seek those people that are kind of annoying, because they always have a question. You want to hold them tight. Really encourage them. I mean, give them some boundaries, right? But, but yeah, and I think it's really this idea of are you incentivizing it or not? And I will say, I don't know if this happens in financial services. But if, if you have a culture where the new person comes in, you're like, yeah, it's best just to stay quiet for the first year, not say anything and learn the ropes, you're missing huge opportunities, because they're closer to the emergent problem set than you are, just factually, they are. And so, they've been having to navigate it through their experience. And you're missing a huge opportunity by not, by not including them in the conversation.

Toni Dechario 50:45
And they're seeing stuff that you've become totally blind to over time.

Preston Cline 50:49
That's right. That's right. And the last thing I'll say to that is just my advice to any, any leaders out there is, if you're wondering, how does this all sort of come to a point, it's this: Next time you're leading, if your instinct when you're approached with a question is to lead with an answer, I really encourage you to pause and reply your first one with a question. Just do that. You do that one thing that when, when your people come up to you, and they say, "Hey, boss, I need this, or this is happening. What do we do?"" Just first thing out of the gate? Say, "Hey, let me ask you a question: My understanding of what you just said," or "Let me ask you a question: What other things haven’t you thought about?" Right? By doing that, you're putting, you're making them own the problem together. And by just doing that one thing, you're starting to foster that curiosity.

Toni Dechario 51:38
It's kind of like your grandmother.

Preston Cline 51:40
Yeah, yeah. Yeah. Just literally lead with inquiry is the bottom line and most great leaders, most great leaders, if you'll watch them, they lead with inquiry.

Toni Dechario 51:50
Well, I will end on that. Thank you so much, Preston.

Preston Cline 51:53
Thank you.

Toni Dechario 51:54
For more conversations like this, as well as publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Banking Culture Reform: Trust, Technology, and The New Workplace

Episode 01
“When Culture Is No One’s Job”
Alison Taylor
What impact does remote work have on organizational cultures? What causes some corporate responsibility efforts to fall short of meaningful change? And is there a silver bullet to creating a more inclusive workplace culture, effective management, and streamlined operations? Alison Taylor, Executive Director of Ethical Systems at New York University, articulates some of the biggest questions that today’s industry leaders should be asking and offers a roadmap for collective and lasting impact.

Sameer Srivastava 00:01
In many cases, the managers have assumed, you know, we've been able to maintain high levels of productivity, things are still getting done. It's all fine. And I think we don't really understand the ways in which the cultures in many, many organizations these days are fraying.

Amir Goldberg 00:17
So, if you're a leader, if you're a manager, if you have a vision to build a company and you think algorithms are going to solve that problem for you, you're in for a big surprise.

Alison Taylor 00:25
HR can't own culture and compliance can't own culture and senior leadership can't own culture. Each has a slice of culture, as do employees as a whole. So, if we still think in terms of delegating to specific functions to solve these issues, I don't believe they will ever be solved.

Per Hugander 00:43
When you want to influence culture, when you want to make that a stronger part of your culture, what you need, if you want to change the culture is to change people's assumptions.

JB 00:52
This is Bank Notes: Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 01:01
Hello, and welcome to Season Two of the Banking Culture Reform podcast part of the New York Fed’s initiative to drive awareness and change in financial services culture. This season, we're exploring themes of trust, technology, and the new workplace. We introduced these topics in our 2022 webinars, which you can watch at NewYorkFed.org. In this season's podcast, we’ve brought back panelists from each webinar to take a more in-depth look at their work around these three themes. My name is

Toni Dechario, and I'm with the New York Fed’s culture team.

Toni Dechario 01:33
Our guest today is Alison Taylor, Executive Director of Ethical Systems, and an adjunct professor at NYU Stern School of Business. Alison's also writing a book, which is focused, in her words, on how business can do the right thing in a turbulent world.

Toni Dechario 01:48
Hi, Alison. Welcome.

Alison Taylor 01:51
Hi, Toni, thank you so much for having me. It's so wonderful to be here with you.

Toni Dechario 01:54
Same here. Let's start out just by outlining what it is that you do. You wear many hats. Maybe you could describe a few of them.

Alison Taylor 02:03
Sure. So, the biggest hat I wear is that I'm Executive Director of Ethical Systems. And that's a research collaboration based at NYU Stern School of Business. It was founded by a prominent social psychologist called Jonathan Haidt, in 2011, and I took over at the end of 2019. And the idea behind it is to bring the best ideas from academia on behavioral science and social psychology into corporate practice. So, one of the things that Jon observed and that I also observe, is that there is a lot of focus in the private sector on consulting solutions, and less focus on the academic research that might actually help us build more ethical and sustainable cultures. So, in terms of how I think about what I do in the world, I think about myself primarily as a translator, as someone that acts as a bridge between real-life practice and real-life experience, and what's going on in universities and the big learnings we can have there. You mentioned also, I'm writing a book. So, I've been interviewing lots of leaders and lots of practitioners for the last year and a half on all these big-picture questions. And then I have the immense privilege of teaching at Stern on a lot of core ethics and sustainability classes, which I think, again, really gives me this hands-on view of what's going on out there and how today's business students are thinking about these questions.

Toni Dechario 03:33
Thank you for that overview. Why did you move into an organization focused on organizational culture? Why do you think organizational culture matters? And what kind of brought you to that realization?

Alison Taylor 03:45
Oh, such a good question. The short answer is I've had a variety of roles, mainly in consultancies, working with, on the one hand, ethics and compliance teams, legal teams, investigating fraud, doing due diligence on anti-corruption, looking at corporate integrity, looking at the background of founders and companies prior to transactions, and that kind of thing. More recently, I worked in sustainability, so materiality assessments, helping companies identify social and environmental priorities, and trying to help drive change to more responsible business. In both sets of experience, it has been very, very difficult to avoid the conclusion that culture is what really matters. So, I first started to notice this, really in the run up to the 2008 financial crisis, where I was doing a lot of anti-corruption and anti-money laundering diligence, very often for compliance teams, and very often prior to a big investment banking transaction. And it was very, very hard to avoid the conclusion that the sales lead, or the banker had the ability, in practice, to override a lot of Compliance and Risk checks, not by saying that they thought those were stupid, but just by undermining them and pushing the way that the system worked to get the result that they needed. Or I would do a fraud investigation and I'd watch the senior leadership team find a convenient scapegoat to blame even though it was quite obvious to me that there was greater knowledge of this fraud in the organization then the organization was prepared to admit to. And so, I got very, very interested as a result of these experiences in questions of culture, because I started to see the same things happen over and over again, and started to ask myself questions about what I was seeing, what I was hearing, what I was experiencing, but I didn't have the concepts to understand. So that took me back to do a second Master's in Organizational Psychology. After that Master's, I moved into the sustainability role. And many of the same questions about power, about culture, about leadership, about incentives cropped up there as well. So, I think in order to understand where we are with responsible business, and where we might end up, you can't get away from culture. And certainly studying culture and social psychology has been more useful to me than anything else I've ever studied. It is real-world tools and real-world insights that I still use every day.

Toni Dechario 06:21
Is there anything in particular that you think is important for financial services firms to understand about organizational culture and kind of how and why it matters to them specifically?

Alison Taylor 06:33
I mean, there's a lot of academic evidence about the kind of people that go into financial services and the specific sorts of risks that manifest in financial services. I take some of the research about the kind of personalities of people that become bankers with a bit of a pinch of salt. But this is an industry with an enormous amount of power over the rest of the economy. It's an industry that is valorized. It's an industry whose high performers are arguably excessively rewarded for their role in society. And so, I think that leads to a lot of ethical pressures. There's also in financial services, particularly since the turn of the millennium, a lot of regulation, so a lot of requirements. So, I think this is both a strength in financial services, you tend to see more rigor and more oversight in banking, for example, than you do in many other industries. But I think it can also lead to a focus on process, at the expense of culture, at the expense of wider organizational dynamics. And so there tends to be an idea that if we put in place the right process, and the right system and the right oversight, and the right carrots and sticks, our wider culture and trust problems will be addressed. And unfortunately, I think, oversight processes while they're entirely necessary, I would never say they're unimportant. They're foundational. I would describe them as necessary, but not sufficient.

Toni Dechario 07:58
Right. You can have the best controls in the world. But at the end of the day, if the culture encourages people to find ways around them, they're going to find ways to do so.

Alison Taylor 08:05
Exactly. I mean, it's been very, very useful to me. And this is part of what I'm trying to write about in this book. It's very useful, I think, to think about a lot of these efforts as a sort of defense mechanisms to deflect either the regulator or to deflect reputational risk. And so there tends to be more of a focus on protecting the value of the organization from these perceived negative threats from the outside, than actually doing what it takes to build an ethical, sustainable culture where you perhaps wouldn't need so many defenses because you'd have more societal trust.

Toni Dechario 08:41
That's a great segue, actually. So, the three topics that we at the New York Fed have been looking at this year, with reference to culture, are trust, technology, and the new workplace. But you moderated our most recent web panel on culture in the new workplace. So, I'd love first to get your perspective on a couple of learnings for you. Is there anything that you talked about in that session or that you thought about in preparing for that session related to how kind of our post-pandemic world is impacting culture and the way that we interact with one another? What are you kind of still thinking about?

Alison Taylor 09:24
I mean, the first thing I want to say is it was such a wonderful panel, and anyone that is listening to this right now and hasn't listened to that panel, I highly recommend that you do so. Three amazing people, amazing academics, amazing experience. And each of them did a lot to push me on my prior assumptions. And I certainly walked away with very different conclusions than I walked in with. So, I think the first thing I would say is I had the assumption that a remote culture might be a culture with weaker signals and a culture where it is less easy to make employees aware of what your priorities are and what your values are. But what the panelists showed me is, actually culture can be stronger, culture can even – or technology rather – can even come further into your home. It can make the organization feel more present. It can create new kinds of dynamics and new kinds of ways of behaving. So, it's not just a case of remote culture is weaker, and in-person culture is stronger, but there are entirely new considerations if you move to a remote or a hybrid way of thinking. The second piece of insight from the panel, I think was about the need to experiment, and this is very much in line with Ethical Systems’ own mission, but the panelists repeatedly emphasized that we're in this unprecedented time where we don't really know what's going to happen next. We're dealing with a lot of things that have never happened before. And we all, I think, collectively focused on the tendency of a lot of CEOs – perhaps particularly in financial services – to say, “This is the way it's going to be. This is the way my culture is. I'm going to make this decision about remote work or incentives or hiring, and it will have this impact.” And I think what we all agreed was, we don't actually know. So, there is a need to do proper behavioral experimental research in real organizations. There is far less of that around than there should be. We do a lot of A-B testing and so on to try and make people buy more, but much less to try and make our cultures, to try and make our ethics, or to try and make our leadership more effective. So really, I think it really made a strong case for experimental research and working with academic partners. And then thirdly, and perhaps most significantly, I have this view of technology and surveillance as very dystopian, and very disturbing. And the panelists convinced me that really, this is a set of tools that could be used to drive far more positive culture. It could be used to empower employees. It could be used to solve a lot of the problems from the past. We're not necessarily doomed to this dystopian future of all being plugged into a matrix and surveilled to death. So, where I really landed, was feeling much, much more optimistic that if we could get these insights and tools into the hands of leaders with the appropriate thoughts, and the appropriate priorities, we would be in a much, much better position to weather some of the storms out there at the moment.

Toni Dechario 12:22
I think maybe first, I'll pick up on your comment that now we can bring the office into the home more. I know that you have some views on that. There's been kind of a trend in the last few years of bringing your whole self to work. But I think that you've identified maybe some pitfalls associated with that, can you talk a little bit about your perspective on kind of the strengths and weaknesses, perhaps, of bringing your whole self to work, and particularly as it relates to ethical and unethical behavior and how it might impact people's motivations?

Alison Taylor 12:57
Sure. So, the first thing I want to say about this topic is that I think the notion of bringing your whole self to work comes from a really, really, really positive place. It's very much tied to diversity and inclusion considerations. It's very much tied to the idea that if you don't feel you can be your whole self in the office, if you are hiding some aspect of yourself of your social identity – let's take an obvious example, your sexuality – then you will not be able to participate fully in the culture. You are also less likely to raise your voice when you have ethical concerns. You are less likely to feel included. So, I think all of this comes from an incredibly positive place of trying to make organizational culture more relevant and more appropriate and more comfortable for every employee and not just a particular subset of employees. And I see this in the classroom every day: to see that young people expect more from their careers than I did at their age, to see that they expect to have a contribution, they expect to work somewhere that has a positive contribution to society. And I think all of that is really awesome, and in strong contrast to how I felt, which was that it was all about getting told what to do until you had enough power to tell other people what to do. So, having said all of that, I see a lot of surveys and a lot of discussion out there about how employees today expect corporations to align with their personal values and expect them to speak up on questions that they feel passionate about. And unfortunately, I think that is going nowhere good, because it is somewhere between difficult and impossible, I would say, for any corporation today to accurately reflect the personal values of all its employees. In fact, it's an – it's an obviously absurd aspiration. Our values are personal, they are highly varied. There is probably less of a global consensus on core values than there has been certainly in my lifetime. And so how we would expect any global corporation to reflect the personal values of all its employees I have, I have no idea. And so I think it puts companies in a bind. It exposes them to risks of hypocrisy and unrealistic expectations. And I think it's also, in some cases – and certainly in the US context – helping to increase polarization and helping to further confuse us on the role of business in society. So, what I would rather see corporations do is have maybe less of an appetite to impose a set of values on all their employees, which is, by definition, going to make some group of employees feel silenced and overridden and resentful and as if there's a dominant culture. I think it's far more important to encourage pluralism, to encourage mutual respect, to encourage conflict resolution, critical thinking. And so rather than maybe taking a stand on the controversial social or political issue of the day, you provide employees time off to vote, you allow them to use their own salaries, to speak up and find whatever causes they believe. And so, I think we've gone too far, and expecting corporations to fulfill a role we used to expect from governments. And I think we are in some cases causing further conflict and fragmentation inside our organizations than we need to. What I would personally do if I was a CEO, today is say, “if you want to thrive and be senior in this organization, I need to see you work successfully with somebody with very, very different values from you and who you may even personally dislike.” I also would kind of close by saying, I would like to shut my front door at night and know that my employer is not going to come into my house and know what I'm going to do. So maybe where we need to go is don't bring your whole self to work and we won't bring HR into your home.

Toni Dechario 16:47
So, picking up on kind of another of the learnings that you talked about, which is the idea of experimentation, that we don't actually know what the right mix is between virtual and in-person work. We don't actually know who should be working with whom and where and why and how that impacts culture. It's different for every organization, I think, is one of the big takeaways I had from that session, that you moderated brilliantly, by the way. But I think that there's a real resistance to experimentation. I think this is particularly true, actually, in the highly regulated industries like banking, but true anywhere where it is a careful trapeze act to be seen as experimenting with your employees, right. But you have a lot of experience with this at Ethical Systems, and what is it that kind of resonates with people and gets them over that hump and willing to try new things and maybe make a mistake?

Alison Taylor 17:45
I mean, I don't think it's super easy to encourage any private sector organization to do this kind of research. When I'm trying to persuade an organization that this is a good idea, I emphasize that they will have the benefit of academic rigor, they will have the benefit of independence, anything they do will be documented. We would try something with a control group. We would be able to measure before and after. So, one big selling point is it will stop you wasting maybe millions of dollars on, for example, DEI training that doesn't work, and have some hope of designing something that might work better and might actually improve inclusion. But you also talk about how difficult it is to experiment in areas like compliance or like ESG, where there's so much reputational and regulatory pressure, and perhaps a nervousness with, you know, we're experimenting with our compliance program that already sounds really risky. There is an idea in sociology called isomorphism. And I think you see this very, very strongly in compliance and in sustainability is that firms are essentially copying each other and herding together to try and prevent regulatory scrutiny. And I think it's really stopping us progressing. So, there are ways to design experimental research that are ethical. They're not creepy. They don't involve violating employees’ privacy, I certainly think it would be important to have rigorous academic partners to do that. But I think that we've reached a limit in terms of how we can progress on any of these issues if we just keep doing the same thing over and over again and expecting a different result.

Toni Dechario 19:21
Isomorphism, I like that concept. I have to admit to not knowing it before you mentioned it. It makes me think about kind of the challenge that many industries face, I'm sure this isn't limited to financial services, but I know that in financial services, there is a kind of a collective action problem when it comes to culture and behavior, because there's so much movement among and between organizations, that you kind of have an industry culture as much as you have an individual firm culture. So how can firms assert a different approach to culture kind of within that collective-action problem, if you will, and make it like a strategic strength?

Alison Taylor 20:06
I think it's true in all industries to some degree, but I certainly had a client from banking a few years ago, who said, “We like to walk across the street together holding hands.” And I think because of the regulatory pressure, there's certainly a very, very big driver to kind of herd together and not put your head above the parapet. And that's incredibly understandable. One solution would be collective action. You see that also on – things like climate with GFANZ (Glasgow Financial Alliance for Net Zero), so getting companies to sign up to the same approach to do the same kind of culture assessment to share findings. Obviously, there are antitrust considerations, but they are not insurmountable, and so on. So, I think that's really, really positive. I mean, something I certainly see is that there is more emphasis on culture and conduct risk thanks partly to the Fed, but more emphasis on these questions than there is in many, many other industries. And so I think you are starting from a really, really good base, I would say it's financial services and pharmaceuticals that have gone the furthest here. That have gone furthest in hiring behavioral scientists, that have gone furthest in bringing in these insights. So certainly not starting from scratch, and certainly in a much, much stronger position than other industries. But I think differentiation and trying to do anything truly innovative, it's going to continue to be a struggle.

Toni Dechario 21:21
You talked about folks in banking, having brought in behavioral scientists to help them with this work. You sitting in your seat at Ethical Systems brings a super wide range of perspectives to bear on this issue. You have members that are sociologists, organizational psychologists, economists, accountants, who are kind of all bringing a different perspective and indeed, bring a necessary perspective, you kind of need to be able to see it from many different angles. There are many ways to skin a cat, if you will. Obviously, a single organization can bring in folks with all of those different perspectives to kind of help them solve their unique problems. So, what do you see as effective ways for an organization trying to attack culture as something that can be formed and influenced how they bring all this to bear when facing this huge amount of literature?

Alison Taylor 22:20
So, I think this is – you've kind of really with your question expressed some of the problems with culture, which is that it's perceived to be almost impossible to measure. And it's perceived to be not just complex, but sort of fluffy and soft, compared to other things we might do around structure or process or things that are much easier to understand, easier for the average business to implement. So, I think that's all a shame. Because if you get culture, right, all these other things would likely fix themselves. So, it's not easy to answer your question with a kind of pat, couple of pieces of recommendations. But I think a very good place to start is just by trying to measure your culture. And not measure it in the sense of, I want to have a score, and I want to understand how I compare to my peer banks, and where I'm higher or lower, and how I can improve my score. But understand kind of some key points about how the culture works, how employees feel about their roles, how employees feel about their bosses, how comfortable employees would feel speaking up, and so on. And so I would, Toni, just point any listener to, there's a page on the Ethical Systems website, where we have summarized what we know of as being the best available culture, ethical culture assessments out there. We've done a link to all of them, we've done a review of them. And so that would be a really, really good place to start. If you could get a baseline measure of where you are, then you will be able to understand and track change and progress over time. And from there, maybe start to think about what themes are occurring, or different themes are rising in different regions and different groups and different product lines in different teams? And then how might we go about improving some of the issues that have been identified? So, the short answer is we're not going to be able to change or improve anything if we don't know what the current situation is and can't measure it. So, the first step is always to measure culture and have some curiosity about what's going on in your organization. And then it's not as mysterious and not as fluffy as people think.

Toni Dechario 24:19
So going back to new ways of working, and how culture or the transmission of culture has maybe changed in the last couple of years. Can you give us some perspective on whether there are different expectations now, around acceptable behaviors? And I asked this specifically in the context of, you know, news articles that we've seen about firms that have ended up paying pretty hefty fines for the use of unauthorized channels to conduct business. Is there something about our new approach to work that's perhaps normalized some behaviors that weren't considered okay in the past?

Alison Taylor 25:03
I think certainly the shift to remote work has created some dilemmas. It's created some additional opportunities for unethical behavior. It has also created additional opportunities for intrusive surveillance. So, I think setting and conveying culture and being much more explicit about your expectations, and really focusing on what it takes to be a good team manager are real imperatives in a way that I guess they've always been, but there are things you can do in a physical environment as a manager, there are things you can do in terms of oversight that are more difficult in a remote or hybrid environment. The other thing that's very, very much on my mind is changing expectations about work from younger generations. So, millennials, first of all, and now Gen Z, and we talked a little bit about this on the webinar, but we have at this point, anybody under 26, does not have that much experience, if any, of working, you know, in a normal – what we used to consider a normal – pre-COVID office environment. And I think that combined with these possibly unrealistic expectations about what work and leadership and jobs are for, and the increased ability and willingness of young people to raise concerns, and possibly unrealistic demands is all coming to maybe mean that management has never been so difficult. And I'm hearing this over and over again, in daily conversations that today, your 25-year-old intern, or your new hire, will be quite comfortable challenging the CEO in a town hall meeting about, you know, the mix, the diversity mix on the senior leadership team. I've heard that across countries. And I think it's – it’s pretty jaw-dropping for anyone my age, to think of challenging power in that way. So, on the one hand, there's this huge opportunity with this rise of voice to kind of treat this as an advantage to identify problems you're going to necessarily miss, just because you have a lot of power at the top. On the other hand, I'm also frequently hearing that there's a lot of entitlement, there's a lot of unwillingness to adapt to the culture, there's a lot of for example, feeling like, I would like to be able to have the schedule and work from where I like, but I would like to also have all the benefits of the in-person culture and the kind of mentorship and encouragement and so not maybe a very realistic view of the trade-off. So, I conclude really, by feeling quite grateful that I'm not managing a big team these days. But I think we need to do a lot more to support managers and middle managers in particular. I also think we've emphasized over the last few years, sort of strategic inspirational leadership at the expense of just good, hands-on competent management. And I really think we need to go back there and provide today's managers with better tools, and better approaches to navigate some of these challenges.

Toni Dechario 27:54
That's really interesting. I have been thinking myself lately about how our experiences, particularly in the last couple of years, even non-Gen Z folks like us, are so bespoke. And you know that the – there's been research done by Microsoft, which is cited by lots of people, showing that our world has become smaller, and our ties with the people that we’re close to, that we talked to a lot, have grown stronger, but our kind of what they call “weak ties,” you know – we have fewer of them. And we've become much more kind of siloed. And so I'm curious about how that's impacting organizations’ ability to kind of influence via large social groups, because we are so bespoke. And you talked about how kind of the next generation comes in and they want their specific values to be reflected. Well, they all have different values. And so I'm curious about whether the way that we influence behaviors, the way that we influence kind of acceptable and unacceptable behaviors has maybe shifted.

Alison Taylor 28:58
I think this is sort of like the ultimate philosophical question. But I think I'm back to this sort of notion of how difficult it is now to set values from the top down. My impression is this more CEO town halls and kind of company-wide meetings, and then everybody goes back into their tiny teams. And what we're not doing as well as we used to maybe – not that I don't think we've ever done it particularly well – is work across silos and take a kind of whole organization perspective. That's unfortunate because most of the most pressing and difficult problems facing organizations today aren't anyone's job to deal with. So, whether it's deciding what social or political issues to speak up on, whether it's thinking about ethics, beyond compliance, whether it's thinking about how you can contribute more positively to society and set environmental and social goals, whether it is about detecting wrongdoing – all of these things – require cross-functional collaboration and someone thinking about risks in a much, much more holistic way. I think we'd need more of a focus on holistic integrity. I've worked on this for a long time, but closer connections between marketing, public affairs, HR, compliance, ethics, ESG, more strategic thinking about integrity and ethics. And now I think a lot of private sector organizations would really benefit from academic help and support and measurement and understanding what is going on out there and also understanding these aren't issues confined to one organization, pretty much everybody is struggling with them. And we all need to collectively come up with better approaches, which I don't think will be achieved if we just use the old tools and tired old assumptions we've been using from before the pandemic.

Toni Dechario 30:45
What is holistic integrity?

Alison Taylor 30:46
I think it is about thinking about the connections between the voluntary and the regulated and thinking coherently about, for example, it is not sufficient to have even a leading sustainability program with a great materiality assessment and all the disclosures out there, if you haven't, for example, given thought to your political contributions, and given thought to what you're going to speak on publicly. And so the default, I think, is to give, you know, compliance one set of issues, sustainability another set of issues, risk another set of issues, senior leadership another set of issues, strategy another set of issues, HR another set of issues, but we can only make sense of some of these questions if we can sync across those functions. And so, a very obvious thing we've been talking about so far on this podcast is organizational culture. Well, HR can't own culture, and compliance can't own culture, and senior leadership can't own culture. Each has a slice of culture, as do employees as a whole. So, if we still think in terms of delegating to specific functions to solve these issues, I don't believe they will ever be solved. That's what I mean by holistic integrity is thinking more about working across the organization and making some of these questions the responsibility of the senior leadership team, so we can put in place the right governance mechanisms to at least think through and make our best effort on answering these questions.

Toni Dechario 32:15
And that way, you also make it kind of more of an institutional thing, like it's more kind of embedded throughout the institution, which is relevant, because I'm now thinking about the Great Resignation, which maybe is a myth. People are saying now, I don't know – I'm sure you, you know, better than I. Is it real? And if so, how is it impacting firms’ ability to influence behavior as you have as much churn and turnover as people have these days?

Alison Taylor 32:44
There's been a ton of churn and turnover, and in some cases, also exponential growth. So, I also know a lot of firms that have grown substantially during the pandemic. People don't know each other. People aren't used to the culture and so on. On the Great Resignation, I mean, there's a lot of data from surveys and so on out there. There's all sorts of evidence that things like long COVID are really affecting the workforce. So, I think it's a pretty murky picture. But I think perhaps this is another example of a failure or a weakness and thinking holistically about culture and holistically about employee motivation. What I tend to see is a lot of CEO rhetoric around purpose and mission, and I have the impression that all these CEOs have read a lot of surveys showing that more dedicated passionate employees are more productive. But you've seen all this rhetoric that's very, very grandiose, in a lot of cases, advancing along with employees feeling apparently less motivated, apparently less committed, apparently more exploited, apparently on email at 11 p.m. at night. And so, we are possibly trying to use a lot of rhetoric about purpose and mission that we feel will attract investors or deflect scrutiny in some way, without first concentrating on the basics of dignity and respect and employee satisfaction. And so, I think we need to focus on these more basic issues. We need to walk before we run, maybe it's one way to put it. I think it is less important that you have some kind of noble-sounding societal goal and more that you have superordinate goals, and that employees feel some level of pride in what they're doing every day. And so, I think we've a little bit lost sight of some of those basics. The good news being if any company can get all of that right, I think it would provide a significant source of strategic advantage today.

Toni Dechario 34:40
What are your thoughts on kind of whether there have been any opportunities raised either through the introduction and acceptance of more and more technology between us, or the kind of global experience of all of us going home and now coming back to work? Are there any opportunities that kind of came up that you think could still be harnessed? And I guess I'll add to that question, just an observation that I think there are many people generally, and especially in financial services, who want to go back to kind of the way things were, you know, who are going back to be in the office full time. And my observation is, even if we're all in the office, the way that we interact with one another has really changed and that's probably not going anywhere. Even if we're all in the office, we're still using technology much more than we were before. We're much more likely to use Slack or Teams to communicate with one another than we are to pick up the phone, which kind of pre-pandemic, we were probably more likely to pick up the phone – or at least those of us in older generations who hadn't embraced technology yet. And so, where do you see kind of the opportunities that exist for everyone, even those that are kind of more traditional organizations.

Alison Taylor 36:01
I mean, I think the big opportunity is to redesign work so that we are making the best use of the time that we need to spend together, whether it's to generate ideas or get to know each other, or, you know, work on something strategic together, versus what we are best placed to having the freedom to do at home on our own. And so there's a huge opportunity. But to take advantage of that opportunity means really looking at every single person's job role, understanding what they do all day, understanding what part of that can only be achieved through in-person collaboration, what part of it is best to leave the employee to work on their own behalf. And so it's not a case that you – just my impression, is a lot of organizations have defaulted to two, three days a week in person whenever you feel like it. And then people end up sitting in the office with lots of Zoom feedback on other people's computers. You could design a better workplace where you have physical spaces where you are bringing employees together for the activities that are really, really important for them to do together. And otherwise, allowing them to live in other places, visit other places, work more freely, take care of family obligations, is obviously a huge opportunity to advance on DEI goals. It could give people with family obligations, more flexibility, or ability to achieve. There's some evidence that more kind of toxic diversity dynamics, or leadership dynamics show up less in remote environments. So, we get more of a focus on competence in which employees can actually deliver rather than which just sort of talk a good game in meetings. So, the tools are all there; the thinking is all there. In fact, from technology, the insights are potentially all there. But those insights need to be put in someone's hands that know what to do with them and know how to use them for the collective good. So, it's an all opportunity, I think, for an organization that does that, if you don't think deliberately about this, if you just kind of default, and align with what everybody else is doing and, again, kind of try and apply ideas from before, then I don't think you will take advantage of these great developments. And I think probably the net result will be worse than it was before the pandemic. So, there's bigger upside and bigger downside, I would say.

Toni Dechario 38:23
Okay, so you are placed at Ethical Systems in a seat, where you see so much work being done on questions related to ethics, related to organizational behavior, to incentives. So, I want to kind of dig into some resources with you because you are an excellent source of information about resources. So, if I, if I were a bank executive, who has just entered a new organization, and wanted to get my head around what is organizational culture, I'd love to hear your take on the best resources to bone up on in order to approach that. And then moving into – once I've been able to fully understand the culture that I'm dealing with, or the set of cultures that I'm dealing with, what are the best resources for me to consult in thinking about how to shape and influence organizational culture? Particularly when it comes to ethical behavior and ethical decision-making.

Alison Taylor 39:19
I mean, there's a lot of resources out there, there is a really good reading list that we created maybe a year or so ago with really good behavioral science resources aimed at ethics leaders that I will share, and we can have in the in the show notes. That's books, it’s articles, it’s podcasts, it's all stuff that I think is clear and compelling, and you don't need all the jargon to understand. So, one of the really great things about this field is there's so many amazing vivid writers, it's not like trying to get to grips with regulatory compliance or accounting, or something like that. These are, I think, concepts and ways of thinking that are familiar to everybody. They're often in popular discourse. These ideas shouldn't be viewed as impenetrable as they tend to be. I'd certainly be paying attention to the New York Fed’s culture and behavior sessions. I think I would be looking to get some advice and some strategic partnerships to try and kind of put some of these ideas into practice. So, you know, I think my key takeaway is really, that there's a lot out there that is, is accessible and is helpful, and there's more and more being developed every day and so no need to feel intimidated. And no need to feel that this is outside your normal skill set. I had a professor at Columbia that said, “You don't change culture by trying to change culture.” So, very often what you need to do to change your culture is not kind of more happy hours and free ping pong and yoga apps, you need to look at things like incentives and oversight and power and rewards. And then the culture will change. Microsoft is a very, very good example recently of a new leader who really came in and very deliberately changed the culture, and specifically moved the company from a focus on individual results to team performance and behavior. So, it can be done. It can be done quite quickly. It just requires a bit of thought and a bit of planning. And again, not to sound like a broken record, but experimentation and measurement are not just throwing spaghetti against the wall and seeing what sticks.

Toni Dechario 41:33
I think that sums it up perfectly. I will end it there. Thank you so much, Alison, for being here today.

Alison Taylor 41:38
Thank you so much for having me.

Toni Dechario 41:40
If you want to hear more from Alison, watch the New York Fed’s webinar on culture in the new workplace, which you'll find at NewYorkFed.org/governance-and-culture-reform.

Episode 02
“Forget About Trust, Try Another Perspective”
Per Hugander
How can co-workers adopting each other's perspective address complex organizational problems? What are the tangible benefits to establishing a psychologically safe environment in the workplace? And why might establishing trust be irrelevant when it comes to ensuring successful collaborations? In this episode, engineer-turned-strategy consultant Per Hugander shares how he’s worked with corporate leaders to embrace so-called “soft skills” to garner solid results.

Sameer Srivastava 00:01
In many cases, the managers have assumed, you know, we've been able to maintain high levels of productivity, things are still getting done. It's all fine. And I think we don't really understand the ways in which the cultures in many, many organizations these days are fraying.

Amir Goldberg 00:17
So, if you're a leader, if you're a manager, if you have a vision to build a company and you think algorithms are going to solve that problem for you, you're in for a big surprise.

Alison Taylor 00:25
HR can't own culture and compliance can't own culture and senior leadership can't own culture. Each has a slice of culture, as do employees as a whole. So, if we still think in terms of delegating to specific functions to solve these issues, I don't believe they will ever be solved.

Per Hugander 00:43
When you want to influence culture, when you want to make that a stronger part of your culture, what you need, if you want to change the culture is to change people's assumptions.

JB 00:52
This is Bank Notes: Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 01:01
Hello, and welcome to Season Two of the Banking Culture Reform podcast part of the New York Fed’s initiative to drive awareness and change in financial services culture. This season, we're exploring themes of trust, technology, and the new workplace. We introduced these topics in our 2022 webinars, which you can watch at NewYorkFed.org. In this season's podcast, we’ve brought back panelists from each webinar to take a more in-depth look at their work around these three themes. My name is

Toni Dechario, and I'm with the New York Fed’s culture team.

Toni Dechario 01:32
Our guest today is Per Hugander. Per is an engineer-turned-strategy consultant who writes extensively about psychological safety and trust. He's a strategic advisor at the Nordic Bank, SEB, and he teaches at the Hult/Ashridge International Business School. Welcome, Per.

Per Hugander 01:48
Thank you, Toni.

Toni Dechario 01:49
So, Per, maybe to get started, you could describe to me what it is that you do.

Per Hugander 01:54
Absolutely, I will try to do that. So, what I do, I help teams to make progress on complex challenges. And I help them to make better decisions. And then I try to help them to infuse the capacity to make those decisions into their organizational culture.

Toni Dechario 02:13
So, you started off as an engineer, what you just described doesn't sound like what an engineer does. Maybe you could describe to us how you ended up in this role, and how you ended up deciding that this was a really important thing for organizations to be able to do.

Per Hugander 02:28
Absolutely. So, before I became an engineer, I was a basketball player. And I was always really, really struck by how the best coaches that I had, could do these small things that would make our team a little bit better, and it could be stuff in the preseason; it could be a smart play that they drew up at the end of a game; could be, you know, how they mentally prepared us before the game. And it's those small things that would give us an edge on the competition. And I think when I stopped playing basketball, and I decided to go into business, I brought that with me, and I wanted to help organizations with that same thing, to get that edge. And to start with I was a strategy consultant. I thought strategy was the thing, you know, the best way to help organizations to succeed with what they wanted to do. But after seeing a few organizations trying to go through or make it – old organizations – trying to make it in a transforming industry, I realized that probably wasn't strategy that I was supposed to help them with. I was probably doing the wrong thing. It's very much like, I don't know if you read the book “Strategy and the Fat Smoker.” It's a Harvard professor named David Maister who wrote it. And he basically says that it's not, you know, coming up with a great strategy or the strategic plan that's going to make you successful. It's actually how you make that happen. And it was pretty clear to me that it wasn't, you know, lack of good strategies, or lack of resources that was getting in the way for these giants to succeed. It was actually that the way they led the organization, and the culture was really getting in the way of everything that they were trying to do. So, after having that insight, and after seeing more and more organizations trying to make it through transformation, I realized I should probably head back into leadership that I'd been looking at, but when I was a basketball player, right, and culture, so that's how I started venturing this way. That's a long answer to a short question.

Toni Dechario 04:42
I love that. The book's title is so illustrative. It really helps.

Per Hugander 04:46
I love that book and there’s a short article on it as well, that I greatly recommend everyone to read.

Toni Dechario 04:52
So, you can have the best ideas and strategies, but really what matters is how you put it into practice, and whether you can really implement them. So alright, you figured out that this is what matters. How did you figure out what to focus on?

Per Hugander 05:03
I realized that we're asking a lot of our leaders. It's a pretty daunting task to be a leader these days. You’ve – first, you have your team that you're supposed to lead, then you got to do the one-on-ones and manage your employees’ development and then there's the administrative burden of being a manager. And then you also have to stay on top of your area of expertise. And that alone, in a changing industry or a transforming industry is a quite big ask. And then on top of that, there's all these things that organizations are struggling with, or were struggling with, when I started getting into it. You need to be an innovative leader, and you need to be a collaborative leader, and you need to be a transformative leader and an inclusive leader. There’re all these things that we need to succeed with. And it was just hard for the leaders that I met to use the stuff that was available. There wasn't a shortage of theories or models. But all the great stuff that was available, wasn't really being used, because it was, it wasn't delivered in a way that, you know, the leadership industry wasn't doing a good job of getting what we know about leading in complexity, to be used by leaders. So, many leaders were just overwhelmed by all these books and theories, and they ended up not implementing very many of them. So, what I tried to do was to go through many of these fantastic theories and models, and see are there commonalities? What is it in these theories, that really makes a difference? Because they were all good. It's just that there were so many of them that they didn't really help. So, I was trying to find those common threads and the skills that you needed to use them. And I started to see a pattern of a few skills, important skills that kept coming back, and that kept being important. It didn't matter if it was to drive innovation, or if it was inclusion, or if it was, you know, creating a better team, there's a few things that come back. And some of those things, two of them that I thought we'd talk about later is the ability to take another person's perspective, to really go into perspective-taking. So, that was something that came through, and also the ability to create a psychologically safe environment. So, an environment where people dare to take interpersonal risks, you know, ask risky stuff, challenge each other, throw out new ideas that might sound a little bit crazy at first or admit when things aren't going well. Or if there's stuff you don't know, those things mattered. So, I decided to focus on those skills and try to find ways to help leaders to improve them and put them to use. And that was quite helpful. So, I kept doing that. And I found a few things to focus on, I thought it was a good idea to focus on the skills, not so much on the tools and on the theories and methods, but to focus on a few skills and help people to get good at those. So, that's how I found the focus. Then later on, I ventured into trying to infuse those skills into organizational culture.

Toni Dechario 08:23
So, the skills were the ability to take perspective, and the ability to create and establish a psychologically safe environment, and kind of build psychological safety. There's actually a Harvard Business School case study written about how you went about doing that. The case study for those who are listening was written by Amy Edmondson and Elena Corsi. And it kind of describes how your approach brought really tangible and positive business results. We'll link to it in the show notes. And I recommend people review it. It's a fascinating case. It indicates that, you know, the firm has been able to solve strategic problems that it had been working on for years, that it's helped the firm make decisions more quickly, more efficiently, and it even links your approach to improved market share. Can you describe kind of broadly, what that approach looks like? How you actually kind of created a skills-building approach within the organization?

Per Hugander 09:23
So, to change culture, you need to change people's assumptions. So, people need to assume that psychologically, or psychological safety will create good outcomes, and not theoretically buy into that. You know, Amy Edmondson, who's a fantastic professor from Harvard, who's done all kinds of research on psychological safety, proved that it really makes a difference for organizations in complexity. But that theoretical insight doesn't really do it when you want to create culture change. Or when you want to, I don't usually talk about culture change, but when you want to influence culture, when you want to make that a stronger part of your culture. What you need, if you want to change the culture is to change people's assumptions. So, have people assume that this makes a difference for us, here, on our topics, in our market, with our people, if we create the psychologically safe atmosphere, and if we use perspective-taking to explore these tough challenges that we're facing, we will create positive outcomes, successful outcomes. If I can help people to make that connection, then I can start changing the culture or influence the culture. That's my approach, to really go deep and try to make people experience having success with these skills. So, instead of the normal way, or the more practiced way of leading culture change, which would be lots of workshops with, you know, hundreds, maybe thousands of people, if you have a large organization, I would try to find one team that were willing to invest the time needed to learn these skills, and then help them to put the skills to use on the challenges or the opportunities that mattered the most to them. That's what I did. So, in the case study, you'll, you'll read about one team, it was the chief risk officer’s team, so, the senior risk team of the organization. And we practiced this, we had several full day workshops and off-sites and weekly meetings to really get these skills and then put them to use on the really important topics. And we created some really cool results that you can read about – you mentioned some of them – read about them in the case. When we did it with other teams and had similar or better results. And when you have those stories, then you can start doing lots of big workshops and rollouts. But my approach is really about going deep. So, you give people proof that this works in our context.

Toni Dechario 12:04
So, when you say, ‘this works,’ what is it exactly that you're doing with these teams?

Per Hugander 12:08
So first, you practice the skills. So, you get to practice perspective-taking first and in like a facilitated environment. So, we do it together, and we use it on a few topics that the team shares, but then I have them going out and testing these skills, because it's not hard skills, it’s stuff that that we can all do. It's just that we don't do it when it matters the most. We usually don't go into perspective-taking when there's conflict, or you know, when there's tension. But if we do, you usually create much better, you know, both insights and outcomes. So, I would have them go out and try and test this in their home environment, first on low impact stuff, but then gradually using them on more and more important business challenges. And then they'd come back every other week. And we'd share stories and talk about what worked and we’d visualize going forward, what would it look like if I use this skill, the coming week on a specific challenge or conversation. And gradually, they got more and more experiences of perspective-taking leading to more insights, more ideas, better decisions. So, that's how I got them to link this perspective-taking to successful outcomes, you know that it works. Then that it works is different for everyone depends on what you work with. But you know, it works to get progress on stuff, where we might be stuck.

Toni Dechario 13:36
So, by taking someone else's perspective, by kind of putting yourself in their shoes and thinking, “how would I approach this decision that they're facing, or this kind of conflict that they're needing to deal with?” helps you to identify solutions, kind of build on that particular problem, as well as on other problems? Is that what you're saying?

Per Hugander 13:58
Not really, I take it one step further. So, you said you know, “I put myself in their shoes and think about how I would approach that.” The key to perspective-taking is not to put yourself in their shoes – it’s to put yourself in their head. “What is it like to be Toni having this conversation?” With Toni's past and motivation and skills and whatever you bring with you and me trying to understand what is it like to be this other person? So, it's goes beyond putting yourself in their shoes, and really trying to understand what is it like for this person to be in this conversation or to deal with this challenge or struggle?

Toni Dechario 14:37
How do people do that?

Per Hugander 14:39
It’s not very hard. I mean, right now, you could probably try to, “I wonder what it's like to be that weird Swedish guy who's on my podcast,” and think about what would that be, from what you know about me, and just try to do that. And then I would ask you to, you know, go do that with your daughter about something that you might not get along around, or you know, where you might have some difficulties. And once you've done that, “Okay, you know, I get it. I know her pretty well.” So, it's not so hard to try to see it from her perspective. And then I’d ask you to do it with one of your colleagues and it's, it's just something that you can get into a habit of thinking about what's it like to be this other person talking about this challenge. And then, you know, gradually, I would help them do it with situations where there might be conflict, you know, someone that you really have different opinions or different motives or agendas. And you've been struggling and maybe fighting for a long time. To just switch out of, “How do I see it?” and just switch into, “How does she see it, or he see it, or they see it?” And it makes a big difference. Not just because you get more information, because in that process, you also want to ask lots of questions and really interview them about their perspective. So, it's not just imagining what it's like, but in the conversation, you let them know that “I really want to understand your perspective on this thing, you know, so we can move forward. So, that's why I'm asking all these questions.” So, you ask questions, you imagine it. And what happens then as you get more information, you learn more. But also, what's really interesting that I learned through a collaboration that we have with the Wharton Neuroscience Initiative, is that when you switch into perspective-taking, and you switch away from arguing or trying to solve a problem, you actually start using other parts of your brain. So, what they call the default network, which is another part of the brain compared to when you're trying to solve problems. And this part is more connected to creativity. So, that – so it’s – you're more likely to have new ideas about stuff that might work. You get more information from asking all the questions. And, and however you tried to get into that perspective, but also just from the process of switching out of your perspective and switching into someone else's to go into that exploration, you switch on another part of the brain, so you get access to more parts of your brain? I'm not sure. I don't think they let me say that you get smarter, you get more intelligent, but I think you access more parts of your brain. So, maybe that's why we come up with new ideas.

Toni Dechario 17:32
Fascinating. So, this is unusual. This is an unusual exercise to do in a bank. It's kind of different, I think, from how many organizations – particularly more traditional organizations – operate. So, can you talk a little bit more about how you got this organization to start practicing this and how you kind of helped people to overcome any skepticism about this approach, and kind of start building this as a habit?

Per Hugander 18:03
So, that's the tricky part, you need to find someone who really believes in this and believes that it's worthwhile spending, you know, a day or two and then doing these weekly follow-ups. That's a big ask, that's a lot of time. And for lots of people – it doesn't matter if it's in a traditional organization, or the bank, or if it was when I was helping scale-ups and startups – is taking that time. People all want the results, right? But taking that time, it's really hard. So, you need to find someone who's willing to do that, and who's willing to protect that time when his or her team starts, you know, complaining about blocking so much time in the calendar. So, I was lucky, I – before joining the bank, it wasn't that hard, because then I was a consultant. So then, you know, people who contacted me, they already had bought in. They heard about me, they've taken my programs or, or knew someone who's been a part of my program. So, they were already into it. So it wasn't that hard. But being internal, trying to find someone who want to go beyond, you know, doing a half-day workshop or a one-day workshop, and really get into the process of becoming good at this and then putting it to use on their strategic challenges, that was hard. So, I almost gave up before I met this first person, that's in the case study as well, who was willing to do it. And then you know, we get the results, and then another one tagged along. And then we talked about this at a big conference, and all of a sudden you could get more and more people because they wanted the results. But it's really hard, you know, those big asks, of days and hours, it’s not easy, especially when you're asking senior managers to take that time. So that's the hard part. You’ve got to find that first person who's willing to invest.

Toni Dechario 19:54
And in some of your writing, you write about how the proof is in the pudding, right? And when people start to see that practicing this approach is actually helping them make better decisions. It's helping them ultimately become more efficient, and so they're using less of their time not more of their time once they kind of get into the habit. There's kind of a snowball effect, right? Can you talk a little bit about assumptions, organizational assumptions, and why you want to kind of go for those in order to influence culture and influence the way that people do things?

Per Hugander 20:28
Yes, I think everyone who wants to work with influencing culture needs to take a look at Edgar Schein’s organizational culture model. It's a classic and it really stands the test of time. And the foundation of culture according to Schein is the shared underlying assumptions that exist in an organization. So, it's the assumptions about what creates successful outcomes in our specific context. And those assumptions once they are shared, and they become almost automatic, so people act and behave in accordance with those assumptions. And that's how culture forms. So, that's why I focus so much on assumptions. Because if you can influence people's assumptions, you can start to create new assumptions. And after a while, maybe they will get both shared, and hopefully underlying, you know, become underlying assumptions that people just use and act by, without even thinking about it. You know, that takes a long time. But to get started, if you want to influence culture, that's where you want to start, a lot of people start with the espoused values, which is, you know, the middle layer in Schein’s model. It’s this iceberg, right? So, in the bottom is the shared assumptions, and then it's the espoused values, and then on top of the of you know, that what you can see above the surface of the water is the behavior. So it – Schein says is that it's these shared assumptions that it makes the difference. Espoused values is not a very effective way of working if you want to influence culture. And if you want to change culture – I don't really like the word “change” culture. I think you influence culture, not change it. But if that's your aim, that's where you want to work: espoused values. The values that are enacted in the organization will only change if assumptions change. So, it's, I find it a lot more fruitful to focus on the assumptions. If you want to infuse something new into the culture that has to do with, you know, leadership or culture work is about culture. So, influencing leadership or culture, you need to break that assumption. So, the way I try to do with that is try to give people proof quite quickly, of you know, that this will help on your most important challenges. Like you said before, once they understand that they're more willing to invest more, but if you don't give them that proof early on, it's a good chance that they will start, you know, to try to negotiate and use less time. So, what you want to do is give them proof quite early. So, I usually have like a two-day off-site to kick these initiatives off, like the one in the case study. And at the end of the first day, the full first day we just try to build a more and more psychologically safe environment, and we train perspective-taking. At the end of the day, I ask them to identify one strategic important challenge that they all want to make progress on. And then we use two hours to do a structured dialogue around that challenge. This is something that's important to them. And during those two hours, you know, 95% of the time, we'll make some really good, substantial progress. And so they go to bed, realizing that ‘wow, this really makes a difference.’ And then the next day, we have a morning reflection, and they talk about how they're surprised about how this really helped. And with that you're beginning to both influence the individual assumption, but also from having them share those stories, that makes it easier, you know, to kind of start changing your assumptions about these, you know, soft-skill workshops or culture initiatives, then also about psychological safety perspective-taking. So, it's all about giving them proof that this works early on. There's a great theory. – it’s by Nelson Repenning at MIT – and it's called the “capability trap,” and it's all about, if the investment is up front and the payoff is in the future, it's really hard to get people to invest.

Toni Dechario 24:53
Well and also, we're social creatures. And so, coming to this realization jointly, I suspect, is effective in that where we are reinforcing one another's responses and reactions and, and kind of building into the into shared assumptions, not, just personal assumptions, the fact that this was effective and in helping us solve this strategic problem that we all care about.

Per Hugander 25:16
Yeah, absolutely. And that's also why we do these weekly check-ins, about the perspective-taking, because that's when the only thing we do with the – it's, it's an hour, and we talk about stuff that worked the two weeks before, and then we talk about where we might want to use this, the coming two weeks. And all of that is stories about how this works, how it could work, how they believe you know, where they believe it will work. So, it's all about creating shared beliefs and proof that it does work. So, putting it into social context, sharing stories, sharing experiences, that's a big part of influencing and helping people create new assumptions.

Toni Dechario 26:01
So, one of the things you said I want to pick up on, which is before you start teaching perspective-taking and before you have people start practicing perspective-taking, you create a psychologically safe environment. That sounds wonderful. How do you do that?

Per Hugander 26:15
What I do to establish a psychologically safe environment early on is that I have people practicing being vulnerable. And this is nothing new, people have done this, being vulnerable about, you know, sharing life stories, sharing things, it's nothing new, we've done that where we’ve practiced trust for decades. But what I do after that is that I have them be vulnerable about work related stuff, you know, have them share and talk about situations, challenges, topics that they're facing, where they might not know the way forward or they might have, have, you know, made a mistake, or they really want to maybe challenge the way that things are done, but they haven't done it. And have them push those boundaries, given all of those kinds of topics, there's a risk, right, there's this interpersonal risk, which is psychological safety. Psychological safety is a willingness to take interpersonal risk. So, you want to help them to get over that uncomfortable feeling that that risk creates. And all of a sudden, they realize that that uncomfortable feeling, that might not be something I should listen to that much. Because when I do lift these things in, I can get help from my colleagues. And we actually make progress. So gradually, by sharing topics and themes that they're unsure of, we build an atmosphere where that's okay. That's the game, it's not something that I do before we do the perspective-taking. It’s something that I do – these go hand-in-hand. So, I do a little bit of the vulnerability practice, I do a little bit of perspective-taking. And actually, perspective-taking is a really good way of building psychological safety, especially in a team where there might be some tension. Or you know, when there's two or three people that don't get along, when you have them practice perspective-taking on each other, and really getting into asking questions to the point where they understand each other. That's a pretty powerful session right there. And it's, you know, you can do that in twenty or thirty minutes. And that actually builds psychological safety, when you realize that that person that I've been struggling with for a long time really understands me now, you know, even if we always had – she actually seemed to care about, of what I thought about the topic or how I saw it. And from that, you start building that psychological sense. So, they work in tandem, these two things, psychological safety, makes it easier to do perspective-taking, but perspective-taking also increases psychological safety. So that's a nice thing about working with these two, at the same time, and I would never try to work with one of them and not the other. If I'd work with a team, they go hand in hand, pretty much.

Toni Dechario 29:05
So, you've been at this for a number of years, now. You've kind of broken through the obstacle maybe that you first faced, which was finding a group to start the ball rolling, right? To be willing to give you the time and the trust to work on perspective-taking and psychological safety. And to get them to a point where they started to see results. I'm hoping that maybe you can provide some stories about what your results have been, you know, where you've kind of seen this tangibly provide outcomes for the organization. And any lessons learned from the years you've spent doing this.

Per Hugander 29:47
So, this stretches, you know, long before I joined this bank, I've done this with lots of organizations and lots of teams, and it's always a bit different, you know, but it always relates to what's the most important thing for these people right now, because that's what I tried to focus in on in order to create that proof that this works here. So, you know, sometimes they're going through a merger, and you know, there's always tensions and misunderstandings in mergers. So, in those situations, a lot of the times the stories will be about how they could find a way through. Sometimes it's roadblocks, you know, you have this strategy, you know where you want to go, but there's just stuff internally that we can't get through, can't get past a lot of the time, it's a conflict. And a lot of time, it might be between one or two, either individuals or groups and organizations that for some reason, might have different interests. So those are things that we have lots of proof and lots of organizations that you can over them, so you can get over them quite quickly, stuff that people have been struggling with, and not really talking about in a productive way for years, you can get past it in two, three hours workshop if you really put these skills to use. So those are a few things, you know that like you said, a few situations, it's been about creating innovation and trying and testing new things in the market and that led to more market share. And it's different for every team and every organization, but where it makes the difference is where they choose to use it. And for me, the stuff that you see in that case study is just the proof points, right? That this works. The goal is that they internalize these skills and start using them more and more and get progress on all kinds of topics that I don't know about, because I trained them years ago, and hopefully, they're still, you know, I get stories here and there from teams that I worked with, months and years ago, and there's new things popping up, and I can't really keep track. But you know, making progress on those complex challenges, something that most teams need. And, and it's something that isn't that hard. If you just get into exploring, instead of trying to solve you know, get into that perspective-taking and start sharing the most important information, despite that interpersonal risk, you can make progress on most stuff.

Toni Dechario 32:10
It's really just building a habit and practice.

Per Hugander 32:23
Yeah, and I think also shared language. What really helps is when you have that shared language around this and say, “Hey, guys, this looks like a complex challenge that we're facing, maybe we should stop talking about the way we're talking about it and do an hour perspective-taking.” If you don't have the language that can sound really weird, especially if it's a conflict, right? But now when we have that language, and in organizations and teams, where you have that language, it's really easy to just put it there and say, “Let's do perspective-taking for an hour or two and see where we go.” And that's really powerful to have that shared language. So, if you have the language, you have the proof that it works, so you dare to use the language, then, you know, it's habit, you get better every time you do it. But you don't have to practice it for months and months and months to get results. Usually, people do pretty well the first day, if they just really try to get into perspective-taking then it gets easier, the longer you go through the process, but it's not this very complicated thing. It's just, you know, you got to put your mind to doing it.

Toni Dechario 33:26
Okay, so one of the topics that we're looking at this year is new ways of work. And a big part of thinking about new ways of work is thinking about hybrid work, and not always being in person. Does perspective-taking work, when you're doing it either remotely or in a hybrid way? Is there something to being in person that's important to the sessions that you're holding? What's your take on how the change in the way that we work is affecting your ability to bring perspective-taking and psychological safety to your clients?

Per Hugander 34:01
So, it definitely has an impact on how we can reach out and make this happen in the organization. So, it's good and it's bad. So, a few of the things that you would get from meeting in person you don't get from a digital conversation. And when Corona hit and all of a sudden everyone had to work from home, we were stuck with the question, “Are we going to keep doing this?” Because we were just getting to a point where this was kind of, you know, you got a pretty strong internal trademark on these – on this concept. So, do we want to try to transfer that to digital or do we just want to wait? And so, we decided we don't want to do the whole thing because we don't want to burn the trademark but what we wanted to do was keep going with the cohorts that we were already in progress with, and it turned out to work really, really well. You lose a little bit. So, what happens when you sit in a room together, I usually have people sit close, you know, no tables, knees almost touching, making eye contact, something builds that’s called synchronicity, which is when they – we start synchronizing brainwaves and heartbeats. And it sounds really weird, but it happens when people sit close and talk. So, you don't get that as much when you're meeting through a screen. But lots of other stuff works really well, you know, asking the questions, trying to mentally understand what it's like to be the other person, most of this stuff works. So I – my estimation this is, you know, not scientifically proven, or anything – is that it's 90%, as good to do these sessions, digital. There's something that you lose, but it's not a lot, it's definitely worth doing it virtually. But then we get to the good points, which is when you meet virtually to do these sessions – especially when it's when it's senior leaders – who are hard to get into one space, and there's always going to be someone who can't be there, when you have an hourly, person-to-person meeting every week. But when it's virtual, it's easier to make it. You know, there's no traveling time. You don't have to go in and out of different meetings, walking from one end of the office to the next and all that stuff. So, more people attend, and more people are there more consistently through the process. And I think that has a really positive impact. So, I would say that they equal each other out. In the best of worlds, you know, it would be in-person, everyone there all the time, but I think digital has some great benefits. And when it comes to the dialogues, you know, that's also core to this process, you know, to have a dialogue on a really important complex challenge. I think that works almost better digitally, because it's easier to manage the, you know, who speaks and who's listening and to spread the word evenly and move in and out of perspective-taking and sharing, which is a key to those dialogues, that works really well, digitally. It's just lots of people have concluded that digital isn't good for creative work. I think it's just because we don't use it for creative work, we haven't really tried it. But when you do try to facilitate creative conversation, it can be great. So, I think it works really well digitally. But I do admit that I want to start out person-to-person, face-to-face. That's my preference. I'm sure that it works the other way around as well. But there's something in that synchronicity. So, I do like the hybrid versions of doing it. There is something about having that person-to-person start when you want to build psychological safety that's hard to get over. You can do it virtually, but why chance it when you're investing all of this time.

Toni Dechario 37:59
In person, you can use the neural synchrony that takes place when you're in person to almost speed up perspective-taking is that right? It kind of facilitates our ability to take someone else's perspective, because we are like almost biologically synchronizing our heartbeats and our brainwaves are starting to synchronize.

Per Hugander 38:23
So, let's actually think about impacts the psychological safety even more, I would say, you know, it's a really good way of creating that psychologically safe space, when you're able to get people who don't agree to sit in those closer circles and have conversations with each other. It really helps the psychological safety and that makes perspective-taking easier. So yeah, they feed off each other. But I wouldn't say that it's only the perspective-taking, I think it's just as much the psychological safety, but you can really leverage it. You can virtually as well, but then you want to really make sure that people aren't sitting in a, you know, an open landscape environment and being disturbed and stuff flying around them and emails coming in. If you're in your own room and you shut off your emails and you know, messengers and Teams notifications and stuff, and you're really focused on what's going on on this screen, you can get almost the same quality, absolutely.

Toni Dechario 39:27
Fascinating. One of the things I wanted to talk to you about today, Per, is trust. That's another topic that the New York Fed has been focused on this year within the culture initiative. I know that you have some strong feelings about trust versus psychological safety. The listeners will notice the word “trust” hasn't really come up yet, in our conversation. Can you talk about why you focus so much on psychological safety over trust? And maybe some of the pitfalls that you see with trust?

Per Hugander 39:56
Yes, so trust. First of all, I want to make sure that everyone understands I love trust. I think trust is great. I would like to see more trust in the world. So, a lot of the time people point me out as the guy who doesn't like trust, the anti-trust guy. And I'm not saying trust is bad. I'm just saying that it doesn't do it for me when I try to help organizations succeed. So, there's a few problems with trust. And especially today, you know, there's all these sayings, right? “Teamwork is all about trust, collaboration is all about trust.” There – It seems like everything that we do is all about trust. So that could be true, because trust has so many different definitions. When you look at – and I've explored trust quite rigorously. Firstly, trust has lots of different definitions. And that's a problem. If I want to help an organization to move forward. If I say teamwork is all about trust, people can ask me, “Okay, so what kind of trust? Is it that I trust in your competence? Or is it that I trust that you won't hurt me? Or is that instinctive feeling that I have when we meet about trust or distrust?” There's so many kinds of trust. And when you look at the research, there was someone who – but I don't remember who – but there's a really good meta study on trust, where they concluded that there's so many definitions that the research on trust combines to create meta nonsense – no, macro nonsense, sorry – because there's too many definitions. So that's one problem. But when we look at the way, why I don’t use trust, there's so many ways I'll start with, with trust, if you focus on trust, you automatically also focus on trustworthiness. And people managing their trustworthiness, or their appearance to be trustworthy, is really problematic for me, in the kind of conversations, in the dialogues that I need. Because in those dialogues, if I'm going to help people to make progress on their most complex strategic challenges, I need the best possible information on the table. So, I need people to dare to put unfiltered information and a lot of the time, that is risky, because it could show that I don't know everything, I've made a mistake, or I need to challenge someone that you know, maybe someone above me in the organization, and all of those things could harm how people evaluate me as trustworthy.

Toni Dechario 42:31
That makes a lot of sense because one of the components of trustworthiness, according to Onora O'Neill – who I think of is kind of the primary thinker on trustworthiness – is competence. And so, if you're acknowledging that something is difficult for you, or that you maybe don't have full 100% competence in some area where you think people might expect you to, if you're focused on being trustworthy, then that's going to hurt psychological safety.

Per Hugander 42:58
Yes, exactly. So that's the problem. So, with trust comes that proving that I'm trustworthy, and that a lot of the time helps or stops people from voicing the information that I need them to voice to make progress on the most complex challenges. So that's one problem. But another problem. So, like you said, most definitions in organizational context about trust has something to do with competence, a lot of the times something to do with character and benevolence, and that through socializing with someone or interacting with someone for a long period of time, you can start evaluating how competent, trustworthy and benevolent that person is. So, it takes time to build that trust as part of the definition. So the problematic part here is that lots of organizations, definitely the one I work with, but lots of organizations that I've worked with before, they need to bring in new people, right, they need to bring in lots of tech people, if we're looking at the financial industry, you know, tech people, these key people, lots of new people that needs to come in, and help out in the, in the different decision-making processes and in the teams. So, when you add lots of people in a short period of time, those people who have the least chance of having to. – having established trust, right, we're running a risk of not evaluating the information they bring in as much because we don't feel trust for them yet.

Toni Dechario 44:28
Are you saying you know; trust is kind of personal? And psychological safety is more cultural?

Per Hugander 44:34
Yes, I would say trust is between two people. So, I can trust you, but I can't trust a team. I can trust all the individuals in a team. And then we have trust, but I can't trust the team. There's nothing there to really trust. I can trust the individuals. But you can create a psychologically safe atmosphere or environment or if you want to call it culture. That's the that's the atmosphere that you have. I don't have to trust everyone. I'm sure you've been to these, that could be a party, or it could be a training or somewhere where you haven't established trust, you hardly know people, but the atmosphere – they’re really open and great. And you can both share information and challenge each other. You can have great conversation without trusting people, but the atmosphere is there. So that would be the way I would think of the difference. So, there's lots of research, if you look at research on teaming, if you look at research on collective intelligence, that says that there's other things that comes in, that's really important that we can do, that doesn't have to do with trust. And it has to do with you know, sharing, contributing equally to creating a psychological safe environment to take each other's perspectives. If we do those things, we can do really well, before we've had time to, to establish trust. I’ve thought a lot about trust, and it's just not that helpful. It's a lot more helpful to focus on psychological safety, you know, that willingness to take interpersonal risk, to dare to put the most important information on the table, because most of the time, that is what we need in order to make progress on the stuff that we're, we're challenged by now. And it goes for, you know, big financial organizations, but it also goes for really small startups. A lot of the time, it's those complex challenges are getting in the way. And when your focus is to get progress on those, trust isn't going to help that much, it might actually make things worse.

Toni Dechario 46:33
That's interesting. It reminds me of one of the panelists in one of the webinars we did this year, a guy at NYU called Jay Van Bavel has done some writing about cohesion. And how, indeed, cohesion in a group helps encourage challenge, right, because you already have that cohesion, you already, people feel safe to kind of come up with wacky ideas, because they in your lexicon now feel that they've built that trust in that they've established trustworthiness already. But he says – and I think this reflects what you were talking about – that the process of trying to create cohesion hurts challenge. Sounds similar to your description of the process of trying to build trustworthiness or trying to build credibility can hurt challenge because you don't want to appear unsure, or, you know, kind of not competent.

Per Hugander 47:31
Absolutely. And this is, this is very problematic, right? Because in the situations where we need to make good decisions, this goes for companies, society, everywhere. Now, when people come together, if we have a period of time, where we're working to create trust, or cohesion, or whatever you want to call it, where people are holding back, not sharing good information, now trying maybe even to challenge each other to see if we're trustworthy, which can create conflict, if we have that, we're probably going to make really bad decisions. So, what I'm trying to do, what I always try to do is to find ways to get over that how can we perform during that trust-building phase or cohesion phase? How can we perform that as well? Because the way I see most of the important decisions we take, are going to be taking in that phase? So how do we do that? That’s the challenge. Then psychological safety to quickly get that up, but also to be trained to do perspective-taking, even if I don't like you, or if we looked at whatever it is, if I can quickly realize that this is a complex challenge, we need to make progress on it. And I can go into perspective-taking. And that also will create psychological safety, we can get to a space where we can make good decisions during this trust-building phase or, or cohesion phase and, and actually what I think and what I’ve – think I've seen proof of – is that when you stop emphasizing trust, and you start emphasizing psychological safety and perspective-taking, people can start making progress. And without trusting each other, or at least with the definition of trust that trust builds over time. That is actually trust-building in itself, to make progress together to see that, you know, even if we might not like each other, or we don't know each other, or I can't evaluate if you're competent or not. We have this shared experience of working together and making progress. That's actually a really good way of building trust. So maybe we can build trust, not by focusing on trust and saying that it all comes down to trust, but by not focusing on trust. Maybe it's a quick way to get that cohesion.

Toni Dechario 49:49
And ultimately, in the end, it's all about making progress on a decision, on a challenge, on the outcome and you're building confidence in your ability to jointly do that. And I'll bring it back actually to the case study and it shows that you have been able to get really tangible, clear, kind of business outcomes from all of this, which sounds soft. And, you know, a little like trust and psychological safety, some of the vocabulary can kind of create a resistance. You know, I think especially in like a field like finance, you know, which is wants to see the numbers and kind of the quantitative outcomes. And all of this psychological safety stuff is really soft. I think what's really important is you’ve shown hard outcomes. And so, it's a fascinating study. If you can make one recommendation to the people running financial firms, when it comes to influencing culture, what would that be?

Per Hugander 50:49
I can only do one? Okay, so one recommendation, go deep before you go wide. You know, really give one group of people, preferably someone who works with something important, that's quite senior in the organization, give them the chance, you know, a few days and a few hours to really learn the skills so that they can get the experience of this helps to make progress on our challenges. If you can do that, before you ask them to get behind something like psychological safety, or perspective taking or these soft words, it helps a lot. There's lots of people that are now getting behind this, that are promoting this, you know, both the skills and the vocabulary, that originally were quite skeptic to that soft language. And we even call it empathic listening to start with, but I switched to perspective-taking, but you want to give people a chance to really experience the benefits so that they can get behind it. That's where you need to start. Don’t start rolling out culture change based on theories about something that worked some other time, some other place and some other industry, you know. Make sure that people have proof that it works here, for us, in our context, and then try to spread that. So that would be, you know, one thing, if you're going to work on culture.

Toni Dechario 52:19
I love it that you changed what you called perspective-taking it – that you had previously called it empathic listening. What kind of a difference did it make when you made that change? Because I think language really matters, and how people respond and react to language is real. I'm curious about why you made that switch, and what results you saw when you made it?

Per Hugander 52:40
So, it's really hard to choose, you know, what are you going to call it, because we you could call these skills, both psychological safety and perspective-taking, you could call them other things. So, starting out, especially when you're in, you know, if you're going into a financial firm, or an engineering company, I feel that I want to have something with, you know, really credible research behind it. So, when you choose something, choose something that you can point to, you know, this is from Harvard, or MIT or INSEAD or Ashridge, or some really credible school, and some really credible researcher, because a lot of the time, some of the skeptics need that to come along. So, what we started out with empathic listening, that's because Otto Scharmer of MIT, you know, he’s a pretty credible resource. So that's why we use that language. We realized that it was quite tough for some people, empathy and listening, you know, it sounded maybe a little bit too soft, passive. So, when I started finding really credible research on perspective-taking, then it was easier to make that switch. I could have changed it to, to lots of different words, but I don't want to change it into something that doesn't have, you know, that isn't backed by research. Because if you want to spread this to lots of people and you want to spread it in an organization, you want to choose wisely, so that you can always back it up. But since we found lots of research on perspective-taking and the definition of perspective-taking in that research was very, very close to the way Otto describes empathic listening. So, it's not the same, you know, empathy isn't the same as, perspective-taking but empathic listening, the way he describes it to take the perspective of that other person is basically the same as perspective-taking. So, then I felt that it was fairly safe because I could back it up with research, and it was easier for people to buy into it. So that's why we changed that one. I've been thinking about, you know, psychological safety is also a hard word to get behind for lots of people. But Amy Edmondson has done such fantastic research and there's so much proof that this really makes a difference on complex challenges. So, I've stuck with that. And it works. It doesn't work with everyone. Language is important.

Toni Dechario 55:19
Wonderful. Thank you so much. This has been really fun. Excited to do this and to get the word out. You're doing really interesting work.

Toni Dechario 55:26
if you want to hear more from Per, watch the New York Fed’s webinar on “Trust in Banks: Where are We Now?” which you'll find at NewYorkFed.org/governance-and-culture-reform.

Episode 03
“What Our Words Say About Our Work”
Sameer Srivastava & Amir Goldberg
What can natural language processing tell management teams about the priorities of their employees? Do assumptions built over time more often lead to successful or unsuccessful outcomes? Does a speaker’s choice of words carry more weight for their audience than the substance of what they’re saying? Pointing to new developments in linguistics analysis and computational learning, professors Sameer Srivastava at UC Berkeley and Amir Goldberg at Stanford deliver some cutting-edge insights.

Sameer Srivastava 00:01
In many cases, the managers have assumed, you know, we've been able to maintain high levels of productivity, things are still getting done. It's all fine. And I think we don't really understand the ways in which the cultures in many, many organizations these days are fraying.

Amir Goldberg 00:17
So, if you're a leader, if you're a manager, if you have a vision to build a company and you think algorithms are going to solve that problem for you, you're in for a big surprise.

Alison Taylor 00:25
HR can't own culture and compliance can't own culture and senior leadership can't own culture. Each has a slice of culture, as do employees as a whole. So, if we still think in terms of delegating to specific functions to solve these issues, I don't believe they will ever be solved.

Per Hugander 00:43
When you want to influence culture, when you want to make that a stronger part of your culture, what you need, if you want to change the culture is to change people's assumptions.

Jeremy Brisiel 00:52
This is Bank Notes: Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 01:01
Hello, and welcome to Season Two of the Banking Culture Reform podcast part of the New York Fed’s initiative to drive awareness and change in financial services culture. This season, we're exploring themes of trust, technology, and the new workplace. We introduced these topics in our 2022 webinars, which you can watch at NewYorkFed.org. In this season's podcast, we’ve brought back panelists from each webinar to take a more in-depth look at their work around these three themes. My name is

Toni Dechario, and I'm with the New York Fed’s culture team.

Toni Dechario 01:33
Our guests today are Amir Goldberg and Sameer Srivastava. Amir is an associate professor of organizational behavior at Stanford's Graduate School of Business. Sameer is the Ewald T. Grether Professor of Business Administration and Public Policy at the UC Berkeley Haas School. He also co-directs the UC Berkeley Culture Center, Amir and Sameer co-direct The Computational Culture Lab, a joint initiative between Stanford and Berkeley. Welcome, Sameer and Amir. You're both doing really fascinating work on the intersections between technology and culture. How did each of you get to this point? How did you come to believe that culture is important? Sameer, how about you?

Sameer Srivastava 02:12
Great. Thanks so much, Toni. Thanks for having us for this conversation. So, the answer to your question for me goes back to my undergraduate days when I was an economics major, and I wrote a game theory senior thesis, which was a mathematical model of the behavior of firms and the decisions that managers inside those firms made. And the model worked out really nicely. But then I was looking for empirical examples of actual managers and actual firms behaving this way, and I couldn't find any. And it made me feel really disillusioned about this model and made me think I wanted to really understand how real managers, how real people in organizations made decisions. So rather than pursuing a PhD at that time, which had been my plan, I went into industry, and I worked for a management consulting firm. I ended up staying for about 14 years and spent a lot of time really helping organizations think about aligning their organizations with their competitive strategy, and very quickly came to see the role that social networks and culture both play in the way decisions get made, right? So, we might have an idea that we think is right, but then decisions are socially produced through interactions with other people and who you come into contact with. And the nature of those interactions, importantly, shapes what the outcome is. And so I wanted to really understand that better. And that led me to go back kind of mid-career to do a PhD. This time, I decided to go back and do a PhD in sociology rather than economics, because it felt like the discipline that better understood and took seriously the role of culture and social networks. And then as I started doing research, which was initially focused more on the role of social networks in shaping individual and organizational outcomes, I began to see that that literature was disconnected from the cultural context in which networks operate. And so a lot of the work I've been doing together with Amir, and I'll let him say more about his background, has been really trying to take culture seriously. And find new ways of measuring it, new ways of tracking it. And really understanding how people come to create group culture and also how they are influenced by the culture in which they are operating, whether they realize it or not.

Toni Dechario 04:36
Thanks, Sameer. Amir, do you want to tell us your origin story a little bit?

Amir Goldberg 04:40
Sure. Well, first of all, thank you for having us. This is really exciting to be here. For me, I think the foundational moment was when I moved to the United States. So, I have the advantage and the curse of being an immigrant, but I think it gives you it gives you a lot of perspective. I grew – I grew up in Israel, which is a very Mediterranean Middle Eastern culture, with a lot of like, history and fraught history to it. When you arrive in a different country you just suddenly become aware of the extent to which things that seem so natural to you are, in fact, very unique to that particular context. And it's very frustrating because I would say things – and I knew that I understood the literal meanings of what I was saying or what other people were telling me – but I didn't understand the implied meanings. One of the most common things that I've noticed in American kind of work culture is people say, “We should really have coffee sometime.” But it's not a literal invitation to having coffee, it's more of a nice way to end the conversation and suggest that maybe in the future, there will be an opportunity for us to socialize. And it takes a long time to understand these. Or the – or the baseball references and what they imply. And that was a moment where I understood that this is such a fascinating, and such an important aspect of our social lives, but one that we are so deeply and surrounded by that we don't even see that. You need to travel over the Atlantic to be able to observe it. And that was the moment where I decided that that's what I wanted to start doing. And it's very difficult to take that distance, and to look at yourself and others from the outside and ask yourself, what are the beliefs and interpretations that are shared across a group of people that they believe are just the natural order of things, but in fact, are a result of, of a very rich history that they're mostly unaware of. And that's what's so fascinating about culture. And now, with respect to the question of why financial institutions should care about culture, I think there are two main reasons. First of all is just because it's around us. You can't escape culture. It's kind of like the fable of the fish that is taken out of the water and asked, “How's the water today?” and the fish says, “What water?” So, we're swimming in the water of culture, whether we like it or not. And I think financial decision leader – makers, financial leaders, that are better aware of how their decisions and interpretations or bias through cultural contexts are gonna – are going to make eventually better decisions. And I think it's particularly acute in the finance industry, because we know from the study of culture that culture is one of the most unique things that humans have that has enabled us to become such a successful species on this planet. And one of the reasons is because culture is a way for us to share knowledge in a way that no individual could discover by him or herself. And the more the – the external environment is complex, the more culture becomes an important way for us to resolve some of these uncertainties. And financial markets, by their nature, are complex. And they're just becoming even more and more and more complex. And this was very much clear during the 2008 financial crisis, which was happening while I was doing my PhD studies, where a lot of the decisions of investors that seemed to be rational, profit-maximization types of calculations were, in fact, driven a lot by cultural processes, by shared interpretations that had nothing to do with the underlying fundamentals of the instruments that they were using. So, I think every person should think about culture, but in finance, in particular, in light of the complexity of the reality that investors are dealing with.

Toni Dechario 08:44
So Amir, if culture is thought of as kind of just the way things are and the water that we're swimming in. Does that mean it can't be changed?

Amir Goldberg 08:53
I think what it means is that, obviously, it can be changed, because it's not the natural order of things. But the reason that it is perceived as if it is natural, is because it is so deeply shared by people that - you know that the technical concept that sociologists and social scientists would use here is something known as social construction. And social construction is a reality that we have all come to believe is natural, but isn't necessarily the – the natural order of things. But the reason that it is held so strongly is because everybody shares it. So that means that changing that perception is going to be very difficult. So, if you think of one of the most dramatic achievements in that respect of the 20th Century is changing people's perceptions about gender and gender roles. And, you know, in the early 20th Century, many people held the position that women are simply incapable of leadership because they're biologically innately not disposed towards certain types of qualities and behaviors. And it took many, many, many thousands of people to provide evidence, to make kind of strong arguments, to protest. But we saw that change happen. And usually when it happens, it happens in a landslide, because suddenly, it requires a large contingent of people to change their opinions en masse. And then a lot of things happen. As a consequence, we saw – and also with, with the gay rights movement, in the latter part of the 20th Century – doesn't mean that things can’t change. But it means that their opinions are strongly entrenched. And in changing people's opinions, it is an uphill struggle.

Toni Dechario 10:53
So I want to get into the guts of what you both do. One of the themes that we're thinking about this year and that we've been focused on this year is technology and that relationship between technology and culture. This is why we brought you two in – you co-lead the Computational Culture Lab. I'm wondering, Sameer, maybe you can give me an introduction to what the Computational Culture Lab is, and what inspired its creation.

Sameer Srivastava 11:23
Happy to. So, I think it's been about seven years since Amir and I started the lab. And it came about the way a lot of academic collaborations come out, which is, I invited him here to come give a talk at Berkeley. And we had a nice chat afterwards. And he invited me to come give a talk at Stanford, and we had a nice chat afterwards. And then we decided to meet in the middle in San Francisco. Over lunch, we started to think about research collaboration. And as we started thinking about the ideas that we were both interested in, we also began to realize that the data – we would need to really get at these questions just weren't accessible and wouldn't be accessible using the typical methods one has available to study culture, things like surveys. Surveys are incredibly useful. They're very widespread, but they have important limitations, right? They tell you about what people think and what they report in an instrument. They're subjected to various forms of reporting bias. They're costly to implement in the sense that it takes time for people to fill them out. In many organizations, response rates to surveys have been on the decline for years. And so we really were starting to think about, you know, are there other ways to get at facets of culture? Again, this is about seven years ago, when we were still relatively early in what I think of now as, as the digital revolution as – as it relates to the study of culture. So, we started to think about, well, what are data sources that one could use to get at more behavioral indicators of culture, and ones that could be mined. So that rather than having to just get data, every three months, or once a year, you could get real time continuous measures. So, we started thinking about, for example, interactional language use: the idea that people in organizations are routinely communicating with each other. And increasingly, there are digital traces of that – whether it's in emails, or whether it's in Slack posts, whether it's on Glassdoor reviews – there are lots of different ways in which we can collect these digital traces. And around the same time, there was a proliferation of tools and methods for structuring that data, for analyzing it at scale, computational costs were declining dramatically. And the tools from computer science and computational linguistics were becoming more readily available. And so I think, a big idea, the Lab, the inspiration for the Lab was, can we harness these new data sources and these new methods to help us tackle good old-fashioned social science questions, but in new ways? And that, I think, is really, in some sense, an encapsulation of what we've been trying to do. Amir, what would you add?

Amir Goldberg 14:06
I think you’ve provided a fantastic answer. You know, I will just add that related to our – to your first question about our backgrounds, I think also Sameer, and I come from slightly different training backgrounds. Sameer started in economics, and then went into consulting kind of experience, the limitations of – of the theories and the practices firsthand. I did my undergraduate degree in computer science. And I also kind of understood that this was a moment where data digitization, new algorithmic capabilities are going to revolutionize how we think about, quote, unquote, “softest” aspects of human interaction and – and sociability. And we were very excited because we knew that these technologies are out there. But then our friends in computer science and statistics weren't thinking about culture as – as their immediate candidate. And that was an opportunity to be seized, but also a way to move the needle.

Toni Dechario 15:09
So maybe, Amir, you can go into as layman terms as possible, what are some of these computational methods that you're using? And then you can talk a little bit, perhaps, about exactly how you're applying them to aspects of culture.

Amir Goldberg 15:25
Sure. So, you know, one of the biggest advancements in computation, and in quote, unquote, “artificial intelligence” – which is, as a sidenote, I would say, a term I dislike, because we definitely haven't reached the moment of an intelligent, artificial algorithm in the sense that humans intuitively understand intelligence. But one of the biggest advances over the last ten, fifteen decades has been in natural language processing. The pace at which these algorithms are developing is just staggering. Just over – since Sameer and I started the Lab, the pace has been unmanageable. If you don't stay up to speed with what's happening in engineering and computer science for a few months, you really lose out. If you use methods that were developed in 2018, and it’s 2022, you're like, a century behind. So, it's exciting. And what – what these advances have kind of implied are several things. First of all, they systematically are able to analyze text at scale, in a way that no human can. A human can code, maybe hundreds of thousands of documents. These algorithms can scan millions, billions of documents, and learn something from them. And recently, there's really been a lot of advancement in semantics basically, in understanding the underlying meanings. And not just the statistical patterns of text. So, you know, in the late 1990s, the way by which natural language processing happened was that you would count frequencies, and you would look at, okay, how many negative words how many positive words? Now there are what's known as “deep learning” methods. And we won't get into the details of what exactly differentiates deep learning from other forms of learning. But these are machine-learning algorithms that appear to be able to represent semantics in a way that's quite consistent with how humans understand the meanings of words and the meanings of sentences. And some of them, novel algorithms, are just amazing. I encourage everybody who's listening to this podcast to go to Open AI’s GPT-3 model and play with it a little bit. You ask it questions and it answers quite astonishingly well. It's quite easy to break it. So, you will very quickly realize that it's not intelligent in the way that humans are. But for certain tasks, its ability to answer very open-ended questions is astonishing. And we use that as a way to try and infer what do people mean when they say, “Let's have coffee sometime.” And do these set of people mean different things than this set of people? And can we learn something about what's driving their behavior and why they're making the decisions that they're making, by bringing in the insights that these algorithms are giving us? So, in one of our current studies that I think is going to be very relevant to the topic of our conversation, we analyze the text in quarterly earnings calls, where executives talk to analysts and – and describe their firm performance and their vision and their strategy, etc. So, one of the things that we've done was to apply one family of algorithms known as “word embeddings.” These are deep learning algorithms are quite amazing in inferring semantics. So, what they are really good at doing is – they study a large body of text, and they can locate each word in a multi-dimensional space. And it turns out that the distances between these words in that space strongly correspond to how humans understand the meanings of words. So, the word ‘dog’ and ‘cat’ will end up being far closer in space, then ‘dog’ and ‘podcast’ which are semantically unrelated terms. So, what we've done is we use that attribute of word-embedding models to analyze the text of executives and quarterly earning calls. And when we – we observe an executive speaking in such a call, we ask, is the way that this person is speaking, semantically similar or different from how her competitors are speaking contemporaneously? We call this “performative atypicality.” So how atypical they are in their performance – in their linguistic performance – in these calls. And we find something quite interesting. We find that firms whose executives speak atypically in these types of calls, analysts tend to overestimate the future performance of these firms, which, ironically, leads to a negative earnings surprise. They are kind of over-buoyant about – about how this firm is going to perform. And we find that this is especially the case, if these executives atypicality, it kind of emulates the way by which celebrated innovators speak. That tends to influence analysts, and to bias them to believe that you have something special. They believe it so much, that they are overly optimistic about how well your firm is going to perform in the future. So that's just one example of how you can use these algorithms at scale to discover these patterns that are quite subtle, and would have been extremely difficult for a human coder to – to understand at scale.

Toni Dechario 21:10
That's so interesting, because my intuition would be the opposite. You know, I've been, you know, part of lots of different cultures in my life, right? It's not just your work culture, it's the culture of your family, and the culture of any – any sort of kind of identity that you might have, has, has a culture associated with it. And I find that people often end up also using the same words. You know, we do have shared meanings, and we even have shared ways of saying things, even intonation, sometimes you kind of start to just at – people start to really sound alike. And so my intuition would be that it gives people kind of comfort to hear someone who sounds like the others that are doing something similar. And in fact, maybe that is what you're saying. It's just like, the visionaries of that group, are who do well, but what about a few speak differently, but not like a visionary, just like yourself?

Amir Goldberg 22:11
You're absolutely right. This is like a perennial tension, not just in quarterly earnings calls, but in every social situation. There's these kinds of cross pressures of fitting in, but also being different when you're dating. You don't want to be too weird, but you don't want to look like everybody else. Right? When you're making a presentation, when you're talking at the family dinner, you don't just want to parrot what everybody else said, but you also don't want to be entirely unintelligible. There are different ways for people to look different than to be similar. What's really interesting is that if you are idiosyncratically different, you just look weird. If you are, however, kind of, are very good at picking on the subtle ways by which innovation and creativity are conventionally understood, and you are able to differentiate yourself from others in that way, that's when that has the biggest effect. I kind of think about it as like being cool, right? What does it mean to be cool? Just being different doesn't make you cool. There are the right and the wrong ways of being cool. And I think there are also right and wrong ways of being cool in quarterly earning calls in a way that very kind of subconsciously affects the interpretations of analysts. And what Sameer and I enjoy is that you can use algorithms to identify that in a way that none of us could have done it individually. When we read those transcripts, we just drown in the data. We don't understand what's going on, we need the help of the algorithm to do that for us. Sameer, do you want to add to that?

Sameer Srivastava 23:51
I was gonna say, first of all, that Amir and I figured a lot of things out over the last seven years. But one thing we haven't figured out is the right way to be cool. Still working on that.

Toni Dechario 24:01
I think you're cool. I think this is cool.

Sameer Srivastava 24:02
Very kind of you to say. So, the other example I wanted to highlight which is from the financial-services sector is the use of such tools that Amir was just describing, to actually measure post-merger cultural integration. The specific manifestation here is just a machine-learning classifier, right? It's a – it's a way of trying to take a given form of communication – in this case, we take email messages – and we try to classify them. Is this a message that was written in the style of the legacy organization pre-merger and to what extent can we actually distinguish between the language being used by people post-merger? And what this allows us to do – the kind of academic research side of it – is trying to develop a language-based measure of what we refer to as “symbolic boundaries.” But which meant, you know, people in organizations will think about as the various subtle “Us-Them” distinctions that we maintain between groups. And we do this all the time. And we do it often automatically. But it turns out, we can actually assess this in language, we can see people communicating in ways that reify their old legacy organization. And we see people coming up even as culture shifts and language changes, finding new ways to draw cultural distinctions between their group and the other group. And so, in this particular setting, where we have one bank that buys two other banks and integrates with them, we can actually assess where people are in terms of their linguistic style. And, 18 months after the fact, still figure out what their legacy organization was. And then from a managerial perspective, this type of approach helped us give the leadership team some advice about which bank branches, for example, are better- or less-well culturally integrated, and therefore where do they need to spend their time, right? That's an example of how these tools can be used for managerial purposes, but in ways that are not about revealing any individual's score, or doing so in ways that are – that can be used in nefarious ways. So, you can use it as a responsible tool. But – we can talk more about this – we need to put in some safeguards to make sure they're used responsibly.

Toni Dechario 26:17
Yeah, and I definitely want to spend some time on that. But I want to spend a little more time on the research first. Sameer, it would seem like if you can use this post-acquisition to figure out kind of maybe where the holdouts are, you could apply it to any organization to see subcultures. And the existence of subcultures isn't necessarily a bad thing, right? I mean, there are going to be subcultures in any big organization, you can't have one behemoth. That's if we've learned anything, we've learned that. You can see – my understanding of semantics similarities – is that what you can see is kind of how tight that subculture is. If I'm able to describe what Amir explained about semantic similarities, you can kind of map – physically map – how people can associate different concepts, how closely they associate different concepts to one another. And the more similar those maps are to one another – that each individual's map is to one another – kind of the more semantic similarity they have. I wonder, what does that reveal about a group? Is there something either kind of good or bad that can be deduced from how close they are?

Sameer Srivastava 27:28
So, a couple of things, which you said that I want to pick up on, Toni. One is: you're absolutely right; you're talking about similarities and differences. And that reflects a way that Amir and I have really approached this question of culture, which is, broadly speaking, you could think about content-based approaches to culture. These are ones that emphasize certain terms or certain values were innovation-focused or adaptability-focused or integrity-focused. Or you can think about this distributional approach to culture, which is, to what extent are individuals and groups and the organization as a whole similar to or different from other entities, culturally independent of what that content is? And these methods we've been describing are especially good at the latter. Of course, they can you can get a former too, but they're especially good at the latter. And so one of the things that you can start to see going back to subcultures is that managers and leaders have assumptions they make – mental models about where the subcultures exist. And those assumptions typically follow the contours of formal structure. We're going to assume, “Oh, those risk management people have this kind of culture, and the lawyers have that kind of culture and,” and so on, right? But with data like this, one can actually find subcultures that sometimes cut across groups. So, the assumptions we have that – the stereotypes, almost, we have about groups may or may not hold. We may find that there are subcultures that exist that are totally independent of these groups. And then we can start to investigate. And this is a harder question of trying to pin down when a subculture is harmful or hurtful, because sometimes subcultures form in response to that performance, as opposed to causing the bad performance. So, the causality can be difficult, but you could then begin, once you've identified those subcultures, then you can start examining the consequences of those cultures.

Toni Dechario 29:21
We've spoken with other guests about network analysis, and kind of the understanding you can have about subcultures and where you're kind of nodes of influence are using network analysis. So, this sounds to me like you can actually come up with some similar information using NLP. Have you done any work combining the two?

Sameer Srivastava 29:42
Amir, you want to take this one?

Amir Goldberg 29:43
Yes, we have. Some of our earliest work was precisely focused on the relationship between networks and, and culture. I would say, you know, to begin with, is that there is the assumption that culture, and the structure of the network, necessarily are coextensive with one another. So, you would imagine: if we have an organization where one group of people only interact with themselves and the other group of people interact with themselves too, and there's very little bridging between them, that there should be different cultures emerging in these two subgroups. That's often the case, but it's not necessarily the case. And good organizations can actually cultivate shared cultures, even if there are pockets of dense interaction that don't have a lot of bridges across them. Our early investigations were to try and explore this type of duality. And one of the things that we found quite interestingly, was that there's a trade-off, especially if we look at individuals, between the tendency to align and become very similar to your colleagues and your peers that you interact with or be different with them. And it's contingent on the type of network that you are part of. So, on average, a general finding in the study of culture is that there are higher returns to conformism and to thinking like other people around you. Most people who express different opinions are just shocked by their peers, and we never hear about them. So, for every Steve Jobs there are probably thousands of Steve Jobs wannabes. So, but we found that, actually, when you are embedded in a very dense network, where your colleagues have strong friendships with one another, you're kind of part of a quasi-family in the organization. That's when you have more latitude to be a little bit different. I like to think about it as kind of your weird uncle during a family dinner. The uncle is part of the family and he knows that he has kind of the security of the trust of the family members are not ever going to kick him out. And he can occasionally say weird things. But nobody's gonna suspect him for trying to sabotage you know, the family. So, there's an interesting trade-off there. And I think they're also insights for managers. Some organizations need to cultivate more heterodox cultures, need to encourage people thinking outside of the box, especially if their competitive advantage is around innovation and creativity. And the insight would be that if you want to encourage people to think outside the box, you need to create networks that provide the kind of social safety net for people to express unconventional opinions and not risk the penalty of being shunned as a consequence. So the two are not necessarily coextensive with one another.

Sameer Srivastava 32:51
Could I just add, also, that network analysis, of course, is a mature tool and technology. And, broadly speaking, there are kind of two approaches to it. One is there are a lot of firms out there that are providing services around meta-analysis of internal communications, right? So we can get through just the metadata on who's sending email messages to whom or who's sending Slack communications to whom, the structure of the communication network and how it changes over time. And that's great for understanding the network at scale. And then there's another approach, which is to run a network survey, where people are asked to nominate those who are in their network, or they've gone to for different kinds of resources. That can be really useful for getting at the content of the tie. The metadata doesn't tell you anything about who's mentoring whom, or who's seeking information from whom, or who's sabotaging whom. All you know is that they're in touch with each other. The survey data gives you much better insight into what's flowing through the tie. But it's very hard to collect those data at scale, especially if you're a larger organization, you get all kinds of again, recall bias. These are well documented biases, and whom we tend to list when we're asked a network question. So, to me, one of the opportunities is really to bring language analysis into better dialogue with network analysis, just as you were suggesting, Toni, because through language, we can get a much richer insight into the content of what's flowing through a network. And through the digital trace metadata, we can get much more comprehensive insights into who's communicating with whom. And there's some work that we have underway right now that's trying to do just that, together with a validated survey.

Toni Dechario 34:36
I actually have the benefit of having read some of your research, that I don't think has actually come out yet, into semantic similarities. Which is why I was able to get it on the first try, because – because I had the benefit of reading a little bit about it in advance – and one of the stories that you talk about in your research that hopefully we'll be able to link to in the notes to this show – is levels of what you call organizational identification. We've started to get into that a little bit with your identification of subgroups. But this is kind of a larger organizational question. But I'd be interested in in having – having you describe kind of what organizational identification is, how you're able to measure it. And why this approach is – is potentially superior to surveys.

Amir Goldberg 35:21
Generally speaking, there is a huge limitation with survey analysis. At the outset, I just want to say, I don't think that algorithmic approaches are necessarily superior to surveys. There are certain things that surveys can get that you cannot get by using our approaches. But the limitations are, aside from the obvious limitations, which are scale and granularity, you can’t ask the same person to answer a survey day in, day out, and do it like a huge scale. People will get pissed off. And it's also – it's just simply not a viable option. But aside from that, you know, when you ask people a question, in a survey, you activate their conscious cognition, and they become self-aware. And often they give you unreliable answers, not because they're lying, but because their self-presentational self is very different from their authentic self, and they sometimes are unaware of it. We all are. We have been socialized heavily not to be authentic, right? When we go up the elevator, and there's somebody that looks weird to us, we're not going to say to them, “Hey, you look weird.” We have been very kind of aggressively socialized to keep our opinions to ourselves. And that happens when we answer surveys. What this means is, especially when your employer is asking you questions, you're going to put on your presentational self, whether you do it consciously or not. And that's going to skew the answer. You're probably going to answer your ideal answer: what you would have liked as opposed to what you truly experienced at that moment. So that's the advantage of using our methods relative to surveys, especially when you ask these kinds of very abstract, but fundamental questions. “How strongly do I identify? Do you identify with an organization?” And the other thing is that when you think about the problem of identification – by problem, I mean, as a social scientific question – why do people identify more than others? Is it something about the difference between different organizations or simply, certain managers or leaders better at cultivating identification? Is it about the difference between different individuals, or maybe there are actually a lot of circumstantial situational differences that lead to the fact that there's actually a lot of variance within people over time. And we all experience that. You know, when we were hired, our level of identification with our employer kind of fluctuates. It's a function of a lot of things that are happening in our lives and in our professional and work lives. And when you bring our methodology at scale, you can suddenly look at those trends with a magnifying glass in a way that a survey could simply never afford. And we were able to discover that, yes, a lot of the difference in why some people identify more than others has to do with stable differences between individuals. Some people are just like Groucho Marx, they're cynics. They don't want to be a member of a club that would accept them as a member. Some people are very kind of gung-ho and would want to be a member of any club, whether it accepts them or not. A lot of the difference is explained by that, but we also discover that the type of networks that you're embedded in to build on the – the research that, that I described earlier. Whether you are a member of a tight-knit group really appears to affect your level of identification. I want to take Sameer’s caution, we don't know exactly what is the causal direction here. Is it because you identify that you create an – a certain network around you? Or is it because you have a network that your identification, intensifies, or weakens? But we definitely see a relationship between the two. The more you're part of a tight-knit group, the stronger your identification with the organization, but also, the more your relationships somehow span across the organization, where you have access – whether directly or indirectly through your immediate colleagues – to people who are scattered across the organization and are not only exclusively members of your particular subculture. Do you also identify more with the group? There are two kinds of trends here: you want to be part of a dense clique, but at the same time, you don't want your clique to be an island that's entirely disconnected from the mothership. We believe that this isn't actually only true about organizations, maybe this is a way for us to think about some of the problems that the United States – and actually all industrialized countries – are experiencing right now about political polarization, ethnic animosity between subgroups. There's something about being able to be simultaneously part of a strong community, but also feeling that your community has ties to other communities that intensifies your identification with this higher order group. Sameer, you want to add to that?

Sameer Srivastava 40:33
Yeah, I was gonna add just a couple of things. So, one is just in terms of the specifics of the measurement strategy. So again, this is a paper in which we use these word-embedding models that Amir previously described. And we focus in particular on pronoun use. So there have been prior attempts to try to measure facets of identification based on just the counts again, of “we” language or “I” language, right? To what extent am I thinking about the collective when I'm communicating? But here we're trying to measure something a little bit more subtle, which is the degree to which my conception of the self – that is, “I” – overlaps with my conception of the collective – that is the “we.” And this is something that you can't measure through just sheer counts of words, right? We have to actually look at the semantic meanings, as you were saying, Toni, between these words and how it shifts over time. And you can actually see that for those who identify more strongly as measured, for example, in survey data, that they, over time come to have greater overlap. Like, they literally are thinking about the self and the and the group in ways that are more aligned, that are more in unison, and that we think is the novelty of that measurement strategy. And also very quickly, wanted to name some of the collaborators on the various projects we've just mentioned, because we have not mentioned them. So the project that Amir mentioned with analyst calls, that's with Paul Gouvard, who's an alumnus of the Lab now at the University of Lugano. The project I described using the post-merger integration and financial-services cultural integration is with Anjali Bhatt who is an alumna of our Lab now a professor at Harvard Business School. Govind Manian is an alumnus of the Lab who was involved in the project that Amir mentioned regarding fitting in or standing out. This last one is with a current PhD student, Lara Yang.

Amir Goldberg 42:24
Forgot to mention our [Stanford] colleague, Chris Potts, at computer science and linguistics, was involved in some of our earlier research.

Sameer Srivastava 42:30

Toni Dechario 42:31
So, you're spreading your network. You've got – you've got them moving out, building their own networks. Okay, so I can actually get into the – the nitty gritty of your studies all day long. But I do want to move into a discussion of the ethics of all of this, because I think that's really important. And it's a pretty big debate, what is the line between kind of using these powers for good and using these powers for bad?

Sameer Srivastava 43:00
I'm happy to go first on this one. I'll give you an example of the use of these tools and what I think are really misguided ways. So, there's an organization – I won't name it – that we came across, that uses some of these same tools, and they get access to internal communication data from a subset of firms. And they mined these data. And they can predict, because it's not that hard to predict when someone is at risk of exiting the firm. And it's one thing to make these predictions across large groups, or look at these aggregate patterns, but it's quite another thing when you get down to the individual level, and – we're trying to predict, Toni, when you might leave the Fed. You know, that's a very, very sensitive thing, which, if that's known to you, or known to leaders, can have all kinds of unintended consequences, how your manager then treats you or doesn't treat you or what opportunities become available to you or don't become available to you. And this particular organization was producing reports – weekly reports – for all people managers, with the predicted probabilities of each of their people leaving at the end of the month. And not only were these subject to false precision, to the Nth degree. You get predictions of 10.56% right – which we just know is ridiculous, given the accuracy of these models. But there was no attempt to think about unintended consequences. And so I think among the things that we encourage firms to do, of course, we can collaborate with them on research, and we can put in place our own protocols and our universities require us to put in place protocols to protect human subjects and, of course, we follow those. But after we leave, firms can do what they wish and our advice to them is to really think about using these tools in ways that are about self-empowerment of employees, rather than that are about surveillance and monitoring and using them in punitive kinds of ways. Insofar as these are opt-in tools, we think they're much, much better. So, you know, imagine a set of tools, and these are out there where people can opt-in and get data reports that are just for them and how they're communicating, and maybe some suggestions for what they could be doing differently or better. That seems like a really useful tool, a force for good. But I think the other important point here is transparency. So, if it becomes known that such data are being used, and they're being used in ways that are opaque, and mysterious, it will very quickly erode trust in your organization, very quickly erode trust in leadership and in very subtle-but-predictable ways actually destroy the culture of the organization. So – and whenever we do this kind of work, we will often go to a town hall meeting and explain exactly what data we're working with and what the procedure is for de-identifying the data and show some examples of ‘here's the raw text. And here's what it looks like after it's been processed,’ and answer questions because we think that kind of approach is really what people need to feel like these tools can be a force for good as opposed to evil.

Amir Goldberg 46:09
If I may add to that, I think technology is morally neutral. You know, atomic energy was used to reduce the cost of producing energy, and this had huge environmental positive effects. But it also killed hundreds of thousands of people in Hiroshima and Nagasaki. So really, the technology in and of itself affords all kinds of things. And the question is, how do people use it? So, I think it's really important that researchers like us are being held accountable by the public. It's really important that organizations are being held accountable by the public. I want to say very clearly, I don't trust organizations are going to do the right thing. I think it's true what Sameer said that doing the right thing ethically will probably be the right thing also from a profit-maximizing perspective, because the downside of ruining your culture is huge. So, you want to self-empower, and you want to make sure that you're not alienating your employees. But there are – I think there are two particular risks with the use of technology of this type. The first is that when you use data, quote, unquote, you have the false confidence that you have some “objective representation” of reality. We researchers understand that this is not the case. Figuring out what causes what or whether the measurement actually truly measures what we think it measures in the world is so complicated, and we argue about it all the time. But when a manager is presented by some, like, you know, this person is 2.3% more likely to leave than that person, we understand that that number is probably meaningless. And it might only mean something when you look at the aggregate, but not at one individual. So that's very dangerous. I don't think that managers are numerically kind of educated in a way that they understand statistics to make the right inferences. And that's our responsibility as educators. The second thing is that a huge danger here is that the same algorithms might be deployed across multiple systems. And if there's algorithms are biased, and they are by definition biased, because they are trained on data that was produced by humans who are biased, the same person might be disadvantaged across different contexts. So, they will be seen as a misfit culturally, in that firm, and in another firm, and they might not be hired, and they might not get credit. The use of algorithms introduces all kinds of new problems, even though the general problem which is how do we evaluate other people is problematic whether an algorithm does it or whether another human does it. And I think it's our responsibility as a society to have that conversation. I'm always disappointed – I hear, you know, Biden, and Trump and others talk about a lot of things. They rarely talk about these issues. This is like one of the most pressing problems of our time, period. And we have to talk about it.

Toni Dechario 49:10
And actually, one of the other topics that we've been really focused on this year – there have been three – technology is one of them and trust is another one. And trust isn't just an issue with financial-services firms, although that was a huge issue coming out of the financial crisis. But trust is an issue everywhere with everyone these days. Are there ways that technology can be harnessed to actually improve trust or more specifically within organizations to enhance psychological safety? I mean, is – is there a way to fight this…using technology?

Sameer Srivastava 49:45
I mean, so let's just take an example of the self-empowerment tools we talked about. So, in many cases, you know, what leads a workplace or a social group to feel less psychologically safe is because people communicate, sometimes in unintended ways that signal that they are being judgey or evaluative or that someone else's ideas aren't worthy. And again, it's sometimes you're engaging difference, you're not necessarily denigrating when you're interacting with somebody, but that's how they perceive it, right? And so an example of a way technology can help with the building of trust is by giving people some tools. You're about to communicate in a way, whether you intended to or not, that the other person is likely to perceive as denigrating. And if that's your intention, go ahead. But if it wasn't, maybe you want to self-correct, you know, and the person can choose to do it or not do it. It's not shared with the manager; it's not used for performance management; it's just a way to help the person become aware that they may be stepping into something that's going to undermine trust, right? And so that's just one simple example of how you could use it.

Toni Dechario 50:53
I'm curious about how you actually reassure people that their data isn't being looked at, though, that it's that it's genuinely just for them. You know, don't you run into kind of given the state of trust in our society, don’t you kind of run into the problem of people thinking, “No they're – they're using this for something else. I just, I just don't believe that.”

Amir Goldberg 51:17
Of course you do. And I think the fundamental challenge of leadership is to build trustful relationships. So, if you're a leader, if you're a manager, if you have a vision to build a company, and you think algorithms are going to solve that problem for you, you're in for a big surprise. This is sometimes the wrong way of thinking about, about this whole discussion of using algorithms in work. And basically, in other contexts where there's human productivity is to think about them as complete substitutes. “Okay, we're going to just outsource this job to the algorithm.” I don't think that's what's going to happen. What is going to happen is good, thoughtful leaders are going to ask themselves, what are the various tasks that I can use the algorithm, either to fully substitute me on or to give me good predictive analytics on what are tasks that I've never done that the algorithm now enables me to do, but there are certain things that I need to continue doing and building trust with your employees is one of the most important things that that a manager does. So, it's not something about the design of the algorithm in my view. It is something about the culture of the firm. And my knowledge, that when my manager tells me, “We're implementing this algorithm as a self-empowerment tool,” that I can trust them to live by their promises. And we know from many, many years of research and organizational behavior, that the way to do it is not just through exercising cheap talk, is when managers show that they're willing to make sacrifices when these types of dilemmas emerge; that they're willing to pay a cost – that the company is willing to pay a cost – in order to protect its values. That's the only way to communicate to employees that there's true kind of action behind those words that are otherwise vacuous. Nobody in Enron said, “Our goal is to cheat our customers.” They surely had, like, very beautiful statements about how important trust is for them. But in practice, they never implemented that. So, I don't think algorithms change any of that. They just introduce new types of challenges and problems. And good leaders are going to need to think hard about how to solve these problems. Sorry, we can’t – we're not going to solve that problem for you.

Toni Dechario 53:43
I think that sums it up. Alright, I have just a few more questions, kind of rapid fire. What's on the horizon? Kind of what directions? Do you plan to take your research going forward? Can you give us kind of a sneak peek?

Sameer Srivastava 53:57
I'm happy to go first on this one. So, I think one of the things that we've alluded to, is the need to validate a lot of the digital trace measures we've talked about, right? And so we have just started on a few projects where we're bringing together traditional surveys with digital trace data and measures. And I think a really important question is to understand the conditions under which the two are aligned and tell us something similar; the conditions under which they tell us about different facets of culture. And when some of the new measures we're developing actually aren't all that informative at all, which I think is going to be the case for many of these. The sort of metaphor that comes to mind and thinking about where we are, with the explosion of some of these tools is, you know, the drunk searching for keys under the lamppost. In the sense that right now, there's a huge amount of effort on mining existing and readily available data. So, Amir and I had one of the first papers that tried to measure organizational culture using Glassdoor reviews. Since then, there's been an explosion of papers and now a firm that's even providing culture scores based on Glassdoor data. And it's great because the data are widely accessible, and you can work with them. And you can do lots of things. But if you really think about it, there's a – there are a lot of problems with those data too, right? We have certain people selecting onto the platform and writing a review or not writing a review. What leads them to show up on the platform or not. We know that some HR organizations game Glassdoor reviews, particularly right before the best places to work lists get generated. We know that there are structured prompts on such platforms that get you only a window into certain facets of question. So, if we think about it, to me, another big question is, there's a whole range of data available, some of which is easy to get, some of which is less easy to get. So, this interaction that we're having right now over Zoom has a lot of cultural signal in it that has yet to be mined. We have facial expressions we're making; nonverbal layers of communication. We have paraverbal layers of communication, in terms of how we say what we say, the tone, and the pauses, and so on. We have various acts of subtle deference and lack of deference happening amongst us. And there's culture in there. So, getting at some of these other facets of culture beyond what you can just measure through text and these structured forms, I think, is a big area. And then the last part, which we can talk about more is really understanding what works or doesn't work in terms of changing culture. And I think to do that, well, we're going to have to think about running randomized controlled trials of the kind that get run in pharmaceuticals and that firms actually do all the time with their websites, A/B testing, but we don't really do good A/B testing as it relates to cultural practices. And we should.

Toni Dechario 56:55
So, Sameer, maybe you could give some examples of ways that actually academia and industry could work together to do some of that testing.

Sameer Srivastava 57:06
Yeah. So, I think there's a few different ideas that come to mind. One is, you know, Amir and I – and not just us, a whole range of people within and outside of our Lab – are developing new ways of measuring culture. We're publishing the stuff mostly in academic journals. And then there are providers out there that purport to provide different ways of measuring culture through platforms and tools. The two worlds have generally not been that well connected. And so, I think one simple approach would be, how do you take some of the research findings and begin to responsibly productize them in ways that will provide insight without the negative consequences we talked about? Second is this idea of a randomized control trial at scale, which we refer to as a mega study. And one of the things I know Toni and I have talked about is the idea of a financial services-focused mega study that would be about trying to shift the culture across a set of banks and institutions. And that's something that, you know, we're very excited to explore. But I think a third area that comes to mind is a lot of the focus in organizations is about what's happening inside what's happening to the employees of the organization, or maybe just to the direct customer. But I think a really important, untapped opportunity is for the academic world and the world of practice to come together to understand the broader social impact of what happens in organizations. And here I'm thinking about in the banking world, what happens in underserved communities. So, we know for example, from the work of Fred Wherry, who’s a sociologist at Princeton, about the importance of dignity and respect. And a big factor in why people in those communities are hesitant to go to their banks, and instead often choose to go to the payday lender, you know, that's nearby, is because they actually get treated with more dignity and respect. So, here's an example of how the internal culture inside of banks has a consequence that spills over and is having a negative influence on society in terms of inequalities in the world. There's another very nice recent paper by Mario Small, a sociologist at Columbia, who's looked at literally the travel time: how long does it take you to walk to the nearest payday lender versus the nearest bank branch, if you live in a low-income community? And, it turns out, it actually takes more time to get to the bank branch, right? The locational choices we're making are also having negative consequences. So, I think, more work to really understand like the spillovers and how the financial-services sector is contributing to or – and hopefully over time helping to address – these bigger social problems is a real important next step too.

Toni Dechario 59:54
That's fascinating. Amir, do you have anything to add?

Amir Goldberg 59:58
Sameer and I are both positioned in a place that allows us to interface with industry more than in most academic positions, because we operate in business schools. So, I interact a lot with my MBA students, and with alumni and with executives who come here to do executive-education sessions. And I often find that the conversation is very fruitful. There's also sometimes a danger when firms and academics collaborate, because then the financial for-profit incentives, and then knowledge-generation incentives can get kind of intertwined and might contaminate one another. So, it's often very important for us to very clearly create that boundary and say, “The research is intended to advance knowledge on the topic, not to advance your revenue in particular.” And I found there some firms that are amazing and willing to actually make that sacrifice for the common good. Some are less so. I also think, pursuant to our conversation earlier on, on the ethics of it, that I think we should – we should have a tighter relationship with nonprofit organizations, with government, and to encourage the conversation around these topics. As policymakers are trying to address policy through a changing world. Here at Stanford, there's the HAI, the Human-Centered AI Center, which is really leading the world in terms of discussions around the implications of AI, and its societal impact, its economic impact. And I would like government, business, academics, to be involved in those conversations. And I hope that, you know, voters will, will demand those conversations to be had. Because everybody's going to be influenced by an algorithmic – whether you want it or not. Algorithmic decision makers are going to be there when you get hired, are going to be there when your salary is being negotiated, when your credit is going to be negotiated. When you buy a ticket for an airline ticket, it's already being driven by algorithms. And we need to have a very kind of robust conversation about what's the role of government and what is the responsibility of organizations in making sure that the kinds of inequalities that Sameer spoke about earlier on not reinforced at scale.

Sameer Srivastava 1:02:35
One last thing I wanted to say on this topic is: for those who are interested in getting better connected to the world of academic research, one vehicle for doing that is the Berkeley Culture Center, which I co-direct with my colleague, Jenny Chatman. We have an annual conference that brings together industry leaders who are thinking about culture, as well as academics around the world who are studying culture, from different disciplinary vantage points, and a series of ongoing initiatives that people can use to engage with academics throughout the year, including on joint research. So, if you're interested, feel free to check that out: Berkeley Cultural Center.

Amir Goldberg 1:03:10
It's a great program and exactly – and embodies this academia, business relationship, but in a way where the different objectives of these different parties are still maintained. Researchers are coming in to talk about the researchers and research and business interests are coming in to, to voice their opinions and to learn new things. So it's a really amazing initiative that Sameer built.

Toni Dechario 1:03:35
That's a great resource. Thank you. Final question: if you could make one recommendation, each of you, to the people running financial firms, when it comes to influencing culture, what would it be? Amir, I'll start with you.

Amir Goldberg 1:03:47
I would say get out of your comfort zone and speak to people. You can’t learn about culture by looking at aggregate statistics or dashboards or reading Harvard Business Review articles. You need to go and talk to people, and you need to go to talk to people across all ranks in your organization, but also across all of your constituents outside your organization. And not just your immediate stakeholders, like your investors or your board members, but your customers – especially the customers that are culturally most distant from you. And if you don't talk to them, you just – you won't know – the only way to discover things you don't know is to have conversation. You can't imagine what you don't know unless you actually engage in interaction.

Toni Dechario 1:04:39
The famous “unknown unknowns.”

Sameer Srivastava 1:04:42
Yeah, and I was, I was... it's funny, Amir and I did not coordinate on this, but I wrote down one word on this question, as you were asking it Toni, which is “ethnography.” You know, this was the way in which people did culture work a long time ago because they would go as Amir said and observe and interact and ask questions and learn. And I think this whole idea of the old management, by walking around, has in many ways been lost. And in the post-pandemic world, where we're in hybrid modes of operating, and there's much more remote work, I think it's even harder to do. And I think, in many cases, managers have assumed, you know, we've been able to maintain high levels of productivity, things are still getting done, it's all fine. And I think we don't really understand the ways in which the cultures in many, many organizations these days are fraying. And it's partly through the walking around equivalent of walking around in a hybrid world that managers will get some intuition for it. And then if you pair that intuition with good, rigorous data, I think that's what's going to help managers figure out what to do about this.

Toni Dechario 1:05:47
I was struck by the fact that after the whole conversation we've had about technology, both of your recommendations were very analog, they were very human. Also, something that your research reminded me of is a Microsoft study that looked at how culture has changed over the course of the pandemic, and found that actually, silos became much stronger, and the links between them became weaker. Is that a permanent change? Are we seeing maybe, in Amir's words, “a return to closer community?” Or are we likely to go back to our more global ways?

Amir Goldberg 1:06:19
First of all, the thing that researchers hate doing the most is making predictions about the future. We're good at studying the past, rather than making predictions about the future. But I'm going to go on a limb and I'm going to say, we're definitely not going back to February 2020. That's evident already. And then we need to ask ourselves, what has changed? Actually, a lot of the trends that we were seeing before the pandemic, were simply exacerbated by the pandemic, because we suddenly discovered that we can interact over Zoom, and we can be productive. But also, the communities that we’re part of are starting to change. And there's greater sense of isolation and a mental-health kind of epidemic that was catalyzed as a consequence. My personal view is that the important thing that has happened through the Zoom-ification of work, catalyzed by the pandemic is that the boundary between the home and work has really, really been blurred. And that is a boundary that it took an industrial revolution to create. So, it was a huge accomplishment of the 19th Century to create this idea that, you know, there's a private self that you are at home, where you were maybe a parent or a spouse or a child, but then you go to the office and you occupy a role. And there's a lot of symbolic movement there, you send, you wear different clothes, and you also physically move to one space from one space to the other. And that has been vehemently and very dramatically disrupted during that pandemic. And I think the repercussions are going to be huge. And one of the biggest questions we need to ask ourselves is, if you think about it, a lot of the contemporary American’s life is defined by the organization that occupies – that employs them, I'm sorry – when you ask people, “What do you do?,” the first thing they say is who they work for. That's a huge part of who they are. That's a huge part of how they create relationships, especially amongst the upper middle classes, the educated knowledge kind of workers who tend to work for a firm that's thousands of miles away from where they grew up. So, I think all of that is going to change. And one of the biggest challenges that leaders are going to have is, what does it mean to have people whose sense of self is diminishingly related to who they are employed by? And we have also, the technologies now to intermediate work – kind of Uber-ification of work. That might mean that you could work for multiple organizations, and you don't have to be exclusively employed by any of them. I think those are huge, huge questions and huge changes that are going to emerge. So, if we need to make a prediction in the long run, I think that 100 or 200 years from now, we will look at 2020 as an inflection point in redefining the way that people understand themselves socially, insofar as the organization that employs them plays a role in that definition.

Toni Dechario 1:09:25
That's so interesting, because at the same time that you have this strengthening of subcultures and this kind of strengthening of small communities, small groups. You also have, you touched on this Amir, kind of hyper-individualization of our experience, and those would seem to be working at cross purposes.

Amir Goldberg 1:09:49
Yeah. But yeah, you know, our – we talked about human nature earlier, human-nature changes. If we think about human nature as something that's embedded in our DNA, that changes on a far longer scale and time horizon than our beliefs and our perceptions – and there's clearly some incongruity between the technological environments that we've created in our evolutionarily produced need for being co-present with other people – there's something that happens through sense, through motion, that we don't fully understand, that technology doesn't intermediate.

Sameer Srivastava 1:10:27
Going back to this idea of, of experimentation, and, of like fully understanding what works, what doesn't work, we don't know – as Amir was saying – what the future ought to look like, right? We know it's not February 2020. But it's probably also not just having Zoom calls with your immediate work team and being productive because people lose a sense of meaning and purpose if all they're doing is producing outputs, right? A big part of work life in most of the 20th Century was this was your social world. We would go and you might meet your spouse there, you might, you know, have close friends that you stay with, for the rest of your life that form there. And so, we have to figure out a way to reproduce some elements of the organization as a social world, but in this new reality. And what does that mean, in terms of how often are people coming back physically versus not? What are the ways in which they're connecting through a technology, when it's not just about having a meeting to make a decision or to get work done? When it's just socializing? What does that look like? And how do you make it meaningful? No one, as far as I know, has any good answers to that. Managers have, in some cases, very strong points of view – should be three days a week, should be two days a week – that are not informed by any data as far as I can tell. And this is another opportunity where we could actually learn by running some structured experiments. Let's see, what actually is the minimum level of in-person interaction needed to have meaningful experiences at work? And that's knowable.

Amir Goldberg 1:11:56
But wait, you said reproduce. And I think that's a big question, do we want to reproduce? Or do we want to imagine a new type of social world, and I think parts would be reproduced and parts are going to be new. And experimentation is happening all around us already. It's not systematized in the way that academics would want it to be necessarily, but firms are experimenting.

Sameer Srivastava 1:12:18
I would say what they're doing is piloting random ideas on strong priors they have. I wouldn't call it experimentation in the sense of a controlled experiment where you're learning, you know, A versus B. And there's, in principle – it's a, there's not much extra effort involved in going to that versus just trying this versus trying that.

Amir Goldberg 1:12:35
I think another way of saying what Sameer was saying is that they're doing it anyway, on the basis of their strong convictions that were formed probably in the 80s and the 90s, when they were coming of age, about what an organization ought to be like. And some of those are misperceptions. And some of those are socially constructed to use a term we introduced earlier beliefs about the nature of humans which isn't actually the nature of humans, it is the nature of the world that you were socialized into. And so, one of our biggest challenges is to persuade these leaders, that maybe their preconceptions are incorrect. And if they experiment carefully, that might lead them to find better ways of recreating congruence between the social experiences and the technologies that we have.

Toni Dechario 1:13:34
I think there are lots of reasons for resistance. But I think one of them actually goes back to an earlier conversation that we had, which is about the ethicality, right of surveilling, for instance. Don't you kind of run into some of the same questions with running experiments? I mean, I think that there's a discomfort and running experiments because of the implications to your staff to telling your staff that you're experimenting with their career. This is a serious question, right?

Amir Goldberg 1:14:03
You know, it came out – recently, there was a big article in The New York Times about research that our colleagues here at Stanford and MIT did through A/B experimentation on LinkedIn. You know, there was a big uproar. What, LinkedIn experiments with its users? Well, yes. So does the New York Times, by the way. We all accept, for example, at this stage, that if we are given a COVID shot, there was a randomized controlled trial that was done earlier, such that you are not just given a shot without having had it tested thoroughly beforehand through an experiment. And I think it's a cultural shift that we need to go through. Of course, managers don't need to just haphazardly experiment with their customers or with their employees. But there's a strong case to be made that ethical experimentation leads to better outcomes for everybody. Because employees will benefit. The organization will benefit. Society will benefit. It requires us to kind of reboot that conversation and to make people less afraid about the idea of experiments, but also to put in mechanisms to make sure that managers don't exploit that in a nefarious way. Universities have institutional review boards, because researchers in the 20s and 30s misused experimentation in really nefarious ways. Maybe that's something we should think about for-profit organizations as well.

Toni Dechario 1:15:43
There's also a kind of a vulnerability on the part of senior management to acknowledge that they have to experiment, that they don't have the answer.

Sameer Srivastava 1:15:50
Is it a vulnerability? Or is it a strength? Someone tells me – a senior leader – to find that they know the right mix of in-person versus remote. I don't trust them very much as a leader, right? If instead they say, “This is not knowable, and here's the way we're going to get to a better answer,” I had – my trust in that person actually just went up.

Amir Goldberg 1:16:07
And that's the cultural shift that we need. We need to encourage leaders to talk in that way and to show that successful leaders are actually aware of when are they making decisions that are based on strong evidence? And when are they just operating on the basis of gut? And when I have CEOs coming into my, my classroom, they often say, you know, students ask them, “How did you make this decision?” And they said, you know, “It was my intuition.” That's a very dissatisfying answer. What does it mean, “your intuition”? Can I learn something from your intuition? As an investor, I would be taken aback if a CEO will tell me I'm pursuing this strategy because it is my intuition.

Toni Dechario 1:16:51
Thank you both so much for doing this. Appreciate it.

Sameer Srivastava 1:16:55
Thanks so much for having us.

Toni Dechario 1:16:57
If you want to hear more from Sameer, watch the New York Fed's webinar on Shifting Norms: The Intersection between Technology and Culture in Financial Services, which you'll find at NewYorkFed.org/governance-and-culture-reform.

Banking Culture Reform: Norms, Mindsets, and Decision-Making
Episode 01
Recognizing the Importance of Culture (Introduction)
John Williams
John Williams is the President and CEO of the Federal Reserve Bank of New York. In this brief introductory episode, John touches on the perspectives that listeners can expect to hear in this season of Bank Notes, as well as the importance of culture in shaping decisions at the individual and institution-wide levels.

John C. Williams 00:03
Hi, I'm John Williams. I'm the president and CEO of the Federal Reserve Bank of New York.

John C. Williams 00:09
So this is the latest season in the New York Fed's Bank Notes podcast called, “Banking Culture Reform: Norms, Mindsets, and Decision-Making.” We're going to have eight episodes featuring eight interviewees representing a broad range of experiences – from a banker and a regulator, as well as a neuroscientist and chief flight director at NASA. We really want to understand what drives behavior and what drives decision-making within organizations.

Toni Dechario 00:37
You've talked about this a little bit before. Mark Mortensen, one of our guests, described a story that I think you've actually heard him tell about an executive who put a banana peel in an elevator and didn't, you know, didn't make an express rule about picking up banana peels in elevators. And it took half a day before anybody picked up the banana peel. People get on the elevator and be like "Ugh, God someone left a banana peel, that's disgusting," and then walk off and not pick it up. And he said, that's culture. Getting people to take accountability and say, "This is my elevator, I'm going to pick up the banana peel" is culture, and I'm curious about your reaction to that story.

John C. Williams 01:18
I think it's a great example of how are people empowered to be able to take actions and not sure whether – “I'm not sure what I'm supposed to do here, but I'm going to use my judgment and do what I think makes sense.” You know, I go back to this: the basic observation that we often think about the, you know, the surface things like, “How did we get this outcome?” or “Why did we make this mistake?” or “How did this happen?” When really, when you when you peel away the layers, what you realize is, if there is just a basic approach to doing something that is very embedded in the organization, that's just leading to those outcomes rather than someone consciously making that decision.

John C. Williams 02:02
We started this whole process really focused on lapses in behavior and misbehavior and thinking about, “Well, what are the cultural aspects that lead to those types of actions and how do you change those cultures so that you avoid those kind of things?” And in thinking about that leads you down the road of realizing that culture is throughout an organization, it affects all of the decision-making and really is – you really need to understand what's driving the culture and what kind of cultures that leaders design and build in their organizations, rather than just looking at the outcomes in the organization.

Toni Dechario 02:43
So, what kinds of things do you hope that people will take away from this series and from other work that the New York Fed's doing?

John C. Williams 02:50
Well, I think that the first and foremost is that we learn from each other. And, you know, the past events that we've had – especially during the pandemic – have taught us, you know, different organizations face similar issues. And so, seeing how organizations not only build culture, but how that culture affects their decisions and ability to adapt to changing circumstances is also something I personally found very informative and interesting.

Mikael Down 03:20
We say culture is important culture matters, well, how?

Zab Johnson 03:24
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 03:30
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 03:35
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 03:44
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 03:49
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 03:54
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 04:00
It doesn't make you unethical to wrestle with this. The smart money is, we help you to try to figure this out.

JB 04:07
This is “Bank Notes: Banking Culture Reform.”

Episode 02
Exploring the Predictive Power of Guilt
Taya Cohen
Taya Cohen is an associate professor of organizational behavior and theory at Carnegie Mellon’s Tepper School of Business. She studies moral character in the workplace, including the predictive power of guilt proneness in individuals. In this episode, Taya discusses why highly guilt prone individuals may have a moral advantage and shares her perspective on individuals’ proclivities toward ethical behavior and honesty, as well as how to hire for these traits.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. Today we'll hear from Taya Cohen. Taya is an associate professor of organizational behavior and theory at Carnegie Mellon's Tepper School of Business. Taya studies moral character in the workplace, including the predictive power of guilt proneness in individuals. In this episode, we'll learn why highly guilt prone individuals may have a moral advantage. And Taya will share her perspective on individuals’ proclivities towards ethical behavior and honesty, as well as how to hire for these traits. So welcome, Taya. And thanks for speaking with us today. I'd love to start by asking what motivated you to work on organizational behavior? And more specifically, why do you care? And why should others?

Taya Cohen 02:04
Thank you? My original interest in studying organizational behavior came from my interest in psychology, of trying to understand why people behave the way they do. And through psychology, I became increasingly interested in how people behave at work, because we spend most of our lives at work, and how we behave at work has implications both for, you know, how we and other people behave in the workplace, but also outside the workplace as well. So, the field of organizational behavior studies people in organizations, and takes insights from psychology, sociology, and related fields to try and understand human behavior. For the most part, while people are at work or the implications being at work.

Toni Dechario 02:49
One of the things that you are known for is studying moral character, specifically moral character in the workplace. Could you please describe for us what you mean by moral character in the workplace? What is that?

Taya Cohen 03:03
So moral character is a person's disposition to think, feel, and behave in an ethical manner. There's a variety of different character traits that we can think of as moral character traits. I've organized this and thinking about it into personality traits that might be associated with the person's motivation to do good, and avoid doing bad, so we can think of moral motivation. We can also think of character traits that have to do with a person's moral ability, their ability to do good and avoid doing bad. And then other moral character traits we can think of as related to identity. So, does a person care about being a good person? Is morality central to how they see themselves? And so, the term moral character, I use it broadly to refer to a variety of different character traits, all of which would relate to people thinking, feeling and behaving ethically.

Toni Dechario 03:58
Specifically, within your work on moral character, you look at the concept of guilt proneness. Can you describe a little bit how you think about guilt proneness and what it is?

Taya Cohen 04:10
So, guilt proneness is a moral character trait that captures the extent to which a person would feel bad about their behavior if they did something wrong, even if no one knew about what it happened. So highly guilt prone people, they feel bad. They feel guilty about mistakes, transgressions, and especially when those actions negatively impact others. With guilt proneness I think of it as an aspect of a person's personality. So, some people are more disposed than others to anticipate guilty feelings before they behave badly. And that helps them act more ethically, more responsibly, makes them more trustworthy. So, people with high levels of this character trait of guilt proneness, they feel this great sense of interpersonal responsibility, and that helps them be better employees, better leaders, and because they would feel bad for letting others down or for doing the wrong thing.

Toni Dechario 05:03
So, is this something that's just innate in people? Or can it be learned, guilt proneness?

Taya Cohen 05:08
I think it's a little bit of both, you know, there's nature, there's nurture, there's some combination. But there does seem to be something stable, but not definitive or determinant because it certainly changes. Guilt proneness in general, for all of us increases over time, as we get older, we mature, as all of us mature, in general, our guilt proneness increases, but their guilt proneness may increase or, or even decrease at different rates for different people. Some people might be more predisposed than others from a young age and early in childhood, maybe even something that they're born with, although, you know, we don't fully know. And then a person's experiences over the course of their life and childhood and adulthood, shapes who they are. You know, there's lots of debate about, you know, to what extent is personality, a result of a genetic or biological influences how much of it is from the environment? What's the combination? I think the some of the best research in this area probably says about maybe we can think of a third of the variance. So, you know, the variability in who we are, across a variety of personality traits, we might link to something more genetic or biological, something that maybe we're born with. But then, there's another third that might be environmental. And then of course, there's the remaining third might be some combination of the two. And those are very rough estimates. And so, I think guilt proneness, much like how we think of other personality traits, with some nature, some nurture, and of course, the combination.

Toni Dechario 06:38
So, Taya, how do you measure guilt proneness?

Taya Cohen 06:42
To measure guilt proneness, I found the most efficient way is to ask people a few questions. So, my colleagues and I devised the five questions scale, we call the five-item guilt proneness scale. And so, we ask people to imagine different situations that they might find themselves in, and they read each one. And each situation describes how they might behave in this situation. And we asked them at the likelihood that they would feel bad about their behavior, would you feel bad about what you did? And to get a guilt proneness? So, for example, one question, after realizing you have received too much change at a store, you decided to keep it because the sales clerk doesn't notice. What's the likelihood that you would feel uncomfortable about keeping the money? One third one that I like, at a coworker’s housewarming party, you spill red wine on their new cream-colored carpet, you cover the stain with the chair so that nobody notices your mess. What's the likelihood that you would feel that the way you acted was pathetic? What all these have in common is you've done something wrong. Nobody knows about what you did, but would you feel bad about it? And so, we just ask people to imagine these kinds of situations. And it turns out that these questions about what you might think, are a little strange kinds of situations, they predict real consequential behaviors. And because of that, it's kept me fascinated for so many years about how just asking people these questions can then predict their behavior, say three months later at their jobs, you know, and so they do seem to tap into something about a person's character that is enduring. No one knows about what you did, but it's your own conscience, I think of guilt proneness as the strength of your conscience.

Toni Dechario 08:18
To what extent in your experience, do you think kind of individual motivations drive misconduct or unethical behavior, versus how much context and environment drives that unethical behavior? So, in your opinion, is that, would that follow kind of the same?

Taya Cohen 08:36
If we thought of misconduct broadly. I know from my own work, that I can ask people a few questions, the five self-report questions about guilt proneness and that predicts their behavior, their workplace deviance, counterproductive behavior, many months later, you know, three months later, over time, so there's something that we're capturing that's really about the individual. But at the same time, you know, it's not 100% perfect prediction and you know, people, who they are, sort of affects how they interpret situations and effects, what kinds of situations they enter into and experiences they have. It's really hard to kind of pit the person against the situation, because people create the situations they're in. And so, it's really a joint influence. When we think about it, it's hard to separate the two, because who a person is, how they interpret situations, how they treat others, then affects the situations that they're in. And so one example actually is a paper I have under review right now that I wrote with a former doctoral student, and what we found that the people who did more bad behaviors at work were subsequently a week later treated worse, had more mistreatment from their colleagues. And then, experiencing more mistreatment led them to behave even worse, right? And so, you get into this cycle where, you know, negative experiences being mistreated, you know, abusive supervision, ostracism, discrimination all these negative stressful situations can cause people to behave badly. And yet, we also know if people behaved badly, then they are more likely to be treated more negatively by others. And then you get into these patterns where people create the situations that they are in to some extent. But of course, not exclusively.

Toni Dechario 10:19
So, it's just a vicious cycle?

Taya Cohen 10:21
It’s a vicious cycle. And one thing that we found interesting related to moral character is people who had a reputation for being highly moral people – and these are people who their coworkers identified as being relatively more moral than, say, their peers – when they behaved badly, they weren't mistreated as much in the future. So, they were perhaps forgiven more. Whereas people who had lower moral character, when they behaved badly, when they enacted counterproductive work behaviors, they were subsequently mistreated more by their coworkers. So again, these joint influences of the person and the situation, and people creating the situation, makes it hard to sort of separate into one or the other.

Toni Dechario 11:02
I'm gonna take a step back a little bit. What in your opinion makes otherwise ethical or moral people do immoral things or make unethical decisions?

Taya Cohen 11:13
Recently, I've been thinking a lot about what we call moral awareness, or moral recognition. You can think of some people are more likely than others to have moral blind spots, maybe all of us have some moral blind spots. And in certain situations, situational pressures, or the way the situation is structured, could cause us to have moral blind spots or not read or have low moral awareness or not much moral recognition. And so, one thing that I found really interesting in my recent work is that people who have higher levels of moral character, in general, have greater moral awareness of the decisions they're faced with. They're more likely to recognize the moral implications. Other people might be in the same situation, and they might see the decision as, you know, something just a strategic decision, or maybe a financial decision, or a decision not particularly related to morality and ethical concerns. And so, part of the answer, I think, to the question is, do people even recognize what are the moral issues that could be at play here?

Toni Dechario 12:20
Many of our listeners are bankers, who are have an interest in having their staff make ethical decisions, make moral decisions, and have therefore increased moral awareness.

Taya Cohen 12:34
So, I think it's not just about what the person brings in and the lens they use, but how decisions are framed. I've been thinking lately about what's the opposite of moral recognition. And the idea that my colleague Eric Helzer, of the Naval Postgraduate School, and I have come up with is the idea of game framing. If you think of something as a game, there's two elements that might be related to having low moral awareness. So, if you think of something as a game, often you can think of it as adversarial, right, with winners and losers and competitive. And so, that could lead to a competitive motivation to achieve one’s goals and beat opponents. And then the other aspect of a game frame is that in games, starting and endpoints, rules of play, scoring methods, all those could easily be different. And what's important here is that when it's a game, there's a sense of, it's arbitrary, it's artificial. And the rules don't carry over outside the specific game. If you're a banker, and you see banking as an adversarial context, right, with winners and losers where the goal is to win. And how you behave in that setting doesn't say anything about who you are, right? It's just me playing the game, it doesn't say anything about my character, my values or anything about me, that combination can lead to a lot of dishonesty. So, some people I think, might be more naturally, by who they are, be more or less likely to play a game frame. But also how, you know, the workplace culture can amplify or attenuate that sort of framing of decisions. So, if there is a workplace culture, that frames things, as you know, very competitive environment, adversarial, and it has a message that you know, how a person behaves here in this workplace doesn't say anything about who they are about their true character, or that the standards in this setting are not real, or you know, they're more like temporary agreements than moral absolutes, than that mindset. And that culture that's created could allow for a lot of dishonesty unethical behavior. But conversely, if decisions and the culture in the workplace suggests that one more of cooperation or value creation, that is not this win-lose context. And perhaps most importantly, if saying, “Well, how you behave here, it is important. It is, it does say something about who you are,” right? It's not just a game that you're playing with no implications for anyone outside of this context.

Toni Dechario 15:00
Do you think there might be something about financial services that would lend itself more or less to this game framing or to potential ethical behavior?

Taya Cohen 15:10
I don't know if we could reach a broad brush to think of all of financial services, but certainly elements of it seem like they could lend itself to this very win-lose mindset where being cooperative is seen as a liability. If the financial services industry and the work is structured, that people are become very detached from the implications of their behavior for other people, or for themselves. If it's, you know, just numbers in a spreadsheet, it can be easy not to recognize the implications of that, and the ethical implications, to the extent that the culture and the work removes people or makes it hard for people to see the implications of their decisions for themselves or others where that could allow for a person to believe "Well, what I'm doing here doesn't really say anything about who I am," that would be a potential problem for the industry.

Toni Dechario 16:02
Are you aware or familiar with any interventions to counter either that detachment from the outcome of your behaviors in your decisions, or to counter kind of, the “I'm just a player in this game, this isn't me...?”

Taya Cohen 16:18
I think there's been work in a variety of different areas that suggest various kinds of reminders. So, you know, early work in psychology, not necessarily in the domain of unethical behavior, but if you don't have any mirrors up and making people kind of think of themselves, that can certainly have an impact. And I don't know if mirrors are the answers, per se, but things that make people sort of see themselves and see their behavior, as you know, how I'm behaving here does have implications for how I might see myself. And so, interventions that make people kind of understand the consequences of their behavior for themselves or others. Earlier in my career, I studied intergroup conflict and competition and cooperation between groups. And one intervention that we found worked very well there, which I think could have relevance in the about ethical behavior as well, is considering the long-term implications, the consideration of future consequences, we call it. So, if I do this now, how is, you know, that going to effect the subsequent decisions other people might make? What are the effects of that? A lot of unethical behavior comes about because when people are short-sighted, when they're focused narrowly on short-term gains, especially if they're focused narrowly on themselves, so interventions that encourage people to think more expansively both about the long term in addition to the short term, and about other people, in addition to themselves, those interventions may look different in different workplaces. There's the motivation to do good or avoid doing bad, but there's also the person's capability. And so, interventions that give people the information, the tools they need to behave more ethically, I think that can be effective as well. And there's a framework that Professor Mary Gentilly at the University of Virginia has developed called Giving Voice to Values. And the idea behind that framework of ethical leadership is that a lot of people, most people just want to do the right thing, and they notice something. And so, sometimes we don't notice, that's the moral awareness. But sometimes we do notice something that we're not comfortable with, but we don't speak up. Often, we don't speak up because we don't feel prepared. We don't feel confident, do you give people the tools, the information, the confidence to be able to voice their values to speak up when they have concerns, to figure out how they can do that effectively? That can be a potential way that to make people more willing to speak up when they do notice issues.

Toni Dechario 18:47
What might some of those tools be?

Taya Cohen 18:49
One thing I teach is negotiation. And in negotiation, we know people are more likely to lie when they don't feel prepared. And so, simple tools like having a negotiation, like having a planning document where you identify things that you want to reveal things that you don't. And so similarly, in this idea of, you know, how can a person give voice to their values or speak up? Do you have a script? Have you identified what are the ways the audience may be more receptive, so you don't make them feel threatened? And so, there's not a sort of magic bullet or one particular thing you might say, but the idea is, if you sit down, okay, what if I were to voice my values? What if I were to speak up when I noticed something I wasn't comfortable with? What are the implications of that? And what I have looked at in my work on honesty is that people believe having honest conversations will be much worse than they actually are, when they have them. And so, recognizing that and, and preparing for those conversations, figuring out what information you need, and how the other side might be more receptive to it. That's the process that I think can be helpful.

Toni Dechario 19:54
Is the connection between guilt proneness and outcomes. So, could you give a description of the work that you've done on linking high levels of guilt proneness to particular outcomes in terms of decision-making?

Taya Cohen 20:11
When I originally started studying guilt proneness it was to better understand the question of, “What is guilt? What is shame?” and to differentiate those two. So, guilt proneness is feeling bad about your behavior when you've done something wrong or anticipating that you would feel bad. Shame proneness is feeling bad about yourself, you know, when you do something wrong, you may feel bad about both what you did, as well as who you are. But shame is not as helpful as guilt. Because when you think, “Oh, I'm a terrible person,” it's much harder to change who you are, right? And that can not necessarily lead to as many repair-oriented actions. Okay, so with that in mind, once I have had a better sense of what guilt proneness and shame proneness are, people's responses to the guilt proneness questionnaire predicted whether they were more likely to lie to their peers in negotiation roleplay exercises, for example, several weeks later. So, that was really intriguing, because just asking people, a few, you know, four or five questions, and then it could predict with some degree of accuracy, who was likely to lie to their classmates, I thought that was fascinating, right, because it was capturing something about that would relate to their ethical behavior. And so, that was about 10 years ago. Now, I had those initial findings and back in 2011. And at that time, and then in the many years since, I've become interested, what are all the different other things that guilt proneness might predict? Things like trustworthiness, which we've looked at, in laboratory studies, online experiments, so say, you send me an amount of money $10, and then it triples to $30. And I have the choice, do I send any of that back to you to share with you or just keep all the money? Turns out, people who are low in guilt proneness, they're more likely to keep all the money. People who are higher in guilt proneness, they're going to share it back with the person who entrusted them with it. So, we've looked at things like trustworthiness and we find that that's motivated by this sense of responsibility, you trusted me, and now I have this responsibility and accountability to act in a trustworthy way. And also, what we can think of in a way is the opposite, the helpful behaviors in the workplace, what we call organizational citizenship, taking time to advise others, mentor others, rearranging your shifts, you know, vacation schedules, people who are higher in guilt proneness, they feel this sense of responsibility to others. And that can motivate both more positive behaviors and be less likely to, for them to do negative behaviors. And then finally, one other set of findings that was initially identified by Professor Rebecca Schomburg, at University of Pennsylvania, and Professor Frank Flynn at Stanford University, is the relationship between guilt proneness and leadership potential, which I've subsequently replicated in my own work, that people who are high in guilt proneness are more likely to be judged as effective leaders, by their peers, or by people who report to them, or supervisors. And then this has been looked at in a few different ways, with the idea that if a person tying guilt proneness, they have more of the sense of responsibility to others, and having that sense of responsibility to others makes the person more effective leader.

Toni Dechario 23:12
So, I want to go to kind of a practical conversation, which is, you know, putting myself in the shoes of somebody who's running a bank, and wanting to build and hire a highly guilt prone, well-practiced, aware, staff, that is not framing things as games, but rather kind of living their own moral compass when at work. It sounds to me like those are the elements that, you know, from your perspective that I would really want to make sure to kind of imbue.

Taya Cohen 23:48
We need to hire people with high levels of moral character. But we also need to create organizational cultures that is going to bring out the best in people in the workforce. And so, I often think of personality character, like a habit, once something becomes a habit, it can become hard to change. And so if you think of from the hiring perspective, if you're hiring people who already have established ways of behavior, whether that's something about who they are, what they learned at, say, a prior organization that maybe had a negative culture or some other prior experiences, if you hire people who kind of bring that with them, it can be hard, you know, to change that habit. Organization can start by hiring people that have the character traits that they think are important. But those you know, might be hard to judge. Some things may only come out in certain situations in high pressure situations, you know, you might not realize that. And that's not to say, you know, even if you hire good people, there can still be environments where the culture that doesn't allow them to be their best selves. And so, that's where that, you know, what is the organizational culture? What are the policies, how are decisions framed, are they framed very narrowly about you know, short term focus? Are they framed a little more broadly? Are the relevant stakeholders highlighted or is it more narrow focused on one particular set of people. But even the most moral people can have blind spots, could have situations that would hinder them from having a lot of moral recognition or moral awareness. Or even if they have, say, that they recognize a moral issue, there could be cultures that aren't they don't feel safe speaking up to the voice those values. And so, you need both the culture and character.

Toni Dechario 25:25
So how do you hire for moral character?

Taya Cohen 25:28
We've come up with two questions, interview questions that can help. With hiring first, you have to identify what you want to look for, what's important? So, three questions, I think, kind of capture the essence of this. Would this person feel guilty about committing to transgression making a mistake, even if no one knew about what they did? That captures what guilt proneness is. And would they feel bad about letting others down or harming them? Even if it was not done intentionally? Does the person have a strong sense of responsibility for others? So, one question we called the difficult dilemma question, we asked people to describe an experience in which they were faced with a difficult dilemma at their job, a situation where they found it hard to decide what to do. We asked them what factors did they consider? What do they do? What if anything, did they learn from the experience? The idea here is that people who have higher levels of moral character are more likely to mention some kind of consideration of others, maybe consideration of long-term consequences. They would have more, maybe, moral awareness of the implications of their decisions, when you ask them to describe a difficult dilemma and what they were thinking about? Is their response indicating that they're focused narrowly on themselves or very short-term focus, or is it thinking more broadly? And so, that question is interesting, because it seems like it provides information that people can make a judgment, a sort of a holistic judgment, of whether they think the person is relatively high or low moral character from reading responses to that question. And then we have a second question we've devised that also seems to provide helpful information. We call it the mistake question. Please tell us about a time when you made a mistake at work. How did you feel when this occur? What did you do? What if anything, did you learn from the experience? And here the idea is, you know, when people make a mistake, do they feel bad about it? Does it motivate them to correct their behavior, do something different in the in the future? And how people talk about mistakes they've made in the past, can provide some information about their character. We found that people can sort of read responses to these questions make accurate predictions about a person's likely to behave, how much workplace deviance they would do at their jobs, you know, decisions in different economic games. What's not yet clear, what I think we still need to learn is what exactly are the judges, the people reading the responses? What are they cueing into that allows them to make accurate judgments? Because I think it's more of an intuitive, people just get an impression from those questions, the information revealed by them. And it turns out those impressions have some level of accuracy. But of course, not 100%. Because why would we think an answer to one question would be 100% predictive, the fact that it provides any predictive useful information I find fascinating.

Toni Dechario 28:09
It's interesting that people have an impression, even though I believe you said that they're reading written responses versus reading someone's body language or, you know, some other kind of in person way that you have intuition about somebody.

Taya Cohen 28:24
So, the way we've done this work is with written responses. We haven't yet tested this in face to face or online or even phone call. There's earlier work on lie detection. That suggests sometimes providing me with more information leads people to focus on the wrong things. And I think there's early work by Dr. Paul Ekman, that found people are better at detecting lies over the phone than videos, for example, because people focused on the wrong things. It's interesting to test and we haven't compared the how people do with these sorts of questions written versus verbal, you know, audio, visual, but I think there is some reason for us to think that reading the written responses could be just as revealing, if not more revealing, because when it is face-to-face, people may tune into the wrong things by assuming, say, a person's more attractive then they must be more ethical, right, or some other way in which a person communicates their tone, you know, their vocal cues. That information may not be diagnostic at all, yet people could use it to form an inaccurate judgment.

Toni Dechario 29:28
Now that we've you know, hired people with high moral character using your interview questions, they've come into the context of whatever our culture is. And so, what do I do to make sure that I'm creating an environment in which people are able to have high levels of moral awareness, recognize moral situations, and kind of avoid a game mindset?

Taya Cohen 29:57
One of the findings from my work is that people assume having honest conversations with colleagues or friends with all sorts of data is going to be much worse than it actually is. So, people withhold information, they stay silent. So, the research on things like psychological safety, or voice and silence in the workplace that is focused on how do you create a culture where people feel comfortable speaking up, where they feel safe to speak up, I think that has implications for honesty and conversation about ethics, and I mentioned that idea of giving voice to values. And so, making it clear that people can disagree, create an environment from the leadership in the organization, from the policies in the organization, that allow for disagreement, that allow people to raise concerns without fear of retribution or feel, you know, that they'll be humiliated. When you think of an ethical decision making, we can think of what are the factors the organization can do to bring out more awareness, framing the goals, so, goal setting – there's some work, talking about “Goals Gone Wild,” which is a great title of a paper – with the idea that when an organization has goals that are too extreme, then people feel like they have to meet them, then they can lose sight of a lot of other things, right, that made it makes it more of this competitive environment, people might feel like they have to cross ethical boundaries to reach those goals. And I think it also reduces moral awareness, too, because people are so focused on achieving that goal, it can lead to that game mindset, that game framing. Thinking, you know, what are the appropriate goals your organization can set? If you want a culture that promotes teamwork? How are people being incentivized, especially on their individual performance, and where it creates an environment where people feel like they may need to behave, you know, in ways that could harm their colleagues to get there, you know? So, thinking about what are the incentives? How are the rewards set in the organization, all of that can be helpful, I think, for creating an ethical culture.

Toni Dechario 31:58
So, I'm so curious, as I listened to you talk about all of this, as I listen to you talk about moral awareness and the importance of practice, also, in moral recognition, how has your work influenced your own behavior and your own awareness of your moral character and your moral behavior?

Taya Cohen 32:18
I mean, certainly, I probably think about guilt and shame more than most people, right? And honesty. Actually, most recently, the work I've been doing is on honesty. And so, I've been very cognizant of situations where me and people I'm around could be more or less honest. I have two young children. And so, being really mindful with my conversations with them, you know, asking a question, because sometimes the easier answer is not to be fully honest, or thinking how do you be honest, in an age-appropriate way? So, I've been sort of very mindful of that. And also, with guilt and shame, you know, when I think of my own personal life and raising children, into the questions earlier about how do we develop this, if a person does something wrong, and they feel bad about their behavior, that's very different than feeling bad about themselves, right? That's the difference between guilt and shame. Right? So, you made a mistake here, but it doesn't mean you're a bad person. And so, I think about that, as I'm sure many parents do, how do we frame the messages to our children? How do we, you know, fighting with a spouse or a friend, you know, I think it can be easy to say you're this or you're that right? That would be a very more global way of saying it to put negative labels on people, as opposed to, here's this negative thing that you did, or I did, and to think specifically about behavior, which would be more about guilt, as opposed to more globally about a negative attribution about yourself for another person.

Toni Dechario 33:43
So, I was thinking about my daughter as well, when you were talking about shame versus guilt, and how do you create guilt proneness and not shame?

Taya Cohen 33:53
Yeah, I think it's a great question on with parenting, it comes up a lot. And I think the key thing that I take away from the research that I keep in mind is, it's really hard to change yourself as a whole person. It can feel overwhelming. It can make people want to hide. It can make them angry, if they feel like they are flawed in some way. That sense of shame is a really negative thing to feel. And it's hard to know what to do with that. It's painful when you know you've made a mistake or done something wrong, and maybe you can't fix it. And I think it's critically important when we think about children, and also some managers giving feedback, right? I mean, it's a thing, what are the workplace implications, when there's times at work when we have to give negative feedback to others, you know, best practices there? Can you give feedback about specific behaviors and what could be done differently? Right, as opposed to a more global negative evaluation the person or something that the person doesn't really understand how they could behave differently. So, that difference between a behavior versus a person's whole self, I think, is one of the things that that sticks with me and I'm not sure how it influence is my day to day but I'm sure it does,

Toni Dechario 35:02
Can honestly be induced through kind of good examples and sharing positive examples?

Taya Cohen 35:10
It's a fundamental truth and psychology that we look to others to try and figure out the appropriate ways to behave. We do this sometimes consciously, sometimes unconsciously. So, the examples that are around us, I think, especially people who are very visible positions, leaders in organizations, how they behave sort of sets the tone, sets a message, and people look to that. So, if you have high profile people, people who are very visible in their organization, very influential power and status, if they are perceived by others as being more honest, as a more ethical and whatever way, I think that can set an example because it lets people know what the expected behaviors are, what the organization values. So, I do think having what we can think of as moral beacons in the organization can help influence the culture in a positive way.

Toni Dechario 35:58
Taya, thank you so much. This has been fascinating and really fun.

Taya Cohen 36:02

Toni Dechario 36:04
For more conversations like this, as well as publications and other resources related to banking cultural reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Episode 03
Establishing Values, Not Rules
Mark Mortensen
Mark Mortensen is an Associate Professor of Organizational Behavior at INSEAD. He studies collaboration, team dynamics, and communication, with a particular focus on remote and distributed work. In this episode, Mark tells us what drew him from engineering to behavioral science, why we can’t rely on rules to drive good decisions, and the critical importance of psychological safety in building strong cultures.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. Our guest today is Mark Mortensen. Mark is an associate professor of organizational behavior at INSEAD. He studies collaboration, team dynamics and communication. We first featured Mark as a panelist in our webinar on “Culture in a Post-Pandemic Workplace.” In this episode, Mark tells us what drew him from engineering to behavioral science, why we can't rely on rules to drive good decisions, and the critical importance of psychological safety in building strong cultures. Thanks for joining us, Mark, and welcome!

Mark Mortensen 01:52
Thanks, Toni. I'm really glad to be here.

Toni Dechario 01:54
So, what drew you to study organizational behavior in the first place, and specifically to be interested in how teams function and team dynamics?

Mark Mortensen 02:04
It's the classic story, right? It's navel gazing. So, I have to start by saying, I'm an organizational behavior guy, but I'm actually a recovering engineer. So, I started off my career doing computer science, trying to build different technologies. And honestly, what happened was, we put out technology, of course, of course, our technology was perfect. We never made mistakes, but things went wrong. And you know, I'd hand something over to you and you'd start doing stuff that after a while, I'd say, “What?” And I started to realize that more often than not, the problems weren't, at least entirely, the technology. It was more about the interactions and the interpersonal interactions and the interactions between people and technology. So, we introduced a new technology, we introduced a new way of solving problems. That's kind of what got me into it. And in particular, when it came to teams, honestly, my own experience is working in teams, working in collaborations, trying to get stuff done, and then realizing that the dynamics of the team, the dynamics of the people, and the way in which they think about things actually really played a big role in determining whether or not this stuff was successful in the first place. So, I sort of retooled myself to go more into the psychology side of things and try to understand the original equipment as opposed to the technological stuff we were trying to build.

Toni Dechario 03:18
How do you think your background in engineering actually gave you a different perspective on organizational behavior than the people that you were studying with?

Mark Mortensen 03:27
To be fair, a lot of people when they see, you know, “Hey, it's the organizational behavior guy coming,” they have this sort of knee jerk, allergic, slightly annoyed reaction of, you know, “Kumbaya, let's hug and talk about feelings and this sort of stuff. And but hey, we got stuff to do.” You know, engineering is about solving problems, fundamentally. And that still is the core of what I what I love to do and what I want to do. So, it gives me a perspective, also thinking about people, not just as, you know, squishy things that are kind of arbitrary, but recognizing people follow rules in the same way as computer systems, social systems, you name it. And so, I think it gives me an angle that is honestly sort of an engineering angle to understanding social dynamics, and internally the sort of the wiring that we've got.

Toni Dechario 04:17
Okay, thanks. I'm going to jump right into kind of our central question, which is, why is it that otherwise ethical people do unethical things?

Mark Mortensen 04:28
So, I think you're asking exactly the right question when you start to frame by “otherwise ethical people.” You know, I hear a lot of people with this an overly simplistic, overly black-and-white view of, “Look, well, you know, the reason bad stuff happened was there were bad people and bad people do bad stuff, and thus we have bad.” Yes, that does happen. And look, we can all point fingers to obvious massive, massively egregious failures and people who are doing really bad stuff, but more often than not, it's the smaller things right? “It's bad people” is sort of an easy and convenient scapegoat. What we have to remember is it tends to be things more like exogenous pressures. Every one of us in our jobs have pressures, pressures to deliver to given deadlines, pressures to succeed in our work, the pressures we put on ourselves about wanting to be good at our job and have the reputation, this sort of thing. Now, you take that, and you add on to that, “Oh, by the way, this is also how you earn your living.” So, if you have a family that you're supporting, if you have any concerns out there in the world, other things that feed in, we operate under tremendous competing pressures, many of which are not perfectly aligned with ethical behavior. And let me be clear, I'm not saying they are necessarily unethical pressures. But if the pressure is you got to deliver, and you know, look, I can be sneaky and do something that's, well, not really sneaky, but, “Look, everything's got gray areas, what if I push a little bit further to the left just a little bit? It's what everybody's doing.” That's where we start getting into the situation. And more often than not, it's about those pressures and the other pieces. It's almost always about small steps and escalation of commitment. It's very rare that a breach is something like, you know, zero to 60, “We were completely ethical, and everything was great, and then we decided to go off the deep end and do something hard.” More often than not, it's, “Look, we're behaving well, we push the bounds a little bit on this. And then, guess what? Nothing happened, nobody got hurt, it was really fine. Okay, maybe we can push another a little bit further on the next one, because we're still under the same pressure.” And not only that, but, “Hey, we delivered last time.” So, everyone's going, “Hey, deliver, deliver some more, we want to see more.” It's that situation that we really have to, I think protect much more against then looking for the, you know, the real, real bad people who are doing terrible stuff in extreme cases.

Toni Dechario 06:55
I've never heard, is it “escalation of commitments?” I've never heard that. I've heard kind of a related discussion of normalization of deviance of that idea that, well, “It was fine last time and nobody got hurt. And we'll just do it this way again, even though it's technically against the rules. It's fine. Until it's not.” So, how do you counteract that? How do you if you're an organization looking to kind of encourage people to resist the pressure to deviate? What do you do?

Mark Mortensen 07:29
So, two different things. One, I think we have to think about what are the right tools that we need. And here obviously, part of what we're here to talk about is things like organizational culture, and I happen to believe that culture is one of the really most robust ways to tackle this. But the other thing is we need, you have to put yourself more in the mindset, or at least it from my perspective of helping people, you have to put yourself in the mindset of, how do we help people to maintain their ethical compass and to maintain that ethical behavior? And that means, when they're feeling those pressures: a) are you giving them a release valve? Are you giving them a place that they can talk about that? Are you normalizing the conversation about the gray areas, right? Sometimes we actually don't exactly know where the line is. And so, if you don't know where the line is, you run into a very new or a different problem, which is, you may be unethical accidentally. Now, one of the problems is when you know that organization is going, “We're watching you, you Toni right there, yeah, we're watching you and everything.” The last thing you're going to do is say, “You know, I was thinking about this thing that I might be doing, and I'm not sure it might be unethical, no way, right?” This is about psychological safety, about creating an environment. What you need to do is you need to create an environment where you say, “Look, we're going to talk about this, we're gonna bring it to the surface and talk about how it's sometimes tough. And that's okay, it doesn't make you unethical to wrestle with this.” The smart money is, we help you to try to figure this out. And so, I'm a big believer in process, because look, we have to outsource what we're bad at. Just relying on you know, “I'll probably be ethical, I'm generally a good person,” you're giving yourself an unfair disadvantage. Outsource to a process. Say, “Look, once a week, we're going to have a roundtable where we talk about this stuff, we bring it to the surface. We put in place a process that’s there for anything where I'm the one person making this call, where maybe I might make the wrong call, we have a check and a balance. I have to run it past one other person who's unconnected to the project,” right? These are simple mechanical things, but one is normalizing the conversation. The other is giving people help to make the right ethical decisions and get into that.

Toni Dechario 09:37
One of the other things that you touched was surveillance and autonomy, or lack of autonomy, and that feeling that you're accountable for and responsible for your decisions. Can you talk a little bit about what you think the impact of being closely watched may be, and kind of the counterpoint of what is it to have autonomy? And how does that impact your behavior?

Mark Mortensen 10:04
Look, this is where it gets tricky, because some of it feels a little bit counterintuitive, right? Our logic would be, “Hey, when things are getting concerning, what do we do? Let's watch more. So, we make sure that we catch it.” There are a couple different things. One, you do run the risk that people, in effect, outsource their moral compass, or they outsource their ethical awareness. “Look, I don't have to worry about it. Because I know if I screw up, Toni is gonna catch me. So, I don't have to worry about it myself.” That works great, as long as Toni's always there to catch you. And this is part of the problem also. And this is what I was what I was getting at around that the idea of culture. One of my favorite stories was a CEO that ran a little experiment, there's an elevator that went up to his part of the floor, not only to him, but you know, when you got the top floor, that was his place. He had somebody put a banana peel in the elevator, and they just left it there. And then he stationed a couple of interns to watch and say, “Okay, so what's going to happen, who's going to pick up the banana peel?” The banana peel sat there for a while, a good chunk of the day with people walking and going – and this is a very substantial firm, you know, revenues in the billions, this is – and they'd be walking, “Oh it's gross, banana peel, who would do that? Well, that's my floor,” right? And they would get out of the elevator. And, to me, it's a really illustrative example, about the power of culture versus rules. If you have a culture of “We own this place, we care for this place,” the first person who walked into that elevator should go, “Oh, that's gross. I don't know who did that. But I'm going to fix that because I feel a responsibility.” If you rely on rules to do this, and surveillance is the rule approach, if you rely on those rules, you better make sure that you have a rule that says “When there is a banana peel in the elevator, thou shalt pick it up, including rider, if it's an orange peel, also pick it up. If it's a tangerine peel, also pick it up, clementines, those are okay," you need to have some rules for every possibility. That's the problem when you rely in effect overly on the rules is you give people the freedom or the right to not have to worry about it. If it's not fitting into one of those categories, and that's the danger when it comes to especially challenges around ethics. How many times is the ethical breach a new thing? Very, very often, it's not the same breach that we've seen, it's, “Oh, well, now there's a new type of derivative that we have to think about in a slightly different way in the cost. And there's something that maybe nobody even realized was a concern. But yet, that's bad.” That's why culture, in my mind, is the best way to approach it. Because if you instill in people a sense that they need to have ownership, and they are responsible for maintaining the ethical standards of the organization, you also trust them to make the judgment call to say, “You know what, we've never talked about this, this is making me feel a little bit weird.” And again, if you created a culture where you talk about it, that's what comes up in the next meeting, going, “Hey, guys, have you ever thought about the fact that somebody could do this?” and suddenly red flags and you catch something before it's ever happened? And that's why I think you need to have this interplay between the broader culture and the rules that you're putting in place. And you have to think about them in the way in which those pieces fit together.

Toni Dechario 13:18
So, I have a couple of follow ups to that. If you're able to create a culture in which someone is willing to say, “Hey, I haven't seen this before, and I'm not sure about this.” How can you make sure that that's heard? And that's incorporated into decision making?

Mark Mortensen 13:37
You're hitting on exactly the right challenges that are questions, right? One is, do they raise it in the first place? So, is it vocalized, so that there's the possibility it gets picked up by people who can do something about it? The second is when it's localized, is it actually heard? And do people then take that and say, “Whoa, we've got to be concerned, we need to do something with it.” On the vocalization front, right? You need again, to think about some more cultural things, psychological safety, things like that, do you have you created an environment where people feel free to share one of the critical drivers of that, you need to model that behavior at the top. You need to model vulnerability you need to model and show, and this some of the work that I did with Amy Edmondson around psychological safety. Obviously, she is the source of you know, the great thinking around psychological safety, but you need to think about what is it that will make people feel comfortable and able to share that stuff, and then we'll get into the conversation. Now, whether it gets heard, you've got a new set of problems, right? One, again, the same competing motivations I talked about in the beginning, those are there as well. Right? “Look, I've got an employee who is going on and on and on about this thing, and they're really worried about it and I don’t know, maybe it's a concern, maybe it's not. I've got competing pressures I've got…” Managers face the same ethical challenges that everybody else faces in terms of the pressures they're getting from their bosses and from laterally and from their employee. So again, you need to put in place some structures to, in effect, force the conversations to happen to force, the openness and the discussion around it so that people can take action. You know, the other piece of the puzzle is, that all of these things require a certain amount of policing sounds bad. And when I say policing, I don't mean, I'm going to watch you like a hawk and see what's happening. I mean, they require vigilance. So that when these things come up, they are dealt with. Everybody listening knows how toxic it is, or how devastating it is to any culture around whether it's whistleblowing, ethical awareness, whatever it might be. When a complaint is raised, and they feel like they aren't heard. I bring this to the “Hey, guys, I got a big warning flag” and people go, “Yeah, yeah, yeah.” That's pretty damaging, because I risked myself by, potentially, either for going something that could have been, you know, maybe very lucrative, or whatever else for me, maybe I opened myself up, and certainly when it comes to whistleblowing, to retaliation to all this other stuff. When you hear something, you have to show that it is heard and understood, and it has to be acted on. That doesn't mean you have to take any accusation. And so, there's a balance there, you need to show that it's heard and acted on. And it needs to be acted on in a fair way. Fair process that, “Look, as soon as we heard it, we took it seriously, we've documented it, we've started a process.” Now, the process may go through, and in the end, say, “Look, it's actually okay,” or, “This person did do something wrong.” You need to make sure also that there's no retaliation going towards the person, you know. They did what they thought was right. It was in everybody's best interest that we vocalize this, that we talked about it, and then we take it from there. But when they feel like they've been heard, and that's what I mean by the policing, you need to take it seriously. You need to make sure that people feel that when they do follow the rules when they do what you want them to do. That behavior is rewarded through recognition through whatever else, I'm not saying monetary reward, but they feel validated for having taken that action.

Toni Dechario 17:11
Yeah. How about in cases where the issue isn't raised through formal channels? It's not like a whistleblowing incident. You know, it's kind of just a person raising their hand and a meeting. And let's say the issue is not… let's say they're wrong. How do you handle that in this world in which you want to make sure that they're not afraid to raise their hand, again?

Mark Mortensen 17:33
Totally fair. And I'm really glad you're saying that, because again, people say, look, but we can't grind everything to a halt, you have to try to deal with every one of these different situations. Again, what is important is that people feel heard, and that hearing is validated. Now, what that means is you need to have a way to explain to whatever is the person, whatever is the entity that's bringing it up, we've listened, we've heard it, we've evaluated it fairly. And we've reached this conclusion. Now, look, they may disagree with you. You may say, “We've looked and this is actually okay, we've looked and we don't think this is malfeasance, whatever, you know, bias, whatever it might be.” They need to feel that that is clear. One of the ways that you can, that you can move in that direction, is remember that the last thing you want to do is set policy when there's an issue on the table. So, one of the ways to deal with this better, is have a conversation before there's a potential breach or a concern, or somebody brought something up. Have the conversation now and say, “Look, here are the steps that we will take, you know, if Toni brings something to the surface, we're going to do this, this, this and this, and you get everybody to agree on. If we do these four steps, do we agree that that is good due process for how to handle these sorts of issues?” Now, of course, if they say, “I refuse, you're wrong,” you can't please everybody. Not everybody will always be happy. But having that conversation out front is way, way better than waiting until you, Toni, raise something. And then we go through and at some point in the process, decide, “You know what, it's actually not to concern,” you're never going to feel as validated. You get people to commit to the process beforehand, without knowing what the outcomes will be. Then when they run through the process, it's a lot harder for them to push back beyond saying, “Did you do the process? You did, then we're good.”

Toni Dechario 19:26
I think you've kind of answered this question already. I think I know what your answer is, I'll say, but I'm curious as to what your thoughts are on the kind of relative weight or importance of individual motivations versus group norms in decision-making.

Mark Mortensen 19:41
It's a tough one. In a certain sense, you’re asking me to pit psychology versus sociology, right? You know, psychologists are gonna say, “Look, it's about the original wiring and that stuff.” Then the sociologists will say, “But look, the system affects how we behave.” And my perspective is it is impossible to disentangle those. Go back to the examples I gave earlier on about motivations, right? What motivates you? What motivates me to do anything? Well, some of that is my own personal psychology, very much about personal motivations, what it means to be me. Where do you categorize family pressure? Well, my family wants certain things from me and is that not personal? It's kind of personal, but it's kind of not, it's also my family, it comes from other sources. So, then we start getting a little bit in the middle. Then at the same time, there's broader societal pressures. And where I sit in the community in my role. I think it is impossible to differentiate and it is extremely idiosyncratic. There's a lot of research, for example, on identity, how do we think of ourselves? One of the very consistent findings, everybody has about as many identities as things that they look at in the day. I mean, you have so many. I have an identity of me, as an academic of me, as a researcher of me, as a father of me, as a son of me, as a maybe as a sibling, or as whatever, all of these identities. And in any moment, one of them is triggered more or less than another one, and they're constantly moving around. That's why I think it's really hard when people say, “Well, which one is it?” It isn't one, it's the mix of all of them, there may be a time and coming back to what we're here to talk about. When we talk about ethics, we talked about breaches, these sorts of things, at any point in time, you know, “Hey, COVID hit and by the way, you're now feeling really, really at risk for your job, because the organization is going through a whole bunch of stuff, maybe you feel a whole lot more pressure to stand out.” And to excel, that might be a really strong motivator to toe the line a bit more than you naturally would have. At a different point in time, you may be much more motivated by your own personal drivers, I'm, I'm passionate about this, we all ebb and flow over time, it's impossible to pull those pieces apart. But I think what is useful is to give a little bit of thought to what are the different things pulling at you at any point in time. And I think that's a really good exercise for anybody to do, you know, sit down with a piece of paper and ask yourself, “So, what's motivating me now?” It's kind of fun, you can do it. Now you can do it in six months. And you may find out the same list.

Toni Dechario 22:09
That actually reminds me of, you know, this, this famous study that was done with bankers, testing their ethics, basically. And they were primed, the first time they took the test. Well, they weren't primed with anything, they were just asked to take the test as a human being, right? And then the next time they took the test, they were primed as bankers. And they were shown to be far less ethical, the second time around. And so, I wonder what your perspective is on? Is there something about financial services about banking, that impacts the extent to which ethics are an issue in decision making?

Mark Mortensen 22:50
You're trying to get me in trouble with everybody listening right now? This is not good. Do I think there's something intrinsic? I think that there are, look, there are structural components in this, you're dealing with an entire industry in which pretty much everything you do, feels in a lot of respects, very black and white. Look there, numbers on a piece of paper. It's in one column, or it's in the other one, which I think for a lot of people obscures how gray this stuff can be. And look, I have colleagues, we have, you know, at INSEAD, we have an accounting area, we have a finance area. And I have colleagues who have spent their entire careers researching nuances of things that way beyond me and my comprehension. But the point being that black and white, it's not so black and white. But I do think that there's a little bit of that perspective that, you know, “Oh, no, but it's, it's clear.” It's not clear. And I think sometimes we underestimate how much gray area there is, on top of that, look, because of the success of the industry in terms of the financial rewards that has paid over the years, particularly because that has been you know, it has that, you know, Wolf of Wall Street, all of those sorts of examples. There is a rhetoric out there about the times of excess and the high flying. But in a certain respect, look, you also had some of those stories in other professions as well, back when they were making lots of, when doctors were making loads of money, with the doctors in the fast cars and doing like never happened with professors. But you know, for the rest of the, you know, when you're in a profession that is viewed as a high flying, one that others don't necessarily understand high barriers to entry to those high levels. All of those things can create an environment where there's also hyper competition, you know, you look, we've got lead tables, we know exactly who's ahead of whom and that does breed some more competition. Now, does it breed more unethical behavior? I don't have the data. I mean, I'm in empiricist, you can also look at other things. I mean, you look at bad behavior among professional athletes. You look at bad behavior among anybody who is at the pinnacle of their career. I think that’s more of what you see is as you go higher in a given career, you have both more opportunities and also more pressure to continue to deliver and deliver and deliver. And I think that's what pushes more of the unethical behavior. I don't think that in general, somebody who is… somebody who's a teller in a bank, helping people to get loans or do whatever else on a day-to-day basis, I don't think that they feel significantly more pressure to be unethical than does somebody at a comparable level in another role, another industry.

Toni Dechario 25:33
You've talked about pressure a lot. Can you describe a little bit more the relationship between pressure and decision-making?

Mark Mortensen 25:41
A number of years ago, we recognized that rational decision-making is a beautiful ideal. It's not a reality in any way, shape, or form. Now, in what ways are we irrational? So, all of Dan Ariely, his work and Predictably Irrational, everything's great work that shows that we have biases. So, all of our great ideas on how to make decisions were broken. We have psychology or psychology doesn't fall into the nice buckets and do always the right thing. On top of that, you have, you're always dealing with incomplete information, imperfect information, you've again, got the biases. And now you add in all the pressures and everything else, decision-making is nowhere near as nice and objective a category as we like to think it is. So, you know, in terms of what's the relationship between pressure and decision-making? Given that you've got a lot of different things in play, the more pressure you put on the system, the more likely it is that you end up making a shortcut, either intentionally or otherwise. And you don't do the step-by-step testing of everything. And that's where we start to get to the suboptimal decisions. One of my favorite books, Pfeffer and Sutton, wrote The Knowing Doing Gap. And they're basically arguing that more or less hyper-simplified, most of the errors that we make are errors that we wouldn't make if we actually took the time and stopped and reflected and thought through this stuff.

Toni Dechario 27:01
So, my last question on this is, if you're an organization looking to improve decision-making in your organization, it sounds like you'd be well-served to figure out where there are points of high pressure, and where your staff is really feeling under pressure, for whatever reason. You know, it sounds like pressure in one area can translate into behaviors in a different area. How would you recommend figuring that out?

Mark Mortensen 27:30
Conversations? Now I'm belying the organizational behavior piece. And I said to you, I'm an engineer, it's not all the warm and fuzzy and stuff. I'm sorry, the best tool you still have is a conversation. It's not just a, let's have to get the CEO to say, “Hey, everybody tell us where you're under pressure.” That doesn't work. This has to be at the level of the operating unit, right? The team level, were there real relationships, if this is something that you're really thinking about? You're worried about that pressure managers need to have that conversation, say, “Look, let's talk about this.” And again, model the behavior you want to see. If you want people to honestly tell you about their stressors, their pressures, the things that are pushing them, especially if you think that those might be things that are pushing them towards behavior that they don't feel good about, you better be coming up with some examples of your own. That's a tough bill of sale for a lot of leaders to start off by saying, “So let me tell you about a time where I probably got a bit too close to the gray line.” Most leaders will say, “Absolutely not. No way. I'm not going there. That's uh-huh,” but if you really want people to be open and honest, you need to take that first step. You are in a position of power and safety relative to them. Use that for some good by saying, “Look, I'm going to reveal where it was tough for me.” And that's a first step, not the whole step. But a first step towards getting people to say, “You know what, I kind of had something similar, or here's what I'm wrestling with, right?” But again, it has to be real vulnerability, not the kind, not the, you know, the one that we use when we're applying for a job, what's your biggest flaw? “I'm too dedicated,” like, come on. It's not that. It's real vulnerabilities actually doing the stuff that matters.

Toni Dechario 29:08
So, let's get into your sweet spot. How would you say the pandemic has changed the way that people make decisions?

Mark Mortensen 29:17
There's been a lot of debate, honestly, going back and forth. A lot of people started saying, “Look, people are a lot more productive. Because I'm not distracted by all the stuff going on that chatty person in the office who's always talking at me, I don't waste time with commuting. I don't, I don't, I don't, I don't. Look how much more productive I am?” At the same time, we have to be careful, right? There's productivity, and then there's collaboration, and it depends on what kind of productivity you're looking for. So, what I've been seeing, yes, I think people are more productive, at least in terms of all those hours put in. We also know and we have lots and lots of data that shows people everywhere across the world working longer hours. They start earlier, they end later. That's more hours in the day, they take less time for lunch that, you know, we also know, and we've known this since, oh, I don't know, like the 80s, that when people communicate via technology, they tend to be more task focused. So, we're more scheduled, we're hyper-scheduled, we are more task focused. It's not surprising that people say, “So, I'm more productive.” In a certain respect we are. The problem is, we have to be careful of what we're losing. So, if what you're losing is more collaborative work, work that you need to get other people's opinions on, right? Come back to our, into the focus of our conversation, you're talking about ethics, maybe you have an environment where people are able to produce more widgets, and whatever that might be, you know, sell more accounts or settle more deals, whatever it might be, they're able to deliver more, but they spend less time talking to other people about it. That could be a very big red flag for ethical breaches. You know, it was really funny. We were, I was talking with this guy about this deal that we're closing. And he said that you could actually write off a certain something and I hadn't thought about it that way. And you chime in and say, “Whoa, no, no, I actually just learned about this, or I just talked about this. That's actually not okay. You can't write that off because of whatever.” Those random communications may stop me from doing something that could get me in trouble. Could get the firm in trouble. Could whatever else. So, are you more productive? Yeah, you got more stuff done. But maybe you're missing out on the opportunities, collaborative opportunities to catch stuff. Same thing goes obviously also for innovation. Innovation is a team sport. We know this. The idea of Newton, just be, you know, the apple on the head, the bolt of lightning, the eureka moment. Does it happen? Yeah. Does it happen often? No. Does it happen most of the time, no. Collaboration is typically the vehicle of innovation, where we talk about things. We use analytic learning. I take something I learned from over here, and I plug it in over there. And that fits with this piece. And now suddenly, we've got a new solution. The more people are working remotely, we have to be much more cognizant of the stuff that we've lost, right? And I always tell people, “You have to pay for the stuff that used to come for free.” We need to stop and make sure we've done the shopping list, the inventory list of the stuff we used to get, and then think about how we can put it back in, because otherwise it really does start to affect the way in which we're reaching our decisions. Some of it may be positive, some of it may very much not be.

Toni Dechario 32:24
You basically get a higher quantity of decisions, but probably lower quality of decisions, even when it's not an ethical question.

Mark Mortensen 32:31
Let's be clear, I guarantee right now somebody is listening and going. “No, that's not true. I've cranked out lots of stuff. And I've been totally ethical.” Sure, you may have been, again, remember when we talk about ethics, when we talk about ethical breaches… In the same ways when we talk about innovations and other things, it's a numbers game. And you have to ask yourself, “What's the cost of a failure?” Just like a venture capital firm doesn't expect to get a unicorn. Every time they fund something, one unicorn funds all the other stuff. Same thing goes for ethical things. Just because you didn't have an ethical breach doesn't mean that you're not at risk, or there isn't a problem. Maybe you got lucky. Maybe you didn't. Maybe you're totally fine. But it's a question of how conservative, how risk averse do you really want to be? And then you have to balance that out.

Toni Dechario 33:16
So, what have we missed in terms of any recommendations that you have, for organizations that are looking to build in more ethical decision making?

Mark Mortensen 33:27
I come back to the same the same two things, I sound a bit like a broken record. I'm a huge fan of all of Amy Edmondson work around psychological safety. And not just because she is an amazing scholar and a truly delightful person, but because she's absolutely right. One of the best ways that you can avoid breaches and basically failures in the decision process – whether they're ethical breaches or not, they can also be planes falling out of the sky, they can be surgical goofs, they can be, you know, whatever – the foundation of that is open conversation to surface when something goes wrong, right? It comes back to what I was saying before: step one, the issue has to be surfaced so that you know that there's something to talk about, then step two is how do you deal with that? Psychological safety is the fundamental underpinning of that. It is an attribute of an organization, it's a cultural thing, it is something that you can build over time into something that is personally felt. You do or don't feel psychologically safe. And whether you do or don't, I have no control over that. I mean, I can influence, I can do things to try to make you feel more psychologically safe. But look, if you Toni, just don't feel safe psychologically around me, there's nothing I can do to change that. That is you who owns that, but we can create environments that, on average, raise the level of psychological safety, create an environment where people are more willing to bring these issues to bear, you know? So, what can organizations do? One, take that seriously and really invest in it. Invest in building a culture where people are talking. What you want is a place in which people say, “Look, I'm willing to say, ‘I'm not sure if I'm, if I just did something wrong, can somebody help me?’ Because I know that they're gonna say, ‘Wow, Mark, you totally screwed up, that was really not okay, we're not gonna judge you for it, we're going to try to help you fix it, and we're going to do something about it.’” So, I think psychological safety from a cultural standpoint… and then again, think about process. Remember outsourcing what you're bad at. Think about putting in place the things, not in terms of monitoring, but in terms of helping people to be more honest and open and have those discussions. I think that's really at the crux of what is necessary.

Toni Dechario 35:35
You know, if I were a CEO of a relatively big organization, is that you have subcultures, right? And some of them might be subcultures that are psychologically safe, I might feel safe in one environment with one set of people but not in a separate one, or not, that might be a subset of a larger environment in which I don't feel psychologically safe. How would you recommend organizations try and understand whether they have a psychologically safe environment?

Mark Mortensen 36:05
It is a process. Again, it is something that you create by modeling the right behavior by showing exemplars by keeping your eyes open and making sure that when something comes up, it is truly dealt with. And people feel like you know that they actually take this seriously. But at the end of the day, it's a bit like, it's like parenting, you can do everything you try your hardest to instill the right values and all this stuff. They're still their own people. Sometimes they don't do exactly what you wanted them to do. Frustrating as that might be, you know. And I think that that's the reality, I think leaders need to be thinking about this from the perspective of saying, “Look, I'm going to prioritize this, I'm going to send strong signals to the organization that I legitimately and sincerely think this is a priority. And I'm going to do everything I can to try to instill that. I'm also going to recognize that it might not work 100%. It might not work in certain pieces, there might be subcultures and everything else, I don't close my eyes. We say, ‘Look, we're going to create psychological safety, to bring these ideas to the, these issues to the surface, we're also going to keep our eyes open, to make sure that we're keeping an eye out.’ And if we see something that's going wrong, we say, ‘Hey, what's going on over there? Little funky thing in the gray over there, that doesn't feel right.’” And you know, again, as long as that as part of the contract upfront, employees can't really complain about you keeping your eyes open, you're looking after your own shop. And that's your job. The main thing is making sure that again, those conversations, that contract implicit-explicit is upfront, make sure that gets set and is clear before there's an issue on the table. Because as soon as there's an issue on the table, it pollutes the whole discussion, and you can't disentangle the two.

Toni Dechario 37:50
What resources would you recommend on these topics? If people want to dig further?

Mark Mortensen 37:55
I'm Amy's cheerleading section. Fearless Organization is a fantastic book. Again, it gets people thinking about these sorts of issues. What I like is, again, it's important to be able to ground these in reality. It's not just an abstract thing. It is, “Let's actually see where this comes in over and over and over. And what is the concrete impact of this on people's real behavior?” Because that's really what matters. Culture doesn't matter for culture. Culture matters for the behavior that it drives.

Toni Dechario 38:22
Alright, my last question is kind of a fun one. It doesn't have to be about culture. What are you reading, watching listening to that you're really enjoying that you want to tell the world about? Could be anything.

Mark Mortensen 38:34
I love Ted Lasso. It is a great show, for two reasons. So, I love it because it's really funny. But the nerd answer is, it’s all about working across cultures, which is something I happen to be passionate about. You know, you have a sports setting, but it's working US, UK, etc. But it's also all about the power of positivity and kindness, which I think we need a lot more of. So, it's kind of a feel good. It's silly. It's funny, it is really funny. That's kind of what's on my mind at the moment. I'm really enjoying it.

Toni Dechario 39:06
Thank you. Is there anything we didn't cover Mark that you want to make sure to include?

Mark Mortensen 39:12
No, I think this is a great conversation. I had a lot of fun. I encourage people just to think about this stuff. In a weird way, it's not rocket science. It's just something that we don't often give the time it needs to actually reflect. We have as a society and industry, a huge action bias towards, “We got to get stuff done, things have to be happening.” A little bit more thought wouldn't always be the worst thing. Huge grain of salt: I'm an academic, it's what I do all the time as I sit and nerd out and think about things all the time, but a little bit of a pause, you know, 80/20 rule, I think can give a lot of benefit. But this is what we also know about behavior change: behavior change, cultural change, neither one is achieved through a, sort of like, big actions of, “I will now be this going forward”. No, you won't, you or something else up until now for a lot of good reasons. Behavior change is accomplished through small nudges through small shifts repeated over and over and over. We're creatures of habit. Sometimes you just need to force yourself into that new habit doing enough and eventually that becomes the way you think, “That's really the game that we're in right now.”

Toni Dechario 40:16
Thanks so much back. It was really good to see you again.

Mark Mortensen 40:19
Great to see you, too. Thanks so much for having me.

Toni Dechario 40:22
If you want to hear more from Mark, watch the New York Fed’s webinar on “Culture in a Post-Pandemic Workplace,” which you'll find at newyorkfed.org/governance-and-culture-reform.

Episode 04
Prioritizing People and Mission… in Space
Holly Ridings
Holly Ridings is the Chief Flight Director at NASA, an institution that’s spent more than six decades thinking about how culture connects to outcomes. In this episode, she talks about putting safety and mission first, the importance of having humility to learn from past mistakes, and how NASA’s culture helps directors of human space flight develop their command presence and remain laser-focused.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. In this episode, we'll hear from Holly Ridings. Holly is the chief flight director at NASA. NASA spent more than six decades thinking about how culture connects to outcomes. We first met Holly when she joined our web panel on “Trust and Decision-making.” In this episode, she'll talk us through how NASA teaches directors of human spaceflight to develop their command presence and remain laser-focused on the ultimate goal of getting astronauts home safely. Holly, welcome, and thanks for joining us.

Holly Ridings 01:50
Thanks so much for having me today. It'll be an exciting conversation, I think.

Toni Dechario 01:53
So, we want to kind of start with the basics of why we're talking to you today. What got you interested in culture? And how is it relevant to your job?

Holly Ridings 02:02
If you think about human spaceflight, and where we started – so the beginning of NASA, back in the 60’s – we have had a culture of excellence and leadership. Trying to do really hard things since the very beginning. When I came to work here in the mid-90’s, there was a tremendous culture already established here at NASA, and specifically in the operations community. We have foundations of flight operations that have been passed down for generations. We got our roots in military test pilots with our very first astronauts. And so, you're kind of surrounded by culture and indoctrinated in a really positive way to just be part of this amazing team from the very beginning. I've been a team person since I was young. That's always resonated with me. It's part of my DNA. And so, you take that sort of natural tendency and then the NASA environment, and as I've moved through the leadership ranks, I’ve really gotten more specifically interested in, you know, what does it mean? How does it grow? How do we teach it, what is its value? And also, when does it need to evolve and change? You can't be a victim of your culture as the world changes around you.

Toni Dechario 03:22
That's a great point. And one of the specific aspects of culture that we're interested in exploring through this series is decision-making. And so, I want to kind of dive a little deeper into why decision-making is so important to you? And what is it that you've seen over time, that's caused you to focus in on decision-making as much as you have?

Holly Ridings 03:46
Okay, so decision-making in human spaceflight, there's a couple of really important aspects, right? The first one is, that we teach everyone who comes through the door, is that you have to lead your leader. And so, we really empower everyone to be a part of the solution. It's not a hierarchy where the person at the top tells you the answer and you go implement. From the very first day, there's this idea that you are valued for your thoughts, for your capabilities, for your technical knowledge, for your specific view of the world. So, lead your leader. It's a very specific thing that we teach. One of the other aspects of decision-making that we teach is, it's okay to not know the answer. So, when you do human spaceflight, you can find yourself in very stressful, very critical situations where you absolutely need to know what to do. But sometimes in that same situation, the information you're looking at doesn't make a picture and you don't quite know. Now, you might still have to make a decision, but you have to communicate, your confidence level, the information that you're looking at, and it's a really hard skill to teach. Because you tell people, you have to absolutely be able to make a decision, but at the same time, you have to admit you don't know the answer. So, everyone in the room is contributing, and you have to both be confident and humble at the same time,

Toni Dechario 05:04
One of the things you mentioned is pressure, and part of what we're interested in with respect to decision-making for financial services, at least, is there can be a great deal of pressure on bankers with respect to the bottom line. For flight directors, the pressure is well, is definitely even more extreme, right? You're dealing with people's lives and their safety. How do you manage that pressure?

Holly Ridings 05:27
I think you have to teach flight directors – and really, operators, flight controllers – to narrow the focus. What is the most important thing? And what is the next important thing? So, the most important thing is always the safety of your crew. Safety of your crew. Are we keeping them safe? Are we giving ourselves an opportunity to get them home, if that's the situation you're in. And so, the safety of the crew, that's always, kind of, your very, top-top of the food chain thought. Anything you do gets evaluated against safety of the crew and safety of the vehicle. The next piece is what we call mission success. We want people in space to accomplish things, right? International Space Station, science, Artemis to get to the moon. So, there's a big, bright, shiny goal. That's why we take on all this risk to get people into space. And the third piece, beyond the safety of the crew and the vehicles that they fly in, is the success of the mission. All things are evaluated against those priorities. And it kind of narrows your focus. The more complicated pieces, the risk of each of those potential paths, and we talked about risk trades. Evaluating risk or risk assessment or risk management, obviously, risk is just the probability of success versus the probability of failure, right? And so, that skill takes a lot of time to learn, when you have a bunch of information in front of you. After a while, you can start to see, okay, well, I go ten steps down that path over here – it's little bit like playing chess, right? You go ten steps down that way, and, “No, okay, somebody's gonna take my queen, maybe not the best path. I go ten steps that way, and then maybe I checkmate them, that's maybe a better path.” So, your brain tends to think like that in terms of the next steps, down any given solution path, toward the best solution to keep the crew safe and get the mission done.

Toni Dechario 07:22
I'm thinking about the dual goals of safety and mission, and wondering – the extent to which the mission is very exciting, and very shiny as you described it – how do you ensure balance? That that safety component is as important as the mission component, despite the fact that the mission is much more shiny?

Holly Ridings 07:46
So, we have been taught throughout the process to weigh, as you said, both sides. But more importantly, we're talking here about flight operations. NASA is a much larger group of people who all, again, have the same goals that I just articulated. We have a safety community, a safety team. We have an engineering community and engineering team. And NASA overall has a culture of very methodically weighing the different options, and each of those groups of people gets to provide their assessment. Now, typically, that process runs before we launch. We have readiness reviews. If you were going to launch a product, you'd have a readiness review. I mean, we're launching people. So, obviously, a little bit higher risk than a product, but the thought process is the same. You go through and say, “Hey, are we really ready to do this? Do we think it's going to succeed? Do we think it's going to fail?” And so, all of the NASA entities weigh in with their assessment and their judgment based on their expertise. It's a really robust process that we call a certification of flight readiness. Now, when you're talking about sitting in mission control, and something happens and you’ve got to make a decision in the next five minutes, yes, a lot of that is delegated to the operations team. But that same methodical process, although it runs a little bit faster and maybe with fewer people, still exists. And you are always weighing the safety of what you're about to do against the success of the mission that you're going to accomplish. We talked about flying, safely and successfully, right? You can't divorce one from the other. The safest thing to do is stay on the ground, right, instead of put people into space. So, you know at the beginning you are accepting some amount of risk. There's no baseline zero risk, you are accepting some amount of risk. And then the challenge is to not push too hard to towards the goals that you mentioned in terms of the mission.

Toni Dechario 09:45
One of the other questions that I was curious about is, we had a webinar recently on purpose and the kind of relationship between purpose and culture. If ever there were a mission-driven organization, it's NASA. Your purpose is really clear, and so how do you think having that sense of shared mission and shared purpose – and by mission here, I don't mean Artemis, I mean purpose – how do you think that has impacted, kind of, individual decision-making at the organization and among the flight directors specifically?

Holly Ridings 10:15
I think the impact is huge. I mean, you really almost can't put a number or a value on it. When you have a group of people who have a shared purpose, right? I mean, fly humans in space, make progress for the human race, that is an amazing thing to spend your life on. You feel very relevant to the world. Not just to NASA, but certainly to the world, and you feel like you have this responsibility to make it work. We don't want to go back in the opposite direction. We want to keep making progress forward. And so, I think it creates this shared purpose, this sense of team that is not just NASA, but across all of our international partners, and our commercial partners, where everyone really wants to do the right thing. Right now, people have different opinions about what the right thing is. You may look at something and have technical opinion, different than the person sitting beside you. You may even have a cultural different opinion about priorities than the person sitting beside you. But at the end of the day, everyone wants people to fly safely in space, and so it creates this team feeling that really can't be, almost can't be described. A lot like if you've ever played sports, and you go and win the championship, and you have that camaraderie. And certainly everybody has tough days, but at the end of the day, we're all here trying to do the right thing for the human race. NASA, the partners, and all of our providers have made progress for human spaceflight. And right now, it's just growing exponentially. The barrier to entry for human spaceflight is lowering. There's more people involved. There's excitement about it. We're going to go back to the moon, and then sustainably onto Mars, and so much energy. So, I'm not too sure I'm asking here answering your question, other than to just tell you, there's a lot of energy, and it's really exciting.

Toni Dechario 12:07
Okay, so despite all of that, there are times though when bad decisions get made. And so, do you have any sense of when bad decisions are made, why bad decisions have been made? And is there a way to influence that or to change that?

Holly Ridings 12:20
You know, we have a great culture around evaluating our decision-making. Our tagline, our name for it is, “a lessons learned process.” And a lot of people do this. The military has a hot wash. You do debriefs. What went right? What went wrong? And I'd say we actually tend to focus on what went wrong more than what went right. We have to remember to do the cheery parts. We tend to be a little bit hard on ourselves, but we need to be right? We need to be harder on ourselves than anyone else is on us. And so why do bad decisions get made? Some of them are really complicated. The space station, as an example, is a very complex piece of machinery. It's built by lots of different people. It has lots of different software, lots of different hardware. To be able to seamlessly integrate all of that information so that it is available, so that everyone remembers, so that you understand what the space station might do in any given situation. It is challenging over time, right? And you probably see this in your systems, right? Somebody built a system ten years ago, and that person's gone, and then it gives you an error, and people are looking at that error like, “I don't know what this means,” right? So, we do spend a tremendous amount of effort, trying to keep all of that information current and documented. But you know, occasionally that doesn't work out and you learn something new. And so, we call those features, right? Where you learn a new feature, and then you take that lesson and go figure out what you need to do with it, document it, record it, fix it from a people standpoint, right? Bad decisions get made, sometimes it’s lack of training, where we feel like we've communicated the important skills, and we've evaluated them, but we were just, maybe a little off the mark. And so, you go back and you look at your training program and see what you need to adjust. This is particularly challenging with all of the development that's going on in human spaceflight right now. Because you never know what you need to know until you've done it, right? And so, you try to apply all of your lessons, again, that you've learned and your history to this next problem. But fundamentally, we haven't solved that problem yet. And so, trying to get it 100% perfect, then you fly brand new vehicle in space and you're going to learn things. So, you talked about mistakes. I categorize a mistake as we don't get our crew home safe. And luckily, human spaceflight and NASA we have not lived that mistake very much. We have a couple times and there are books and reports about it, classes. It's a tremendous part of our culture, because that's really the mistake. Everything else to us is just an opportunity to learn. So, my threshold of pain is pretty high, right? If a human isn't in danger, then we have time, we will solve the problem. I tend to stay pretty calm. But when you're talking about the mistakes, Colombia and Challenger, we have that as part of our training, to go back and really look at that thread, and what happened. And if you read those reports, there's communication errors, there's technical information, documentation errors, there's training errors, all of those. Your system is usually robust enough to handle a couple of errors before it turns into this catastrophic mistake, but your system’s not usually robust enough to handle multiple of those stacked on top of each other. So, you're trying to build some tolerance and some margin with all the work you do. And then guard against that day where they all stack up, which of course, has unfortunately happened to us a couple of times. That's how I kind of see mistakes. It's an interesting question.

Toni Dechario 15:53
And do you conduct a “lessons learned” discussion? At what points do you conduct those discussions? How do you think about when it makes sense to have those conversations?

Holly Ridings 16:03
Depending on the length of the mission or the style of it, do it periodically while the mission is in progress. So as an example, our crews live on the space station for six months. We call that an increment. And in the beginning, we would get them home and we do a bunch of debriefs, where they literally go sit in a room and talk to the people on the ground. And we realized after a while that that's not the best way to capture the information, because the thing that we're talking about might have happened, five months ago. And so, now, for the crew onboard the space station, and that six-month period, we actually after big – we call them dynamic operations. So, we bring a new vehicle to the space station, and they're involved in the docking or the birthing. Or if we do a lot of maintenance where we've got to take something apart and fix it, or a new science experiment, we'll have a debrief with them, even on orbit and are able to capture the lessons learned when they're much fresher. So that's one example where we've systematically looked at inflection points where you might gather a lot of data where you need to have a discussion and learned how to capture that better.

Toni Dechario 17:11
What do you think the cultural impact of having these regular debriefs and these regular lessons learned sessions has been?

Holly Ridings 17:19
I actually think it's been really important. And it's interesting, because when you first come here, you hear about lessons learned and what that looks like to you, is it again, the end of this project, this mission you've been working on, you show up with your PowerPoint slides, and you talk to the flight director who's in charge or someone else. But because of the continuous operations of the space station, which I was just describing, where we have these inflection points, we now, I now even personally, view it as a as a more continuous process than when I first started. And so very fluid, in my opinion, in a positive way, versus the static sort of milestone thing, that you check off at some point. And even now, it's really funny, right? So, you'll take a bunch of folks from flight operations, and you'll go – when we were traveling more, we haven't as much with COVID – but when we would travel and be somewhere together for a launch or a meeting going to see our international partners, and we're sitting in different parts of the room, we would actually naturally group together, a little, a little bit of that can be, you know, “Hey, we're there, and we're a team and we know each other,” but it over time really turned into this real time lessons learned debrief process. I can remember a couple years ago, we went to, like, a women's conference in Houston, drove up to town, and there was maybe half a dozen of us sitting in different places. We didn't know anyone else in the room, and at the end, the room filters out and we're all standing in the middle of the room like the six of us, you know, comparing notes like, “What did we learn? What did we hear the speaker say, you know, did we think this was of value? Should we come back? Would we like to invite any of them to come and talk to us?” And so, then we kind of like realized, “Oh, wait, we're doing our quick response, you know, lessons learned debrief process.” And so, now, I noticed it like we do it everywhere.

Toni Dechario 19:04
You have a flight director voice? Am I hearing your flight director voice right now? Or is it different from what I'm hearing?

Holly Ridings 19:08
Yeah, different, different, not as cheery. It's very, like serious. So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right? And so, we call that command presence, where you can be just perfectly having a sort of normal conversation like we are and if my phone went off, and it was the control center and something was going on, then it's like, boom. You're just, you're in the zone.

Toni Dechario 19:36
But I wonder whether being kind of in that frame of mind influences your behavior in one way or the other, if you think it does?

Holly Ridings 19:46
We're talking about culture, right? So, one of the great things about human spaceflight is I think that you don't often run into inconsistencies between, you know, your sort of personal belief and what you do at work, right? Again, we're all here. We're trying to make progress for the human race and get back to the moon and on to Mars and keep our crew safe with the space station. So, yeah, to me, I think of it more as a tool set, right? Where even if you have friends, you know, some friends, you may act a little bit differently. If they're your friends that you've known since you were little, you have a different personality and the way that you communicate with them versus someone that you just met last week, right? You're talking to them with a different style. So, for me, it's more, you're using the tool that's appropriate for the moment. Flight directors in general have to have a lot of skills. You have to be a team builder, you have to be very technically competent, you've got to be pretty adaptable with all the things that are going on in human spaceflight. And you also are responsible for the lives of humans. And so, when you get in a mode, where you're weighing the risks for people, it requires a certain amount of, of gravity that is applied to the situation. And I think then, that starts to, a little bit, feed back into your personal life. We don't have a tremendous amount of separation between work lives and personal lives. I mean, people work nights, weekends, holidays in the control center. Your family, like it or not, is sort of involved in your job, right? You don't go home and never talk about it. The phone rings in the middle of the night, and you get up and leave, and you come to work, because that's what we do. We come when we're called and we're responsible for keeping everyone safe. So, I actually think about it as different tools for different situations. And I just have to remember, my nine-year-old might not need the flight director tool as an example.

Toni Dechario 21:42
But it sounds to me like your tools, it's almost like a framing or kind of a shortcut into the, like, this is the dead serious me, and it's like you can get there quickly through practice.

Holly Ridings 21:54
Yeah, you can cut out all the clutter, right? If you watch a flight control team, you can tell the difference, right? If they're working a really hard problem, if the crew has the day off and people are a little relaxed. And my husband can tell, like, if I’ll answer the phone, he can tell just by my face and the tone of my voice whether you know something's wrong or whether it's… because you're just necking down your focus. And so, you're kind of applying all your brainpower to, really listen to the problem, think about what's going on, maybe you're considering resources you need, how we're going to go make a decision. I mostly think about it as, I block out all the clutter and I just focus. We talk about scenarios in the last many years where you kind of go into, I'll tell my husband, like, the phone will ring and, “Something's going on,” and I'll be like, “I'm going to work, I don't know when I'll be back.” And I literally just disappear into the control center. And then he runs everything at home until I show up again. So, it says so much about, you know, total focus for the safety of the crew and the mission. It doesn't require that extreme all the time. But the term I used earlier was command presence.

Toni Dechario 23:04
It sounds exhausting. In thinking about the financial services sector, the kind of parallel that I would make would be these interns that work 110-hour weeks, 100-hour weeks, and others, and can get exhausted. How do you ensure that you and your team are still kind of making good decisions after hours and hours and hours of this kind of really focused, intense work?

Holly Ridings 23:30
There's two kinds of work that I think we have to keep an eye on, right? So, one of it is what you mentioned, just, the hours. Like, just how many hours have you been putting in? And, again, the space station is 24/7 operations, right? So, 24 hours a day, seven days a week, 365 days a year, we have a team in mission control responsible for the space station. And so, that's a lot of hours and a lot of shifts, you know, that the team has to do. So, again, we will fly a space station for 20-plus years. We have metrics, just like every good organization. How many shifts are people doing? How many nights? How many weekends? And now we can kind of predict when it's too much, right? So, in the beginning, you know, it was like people would do too much and you'd need to get them to back off. Now, we can predict a little bit. So, we have numbers that we watch, try to make sure people don't get close to those. You know, you will end up working lots of hours if you have a specific tactical, like, “You're responsible for the next crewed launches to the space station? Yeah, that's a lot hours,” right? But try really hard then on the backside to give people a break, let them take vacation. So, just like any job, it has a, it has a cadence to it. And you do as a leader, I think, have to really pay attention to the human aspect of that cadence and the work. If you just pay attention to the technical work, you're going to end up burning your good people out, right? Because they'll just take on more and more and more. And so, one of the first questions I talk to people about whenever it's, “Hey, we have a task,” is, you know, “Just tell me what your world looks like.” In the pandemic, it's been even more important to have that communication because you're not seeing it every day. You're often talking to them a lot on the phone, and you can't see their faces. And even the video is not as, not as good. And so, kind of, doing regular check-ins with how they're doing. The other part of that is really just the load you carry around all the time. It is a struggle to get people to completely unplug. The pandemic has actually made that maybe a little bit worse, but better in some ways. But let's tackle the worst first, is that you can now, kind of, work remotely at least when you're not having to physically be in Mission Control, right? So, one aspect of your job is that one aspect of your job, you know, you run meetings, and you get ready for the next mission. And some of that can be done remotely. And so, everybody is, “Okay, well, I'm gonna go check on my parents I haven't seen in a year and a half, but I can keep working,” versus like, “I actually am going to unplug and put the phone down.” So, I think that's a little bit where our struggle is right now, is the baseline load that you carry around with you all the time and encouraging people and finding ways for them to completely turn it off.

Toni Dechario 26:06
I could do like three hours of this with you, Holly. But I'm gonna move to a different topic. This question is about speaking up. So, what do you think makes people more or less willing to raise a concern?

Holly Ridings 26:20
I think a lot of it stems from leadership. I think that, one, you’ve got to be verbal, vocal about it, like actually say it out loud, “I want to hear your opinion, it's okay, for you to speak up.” You have to give them permission to participate. But I also think, then, you have to show it in action as well. I mean, that's kind of pretty basic advice. But I think that, you know, as you become a leader, your time is really valuable, you can be short with people, you can cut them off. And some of that is sort of time management and teaching them, you know, how to communicate, and skills that they need. But if you overdo it, then you're shutting down conversation and not allowing them to participate in it. I have new flight directors and some of the things they want to talk about maybe don't make my list of top priorities because we've already solved that problem ten times, but they haven't solved that problem ten times. And so, I have to continuously remind myself to, you know, not talk over people, to give them a little more airtime than maybe I think they need because my brain’s already moved onto solving the next problem. And to me, as you move up in leadership, you sort of get more clipped and more short and, you know, more focused, just because your time is so valuable. But then you have to remember, everybody's time is valuable, and they're at a different place in their journey. And part of your responsibility is to develop them and to grow them. So, that's maybe where I'm at in my personal growth, is trying to remember that part and have a little patience and give a little more time and space that then encourages people to speak up. Because if you, if you don't do that, even if you tell them over time, they'll realize, “Well, she says she wants to hear my opinion, but every time I mention something after three words, she says, ‘Oh, no, no, no, I understand already,’” then they won't talk to you anymore, right?

Toni Dechario 28:12
Your flight directors also need to be able to do this, right? I mean, part of their job is to be able to run a team that's putting people in the space, and the people that you're managing need to be able to hear the people that are part of that team. How do you help them do that?

Holly Ridings 28:30
So, it's interesting, because the communication is very different in mission control, you know, on console, so we do spend a lot of time training that communication to be efficient, to be crisp. Again, if someone does cut you off, in the interest of, “We're trying to solve a problem on the space station,” you have to have kind of thick skin in that room, because you really have to stay focused on what's going on. And even if it's just a normal crew day, and they're just trying to get through the timeline, you've got many, many crew members, right? Seven at the moment, trying to get through their day, and everybody's got science and maintenance and experiments. And so you just don't have a lot of time for chitchat. But then there's also a team-building aspect of it. So, the first thing you have to get them to understand is, there's different communication that's acceptable in different situations. And once they understand that, then we tend to initially focus on going to mission control and how to have that focused, calm, command presence that invites communication but also keeps everyone focused. People tend to maybe have a more conversational style off console already. So that's not as much of a ramp up in terms of, in terms of skills, but it can go really, really fast. And so, we practice a lot, right? We do simulations, where we practice a lot, and one of the tenets of our training is communication and you are evaluated on it very specifically and receive a lot of feedback. And you will not get certified to work in Mission Control if your communication is not good. It doesn't matter how technically competent you are. So, it is a vital component.

Toni Dechario 30:08
What can banking organizations learn from NASA's experience and observing decision-making? Based on your experience, what recommendations would you offer to organizations that are seeking to reinforce better decision-making?

Holly Ridings 30:19
I think that NASA is really good at soliciting a wide spectrum of ideas and inputs, but then also good at driving to a decision, right? So, I think organizations can learn to a) open the aperture, but b) not be afraid to, you know, neck it down and focus and go, right, people want to spend too much time evaluating, you know, to have the perfect solution. And sometimes you just need to try something. Needs to be safe, right? Certainly in our case, but sometimes you need to just try something, and be okay if it doesn't work, and try the next thing.

Toni Dechario 30:53
I can't imagine what your time management looks like. You also obviously spend a lot of time thinking deeply about these questions. When do you do that?

Holly Ridings 31:02
Let's start with time management. Time management is certainly an important skill for everyone. I think, as a flight director, or the chief flight director, it might be the most important skill. You're jumping between all the NASA programs, again, so ISS and Artemis and all of the things we do there, and then trying to keep the team running and spend time. So, it's a little bit of a battle on a daily basis, to make sure that you get everything covered. For me, there's a category of things that are associated with the missions we're doing, right? So, real time, we launched a cargo mission yesterday and it'll dock tomorrow morning. So, you've got that as your highest priority. And then, on the opposite end of the spectrum, we kind of have the strategy for the future. So, I kind of use this suitcase model in my head where the tactical highest priority safety things are covered, and I'm making sure those are in good shape. And then I try to spend some bandwidth on the strategy as a leader in the organization. You know, it's a challenge. NASA is really busy. Human spaceflight is really busy. The first ten years or so in my career, we had two vehicles, and we were building the space station and the space shuttle. We're just bringing on the international partners. And now we're, you know, half a dozen or more vehicles, all the providers, so all, of course, the international partners. So, it has gone from just a couple of interfaces to this huge labyrinth. Every morning, I feel like I wake up and the starting gun goes off and it's just, “Go, go go go go go go go,” until I get home and you know, walk through the door and have to do the things at home that I that I need to. You have to learn how to protect yourself, right? So, one of the things I tell the flight directors is that no one will protect you but yourself, no one knows what your limits are. No one knows when you need to recover. No one knows what your recovery strategy is. And you need one and you need to execute it. Because otherwise any job – and especially this one – will just burn you out. I mean, even if your leaders have the best intentions. If you don't have some boundaries and enforce them for yourself personally, you will burn out. There's just so much going on and people are excited about it. So, no one can help you but yourself. You have to be an advocate for yourself. I probably did not learn that until midway through my career and have been through the process of being, you know, burned out a couple of times. And so, I know, I know what it feels like. So, that's one of the things I really try to encourage people and try to teach people. You ask me what I do to think about this? I will tell you I actually talk to people, right? Because I learned the most certainly right now from answering your questions, you know, the ones I haven't thought about. I'm like, “Huh.” And the ones I have thought about, hopefully someone else can find a nugget that helps them think about the challenges they're having. So, I'd say right now, I'm probably finding great people and talking to them and that really helps me. We're about to go back to schools, but I really try hard to talk to folks. I've gotten a little bit into podcasts. I had not really been into it until recently, and a couple folks had asked me to do them, and then trying to figure out the value of a podcast, and how do you communicate in a way that that is valuable and useful to the people that listen to them? So, I do spend a lot of time thinking of it. Usually it's when I'm exercising, actually, that's like my, my free brain time. It just spins in circles and has these thoughts. And then I have a couple of really good friends and associates, who I'll call and I'll say like, “You know, this is bothering me, how do you see it? What do you think?” So, right now I'm just using conversation and relationships more than written documentation.

Toni Dechario 34:40
A lot of at least early astronauts came from the military. And a lot of people at NASA have come from the military, and the military is pretty famous for their culture, you know, and thoughtful about – different branches of the military obviously are different, but – about how they form their culture. How much of the military culture has NASA kind of inherited? And what parts of it kind of work for you? And what parts of it have you had to retool?

Holly Ridings 35:07
I certainly think that we in flight operations and NASA and I think overall, NASA inherited a lot of the discipline, right? Really be disciplined about your approach be thoughtful, you know, what are your goals? What are the resources you have? How long do you have to make a decision? And then, as we talked earlier, sort of the pros and cons, we'd say, the risk trade of that decision. So, I feel like our military roots gave us a lot of cultural and organizational and structural discipline. It also gave us a lot of focus on technical competence, right? You got to get it right. It's got to be, you know, good. It's got to protect people, they've got to be safe, you got to get them home. And so, that military mentality, and I'm not, I've not been in the military, right? So, this is just me observing many of the people, like you said, the astronauts and a lot of our other community came from the military side. They do a lot of debriefs, they do a lot of lessons learned. We are civilian organization, right? Our goal is a positive one for humanity. We have a lot of relationships and partnerships. And so, I do think we diverge from the military in our overarching goal and culture of how we're able to present ourselves in the world. I mean, we have international partners all over the world. And so, depending on what year it has been in the, in the last, you know, 60-70 year history of NASA, we may or may not have been, “You're gonna fly in space together, we're partners, we're friends.” So, I do think geopolitically, you know, we have just an amazingly positive goal that everyone resonates with. And so that is one of the things that I think is a real positive for NASA in the world.

Toni Dechario 36:59
That's a really great point. What happens to individuals and NASA who operate outside of normative expectations? Are they coached or disciplined or managed out? Or maybe this never happens? Because they're vetted so thoroughly before they join?

Holly Ridings 37:11
I would say that the short answer is, all of the above, right? So, there is, like any organization, a process where you can break the rules enough, right? Every organization has rules, and you guys do as well, where if you break the rules enough, you could definitely get managed out, as you put it. We have training every year, ethics, cybersecurity, some of the big things in the world that every employee of every organization needs to know that this is their organization's stance on all of those things, right? So, we do a pretty thorough job of proficient continuous education. And that's not just operations. I mean, that's everyone at NASA, who has to do all of those things. So, there's some baseline education and expectations, that's any NASA employee, any government employee, and then also all of our contractors who work for us. If you're talking about operations expectations, there's the, might have showed up late for shift, as an example, right? So, this kind of a small infraction, but one that we don't tolerate, that shows you're not prepared, that shows you're not taking this job seriously with the responsibility that you have. So, those things are much more in the, in the coached area, right? If you have new people coming in, a lot of times the structure of this job, you show up on time, and you leave, and there's a dress code, that's maybe not something they have experienced before, if they're coming in straight out of college. So, there's a lot of coaching. And then obviously, if there's multiple infractions, there's discipline, up to taking them off console, out of Mission Control, if they're not able to represent NASA in a way that we believe is required. So, that's kind of the spectrum. For flight directors, there is a lot of vetting beforehand, and so, luckily, I probably have the best supervisory job in the world, because I have this elite team of high performers. And so, we don't run into much of that. We've got quite a bit of knowledge about them before they move into this position, because they do have to be the representatives, right? I mean, everyone's looking at them. And if you don't have it together, well, then obviously it's maybe not as important to have it together. And then the whole thing kind of breaks down.

Toni Dechario 39:28
Yeah, it does. Holly, it's such an inspiration to speak with you. Thanks so much for doing this. I really appreciate it.

Holly Ridings 39:35
Yeah, you guys too. Maybe we'll get to travel again. We can meet in person. We've done this twice now.

Toni Dechario 39:39
Thank you, Holly. If you want to hear more from Holly, watch the New York Fed’s webinar on “Trust and Decision-making,” which you'll find at newyorkfed.org/governance-and-culture-reform.

Episode 05
Applying Neuroscience to the Workplace
Elizabeth "Zab" Johnson
Elizabeth “Zab” Johnson is a neuroscientist and the Executive Director of the Wharton Neuroscience Initiative at the University of Pennsylvania, where she harnesses insights from brain science to help understand and improve business outcomes. In this episode, Zab helps us to better understand the neuroscience behind the behaviors and decisions that we see, and shares how practices like perspective-taking can help build stronger cultures.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. Today I'm speaking with Elizabeth “Zab” Johnson. Zab’s a neuroscientist and the Executive Director of the Wharton neuroscience initiative at the University of Pennsylvania, where she harnesses insights from brain science to help understand and improve business outcomes. Zab was a panelist in our webinar on “Trust and Decision-making.” In this episode, Zab helps us to better understand the neuroscience behind the behaviors and decisions that we see and shares how practices like perspective taking can help build stronger cultures. So welcome, Zab, we're excited to get to speak with you again.

Zab Johnson 01:55
Thanks, Toni, it's really great to be here.

Toni Dechario 01:57
So, what brought you to the Neuroscience Initiative? What interested you in thinking about the intersection between neuroscience and business outcomes.

Zab Johnson 02:08
I've spent a lot of my years as a neuroscientist, actually thinking from the 20,000 foot view, to think about how applications from neuroscience can be moved more into the world, to real world, to address challenges that are cropping up in individual lives and in our organizations and in our societies at large. For many years, I led the Duke Institute for Brain Sciences, together with my colleague, Michael Platt. And when he moved to the University of Pennsylvania, there was this incredible opportunity to sort of shift our direction and really make an impact within the business community. This had been something that I think was a really interesting new dynamic, to take neuroscience into the real world now, not just within the sphere of academia, but also to interact with those who are out there in the world, really, at the frontlines of trying to figure out challenges, to our work and to our thinking,

Toni Dechario 03:12
Before we get into discussing decision-making and the linkages between our brains and decision-making, I wanted to ask you quickly about something that you introduced me to, which is neuro-economics, kind of bringing together learnings from neuroscience and economics, which are very different disciplines and very different ways of thinking about the world. And if you could just give us kind of a quick introduction to what that is and why it exists.

Zab Johnson 03:43
The first papers in academic work came out in there probably late-1990’s and early-2000’s, so it depends on your perspective of time, on recency, but neuro-economics was really this sort of burgeoning new interdisciplinary approach to combine some of the more theoretical and behavioral approaches that were in economics, in the world of neuroscience, and to think about the mechanisms by which we do things like calculate value, and think about how decisions are made under risk and uncertainty, but also the brain mechanisms that are at play, in order to determine better outcomes. So not just taking behavioral approaches, theoretical approaches, but actually sort of looking underneath the hood itself at the data that the brain produces, in order to get better predictions of how those things are calculated.

Toni Dechario 04:41
What are some things that we've learned about decision-making as a result of fusing neuroscience and economics into this neuro-economic approach?

Zab Johnson 04:50
I think one of the things that's been really critical is the idea that we don't always have access to the information that's part of our neural processing. And so things that people will report, self-report, or even do, aren't necessarily directly correlated with what the underlying brain activity is. I think this is really apparent actually in the sphere of decision-making, often because we rationalize our decisions. And sometimes, as we know, from heuristics and other kinds of behavioral psychologists’ findings, we are, in fact, irrational much of the time. We rationalize our decision-making process as if it has rules governing it, but the reality is that underneath we are complexly organizing our emotions, our emotional responses, our internal motivations and incentives, as well as a weighting of accumulated evidence, as we approach different things. And the brain's mechanism for making decisions is at play constantly. We think of decisions, you know, order of things that are really, really important, like making investment decisions, what to do with our financial resources, when to buy a house, those mammoth kinds of things. But we also are making decisions all the time, at the subconscious level. These are things that help us navigate through the world, almost without thinking, this more automatic kind of processing of information that we used in the moment and then disregard so that we don't become exaggerated. And I think some of the most important work that has come out in the decision sciences, from the neuroscience perspective, is sort of a glimmer into all of that that goes underneath. It has impacted theoretical models for how we can better understand more complex and real-world decision-making in contexts where the stakes are very high, to these very low-level decisions about which snack food we might grab in the line at the grocery store. And I think it's a really exciting place to understand the rich complexity of the neural underpinnings across all of those kinds of decisions.

Toni Dechario 07:07
So that kind of gets us to the heart of the question that we really want to answer as part of this series, which is, why do otherwise ethical moral people make unethical decisions? Is there something that neuroscience can tell us about why that happens?

Zab Johnson 07:27
I mean, I think what's really interesting here is that we live and work in highly complex social environments, and our work environments and our societies are getting more and more complex, and more, you know, global and larger as communities. And so many of our most important decisions are actually made in the context of our interactions with others. And I think we have thought about moral reasoning and ethical behavior at the level of the individual for a long time. “What are the drivers and the motivations and the incentives of an individual?” And I think one of the challenges is that because we live in these highly dynamic, rich social worlds, we also know that an individual-based perspective is probably not going to give us all of the answers. We really do need to start to think about more complex social interactions and the social aspects that are at play in these environments. And we know that rather than a property of the individual, sometimes, in these kinds of behaviors, it's actually the decision not of an individual, but the decision of a larger group and the dynamics of the group at play. To further answer your question about this idea of why otherwise good people would do bad things, we also know that there are specific brain areas that are at play in things like moral decision-making and moral reasoning. And these are areas that are also implicated in our social cognition. So, you can sort of see why these things are intertwined. These are areas of the brain that are things like the temporal poles, the medial temporal junction, which is an area that we know is really important and valuable area that is calculating our theory of mind our sort of our calculations of the motivations and effects of others, in other individuals, and ability to take perspectives of others. And also, the medial prefrontal cortex and work that was done actually, at the University of Pennsylvania by my colleagues a number of years ago, actually measured brain areas during moral reasoning. They actually had MBA students, 700 MBA students, take a moral reasoning questionnaire, and then they could separate them into different cohorts. And in a subsample of that 700, about 62 individuals, they measured their brain activity. And what they found was that there were differences in reward-related areas, especially around the dorsal medial prefrontal cortex, for individuals who are higher in moral reasoning, and then others who are lower in that. The really interesting thing about that particular study is that it's sort of a chicken-and-egg debate, right? Is this innate? Are these differences in the brain structures and the strengths of those networks, something that's malleable and can change over time? How much of it is driven, you know, genetically predisposition only? And probably, it's an interplay between both of those things, a little bit of nature and a little bit of nurture.

Toni Dechario 10:39
Well, this is interesting, because there's this kind of play between the individual and the collective in driving decision-making. What do you think the balance is between those two?

Zab Johnson 10:50
I think that you have to align the motivations and the incentives of the individual along with sort of an emphasis right of the community, and cultural environment as well. We know that people that have high moral reasoning, are more pro social, right? They do more community service, they're more likely to do charitable giving. So, they're thinking about their impact on others. I think that there's this other balance that we need to think about from both the scientific perspective, the business perspective, and how these things can come together, to really strategize about new solutions that emphasize both sorts of individual decision-making, but this sort of rich social aspect of our work and our society.

Toni Dechario 11:38
Let's start with the individuals. If there are individuals who have high moral reasoning and individuals who don't, how do you find the individuals that do? How do you know whether somebody has high moral reasoning?

Zab Johnson 11:49
Well, in the lab, you can give people questionnaires. Should we give those to people as we onboard them in human resources? You know, maybe, right? That's it, gives an indication. I mean, we were going to push things even further, right? If we do believe that predictions about structural brain differences amongst individuals, what might imagine a time in the future where we would actually measure the biometrics and neuro-metric signals directly from the brain. Now, that gets us into another kind of ethical dilemma, sort of the Minority Report idea. Right? But I think, as a toolset, we are at a really pivotal moment, where we are using more data analytics to make different kinds of decisions on who we hire, who we assigned to different kinds of teams and different kinds of work. And I think that there's always going to be this interplay between the sort of ethics and responsibilities of the leadership in our societies, to keep questioning how we're applying different methodologies to doing that. I do think that there needs to be a push towards modernizing some of the things that we've used routinely, in our human resource management, things around personality measures and skill sets. Because the future of work is radically changing. And what we're asking people to do is really different than it was, you know, even a decade ago, but definitely more than 50 years ago, and the kinds of diverse teams that we want to put together to strengthen organizations and to create better group decisions. It, you know, needs to catch up with that as well. It would be great if we knew, devise better methods to both sort of take individual differences, but also to say, “These people together would just be a fantastic team, where they will do innovative, creative problem-solving, and come up with brand new strategies that could really impact the future of a business, an organization, and our inner lives.” That's the key, that's the dream. But one of the things that's still missing, I would say, as a scientist, is the applicability out of a well-controlled laboratory into the wild into the real world. There's still a disconnect, there's still a long way to go. So, in the context of what we talked about earlier around neuro-economics and decisions, we can simulate value-based decision-making, using very typical economic games, things like the ultimatum game, or the Dictator Game, are classics, in economic theory. We can see how people in the lab that respond under those circumstances, make their decisions, and what the underlying underpinning neural activity is. But that is a far cry from understanding what happens in a high stakes environment which you can't ethically simulate in the lab. You can't make people lose their entire retirement portfolio and know the kinds of differences that might happen as they age and make different kinds of investment decisions. You can't really put a team together and say you know that this might lead the business to go under in any way except a theoretical way in the lab,

Toni Dechario 15:15
There are many avenues I want to pursue with you, based on that answer. Maybe I'll start with the most recent, which is, what are the biometrics that are kind of indicators of good decision-making?

Zab Johnson 15:28
Of course, you always have to define “good,” right? So that's something again, that in the lab, you can divide the task where there's an optimal decision, that's not necessarily guided by personal preferences. We can do at the individual level, we can use techniques actually, like eye tracking. This is a technique that I use, often to look at where people gaze at a screen-based decision. A lot of work on this kind of decision-making, unfortunately, done with snack foods, something that's very low stakes, where you ask individuals to choose between two different kinds of snacks, and those kinds of gaze patterns are actually predictive of ultimate choice behavior outcomes. It can be modeled really nicely as an accumulated drift diffusion model that shows the sort of interplay of the different variables and weightings of the gaze trajectories. How long you look at something gives an indication of how sure or confident people are in their decision, their starting point, whether they even gaze at all at the other alternative, or only briefly gives an idea of biases and preferences. Those are some of the biometrics that one can use in this that are really simple and non-invasive. Don't require, you know, millions of dollars of equipment, are things that consumer insights in business are already using. Mostly in the marketing and advertising context, but more and more actually, in financial institutions, because there's sort of a rich data set already, that's being gathered about how long people spend on a website, how often they might click on something. There are other aspects of mousing or using your trackpad or your cursor, that mimic the kind of things that you do with your eyes, use of eyes and your hand movements are known to be linked together for obvious reasons. We often look where we want to pick something up or choose something, and so those mechanisms are linked together.

Toni Dechario 17:32
I want to go back to moral reasoning. We were talking about how and whether you can hire for moral reasoning. Is there a way to teach or grow someone's moral reasoning? Is that possible?

Zab Johnson 17:46
Yes, I think that it is. I mean, again, we don't have all the answers of how much is you predetermined and how much is experiential learning. But there's indications especially around social cognition, that suggests that there is plasticity, there are changes that can happen with practice, and with pretty simple applications that include things like perspective-taking exercises, and other aspects that we know build more awareness of the others around us and their own motivations and goals. Perspective-taking practices can include things like listening to others, and then thinking about how they might see the same challenge in front of them from their own sort of set of experience. Of course, this is always biased, right? We always make assumptions about others. So, this is one of those areas where perspective-taking exercises can really grow that capacity. There needs to be a back-and-forth dialogue, usually, in this situation where people can correct you when you've made an assumption about the way that they see the world. This is work that we did actually with a Swedish bank called SCB. We partnered with their organization and their risk team to look at how teams that were involved in a professional perspective-taking workshop – instead of training that they would do over the course of several months – would actually impact their abilities to make better, more optimal decisions moving forward, and even work together more effectively in light of the pandemic. So, we know that there's some flexibility and perspective taking that can be exercised. You can't take someone who lacks any perspective-taking skills. There are some people who are sort of born without that ability. It just seems to be miswired. Clinically. We can't take those people and turn them from a one into a ten. You can sort of think of it as the dial, and there's some wiggle to the dial. Most people are somewhere in the middle and then life might alter some of that. We might be able to shift that knob to a seven, you know, up from a five to a seven, if you practice if you really take a concrete effort to do so, that's at the level of groups. And that's one of the things that I wanted to emphasize, is that a lot of organizations are really emphasizing how we might help revise and help knowledge-sharing at the individual level for a lot of these things. This is also the same for things like implicit bias training, right? And things like anti-racist theory. There's a lot of evidence that individual fluctuations are pretty noisy. And what you really need to do is emphasize the collective, really emphasize the organization at large, to really shift those kinds of things. So, one of the things that we know is impacting that, is work that Adam Galinsky and Emily Falk – Emily Falk is here at the Annenberg School at the University of Pennsylvania and one of my good friends and colleagues – their work actually suggests that the higher up you are on a socio-economic ladder, your own perceptions of your position in the world, the more tamped down your perspective-taking is without practice. So, those are who are in leadership positions are actually at the highest risk for deficits in their own social cognition, interestingly, so we sort of reward them by elevating them to high status. But organizationally, I think we have disregarded the fact that we actually may need to do more work to make sure that our leaders continue to have very effective perspective-taking abilities, and that they are probably in the most need of continuing to work at that skill set than the workers who are in the trenches doing most of the groundwork. So that's a really, really important aspect of perspective-taking.

Toni Dechario 22:00
That's fascinating, especially for us, because the population that we are dealing with are bankers, who tend to be higher up the socio-economic ladder than society at large. And so, is there something to take away from that? Is there maybe something unique about banking and financial services that might lend itself to perhaps lower levels of moral reasoning, as a result of this perspective taking issue?

Zab Johnson 22:28
I think, on the whole, yes, probably. I mean, it's not going to be unique just to financial services and banking. Any organization has a natural hierarchy, and our society does as well. Sort of biologically, it makes sense that the lower you are on the totem, the more you actually need to integrate the motivations of others around you in order to optimize your survival. And the higher up you are in that social ladder, the less important all the others are around you. So, there's a deep biological root to this. But the great news right is that we can do a lot to practice this. And I think if we can move our bankers and financial services personnel to think of this not as sort of a wishy, soft skill, but something that's really critical for organizational culture, for leadership, development, and balance, and to minimize some of the risks that's inherent in this business challenge, I think that will go a long way, I think, of really helping. And like I said, it doesn't require any biometrics, doesn't require any expensive equipment, or even having a neuroscientist, you know, on consult. These are well documented strategies that are behavioral-only that teams and groups can start to implement right off the bat. But the reality is that these are things that need to be reinforced and practiced, over and over again, you know, throughout our professional development. This is not a “one and done.” This is not a “tick the box, and past that, and we're moving on.” This is something organizationally that we actually need to build into our teamwork and into our cultures and keep it maintained throughout our professional lives.

Toni Dechario 24:22
It's fascinating, because I wonder whether, you know, a higher socioeconomic status, it seems to me is largely about money. And banking is the business of money. I wonder whether there is a connection between being in the business of money and the ability to take on others’ perspective. I wonder if there's a link there.

Zab Johnson 24:48
I wonder as well. I mean, it's a great question. You know, I think if we can do more real-world experiments and can think about individuals and their predispositions even for different industries, I think we can begin to sort some of that out. Banking is not – and actually, you know, economics – are not the only aspect of power and hierarchy. They are linked, of course. As societies we reward those monetarily, usually, who are higher in power. But there are examples where that's not the case. And I think that it'll be interesting to see, we know from the neuroscience perspective, that the areas that encode things around value are not just about money, that these areas also encode other things that we prioritize. So, this can be, you know, the perception of your own family and its value to you. This can be other aspects of what you find rewarding and motivating. We, again, haven't thought a lot about individual differences in those kinds of motivations and goals at the individual level, as well as in the collective. But we also know that sometimes throwing more money at someone is not actually going to be the right motivator. I think we're right in the midst of watching that, for example, in the certain industries, and during the pandemic, that we are going to become more sensitive and perhaps a little bit more creative about thinking about how people's motivations and values might be on something other than money. You know, it might be time. It might be the flexibility of your work environment. It might be the team that you work amongst, that could have as much or more significant impacts in making that a rewarding and stimulating kind of environment than just making a higher salary. Again, I think this is something that in the financial services, there hasn't been that much creativity, thinking about the individual differences between values and motivations.

Toni Dechario 26:55
Before we move on from this topic, I wonder if you could walk me through – if I wanted to run a perspective-taking exercise – what that would look like? How would I go about doing that?

Zab Johnson 27:08
We have one online at Wharton, there's a Wharton nano tool that's freely available. But roughly, it's to think of, for example, a professional one would be to think of a challenge that you are facing, either in your work environment, or even in your personal life. To reflect on that for a little bit. And think about your strategies around that. And then think about the strategies and perspectives of the other person. So, in this, it's some sort of modest perspective-taking. So, I wouldn't like, fill the room with people, like in a team, a more complex team. But think about how they might be thinking about the same challenge. You can do that with past challenges that you might have had, or figuring out who is going to pick up your kid from childcare, or how you might have asked someone to help with a more recent challenge in your work, think about the ways that that went or didn't go as planned, and then think about the way that it might have impacted the person that you are thinking about. So that's one really easy way to do it. I do this exercise in a different context, I do this kind of exercise with small teams. In an art museum, I really like the idea that how we see is also very personal. And it's based on our own learning and experience, although we sort of go navigate through the world and think that others see the way that we do, we know that's not the case. So, actually, if you get a small team of three to five individuals around an artwork, and you choose an artwork that, you know, it doesn't have all the answers right in front of you – most of them don't – what you find is through an active discussion amongst team members. You first write down the first five things that they saw, and then share them one by one by one with each other. There are these sort of “Aha!” moments where people are like, “Oh, I didn't see it like that.” And that is a really excellent perspective-taking exercise and application that's really neutral. You know, sometimes I have pushback from executives and business professionals because they think it seems really different from their work. But at the end of the exercise, when we go over the motivations and the goals, they realize that that actually has really enhanced their ability to work together with their team, to take a risk and feel more psychologically secure, that they can say something but others may have a different perspective and perception of, and come up with better strategies going forward. We are poised to try and do some data collection of that exercise and move it from sort of anecdotal evidence, hopefully find some of those sorts of systemic changes that are might be happening in our bodies and our brains that can corroborate why. I have found that that's a particularly strong exercise.

Toni Dechario 29:55
Let's take the SCB example. Several months on, after conducting this perspective-taking exercise, was there a difference noted in how decisions were made? Who was contributing to those decisions? Whose perspectives were being considered in those decisions?

Zab Johnson 30:11
There was more effective teamwork, especially in the context where teams were thrown into remote work. They inherently reported more trust and psychological safety with one another. So, some of the early evidence, there has been some transformation. In our laboratory experiments, the different groups didn't actually reach the optimal decision. So, it shows, that we know we can’t – it was a small sample, we don't actually know whether that was due to language-, context-related differences between Swedish culture and tasks that we had devised. So, we would have to do, we'd have to do more work. But one of the things that was really interesting was that groups were more likely to have a balance of a turn-taking in their discussions. So even though they may not have reached the optimal laboratory-controlled decision, ultimately, the indication was that they were actually listening to other people and that more voices could be radically different from a team that had never gone through this kind of experience. So, I think there's room more to study for sure, and in different contexts, but there's also some indications that teams are actually doing better work together by integrating more diverse perspectives.

Toni Dechario 31:32
Do you have any other thoughts on important elements to either encourage speaking up, or encourage listening on the part of the decision makers?

Zab Johnson 31:46
We know that strong cultures tend to actually retain workers who share a similar viewpoint, and that that sometimes is not a very great environment. So, it's that interplay, I think, between optimizing culture, in the sense where you do that to really strengthen teamwork, and this idea that multiple perspectives enhances your ability to problem solve and innovate and create new strategies, you actually have to diversify. But I think right now is sort of a counterpoint to this strong culture, right? This drive for strong culture. Because, again, we don't want to overweight the groupthink idea, the single viewpoint aspect. I think that the more that we can diversify everything from our leaders down, the stronger that will be, right? Again, it's building in the idea that what the culture of an organization values is the diversity of perspective. But there's so much work to do, right? You, you have to make individuals and teams feel more secure in that environment. And this gets to this idea of balance, of sensitivity to reward and punishment. That's a whole other dialogue of neuroscience. And to realize that when you have your voice heard, that will be information that's not used against you, personally and professionally, is one that I think is inherently a challenge in this particular kind of context. So, building more diverse teams is the first great step. And then, you know, perhaps integrating into our workplace, this idea of real perspective, taking professional development opportunities for our groups, not just our individuals, but our groups, again, reinforcing that that might be really important at the level of our leaders, and those at the tops of our organizations that have to actually be prioritized. I think we have a long way to understand the difference between how we code an organization and build one that we feel has our backs as employees, while also realizing that nothing can be permanent. And that, we as individuals, but also as an organization, have to know what we can't guarantee. Like the tenure system and academia is relatively a relic of the past as well. So, I think these things are really going to be some of the grandest challenges of business organization moving forward.

Toni Dechario 34:24
You've already given a few recommendations. I think, perspective-taking is clearly a recommendation. Do you have any other recommendations for organizations that are looking to reinforce more ethical decision-making?

Zab Johnson 34:39
There are lots and lots of ways that we can reinforce that. I mean, I think as organizations we have to constantly think about how we're addressing motivations and incentives, for example. So, a little bit of what we talked about before, sort of knowing that there are individual differences. There are strong drivers to that, that individuals can change their attitudes towards social norms relatively quickly. And I think, you know, in the financial services industry, on the whole, we know that the most egregious aspects were where there have been ethical and moral challenges, has been this misalignment of incentives. What the organization is actually asking their employees to do, without regard, actually, to the methods by which they get there at the end product. And so, that reinforcement of considering the humans and the brains, that are behind your business, is a really integral aspect to the work that any organization is doing. We're powered by our brains. We're not always rational. We are influenced by others. And I think we can go a long way to actually share knowledge with one another and begin to come up with new and transformative applications that prevent those kinds of things, just through open dialogue and knowledge sharing. I don't have any great examples of how to build your team to be highly moral. That's, again, a really big thing. But you can devise ways to make your teams more effective. Again, like decision, group decisions, there are ways that you can optimize feedback. Even in person, once we can return to in person meetings, I think there's a lot of body signaling. If you can emphasize that people need to put their phones away during meetings and be fully present and attentive to the others in the room. It just comes from leadership, that goes a long way to enhancing our abilities to take into account how others are feeling and thinking and what their motivations are. It also emphasizes that everyone in the room is sort of important. So those are, you know, there's really simple ways of starting to rebuild some of this. And then to question, are the brains behind our business capable of reaching this goal, or are we asking them to bend something, because it's not possible if they don't?

Toni Dechario 37:20
There's nothing that sends more of a message of, “I don't care what you have to say,” than someone looking at their phone while you're talking.

Zab Johnson 37:27
I think we're gonna have a really big challenge moving forward, because we are all out of practice.

Toni Dechario 37:33
There are people who have meetings with me, and I know they're working. They're typing an email while they're talking to me, and it's like, “I can see you, I can still see you.” It's kind of the same thing, right?

Zab Johnson 37:44
It is the same thing, I think. And we also jump to conclusions, right? So, using a lot of different kinds of visual or non-visual cues. You know, when you hear the keys clicking, you believe that they're doing something just like if they're looking at their phone underneath the table. That's a such an obvious cue. I don't know why people hide the phone underneath the table. Except it's sort of an inherent admission that you're doing something surreptitious. They are not really paying attention. So yeah, no, I think that's right. You can get really paranoid when those kinds of cues are either correct or incorrect. Your assumptions about others does matter in how you feel within your own environment. And I think those are those really easy things to fix that, again, don't require a lot of resources, but do require some willpower.

Toni Dechario 38:40
Last question from me, what resources on these topics would you recommend for people that want to know more?

Zab Johnson 38:49
I would be remiss if I didn't mention my colleagues' book, The Leader’s Brain, which is published by Wharton press that came out in the last year. It's an easy quick read. It sort of has a lot of Wharton neurosciences, thoughts, and ideas behind it, sort of encapsulated in a quick – it's actually designed to read in one sitting. It's not something that is a coffee table book or something, but isn’t a painful, long investment. It doesn't assume any neuroscience background, either. And, of course, keeping in touch with us The Wharton Neuroscience Initiative. We are an open and inclusive community. We actually want people from the public and outside of academia to contribute to our knowledge and to our questions. And so, we actually have events that are free and open to the public. We have social media channels that people can follow and a general mailing list that people can find on our website. That's neuro.wharton.upenn.edu. So that's a really easy way of staying abreast and in touch with the work that is relevant and important in this area.

Toni Dechario 40:03
If you want to hear more from Zab watch the New York Fed’s webinar on “Trust and Decision-making," which you'll find at newyorkfed.org/governance-and-culture-reform.

Episode 06
Understanding Behaviors in Context
David Grosse
David Grosse is responsible for conduct risk, culture and behavior at HSBC Global Banking and Markets. A long-time banker, he became convinced that understanding human behavior was central to understanding what was happening at a bank, and went back to school to earn an MSc in Behavioral Science. In this episode, David tells us about his own experiences with context and group behaviors – including at rugby and soccer matches.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. Today's conversation is with David Grosse. David's responsible for conduct risk culture and behavior at HSBC global banking and markets. A longtime banker, David became convinced that understanding human behavior was the only way to really understand what was happening at a bank. So much so, in fact, that after a 20-year career in operations, audit, and operational risk, David went back to school to earn an MSc in behavioral science. In this episode David will tell us about his own experiences with context and group behaviors, including at rugby and soccer matches. Welcome, David.

David Grosse 01:55
Thank you very much, Toni.

Toni Dechario 01:57
So, David, I want to start off by asking you how you landed in the spot where you did? You've had an interesting journey to get there. What motivated you to work on culture?

David Grosse 02:07
I've been working in banking for quite a long time now, over 25 years. I'd say that my background was kind of the more traditional route, in risk and control, coming through internal audit roles, head of operational risk roles, traditional roles. And I think I got a sense as time went on, that maybe I was missing something, maybe there was a sort of sense of frustration there. Or maybe I shouldn't say frustration, maybe I should say curiosity. It felt to me that we were expending a lot of energy in traditional areas, but not necessarily getting the outcomes we're expecting. I think, particularly, I look at my life in operational risk, I got into operational risk at the time – it was the thing to get into around the turn of the millennium, with things like Basel II – and trying to make it much more of a sort of scientific discipline, if you like. And I thought it was very interesting that ever since then, through the millennia, it's been bizarre that a lot of the issues we've had in banking have been in exactly that area. We don't seem to have tackled the root causes at all around such as comebacks. We've had hundreds of millions, in fact, hundreds of billions worth of costs and fines in the space. At the very time, we thought we were focusing through operational risk on the areas which would help reduce the risk. It doesn't seem to reduce the risk. It almost seems to have increased risk. So, I was frustrated, but curious, and really wanted to try and understand why. I've increasingly got into looking at the drivers of human behavior. Because we work in banks, banks are full of tens of thousands, or, in the case of my institution, hundreds of thousands of people. And that's what really drives what's going on. This is what we are. And so, without understanding human behavior, to me, it felt like we were never going to really properly tackle risk within banks.

Toni Dechario 04:07
So how did you convince HSBC that this was something that they should let you do?

David Grosse 04:11
It really was just introducing it through the work we were already doing. So, we were already doing a lot of work around the broader conduct agenda, about trying to improve what we're doing around the conduct agenda. And in doing that, we took it apart and said, “Well, if we don't tackle – not just the hardware, not just the middleware, the areas where things might go wrong conflicts of interest, etc., but actually – the underlying human behavioral point, we were never going to crack this.” And like many banks, we had a fair bit of scrutiny from some very important regulators, so we needed to focus on it. And so, there was definitely an appetite to look at this in a more scientific and behaviorally scientific sort of approach. I think a key part of it is not making what we do and how we think about behavior and behavioral science, just about the bad stuff, if I can put it that way, just about looking at the downside of cultures that aren't working. There are many, many areas of applicability in how we look at our own staff, how we look at our behavior with our customers. Indeed, if you look at things like trader behavior, asset manager behavior, there are lots of very interesting areas of exploration, which are good for the P&L, but equally good for the internal culture of the organization. So, I think focusing on the broader benefits you can get from behavioral science is absolutely key, and not just pocketing it into one specific area of looking at the downside of people's behavior when they misbehave.

Toni Dechario 05:52
I am going to focus for a minute though, on the bad stuff. One of the central questions we're trying to explore through this series is, “Why do otherwise ethical people do unethical things?” And I wonder if you have some perspective on that, after a few years being out this.

David Grosse 06:11
That is such a great question, many books have been written on the topic. I think I'd start with looking at the what's called, “the better-than-average effect.” And so far, as you know, many people are aware that people think they're a better driver than average. Everybody thinks they're a better driver than average. I'm not great at statistics, but that seems unlikely. When it comes to your own concept, your own ethicality, it's even more extreme. People think they're better than the average around conduct and ethics, etc. And then there was an interesting piece of research in the UK, which actually looked at prison populations, and asked them questions about their view of their relative efficacy versus the wider society. And again, it came out that they believed they were more ethical than the wider society. And in their heads, they had all sorts of situational reasons, which led them to do the unfortunate things. I actually did a little bit of research when I was doing my master's in behavioral science, looking at the better-than-average effect. And I'd set out all sorts of different ethical scenarios, which I was getting people to rank themselves as to how they thought they'd behave in certain situations, on a sort of scale of, you know, they would always exploit the situation or they'd never exploit it. And I deliberately, as I, after I did that, also asked the question at the end about, “How do you think all the other people in the survey would have responded when compared to you?” The reason I did that, is because if you ever want to do any research, and you want to cast-iron way of getting a result, is look at the better-than-average effect. Off the back of that, I think it was something like they felt that 58% of people would exploit situations more than them. That about 36% would exploit the situation is about the same, you know, there's about the same as me. And only 6% would exploit the situations less. So, you can very much see how people position themselves as being at the better end of things, ethically. Now, if you think about that, that means that people basically think that a lot of what they do is ethical. It is, in effect, you are kind of blind to some of your own behaviors, because you have rationalized them internally. So, that is a really important thing to consider as to why people do unethical things, and then you can actually come up with other examples. I'd use an example where, when I used to commute into London, before the COVID days, I would drive into a car park, and I'd have to tap into my phone the fact I've got that car park to pay the carpark fee. And then I drove up into London, I'd go to work. And then as I was coming back out again, on the train, I suddenly have this thought of “Oh, no, I don't think I paid, you know, my car parking fee.” I'd get back to my car in the carpark and celebrate because I didn't have a penalty notice on my car. I climb into my car, I drive home and that would be it. Is that in any way ethical, because I haven't paid the car parking fee? When I gave that example, people also very kindly gave me all the reasons why it was perfectly acceptable for me to do what I've done, which is very kind of them. But what it shows us that in your daily life, you can have all these situations where you rationalize things which ultimately perhaps aren't ethical, because you understand the context of it yourself. And so, you know, beyond that, I think there are lots of other things that tip people towards perhaps potentially behaving in less ethical ways. There'll be things that, you know, around being tired and emotional. There’d be the sense that things aren't fair. The slippery slope is often quoted where a very small transgression, you know, gradually builds and builds, and you can't back your way out of it. And things like loyalty to others is really important. Because ultimately, many decisions, you're in a conflict situation, “What's best for me? What's best for my team? What's best for my family? What's best for the bank? What's best for wide society?” Sometimes those things can be in conflict with each other. And then how do you balance those things? That kind of loyalty thing often comes into play. And maybe one other thing I'd say that sometimes allows people to rationalize the behavior is, they go, “Well, everyone else is, so I'm going to as well. If I don't do that, then, you know, I'm the outlier.” So, probably one of the key things is the context and situation in which they make decisions is really, really key. And it's not just about their own personality, in isolation.

Toni Dechario 10:54
I think that the concept of ethical blind spots, of maybe not recognizing the lack of ethicality in a decision that you've made, is a really central one. Do you have thoughts about how to help people recognize situations, decisions as ethical ones, how to help people kind of frame a decision as an ethical decision?

David Grosse 11:18
So, the question being, how do you help people recognize potential ethical blind spots in their own behavior, or their own situations, and I think that is actually a really key point. When we're looking at conduct and culture in the financial services industry, for the reason being there are very many situations, scenarios, gray areas, conflicts in financial services, over and above that of other professions. I think that's why we have many issues in banking, is because we've got a plethora of opportunity and a plethora of gray areas. Getting people to understand the behavioral drivers and the situations, scenarios where they may be treading into dangerous areas is really the key of tackling these things. I think a very important thing to do is look at things like conflicts of interest, and really have a detailed way of understanding in a particular role, in a particular product, in a particular location, where you might be exposed to those conflicts of interest, and really try and think about it as broadly as you can, because it's from those situations, it's from where you are conflicted, that you will start to nudge the interests of one party over and above the interests of another party. And obviously, there's some more basic ways that you can do it, when faced with a decision, is to do what people often say, sort of look at how you think you'd explain that to somebody outside of the bank? How would you explain that to a journalist to ask you that question? How would you explain that to a regulator and ask that question? And probably more importantly, how would you explain that to your family, to your friends, to your parents. But it is absolutely key, I think, to conduct and culture within financial services in understanding the full population of the gray areas that you might be faced on, on a day-to-day basis.

Toni Dechario 13:14
It's such an interesting area. We had a conversation with an academic at Carnegie Mellon, a woman named Taya Cohen and she studies guilt proneness, and the linkages between someone's guilt proneness, using similar questions and scenarios to what you described. So, it raised that guilt was an interesting conversation to have, and you've touched on some of the same topics that she did.

David Grosse 13:38
Toni, you I mean, you raised the question there a bit of guilt proneness. And how do you, in essence, get people to feel that, because that then helps moderate their behavior thereafter? And that's actually something I did look at, in my work around my master's in behavioral science, and I was particularly looking at a potential use of oaths in financial services. So, very similar to what's used in the medical setting with Hippocratic oaths. Can you use oaths in a banking setting, to see whether that can impact behavior? People may be aware that that's actually used in the Netherlands as a mandatory thing. It's used in Australia as an optional oath for bankers. And I was sort of doing a bit of research to try and understand does it actually make a make a difference, and that kind of plays into this guilt proneness thing, and, really, what you're looking at there, is something called cognitive dissonance. To see if you can get people to think about the sort of person they are, and if people have two thoughts about the sort of person they are, and the activities they undertake, and they're in dissonance with each other, or clash with each other, that makes them feel really uncomfortable. And they want to bring those two things in alignment with each other. So, they may, well, adjust their behavior. If it doesn't come in line with the sort of person they think they are, and potentially doing things like an oath can set that up. It would have to be done in quite a thoughtful way. But if you set something up where you give people a lot of sense of personal choice over about what they're committing to, or how they're promising something, so they feel like they themselves invested in it, if you then wrap around that quite a lot of ceremony about how you are publicly explaining to peers and to other people in your institution, and potentially to the wider society and family, the sort of person you are. So, if you kind of make it a personal thing, a thing with choice, a thing that resonates to somebody, then actually, there is evidence that that has impact on subsequent decision-making. Because, obviously, it will then set up that guilt proneness, it will make you feel awkward, it will actually give you some sort of physical side signs that you're feeling, that you're in discomfort, and then you might dial back on the sorts of decisions or unethical decisions that you might otherwise make.

Toni Dechario 16:01
The question of an oath brings me to another question, which is, if there were an oath to be instituted, it would likely be some sort of industry wide initiative, right? It's, it would be unlikely that it would be one firm that would have bankers take an oath. And in some ways, that culture issue is something of a collective action problem, because bankers move around, people move from institution to institution. Sometimes whole teams move. And so, what is one organization's either problem or success can quickly become another organization's problem or success. Do you have thoughts on a sector wide approach that could be deployed beyond an oath?

David Grosse 16:45
The first thing I'd say is, I think of all the things that we can look at around banking, banking culture, risk-taking. So, I think this is an area which absolutely requires collective action, which absolutely requires institutions to share openly with each other. Because as I say, all boats float in a rising tide. So, I think that what I wholeheartedly encourage people to do is to reach out to all the other institutions that you see out there that have behavioral science capabilities, that have thoughtful cultural capabilities, and discuss with them what you're doing. I don't think there's any sort of secret sauce in this where people should be holding on to their own cards as if it's some sort of magic, sort of P&L advantage over other institutions. So, I would definitely encourage people to speak to what I call the Coalition of the Willing of banks and bankers who are already engaged on this journey. I'm not going to name them in this podcast for fear of embarrassing them all, but I think they're relatively well known. So, I certainly encourage pan banking engagement with institutions who are on this journey already. I would definitely encourage joint work with academia, it seems to me that academia has done so much work in this space, which is of use to wider corporate life and to wider banking life. And they sometimes struggle with the applicability into day-to-day corporate situations. On the other side, we're in the banking world, and we struggle with actually getting the kind of scientific underpinnings of what it is we want to do. I just think it's so important in this particular area that we have joint work with academia, that we have industry-wide relationships, we have bilateral relationships, to try and improve what we're doing, and to do joint research projects. Then, everybody wins in that. I think, equally, there are some key regulators who are much more advanced in this area. I do want to just deliberately be very nice to the New York Fed on this call, but definitely the New York Fed, the UK FCA and others have some very good resources that are easy to find that takes people on the journey.

Toni Dechario 19:06
Thanks! So, I'm gonna shift gears a little bit and look at decision-making again. What, in your opinion and in your studies, do you find makes someone either willing or unwilling to raise concerns to decision-makers?

David Grosse 19:23
I think the first thing I'd say is, when we look at “speak up,” I always want to try and reframe it towards the “listen up” side. Because we're great as an institution saying, “It's about ‘speak up,’” which puts the onus on the individual, which makes the individual feel, “Okay, something about me, it's something about me needing to be brave to raise a topic.” And actually, we should invert it as much as we can into the “listen up” construct, into, “How do we ensure the environment that has the institution and management listening?” rather than, “It's about the people, why aren’t you speaking up?” So, I think that's a key inversion, I'd like to put in. Then the other thing I'd say is, it's also very, very important to look at it in the context of day-to-day conversations, and the safety that people feel in meeting situations, in bilateral conversations, how do we get people comfortable in those environments? I think too often we frame it as if it's the egregious end of the situation where something really bad happened, and somebody has to flag that and, you know, a whistleblowing case goes in, etc. And I think that's too mischaracterized. I think the most important thing we need to do is to ensure we're looking at the day-to-day decision-making environment, because it's within that that gradually issues will come to the surface. If we get that right, it's very unlikely we'll need to spend too much time, you know, looking at the more extreme end of “speak up” and “listen up.”

Toni Dechario 20:52
What hinders listening up, and what can be done to improve it?

David Grosse 20:58
The key thing I'd say, is that it's not necessarily deliberate. I think there's a sort of sense that people feel, that maybe there is fear that is percolated through organization, and that that washes people's comfort in talking up. But I think the key part of it is actually people not necessarily understanding fully the power dynamics. So, it may not be deliberate. But if you don't give people the sense of psychological safety, the sense of easily being able to discuss topics, then they will feel that they can't, even though you haven't deliberately put fear into them, if you like. So, understanding the power dynamics is really, really key, and giving people permission to talk in an open environment is important.

Toni Dechario 21:46
The BSB has written and spoken extensively on the “fear versus futility” roots in speaking up. How do you think about the futility angle of that? How do you advise management at HSBC to combat any potential for your staff to feel a sense of futility? And speaking up?

David Grosse 22:10
I think there are a number of elements to it. The one is the… if people have raised points before, and no action has come off the back of it, then it comes into the, “Why should I bother?” points. That's one element to it. And I think the other point is, if and how people raise concerns, or how they escalate issues, it is felt the onus of responsibility, or the hard work falls on the person who's raised it, that's definitely also going to impact how people want to engage in it. Because if they feel that it's a time absorber for them, if they feel that, in raising an issue, it puts a lot of onus on them to do a lot of hard work, then that's going to knock their sense of wanting to get engaged. So, you know, I think it's both, “Have I raised something before?” and, “How's it been actioned?” But also, “How much hard work is this going to infer upon myself?” And so, obviously, it's so important that people feel points are actively listened to and actioned, then you need to give very quick and engaged and transparent feedback to people. Even if, in effect, it's bad news. I think what people sometimes forget is that, if there's no specific good news that can be handed to somebody about how a decision’s being made, how their life may be made easier, how something has been escalated, you still need to communicate with them what you've done, how you've done it, how they'd be listened to, because otherwise they feel it's just gone into a void, and that no action has been taken.

Toni Dechario 23:43
So, I want to move on a little bit to the question we think can be framed somewhat as a debate between personal motivations, and culture, or context and norms. And I want to ask you how you describe, how you think about the relative weight of personal motivations versus culture in shaping people's behavior, and shaping decision-making?

David Grosse 24:12
I think the first thing I'll say is, it's hard to ascribe an exact weight. There's a huge amount of work and research that’s gone into this, but I think the most important thing I'll say is that the impact of situation, context, and environment is often underplayed, and is far more important than that is often getting credit for. And it's the rebalancing we need to bring in, is to bring in the situational part. You know, psychologists call this the fundamental attribution error, is that, when we look at the behavior of others, we always tend to ascribe a personal, behavioral trait reason for it. And when we look at our own behavior, we can see all the situational factors that played into it. So, ascribing exact balance or relative weight is hard. You know my professor at the London School of Economics, when I was doing my master's, always used to say, “Context, context, context,” as to the sort of importance of situational factors. So, it's really important that we bring those much more to the fore. People don't act alone, they act generally as part of a team or a subculture. Those sort of subcultures are really important in how they drive people's behaviors. You can have two trading desks alongside each other, literally on the same trading floor, but they may have their own separate subcultures, which would drive the behaviors of the teams in potentially different and divergent ways. I have my own example, in my life, I have my own behavior, as to how a situation can drive a different set of behaviors in what would seem to be a very similar situation. I'm a relatively rare person in the UK, as far as I support a football team, which in America would be a soccer team, and I also support a rugby team. And those are kind of two relatively different sports. If you go to football, it tends to be quite an aggressive atmosphere, it tends to be quite tribal. And I've often found myself when I'm in the crowd, when I'm in a football crowd, I get myself quite aggressive. You get involved. With the chanting, you get involved with certain behaviors between different opposing sets of fans. And when I'm in the crowd for a football or rugby game, it's very different. You're mixed in with all the other fans from different teams. And it's a very sociable situation. And it seems to me very odd, that I can be the same person watching two different sports, but behave differently, given different situations. So, you know, I think bringing in the situational attributes is very important.

Toni Dechario 26:59
Such a great example. That's actually a great segue to my next question, which is, is there something about the context of financial services, and banking, that influences people's behaviors, and specifically, their decision-making behaviors in a particular way?

David Grosse 27:19
You know, there has been a fair bit of work on this, a fair bit of research looking into it as to, “Do bankers behave better or worse than others?” And what I can say from having looked at it is, the jury is out. Some research has shown that bankers appear to behave less well. They looked at this for a section of Swiss bankers, using some gamification, when reminded of their own role in banking, appeared to behave worse. But that hasn't been replicated. There's been further studies after that, which didn't come up with the same results, which tended to show that bankers didn't actually necessarily behave worse. I think what is different about banking and finance is, though, that there is a very high prevalence in banking of opportunity of conflicts of interests, of gray area situations. And that gives more opportunity for bankers to have a self. If you like a self-interpreted way of how they behave in the conflict situation, there's just basically much more opportunity, and much more opportunity to note one's own interests than other professionals’ situations. So, I think it's less that the bankers themselves behave necessarily worse or better. But actually, there's much more opportunity, and much more situations, which tends to therefore lead to more issues. I think you could actually move this also into the world of biology and neurobiology, in a situation where there are big rewards and uncertainty that can impact dopamine and that could impact behavior. And there's also a lot of work around things like elevated cortisol levels, elevated testosterone levels, which if they happen in conjunction with each other, can lead to more unethical decision-making. So, in some ways, it's unsurprising that in certain situations, behaviors are driven by the environment of banking, particularly. I think a few other areas that should probably worth mentioning about banking, which may be play into this is one probably the remoteness of bankers from the end people that they are dealing with sometimes. When you can't see the impact on an individual, that gives a little bit of extra moral wriggle room. And something else would be, the framing a lot of the activity in banking around, necessarily, around economic terms, which again, can lead to ethics seeming to be a little bit further down the track. And a lot of that sort of situation played out in 2008 in the GFC, and in the complexity of the products and in people not necessarily seeing the impact of the decisions on the people on Main Street. The GFC, being Global Financial Crisis.

Toni Dechario 30:06
The pandemic obviously has created distance between all of us. And so, I wonder whether you've seen an impact on decision-making, or whether you have thoughts on whether that's impacted decision-making?

David Grosse 30:17
The first thing I'd say is, you know, what a once-in-a-lifetime – hopefully, once-in-a-lifetime – opportunity for us all to learn. If any of us in the industry were to try and plan such a massive natural experiment, we would plan and plan and plan and never get around to doing it. So, the fact that over a few weeks, there was a remarkable change in work patterns and how we worked and where we worked, and we've lived with the longer-term consequences of that over an extended period of time. It is absolutely an error, I think, as an industry and as banks, that we should be furiously mining to learn from, because it is such a rich population to have of interesting behavioral experiments, if you like. We actually did some work with a psychologist, trying to look specifically at people's lived experience and staff's lived experience of the of the pandemic. And I think one very important thing that came through on the impact on decision-making or how people felt their experience of jobs is actually on the positive side, which I'm going to raise insofar as people felt that because of the speed of change, that there was an agility and an empowerment that hadn't necessarily been seen before. And people actually took that as a positive. Then, equally, there has been something that's come through on a sense of being more trusted, and with there being more agency for people in their day-to-day work. Because necessarily, when people have been working more remotely from each other, you've tended to need to be judged more on the outcomes of projects rather than sort of day-to-day micromanagement. So, I think an interesting thing, and that came through strongly from our research, is that those things were seen as an absolute positive. And I think, therefore, it's very important that when we look at the impact of the pandemic, where people work, hybrid, working, etc., we don't just focus on physical location, we don't just think about office, home, home office, isolation, etc. We actually look at what was it that changed in the way we did work, which people took as a positive, and they would like to continue with, regardless of whether they're working in an office location, or home location. And those things around trust and empowerment and agency, I think, are really important. And across all the banks, and, you know, if we look operational losses, or conduct issues, etc., it'd be important to look at those and say, “Well, you know, what actually happened during the pandemic? Did they go up? Did they go down? Did they go sideways?” Because maybe we'll learn something there about the nature of, not necessarily it being hyper control, hyper surveillance that impacts people's behavior, but maybe there's something else around trust agency, empowerment. And I think that's definitely an important, important lesson to learn. There are obviously a lot of other issues within the pandemic that definitely need to be taken into account, and people's living situation. Some people, it's much harder than others, for new joiners or junior staff at the start of their career, definitely much harder for people to sort of get a sense of, if you like, the corporate culture, harder to have the watercooler conversations. So, there are definitely some downsides. But I definitely would also like to raise the upsides of behavioral change, which it's important for us to weed through into the new world, the new ways of working.

Toni Dechario 33:52
You know, we've kind of come to understand over the years that conduct is much more likely to be impacted positively by things like trust empowerment, agency, by providing people positive motivation, versus trying to police negative behaviors, right? So that's such a great point. I want to ask you one last question, which is especially important for us to hear from you. Tell us about a success story, what's worked for HSBC? And what would you recommend for other organizations that are trying to reinforce better decision-making?

David Grosse 34:30
I think the first thing I'd say at the macro level is, is embrace the topic of organizational psychology, behavioral science, behavioral economics, and get on the journey. Try and ensure you have some sort of SME capability and build on that, but don't think it's something that somebody else does for you. You might need some expertise, but, absolutely, you want business engagement, you want business ownership. You want it to be something that everybody owns. You don't want it to be seen as something that a department does for you. So that's the sort of macro point. But for us, to look at one example, which I think maybe was a bit different, was that actually we did look at doing some work around the positive side of the behavior curve. So, rather than always looking at the negative side, rather than looking at the behavioral outliers from the downside, we did a piece of work, and then, again, using a psychologist to sort of say, “Okay, do we have some examples out there? Who appear to be the people who have strong ethics, have a strong conduct profile, who people look up to? And what is it, if we unpeel that, what is it in their DNA, which is different? Or, what is it that we would like to build upon?” You know, we did quite a lot of deep-dive interview work with those people, to try and peel the onion, and then what came through on that was very much that these people had a sense of agency over their own work. It wasn't work they were doing for other people. It was they had a sense of agency in what they were doing, and a sense of trust in what they were doing, which they took as absolutely key. They had a common work, and home persona. So, they didn't put on, if you like, a different hat when they went to work. They had a strong sort of lineage through the personal life and the work life, about what they saw as the right way to work and the right way to behave, which continued all the way through. They also had the ability to sort of push on through problems, to take ownership for problems and see them as things to sort of tackle with and not things to be defeated by. And I think there is a lot more depth in looking at the positive side of the behavior curve, which is an industry we could go into, and try to rebalance the fact that probably across the industry, in all our risk departments and compliance departments, etc., you know, we spend 99% of our resources and money looking for the 1% egregious outliers, and the opposite, you know, only 1% of our resources covering the 99% of people. And I think rebalancing that and looking at the 99%, and looking at the positive side of the behavior curve, would definitely give us all a lot more bang for our buck in the industry.

Toni Dechario 37:21
That's great. David, there's so much, there's so many kind of common threads that you've woven. I think that the sense of agency is a good one. I want to just thank you so much for joining us today and for being part of this conversation. We were thrilled to learn from you.

David Grosse 37:37
Okay, well, thank you very much as well.

Toni Dechario 37:40
For more conversations like this, as well as publications and other resources related to banking cultural reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Episode 07
Shaping (and Re-Shaping) What’s ‘Normal’
Betsy Levy Paluck
Betsy Levy Paluck is a Professor of Psychology and Public Affairs at Princeton University. She studies the way group norms are shaped and changed, including how social perceptions and networks can be used to influence behavior. In this episode, Betsy explains – among other things -- why we’re really all just middle schoolers at heart.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight directors, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision-maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. Today we're speaking with Betsy Levy Paluck. Betsy is a professor of Psychology and Public Affairs at Princeton University. She studies the way group norms are shaped and changed, including how social perceptions and networks can be used to influence behavior change. We first featured Betsy when she was a panelist in our webinar on how Diversity, Equity and Inclusion influence organizational culture. In this episode, Betsy will explain, among other things, why we're really all just middle-schoolers at heart. Thanks for joining us, Betsy. Welcome.

Betsy Paluck 01:50
Thanks for having me here, Toni.

Toni Dechario 01:53
Maybe we could start off with kind of a broad introduction to your work. And you could talk a little bit about what motivated you to study social psychology.

Betsy Paluck 02:03
I'll tell you one story about the first study I ever worked on as a research assistant. What it says about the appeal of social psychology for me, and it's relevant to some of the things we're going to talk about today. I worked on a study of sexual harassment. It was an experiment in which the professor who I was working for, Marianne LaFrance, and her graduate student, Julie Woodzicka, posted an ad in a Boston newspaper for research assistants, and they invited in women who really believed they were coming in for an interview. And they were randomly assigned, experimentally, to either be asked about God or asked about whether they would wear a bra to work in the course of this interview with the same guy who interviewed all of them. So, the idea was, ask everyone something weird and kind of inappropriate, but in one case, it was a sexualized question. And unbeknownst to these women, who were fully debriefed afterward, there was a camera recording their reactions to these questions. So, I'm wondering if you can guess… Did people answer the question about whether they believed in God and whether they would wear a bra to work? Do you have any idea? Was there a difference?

Toni Dechario 03:11
Oh, yeah, I suspect that people did answer the question about whether they would wear a bra to work and thought that the God question was totally inappropriate, and said so.

Betsy Paluck 03:18
So actually, there was no difference. Everyone answered it. Everyone wanted the job. And it was pretty undetectable what question they were asked. So, my job was to turn off the volume, and just watch these women's faces as they were asked this question. And it turned out that the only way you can really tell the difference between these women and the way that they smiled and self-presented in these interviews, was just how much they smiled. So, when they were asked about whether they would wear a bra, they didn't have what, at the time, in this study, we described as the Duchenne smile, the smile when you smile with your whole mouth and even your cheeks. With the God question, they were more likely to actually smile – out of surprise, out of shock – somewhat, you know, uncomfortable amusement, but they answered. And so that was something that I think a lot of people wouldn't have predicted at the time, that given the situation in which women were in this position of very little power, they needed the job, many people thought that women would refuse to answer the question. And the experimenters even gave them an out, they gave them a chance to complain about the interviewer afterward, and almost no one did. I just thought, you know, I want to be one of the scientists who is working on questions of such macro-political importance, but boiling it down to those micro-level moments, day by day, that you don't realize how power really rears its head in these kinds of moments. It got me hooked, and I started working on questions later on when I was a graduate student of social norms and how people could – surprisingly, wouldn't predict it – participate in things like mass violence or discrimination or hate crime. But given the right circumstances, given the right kind of leadership or peer pressure, etc. So, that's how I got into this.

Toni Dechario 05:07
I love the way that you describe these kind of big macro issues and these issues of such import that feel really overwhelming. And the ability to break that down into tangible, bite-size learnings is so important. So, one of the central questions that we're trying to answer with this podcast is, why do otherwise ethical people do unethical things?

Betsy Paluck 05:32
Why do ethical people do otherwise unethical things? I think that one of the big ideas of social psychology is that it's kind of hard to just label someone “an ethical person.” It's hard to label oneself anything that will endure situation-to-situation for eternity. We definitely like to think of ourselves as ethical, and many of us try very hard. And that is a top value to be ethical, in all of these different situations in our lives. But I think that the big idea is that there are individual differences, but also there are these situational, contextual pressures on us. And so, it's better to ask about ethical and unethical cultures or ethical and unethical situations. And it's not to say that we have no free will or possibility to assert our values in these various situations, but social psychology really recognizes that sometimes we can even think of ourselves as acting in an ethical way. But the water that we're swimming in is directing us, in certain types of ways that we now come to think of as ethical, but we wouldn't have judged it in that way to start. It's very hard to overcome the perspectives afforded by your surroundings. I would say that we would point to contexts and not always people, in terms of, “Why would an ethical person do this?” It's more like, “Why wouldn't you do this in an unethical, fundamentally unethical situation?”

Toni Dechario 07:02
Explain what you mean by, “Why wouldn't you make the unethical choice if the context around you is encouraging it?” Is that what you mean?

Betsy Paluck 07:09
I think that we can start from the premise that most humans are striving to see themselves and to be seen as upstanding people, as ethical people, as people who can be counted on, etc. This is part of our drive for self-esteem and so forth, not in terms of just feeling so good about oneself, but the true meaning of esteem, which is to think of oneself in a positive light. I think that, you know, certain circumstances, we define behaviors for us. This is one way in which circumstances can change the way in which we behave even when we're striving to be ethical. So certain behaviors that perhaps outside of the situation, we might label as unethical, they start to seem as ethical, perhaps, because most people are doing them and perhaps because along with that, they are justified using different standards than we would normally use. And so, all of these kinds of ideas, framing how certain behaviors are framed, norms, how many other people do them or think them to be either typical or desirable, and then personal accountability and responsibility. I think you see them in the sort of post-mortem breakdowns, when people are trying to explain why they've done something unethical. I think that we're really good at seeing them in 20/20 vision, right, that we're looking back and saying, "Well, these are all the things that I realized pushed me to do these things." We're less good at recognizing them in the moment, right? You'd really have to, you know, be bicultural, you'd have to be a fish that swims in two seas, and very few of us have that privilege, where we're immersed where we are. And so, maybe we can see it in retrospect, when someone comes to punish us or to question us. But it's very hard to detect that in the moment. That's the compelling thing about being a human, is that we get our reality from those around us, from the way issues are framed, from the way that we're led, etc.

Toni Dechario 09:11
One of the things you talked about was framing. The thing that I think about often in this context is when I first learned the phrase “normalization of deviance.” It was actually reading a study of the Challenger disaster (Diane_Vaughn_-_The_Normalization_of_Deviance.pdf) And there was a problem with an O-ring. And so, there were people raising this issue saying, “This is a problem.” But those who had lots of experience who had been there before, were saying “Yeah, yeah, but we're on a tight deadline. We've got a lot of pressure on us. And this has never been a problem before.” And so, this is kind of… how do you help people gain the confidence and the clarity to say “No, this isn't this isn't okay,” you know, to push the topic?

Betsy Paluck 09:58
So, dissent is a really great example. It's a topic that I've studied a lot in the past, in part, because I've worked in countries where there's been a genocide, and one of commentators’ favorite things to say about countries that have had a genocide is that they must be a very authoritarian context with very little dissent, people must just be ready to follow orders, that must be somehow in their bloodstream. I don't think that's the case. I do think that dissent can be something that is cultural, however, that is encouraged, and that's framed, as we're talking about, as a named practice, a recognized cultural tool. And I think that two things have to go together. So, one would be this kind of framing or naming of the behavior. So, in this case, it would be dissent or speaking up in a meeting. I think that what has to happen is dissent itself has to be named as an action, as a behavior, and almost branded in a way so that when you're doing it, you can say, “Well, I'm going to do this now.” It has to have a positive connotation. A lot of people speak up in meetings, I think, when they're worried about disagreeing with people to say, “Well, what about this devil's advocate position, right?” So, people sometimes frame it this way to maybe soften the blow or, I'll say to my graduate student, “Well, what if a reviewer were to say this to you in your paper?” So, they frame it in ways that make it more socially acceptable to speak out in disagreement or to critique. But the other thing that has to happen is that they have to see that it is acceptable by watching others do it. This is really the critical tipping point issue for many cultures, for many organizations, is that not only do you have to name it as a desirable practice, but you have to show people who are doing their social reality testing all the time, they're looking around others and saying, “Okay, you say that dissent is desirable, but is anyone else doing it?” You need to seed it – S-E-E-D – seed it within the folks at your organization or in a society, so that you can both name it as a desirable cultural practice – and believe it. Not just, you know, declare it so, but actually look around and see that other people recognize that you're doing this thing that has been encouraged, and that they're doing that themselves. And lots of people have different ideas about how to spread these ideas through an organization. Some people really argue that you have to focus on the ground up, that you have to look at a social network and say, “Get the people who are, you know, sort of most surprising to adopt these behaviors first, maybe they're not really the highest places in the hierarchy.” Because as the work of Jen Daniels and Dale Miller would show, they would say, “It's always really informative to look at people who are actually at the bottom of the totem pole, look at what their behaviors are, because we just assume that they're following the norms, the regulations, right? They're not like improvising here, they don't have enough power to do so.” So, if you look and see what people who are in the lower strata of this hierarchy, what they're doing, you sort of think, “Well, if they're dressing up, then it's probably a dressier place.” Other people have ideas that it should simultaneously come from the top, that leadership should name the practice and that opinion leaders should be adopting it so that those who get the most attention in an organization are the ones who are spreading it. And we've done some work on that, showing that that can successfully spread norms. So that's the idea, is that you have to try to make it cultural. And starting to think about where you encourage this practice is part of what I do in my own work, is thinking about networks and how to do a little bit of social engineering with them to make things seem more cultural.

Toni Dechario 13:42
So, you said that in cultures that go through that experience, genocide, there's always been this assumption that there's not dissent. But that's actually not true. There is. And people are speaking up. It would seem to me as if maybe they're not being heard, or at least not being effective in their dissent. And so what makes dissent effective?

Betsy Paluck 14:07
Well, what makes dissent effective? Sometimes all it takes is a minority opinion. Sometimes that's a very powerful thing in a group. And there's been a long tradition of work on group discussions in psychology, that shows that a single person or, you know, a pair of people who are the minority of a group, their dissenting voices can really change – if not the nature of the decision – it can change the degree of the decision, and it really can shape group discussion in very helpful ways. You know, things can also be really overtly structural first, that we say, “Well, we're going to red team this idea.” So that's a journalistic idea of, “We have this official, actual group of people that comes into question, a decision that's been reached.” And so, I think, having these sort of meso level structures, like groups of people who are formed with the express purpose and the license to do this is another way to think about this until this gets into water. I think also, then, we need to be very careful the way power is distributed, too. I mean, if we want to go back up to the macro level and to politics, well, dissenters are often silenced, because they're simply crushed by political power, machinations, and so even at the organizational level, one must be very careful that the red team has sufficient power, that there isn't the case that this is done for a performance right? Or for even just helping the original team to just justify their views, just to flush out all of the objections, come up with ways to argue against the dissent, but that there's a balance of power, in terms of the people who are discussing diverging viewpoints.

Toni Dechario 15:56
So, going back to “the water that you're swimming in,” do you think that there is something about finance potentially, or banking? Is there something about the water that influences the ethicality of decisions? In your view might there be?

Betsy Paluck 16:16
I have to say that one thing that psychologists aren't very good at is history. We're trained to look at the world around us right now. And the constraints on us right now is, we're making a decision. We're not alone in this, though. I think that, you know, everybody forgets history. And that's part of what makes culture, is just this built-up routinized way of doing particular things. And there might be something about the history of the sector that could contribute to certain types of decision-making, maybe individualized, concentrated in certain pockets of power, whose voice counts in these sectors. So that's something I'd like to point to as a weakness in my analysis, but one that I'd want to attend to, from a psychological standpoint. I think, also, though, you need to think about the structure of an organization. I think this is something maybe we're better suited to do is to say, “Who in this moment is making most of the decisions? Who was consulted? Are there consultation processes that are put in place?” And psychologists, we think a lot about voice and identity, right? And so, would this seem as ethical to a decision-maker, if they were making the decision in front of this group, in front of that group? “Whose identities are considered as different decisions are made?” I am not an expert on the financial sector. And so, I think that those are the questions that I would ask. I mean, part of the reason that I was attracted to social psychology is that – to harken back to this earlier example I was giving of women being sexually harassed in an interview – if you ask most women whether they would speak up if they were sexually harassed in an interview, even back then, in the 1990’s, when this experiment was being done, I think they would say, “Well, at some point, I would, maybe. Not right, exactly in that moment.” But they didn't, you know? We're not always good at predicting our behavior. And so, our actual behaviors don't align with our projections, our values. And so that's the point, though, that it's helpful to ask these questions about ourselves, rather than, you know, try to make judgments about whether this or that sector is particularly primed for unethical decisions.

Toni Dechario 18:24
I want to get back to what you were talking about in terms of our ability to predict our own behavior and identity. And what our visions are of ourselves. Then get a sense from you of how much do you think that decisions day-to-day decisions at work are driven by a particular identity versus social norms and others' expectations of us, as manifested through culture?

Betsy Paluck 18:56
What's more important, your personal identity or the norms, the cultural norms, in terms of what's pulling on you to influence your behavior? I would say that it's just impossible to pull those two apart, because norms belong to certain identities. And that's what's tricky about norms, is that you could have a norm at your company about compassion or care for the climate or ethics, but if you don't feel that that norm applies to you, right? We really think that norms have these little identity tags with them, you know? So, this group of people thinks that this is really important, “But I'm not one of those types of people, right?” So, the trick is to really try to communicate a norm, suffuse it throughout the entire organization, so that, you know, belonging to the company or working at this institution – the norm is about that identity, that really holistic identity, rather than the social justice warriors and in this branch of the company or, you know, the younger people who care about this stuff, or the old timers who are really interested in moving in this direction, right? And so, the real trick of a cultural engineer who wants to change the patterns of behavior in a multicultural, multi-identity space is to work on creating that shared identity. And then you have the grounds on which to build norms about that identity. If people don't feel like they belong to your organization, then you've lost your ability to really reach everyone in that powerful way. I still think there's a way to build shared norms, even when there isn't a very strong common identity, but that's harder. That means that you have to try to build the norm in each of the groups, right? And we've tried doing things like that in middle schools, which are notoriously sort of defined by different grades and different cliques within grades defined by race and class and interests. So, you know, working with the people who are very important to each of those identity groups, we were trying to change conflict levels and norms about conflict at the overall school level. And we had some success. But I'd say that's a really uphill challenge. If you have the capacity to do it, really working on that shared identity, making people feel like they belong to some common home with a shared identity, that's a really strong basis to work off of.

Toni Dechario 21:27
So, you said that you had some success in trying to create some shared identities, can you talk about what you think contributed to that success?

Betsy Paluck 21:36
I think that the success that we had, Toni, was not, in this particular case, in working in middle schools, was actually not in creating a shared identity. And it's especially key for that developmental age. That’s when you're actually trying to establish an identity, you know, as separate from your parents, as you're going out into the world, you're trying to find your group. So, we actually didn't try to create a shared identity at these middle schools. What we tried to do instead was to work with all of the different groups, and choose people in those different groups, networks, who were important to them, and work with those folks as opinion leaders to try to change everybody's ideas simultaneously of what was desirable at that school. For that reason, it was really critical for us to work with people who are normally not picked for opinion-influencer positions, because they were coming from groups that don't even have high status within the school. So, I think about this with respect to organizations quite a bit as well, because you don't have to be a 14-year-old, to be entering an organization and trying to establish yourself, and establish identity and distinguish yourself from others. It's not always the case that you come to an organization, you try to be like everyone else, that just doesn't make sense, career wise, right? So I think that, you know, the middle school comparison fits uncomfortably well, for a lot of adults actually from this very different developmental stage. And so, sometimes it could be really difficult to build a shared identity. And instead, it really makes sense to try to understand an organization very well, and who are the different identity groups there. And to address the norm that you want to build, of dissent, of ethics, of fair treatment, of compassion, whatever the case may be, within each of those groups, and with the people in those groups that matter to those different identity groups.

Toni Dechario 23:20
When I think about the organizations that we are thinking about, they range in size, but their cultures are enormous, and have a ton of those subcultures that you talked about. And it sounds like from your description, there's really no way to skip the hard work of trying to understand them one by one.

Betsy Paluck 23:44
I think that, like so many things, thinking locally, is often the most effective, right? And so, I would say that that applies to identities and norms as well. Because the people who you really care about are those who you go to work with and see every day. And the feedback that you care about is not just from a more distant supervisor, but from your peers who you're working with. This is the other hard thing is that when you want to try to, you know, have leaders model, some kind of behavior that you hope to diffuse throughout a large network, a large place. Sometimes the examples of that behavior doesn't make sense to everyone. You know, there are many people in an organization, who actually aren't even in a decision-making position. They're supporting those decisions. So, what kind of information do they send up to the decision-maker? What kinds of objections might they raise, what cautions would they attach to certain bits of information that they're sending along to decision-makers? So, if people have different roles in the process, then also thinking about the role that they play, and what does ethical behavior look like for them?

Toni Dechario 24:52
Do you have thoughts about how the pandemic has potentially influenced our decision-making behaviors?

Betsy Paluck 24:59
I have to say, like everybody else, one reason why I'm struggling with this question is that I just don't know what other people are thinking right now. We've been isolated from one another. We haven't had time to check in and to form impressions of what others are doing. I'm not sure. I haven't done research on it. And so, it's hard to make generalizations. I think that this is a time of such unsettledness. There's a sociologist Ann Swidler who talks about settled and unsettled times. Settled times are those times in between disaster, you know, pandemics. She actually studied the AIDS epidemic, was the unsettled time, when everyone's trying to figure out what to do, again, how to think again. I mean, psychologists talk a lot about short-term versus long-term thinking. I think that folks aren't even sure what kind of thinking to do right now. And so, this is where I think guidance goes a very long way. Some more centralized guidance, or feedback from peers, goes a very long way toward forming up and firming up our impressions of how to behave going forward.

Toni Dechario 26:07
That's interesting, that it is actually probably a good time to try and establish norms, if ever there were time to step into the space. You gave some recommendations about if you're an organization that's trying to affect better decision-making, more ethical decision-making. One of the things you mentioned that you might think about is really trying to engage with and understand individual subcultures within an organization and what they value. Do you have any other recommendations for an organization looking to imprint positive decision-making?

Betsy Paluck 26:45
I would want to know more about whether the folks who you're working with – your colleagues, your reports – what are they trying to do? Are they trying to make better decisions? Is this a goal of theirs? As a psychologist, you always want to know what way the tide is going, right? Are you working with or against the tide? If you're working with the tide, if you feel that people are already trying to do better, and they have this motivation to do better, and something's in their way, then it's a detective story about what are the obstacles to them making better decisions and more ethical decisions and/or broad thinking, etc. And that is more likely to be successful. When the tide is against you, when they don't share your goal, that's a lot more difficult. Then you need different tools. Then it's not about removing obstacles to their path. It's not about the sort of the famed behavioral science advice of make it easy, make it available. You can make arsenic easily available to me, I'm not going to drink it, and I don't want to drink it. Then you want to try to pair their motivation to try something new with something that they're already very motivated to do. I'll use this example – that was made into a great example of norms by Debbie Prentice – which was trying to get men in the American South to stop dueling back around the time of the inception of the United States. They were dueling all the time, as many people remember from Hamilton. And it was against the law, but it happened all the time. And men were not refusing a duel because it would be against your upper class, gentlemanly honor to do so. So how do you how do you fight against that? I mean, we've been asking this for a very long time right now, “How do you fight the tide of masculinity?” Right? Well, it turns out that the most successful project for reducing dueling was to disqualify men who dueled from running for office. And what was so compelling about that was that these men were in positions where that was also considered a masculine duty for men of their class was to run for office. And so, it gave them not just motivation to not duel, but a face-saving out to say, “I cannot duel, I owe a duty to my county, to my state, etc., to represent them.” So, you know, I just offer this up as a metaphor. This is sort of the… it's not exactly the same as carrots, right? It's not saying, “We'll pay you $100 to come get vaccinated.” I think it's more psychologically sensitive. It says, “Here's something that's very important to your identity, perhaps in some ways, important to the same identity that's driving you to do this other thing. So, can we let these two compete? And can we give you an out?” Now, the important thing about this case of dueling is that you could die if you duel, so, probably a lot of men did want to get out of dueling. It just shows you the difficulty, right? That if people really want to do what they're currently doing, you're trying to stop them, well, psychology might not always be the ultimate answer, these psychological manipulations in that case. So, trying to figure out how to frame and introduce and enforce new regulations. Maybe psychology will work with you on that. But this is my basic advice, to first go in and say, “Which way is the tide running? Are they going with you? Are they going against you?” And so, it's a different conversation. And it's a very hard hill to climb if they don't want to do this. I do think that if you find situations where you can characterize it, as you know, in their heart of hearts they wish they didn't have to do this, to have high status, you found a moldable feature of your organization. That's good news.

Toni Dechario 26:45
I want to share with you something that one of our other interviewees talked about, because I think you touched on this a little bit, and I'm curious about whether you have thoughts on it. One of the academics we talked to is a woman named Taya Cohen, and she's at Carnegie Mellon, and she does a lot of work on guilt proneness. And how much guilt proneness leads to good decisions, ultimately, is what she finds. But another thing that she studies is game mindsets. So, she says that a lot of what can lead to unethical behavior is when you're in a context where you're playing a role. And so, you're not bringing your own kind of moral awareness or rationalizing to that game, because that's not what one of the rules of that game is or are. And you kind of touched upon that I'm curious about whether you have any reactions to that framing of why people might make bad decisions.

Betsy Paluck 31:29
It sounds to me, like what you're describing is, one way of making people feel simply more accountable, is reminding themselves that they are themselves within this role. There's a lot of interest among behavioral scientists in general, I think, in trying to get people to slow down, to stop and reconsider from different angles, rather than rotely follow the rules of the role that they're in, of the group that they're in, and so forth. I think all of these are really interesting tactics. I'm really interested in what happens when you can do that with a whole group, though, because I think that what a lot of these kinds of tactics rely on is the individual decision-maker. And I just, from my perspective, I can't emphasize enough, the disempowerment of the lonely decision-maker. You know, and I want to get away from this individualization of the problem. I think that roles are roles because they're in relation to others. And so, you feel an obligation to carry out this role vis-a-vis others. And so, maybe we can provoke you to feel more yourself within this role and critically evaluate, “What would I really like to do?” as opposed to, “What is this role asking me to do?” But I think that it's really easy for the role to win out because it's ultimately obligations to other people. And so, a lot of these kinds of fast-thinking versus slow-thinking, and reconsider from a different position, I'd love to see these be more social as interventions. So, getting a team together to think “How do all of your roles contribute to these kinds of outcomes? How do your interrelationships to one another, your obligations to one another, end up in you deciding the same kinds of things every time that are maybe suboptimal for the following reasons?” I think I'd be really interested in those kinds of interventions. So, basically, making things more social.

Toni Dechario 33:19
My last question is whether there are any resources on any of the topics we've talked about today, that you'd recommend to listeners?

Betsy Paluck 33:27
I think that, you know, one resource that a lot of your listeners may be paying attention to, if they're interested in decision-making, and psychological and economics views on it, is a new edition of Nudge was just published. And so, it's a look back at all of that work and reconsideration of what's worked well, and what really holds up over time and how to think about this. So, that would be good summer reading, I think, for everyone interested in this. I would hasten to say that there's sort of this middle level that I just want to keep encouraging everyone to think about, which is, on one hand, you've got behavioral scientists talking about individuals and how individual people decide. And then the other hand, they talk about, “Well, here's choice architecture, and how to design policies at your organization that affects everybody.” I think somewhere in the middle, we have to think about groups of decision-makers and their relationships to each other in their identities. I'll recommend a little paper that I wrote with my student that was published this past year, where it's sort of a nice take off on the Nudge book, which is we were trying to think about how to recognize culture when you design nudges and identities, and so we were working in a Chinese factory and trying to help them with this problem, how to get people to change their behavior on the floor of the factory. How to get them from directing their waste in a different way. My student came up with the most ingenious nudge, which was to paste these religious symbols on the floor. These religious Buddhist symbols that have been blessed by monks, that the workers were told had been blessed by monks. And it was a really sharp drop off in people dropping some of this waste on the floor because that had such meaning for people, that they understood, “This is a different space now.” And my student is herself Chinese and worked with the monks to have these blessed and to introduce them to the factory workers. It was a very simple way to take into account some of the things that I've been talking about.

Toni Dechario 35:26
That's fascinating. Okay, we have one kind of quirky question, Betsy, is there anything else that you are reading, watching listening to, that you can't get enough of and that you're wanting to tell everybody that you know about and that you want to share with us?

Betsy Paluck 35:40
In my spare time, I'm actually reading a lot of narrative non-fiction to try to redesign this policy class, but I'm reading in that way where you can't even let yourself get like completely engrossed and excited. I'm like reading with a purpose, frantically, in small bits. I don't recommend it to anyone.

Toni Dechario 35:59
For more conversations like this, as well as publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Episode 08
Building Processes that Serve Everyone
Mark Roe
Mark Roe is the Head of Risk Culture at the Australian Prudential Regulation Authority (APRA). With a background in Criminology, he brings a unique perspective to the supervision of governance, behavior and culture. In this episode, Mark shares his perspective on why risk culture matters and how organizations can impact decision-making among staff.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. This episode's conversation is with Mark Roe. Mark is the head of risk culture at the Australian Prudential Regulation Authority, otherwise known as APRA. With a background in criminology, Mark brings a unique perspective to the supervision of governance, behavior, and culture. Today, Mark will share his perspective on why risk culture matters to supervisors and how organizations can impact decision-making among staff. Thanks for joining us today, Mark. Welcome.

Mark Roe 01:48
Hi, Toni. Good to see you.

Toni Dechario 01:50
So, we're focused primarily on decision-making in this podcast. But we want to kind of take a step back first and think about culture more broadly. So, I wanted to start off by asking you why you're interested in culture and why should others care about this topic?

Mark Roe 02:08
I mean, I've been interested in why people behave pretty much all my life. As a kid, I read lots of crime novels, and nonfiction as well around crime. My background is criminology, and I ended up studying criminology back in the 2000’s. So, for me, it's always been a fascination of mine. Why people behave the way they do. Behavioral Science has become really front of mind now. It's a popular discipline. Why should we care? I can't think of really any major issue, which has not had a cultural element to it. So, that's why I care. It’s also really important to go deeper to think about what we call risk mindsets – the attitudes toward risk, why people behave in that way, what is it about the culture and the environment that's making people behave in a certain way? And by doing that we can go much deeper, and try to fix that cultural issue, which should give us a better outcome.

Toni Dechario 03:05
You mentioned a fascination with why people deviate from kind of the norm, from normal behavior. And so, I want to ask you why that is? Why do people make unethical decisions? What's driving that?

Mark Roe 03:18
It's a really big question. I think most people get out of bed in the morning and want to do the right thing. Where things can go wrong is a number of factors, actually. There's probably not one reason why people will deviate from that. And that's why we at APRA have established the risk culture 10 dimensions. We think there's a whole range of dimensions that we should look at, when we're assessing culture, or as we do, risk culture. How are we incentivizing staff? We've had a Royal Commission in Australia, which has shown bankers, for example, charging fees for no service, charging fees of dead people, miss selling products. There's examples of that across the globe, you know, the Wells Fargo “Eight is great.’” Unfortunately, it wasn't great for the customers involved, or for the staff, ultimately, who lost their jobs. And the reason for that, you know, that's an incentive piece. So, we will look at how incentives are aligned to risk management, for example. Tone from the top, leadership, all of those things are important as well. If you're not driving the right culture at the top. I think, as well, we shouldn't forget about context. That's a really important part of culture – coming into work, working with a particular team. That's where you get your cues from, your manager, your immediate team. If the tone from the top is not aligning with the voice of the middle or the echo from the bottom. That's an issue in itself as well.

Toni Dechario 04:37
What do you think about the relative weighting of individual motivations, versus context and culture in driving decisions?

Mark Roe 04:48
I do think context is really important. So, for example, a very well used example is people driving on the motorway. You know what the speed limit is because the signs are up regularly and yet, as you look around you, you'll see people going much faster than that speed limit and you go at that speed or even faster. “Why shouldn't I?” So, even though you might feel that you have those personal values, that you're always going to obey the law and obey the regulations, that may not actually be the case. So, I think it's a difficult one to answer. I think we all like to think we will follow the rules. Where individual decision-making is also interesting, is the cognitive biases, we tend to try and think quickly. Daniel Kahneman has spoken about that as well and written about that – “thinking fast and slow” – and making those speedy decisions using heuristics or shortcuts to make decisions as well. So, there's challenges on both sides, whether you're making a decision based on the kind of aligning to the culture or making your own individual decision. Ultimately, I think it's difficult to call, what actual percentage that looks like.

Toni Dechario 05:52
Do you have thoughts on what organizations can do to create the conditions to allow people to think slowly, and maybe not necessarily rely on those heuristics all the time, in cases where an organization wouldn't want them to? Or kind of put more simply, do you have any recommendations for how organizations can influence people's thinking and people's decision-making?

Mark Roe 06:17
it's important for leaders to really ensure their staff understand, for example, what the risk appetite of the organization is, and how it applies to their role. So, I do think it's about staff being aware of what the purpose and values of the organization are. What is the risk appetite? What does it mean for them? But even more importantly, how they fit in within the end-to-end processes that organization is undertaking on a day-to-day basis. You might just be involved in a small part of that process. If you don't really understand why you're following a process or control, then you can quite easily try and go around it or not really take it as seriously as you should do. And I think it's about communicating that in an interesting way. And behaviorally, it's important to design training and to communicate with staff in a really real way. And explain to them, you know, put yourself in their shoes and actually explain risk and explain why it's important to follow the controls from an end-to-end perspective. You're all in this together. And I think it's important to have those discussions within your team and say, “Well, you know, what would you do in this situation?” or even better, as part of team meetings, I think a good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it. And this is how I learned from it.” Because it really opens up people feeling able to speak up about mistakes they've made, raising issues in a good environment like that. And you can all learn from that as well, because we all do make mistakes.

Toni Dechario 07:43
So many communications you can receive and kind of ignore as like corporate speak, or as just, you know, like this next kind of compliance training that you need to get through in order to get to the real work. And another thing that you mentioned is the importance of kind of team leaders – like, not necessarily just the people at the top, but individual teams having conversations about maybe ethical gray areas that they've encountered. How do you, combining those two things, get your middle managers to feel like this is something relevant and something that they want to devote their time to these conversations with their teams?

Mark Roe 08:21
It's really about helping to equip them to do that in order to have those conversations with their teams around, “What is ethical decision-making? How to do it?” There was a really interesting article, I think, in the Financial Conduct Authority's essays, where middle managers were really called out as being that really important buffer between the top and the bottom of the organization. So, we talk about “Speak up,” a lot. “Speak up about incidents that go wrong,” but it's also about really about the “Listen up and act,” because as part of that reaction, is the person who's made that mistake feels terrible? And, whilst that being dealt with, will it kind of put them off raising incidents in the future? So, I think it's really about talking to middle managers about understanding the pressures they're under. Looking at that as well. You know, how much time do they have to, to do their jobs as well as manage a team? And also giving them some tips and some guidance on how they might react in a better way, or have a think about how that's playing out within the team? Because often, it's not black and white. There's a lot of gray areas, and there's some tools out there, which middle managers can use to kind of talk through cases. “What would people within the team do in that situation?” And there may not be a right or wrong answer, really, there could be, within that gray area, a number of options to take. I think it's about really empowering middle managers to be able to have that conversation with their team and for the team to feel able to do that as well, as part of team meetings, as I say, talking about mistakes that have happened, you know, from the leader’s perspective, in an open way so that mistakes are seen as something to learn from rather than something to blame people for.

Toni Dechario 09:53
You've talked about kind of creating an environment of psychological safety without using those words, for creating kind of a “speak up” environment. How do you know whether those environments have been created, where you have an environment of psychological safety where people can speak up, and listen up and act? Attitude among leadership?

Mark Roe 10:13
We actually do survey entities directly. So, we survey staff within entities directly. And some of the questions will be around, you know, how easy is it to speak up? And so that is one data point, we recognize there's other things that you can do as well. But that's certainly one area that you can look at. If you're not doing that, you can ask for the entity's own survey results and get the full report and just see how those staff have answered. We're looking at metrics at the moment as well, that we can take. If you're not asking those questions, or not going in to do deep-dive reviews – because we also go in and do deep dive reviews that do interviews and focus groups with staff within entities as well – and that's something that we're promoting for the entities to do themselves, and to provide that information back to us. Because you can glean a lot of really strong robust information from those processes, as well as obviously whistleblowing, which is right at the other end of the spectrum.

Toni Dechario 11:06
Have you seen any examples of organizations that have recognized, perhaps because you've told them, or perhaps because they've done the kind of legwork that you've just described themselves?

Mark Roe 11:18
We are working on that. It’s a fairly long journey to change culture or risk culture. We do think at APRA, for example, because the risk culture 10 dimensions are becoming more known, and we're going to be publicizing them even more. And, you know, what does that look like? What do we look for, as part of that? Well, already a lot of entities are asking those kinds of questions, you know, “How easy is it to speak up? Do people feel safe to speak up?” and we can get that information back from them. We obviously did a huge inquiry into the Commonwealth Bank of Australia, which had a huge impact on the industry when that report was published in 2018. And again, we've seen a lot of entities do more work in the culture, governance, accountability, and remuneration space since that point, as well. So, I think it's about being transparent with entities about what our expectations are, and the more that we can do to get the message out, but also monitor what's happening within entities, the better. So, we will also go in and review what organizations are doing in relation to cultural risk culture, on a fairly regular basis. We've trained our supervisors in the risk culture 10 dimensions framework, so it gives them something tangible, that gives them a consistent framework to really tie into that what they're seeing when they liaise with those entities, because sometimes culture can feel quite ephemeral. It can feel quite intangible to people.

Toni Dechario 12:40
So, you've mentioned the 10 dimensions a number of times, and you've touched on a couple of them, you talked about incentives, you talked about leadership and tone from the top. Maybe you could just share with us what are the 10 dimensions of risk culture, according to APRA.

Mark Roe 12:52
I mean, I'll give you some of the key ones around the behavioral side. One of the 10 dimensions is communication and escalations. And that's what we've just been talking about around psychological safety. “How easy is it for staff to really feel able to speak up? And how is that escalation taken on board when that happens?” So again, the “listen up and act” piece as well. There is another one called “decision-making and challenge.” So, having diversity of thought as part of your decision-making processes, and also welcoming constructive challenge. It’s really important for managers and leaders to be able to take challenge and be open to that. Again, that aligns a little bit with learning from mistakes as well. There's also leadership, really important, that tone from the top is very important, also the authenticity of that tone from the top. So, leaders might say the right thing, but if their actions do not align with that, and you know, it's not authentic, and staff will pick up on that very quickly, as well. We also have a risk culture and board oversight piece that is important for us as a regulator, because we want to see how entities are really assessing cultural risk culture within the organization. And how is the board overseeing it? We have a requirement in Australia for the board to form a view of risk culture of their organization, and take action when necessary, and also drive towards a desired risk culture. So, we're really interested in seeing how they're doing that. So again, it's back to the entities to do this work. We have a framework and the tools, but it's really up to them to drive that. And another one I've mentioned is risk capabilities. And the ability for staff to really have the training, to have the skills in relation to risk management as well. Responsibility and accountability is another one.

Toni Dechario 14:37
What's the response been, you know, among the banks that you supervise to the introduction of these 10 dimensions and to having examinations for risk culture?

Mark Roe 14:45
It's been interesting actually, because we sometimes get questioned around, you know, if a regulator is sending a survey to an entity, then how open are the staff going to be in responding to that? So, the survey is part of our deep-dive piece. But we also have a new project called the risk culture industry wide survey, where we're looking to send a survey to up to 70 entities across Australia, to get a benchmark of risk culture, across banking, superannuation and insurance. The response so far has actually been, on the whole, quite positive, because I think from our perspective, we have a full range of supervisory options from the kind of carrot, which is really holding a mirror up to them doing a deep-dive review, saying that “these are some issues that you need to resolve” and then getting on with it, all the way through to enforceable undertakings or additional capital requirements that they need to hold on the harsher end of the scale. So, they're aware of that full range of tools and enforcement tools, which I think is important. I think it's always important to have carrots as well as sticks. But if we're approaching some of our work, getting them to improve themselves, and for example, we'll go and do a deep dive, we'll give them an assessment aligned to the risk culture 10 dimensions, so we can really show what's working well, because that's really important as well to show the strengths, but also the areas of opportunity to develop further. That gives them something to take away and to really action going forward. We've had quite a lot of experiences as well of entities seeing the value of having that, in a way, independent assessment being undertaken by a regulator, which hopefully they take in the spirit of, “you need to improve.” And it's important that you do improve, and we do monitor improvement following a deep dive to make sure that those actions have been completed as well.

Toni Dechario 16:33
I wonder if you think that there is anything about the financial services industry that might influence people's decision-making behaviors in a particular way?

Mark Roe 16:45
It's a really interesting question. I think it's difficult to answer that question. What I would say is, there's definitely been plenty of examples where things have gone wrong. And in Australia, we had the Royal Commission in 2018, which found a number of issues of fees for no service, dead customers being charged fees, mis-selling of products. So, there's definitely more work to be done. Customers have lost in some cases, their life savings, they've been mis-sold products, their homes. It's very important following that royal commission that we do look at culture, governance, remuneration, accountability, and look to improve that. Having said that, I do think financial services are probably more under the spotlight than many other sectors, arguably. There have been incidents, as we know, across a number of other industries. Volkswagen, with their emissions issues. Boeing with their recent issue. Rio Tinto in Australia, which is a mining company, also had some issues recently, kind of blowing up a particular part of Aboriginal land. So, I think there's examples across all industry types, but that doesn't get away from the fact that there are areas that we do need to improve within financial services. And again, it comes back to what we're looking at from the 10 dimensions point of view: incentives, remuneration, how governance is working… “What are those governance structures? How accountable are people within the entities as well?”

Toni Dechario 18:12
Do you have any sense of whether the pandemic has been a major influence on decision-making?

Mark Roe 18:19
I mean, obviously, it has, because decision-making has had to be taken fairly rapidly in an uncertain environment. Often people would want more information at hand before making decisions. They've had to do that fairly rapidly. Again, coming back to the cultural cues that people get from working within a team, how have they changed? You know, how do you communicate with your manager? How are you supervised now, when you're working from home? How do you feel aligned to the team or even to the organizational purpose and values and for that risk appetite? So, all of these things will impact decision-making. And it's certainly things that we need to look at as regulators as well, to make sure we're on top of that, and to assess over time, the longer-term impacts.

Toni Dechario 19:01
So, looking forward, what recommendations would you have for organizations that are looking to improve their decision-making among staff?

Mark Roe 19:09
I think it's about having the conversation, first of all, and actually identifying that. Because at an individual level, you'll be used to using heuristics or cognitive biases. And it's important to be aware of that at an individual level. In the workplace, when you're having those kind of group discussions. I think, again, it's important about having that overlay with ethical decision-making framework. So, we've heard probably all heard the mantra now, “Can we? Should we?” often in the past, we may have taken more of a legalistic approach and thought, “Well, you know, there's nothing specifically written in the standard or the regulation to say we can't do it, so let's just do it.” Whereas more recently, it's around the “Should we? You know, would we actually feel comfortable being on the front page of the newspaper having made this decision?” So, it's about having a frame of reference which aligns with the corporate values and purpose of the organization. But your own personal values should also, I think, have some alignment there. You should feel comfortable with the decisions that you're making as part of that organization. And I think there's those frameworks that you can use and talk to teams about in order to help drive that ethical decision-making. You can also look at examples, they could be theoretical case studies, where you talk through a case study, which may not have involved you, but you can kind of talk it through and say, “Well, what would you have done in this circumstance?” That can be tricky, because we always think we're going to act in a more positive way than we probably actually will do. So, it's important then to also drive, okay, things that have actually happened in the team. And it comes back to that idea of where mistakes may have happened within the team, discussing them in a supportive environment, which also aligns to psychological safety, and really learning from those mistakes, because we all make mistakes, driven by leaders about the mistakes they've made, and framing that. Some of the powerful things I've seen is leaders doing that in a town hall, or having it as part of an agenda, you know, up at the front and saying, “Well, you know, the mistake I made in the last week was this, and this is how I identified it. This is how I escalated it. And this is how we ultimately managed it.” Or, you know, “What might the root cause of this have been?” So, with that openness, you're able to really get to the bottom, hopefully, of what's driven this issue? Was it a human error point of view? Was it because of a manual process? And hopefully, that will also drive improvements across the organization. So, I do think there's frameworks there. It doesn't have to be a difficult framework. It's more about aligning it to the purpose and values of the organization. The “Can we? Should we?” And also aligning it to your personal values and talking through the options, because often with some of these decisions, they can be gray. They could be in the gray area, there may not be black and white. And this is why it can be complicated. And why it's important to discuss them more regularly as a team.

Toni Dechario 21:57
Yeah, that's great, and modeling curiosity and a willingness to acknowledge weakness and mistakes. And yeah… The other thing that you mentioned that we've talked with a number of people about, is the kind of bringing your own moral compass to a question, your personal moral compass to a question, and how powerful that can be and how it doesn't always happen.

Mark Roe 22:21
It's a really important thing to think about your own personal values, and whether the organization that you're working for espouses that. I think that is important. As far as you can, we all need to make money and pay the mortgage or the rent, but you need to try and find an organization where those are in alignment. And where you're feeling uncomfortable, this is where it will be helpful to be able to speak up if you're feeling uncomfortable. It is difficult with context, you go into a team, which is very different in terms of the culture. It may be a subculture of the organization or culture that the leaders are trying to promulgate within your little team. And that can be tricky, because coming back to the motorway analogy, where you're kind of going a faster speed than the speed limit, because everybody else is doing it. This is where it gets tricky. But as much as possible where something doesn't quite feel right and is out of alignment with your personal values. That is a big red flag to kind of put your hand up in some way and try and call that out and not just getting used to that way of working.

Toni Dechario 23:18
So, you've mentioned a couple of books, you mentioned Daniel Kahneman. Are there other resources that you'd recommend for anyone who's interested in learning more about the topics we talked about today?

Mark Roe 23:30
I'm currently reading a book by Max Tegmark called Life 3.0. It's about artificial intelligence. And it's actually fascinating just reading the first chapter of that, which talks about where artificial intelligence could go. And the reason I mention that is, we do need to be really aware from a cultural perspective of developments in the longer term. Who's coding these robots, who's coding the algorithms in the first place? We always need to keep on the ball about how we can assess cultural risk culture, and looking at literature, like artificial intelligence that determine the ethics around that is also really important, because in a few years’ time, that could be an area of focus for regulators as well.

Toni Dechario 24:12
And there's the famous example of the robot that became, that was let loose on social media and became outrageously racist within like, a day or something. And I wonder how much can AI be used as a tool by management to understand culture within an organization? Right? If, indeed, the AI takes on the characteristics and the norms of that organization, then it would be an interesting case study.

Mark Roe 24:37
I think it's going to be fascinating looking at artificial intelligence in the long term. I mean, there's already companies that are looking at, not necessarily AI in a huge way in artificial intelligence, but they are looking at how to use technology more to really gain a better understanding of culture. Whether it's looking at how people are using social media, kind of informal power structures within an organization as well. So, in that It's also really fascinating work. There's the work on unobtrusive indicators of culture as well. So, not necessarily having to go out to an entity and asking them to fill in a metrics return, but looking at what data is available already, externally, potentially, that we might be able to get hold of to look at that. So, there's a huge amount of work that we can do beyond the frameworks and tools that we have now and the assessment techniques to really drive that going forward. But artificial intelligence is fascinating. It could go in a positive way, a negative way, or somewhere in between and could be used for good. But it could also be used in a more negative way. And we just need to stay alive to those issues.

Toni Dechario 25:35
My last question for you is, I'm fascinated by your background in criminology and kind of how that's influenced your perspective now. You talked about learning from other industries that are focused on culture related issues? And what do you think criminology has to teach us about culture broadly, or decision-making specifically?

Mark Roe 25:58
I think there's a lot to learn. I mean, there's a lot of psychological theories that I also look at criminological theories or sociological theories. And I just think there's a lot of things that have been tested already in the past. So, you know, Zimbardo's Prison Experiment, again, which is very context-driven experiment around students taking on the role of either prisoner or the officer, and the kind of abuse that then happened because of the contextual nature of that. Stanley Milgram's experiments, again, getting members of the public or students involved in an experiment, to potentially electrocute other people and people went ahead with it. They wanted to test how open people would be to obedience and those kinds of areas. So, I think it's really important that we're across that literature, as well. There's something called techniques of neutralization that Sykes and Matza were looking at. When people have done something wrong, they neutralize it, you know, the spy techniques. And again, those kinds of research, I would ask people to kind of stay alive or maybe read up on some of those theories, because they're really important. And they will teach you a lot around things that we're looking at now, you know, why people might commit offenses or might deviate from the culture that we would hope to promulgate within an organization. So, there's a number of things there. Something else to mention is, is enforcement the right approach? Or is it the first approach we should use? Does it put people off? If they know there's a fine ultimately? Or they can go to prison? Or do people go ahead and do commit the offense anyway? So, I think there's a whole range of literature there. White collar crime has been researched for many, many years. Again, it feels like quite a recent thing, but has actually been researched for a number of years now. And there's things that we can learn in relation to white collar crime, rogue trading, those kinds of issues. So, I find it fascinating. And I think there is, again, there's alignment there with behavioral science, with some of the psychological theories that we read about as well.

Toni Dechario 27:49
I agree. It's fascinating. Thanks, Mark. For more conversations like this, as well as publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Episode 09
Reforming the Financial Services Industry
Mikael Down
Mikael Down worked as the Executive Director for Assessment, Policy and Insights at the Financial Services Culture Board, an industry body that assesses culture at financial institutions in the UK and helps to design cultural interventions at member firms. In this episode, Mikael shares his perspective on how cultural norms in the UK banking sector have evolved in recent years, including the pandemic’s impact on firms’ relationships with their employees.

Mikael Down 00:01
We say culture is important culture matters, well, how?

Zab Johnson 00:05
We're powered by our brains. We're not always rational. We are influenced by others.

David Grosse 00:10
I think I'd start with looking at the what's called the “Better-than-average Effect.”

Holly Ridings 00:16
So, one of the things we look for picking flight director, is that what we call command presence, right? You kind of just look at people like, “You better get it together,” you know, “We’ve got stuff to do,” right?

Mark Roe 00:25
Good practice would be for a leader to say, “Well, this is a mistake I made recently, and this is what I did about it.”

Betsy Paluck 00:30
I can't emphasize enough the disempowerment of the lonely decision maker.

Taya Cohen 00:35
So, the opposite of what we think of as an ethical decision frame, we can think of as a game frame.

Mark Mortensen 00:40
It doesn't make you unethical to wrestle with this. The smart money is we help you to try to figure this out.

JB 00:48
This is “Bank Notes: Banking Culture Reform.” The views expressed in this podcast do not represent those of the New York Fed, or the Federal Reserve System.

Toni Dechario 00:57
Hi, and welcome to the Banking Culture Reform podcast, part of the New York Fed’s initiative to drive awareness and change in financial services culture. This series, “Norms, Mindsets, and Decision-Making” explores questions like, “Why do ethical people do unethical things? How can organizations encourage staff to speak up and executives to listen up? And what role does context play in shaping people's behavior?” My name is Tony Dechario, and I'm a member of the New York Fed’s culture team. Today's guest is Mikael Down. Mikael is the Executive Director for assessment policy and insights at the Financial Services Culture Board, an industry body that assesses culture at financial institutions in the UK and also helps to design cultural interventions at member firms. Mikael was a speaker at the New York Fed’s 2017 workshop on culture measurement, and at the New York Fed’s 2018 conference, exploring progress and challenges in reforming culture and behavior in the financial services industry. In this episode, Mikael shares with us, among other things, some of the surprising ways the pandemic transformed firms' relationships with their employees. Hi, Mikael, thanks for being with us today. Before we get into our conversation, could you please explain your role and what it is you do at the FSCB.

Mikael Down 02:06
So, my name is Mikael Down and I'm Executive Director for assessment and insights at the Financial Services Culture Board in the UK. We were originally called the Banking Standards Board. We were set up in 2015 by seven of the biggest banking firms in the UK, to help raise standards of competence and behavior across the UK banking industry, with a particular focus on organizational culture. So, I joined pretty much from the start. And my role has evolved many times since then. But really, at the core of it, are kind of two things. One is providing annual cultural assessments for all of our member firms on the basis of a framework and methodology that we developed for measuring aspects of organizational culture that are important, we believe to be important. And secondly, to try and figure out what works in terms of changing culture, raising standards of behavior, competence, designing behavioral interventions, and running those as on a trial, developing good practice, bringing together members of banking standards boards to learn from each other so they can share and exchange good practices as well. That's really the way that we operate, and we have been going since 2015. And the reason for the name change, drum roll, is because we have extended out across financial services. So, broadening scope beyond banking to cover all of FS.

Toni Dechario 03:31
Can you talk a little bit about, Mikael, about what motivated you to work on culture and what drew you to what was then the BSB?

Mikael Down 03:38
I was working for the UK government when the financial crisis happened. I was actually out in Brussels, at the time working in a diplomatic posting, came back to the Treasury, which was my home department. Everything was pretty scary around that time, as you guys will know as well as anyone. I became involved in the early kind of regulatory response to the crisis, focusing very much on the prudential side of things, and new capital requirements, structural changes to banking, and then a number of conduct reforms as well, culminating with going across to the FCA Financial Conduct Authority, which was at the time a new regulator in the UK, and developed there the senior managers and certification regime, which again is you know, focuses very much on governance and accountability of senior leaders and material risk takers within, originally, banks, and now all financial services firms, and including a designated responsibility for culture. And, taking a step back from all of this, one of the things that I observed was, there was this kind of progression in terms of the focus of policymakers and regulators from safety and soundness, which was necessary after the events of the crisis, through to looking at factors that we now consider pretty fundamental. But weren't perhaps seen this quite fundamental before around treatment of customers, conduct duty of care towards customers, and market integrity, onto responsibility and accountability within governance frameworks and looking at the failures that happened in that front as well. And that being an important part of why the crisis happened. There was no focus on how organizations actually functioned and operated all the way through this process. It was actually, to their credit, the UK Parliament who really first called this out and said, “Look,” in a report that they produced, “there have been numerous failings, but actually the biggest failure really has been that professional standards and culture.” So, this idea of an industry body to help with that process of reform, not through regulatory fiats, not through compulsion, but certainly not through any advocacy either, was born. And I was working with the SC at the time, it was kind of tiny little part of my job to keep an eye on this sort of review into this new body that was ongoing. And it felt very important. It felt like something that had been missing from the debates. And it was also something the regulators have a very, very strong interest in, but it's very difficult for them to compel to the extent that they can get too far in the details. It has to be something that has to be owned by organizations, and specifically their boards and their executive teams. It felt incredibly important. And I was really excited to, you know, join this from the ground up and figure out what – actually, “Okay, we say culture is important, culture matters. Well, how? What sorts of aspects of this kind of huge amorphous topic do we focus on? Where can we make the difference? And how can we track progress?” And that was the, I suppose, the intellectual challenge that we faced, but also the, I would say, the moral imperative for the industry, as well.

Toni Dechario 06:58
So much of what you talked about strikes me. When you were talking about how this can't be done by regulatory fiat, it's so different from what regulators – and frankly, bankers – are used to, because you can have all the right rules and regulations and controls. And so, I guess the first thing that I'd love to explore with you is the question of, why ethical people do unethical things? What is it that happens to bring about bad decisions from people who otherwise have perfectly good moral compasses?

Mikael Down 07:37
I mean, this is such an important question. I fundamentally believe that almost all people are fundamentally good or have the potential to be good. And what we see, all too often have seen, within the banking industry – but they're not just the banking industry – when something goes wrong, it’s typically people who are directly involved in that incident, who are punished. And often, that is entirely appropriate and merited, particularly when people are acting illegally, negligently unethically. But what about the environment in which that took place? You know, there are some things that that are genuinely an anomaly, but that's often the minority. There is too much focus and has historically been too much focus on bad apples, and not enough focus on the barrel. So, I think this brings it back to why culture is important. Every single person has individual responsibility and accountability to their organization, to their stakeholders, to their customers, to the regulators whomever, individually. And that's important, but collectively, the organization they're operating in the environment they're operating in, what sorts of behaviors are championed, rewarded explicitly/implicitly? What behavior do they see other people undertake? How able they are to give voice to concerns and the extent to which those concerns are listened to and acted upon? The degree of pressure that they feel. The sense of purpose and connection that they feel with their organization and its objectives. All of these things will have a huge bearing and there's, you know, there's so much research on this, on the way in which they behave. We saw during the some of the scandals in in the UK, upstanding citizens doing terrible things, signing forms for PPI products on behalf of their customers in order to get the commission. But these people don't go home and look at themselves in the mirror and call themselves a bad person. Everyone needs to be a hero in their own story. And it's very, very seldom you see people believe that they are themselves predisposed to act unethically. But we all have to recognize that we have that potential. And it's important for an organization to create an environment in which that sort of behavior is not incentivized, is actively disincentivized and discouraged. For senior leaders to set that tone. So, I think there's such an important connection between an organization's climate, its culture, and all of our weaknesses and fallibilities to sometimes do things that we really shouldn't.

Toni Dechario 10:13
You mentioned a lot of things that influence norms and behavior. One of the things that you mentioned was escalation, and what the environment is for people to speak up, and whether they feel that they can speak up, as well as whether they feel that they can be heard. If and when they do speak up about something they see that's gone wrong, what elements do you think are necessary to create a culture in which people do feel comfortable speaking up, and what's required of management to be able to hear those concerns?

Mikael Down 10:47
This is a really, really critical part of understanding organizational culture, and it's a big part of the survey and our assessment framework, the questions that we ask. And one of the questions that we ask is whether people feel comfortable challenging a decision that's been made by their manager. And when we first asked this question, less than two-thirds of people said they felt comfortable. So, we wanted to understand well, why that's the case. So, the next time around, so we asked them “Why do you feel able to speak up, and if not, why not?” And the results that we got were surprising to us, because there were significant numbers of people who said that the reason they didn't speak up was because they were afraid of recrimination or blame. So, they attributed fear as one of the reasons, which is probably something that you would expect. We often attribute and associate speaking up with whistleblowing, people reporting kind of egregious issues that would have severe consequences for the organization or for other people. So, there's a natural element of fear to do that. But the thing that surprised us was an equal number of people said they didn't speak up because they felt nothing would happen. So, in other words, futility was the barrier, not fear. And this is really important to understand, because the intervention that you need to address one is not the same as the other. And this tells us that in order for people to be able to speak up, psychological safety is vital. And again, there's been a huge amount of research on how to create psychologically safe cultures, but that isn't all that you need. You also need in order to have a voice climate, you need a listening culture, and to see listening as a form of communication. So, for example, Professor Jim McNamara, at the University of Technology in Sydney has done some amazing work on this, seeing listening as an integral part of communication, and particularly focusing on listening by senior leaders who are often better at talking than they are listening, and listening to external stakeholders, listening to customers, and providing a feedback loop, even if that feedback is to say, “We've heard you, but we don't agree.” His research shows that even closing the loop in that way as a really positive impact on voice climate over and above silence, which has an extremely negative effect on voice climate.

Toni Dechario 13:07
That's fascinating. I haven't heard about that research. You touched on this a little bit. I'd love to hear some more about your thoughts on the apple versus barrel question. So, there definitely are academics out there that focus on the individual aspect of morality, especially in ethical decision-making. Though, I think the debate that you and I have heard for the most part, or the side that you and I have heard, for the most part, is the barrel argument that really your ethical decision-making is mostly influenced by your environment. I'm curious as to what your thoughts are on that kind of debate. How much of decision-making is driven by individual motivations versus kind of group norms?

Mikael Down 13:52
It's a big question. So, there's an interesting angle to this, which is looking at the role of purpose within organizations, because that's what connects the organization to the individual. Right? That was one of the things that connects. You know, there's been some really interesting research that's been done on this by Nava Ashraf at the London School of Economics to suggest that the extent to which employees see their roles as meaningful is linked to the extent to which they see it as benefiting others. So, this is the whole concept of what she calls altruistic capital. And we incorporated this into our survey one year, where we asked people to what extent do you see your work benefiting others? And we ran correlations between this question and some of our core questions. And what we found was that employees who said that their work had a positive impact on others, and who also felt valued by others, are more likely to say that their firm responded effectively to staff feedback, and they were more likely to say that they were treated with respect. Those who felt that their work had a negative impact on others were more likely to disagree to both of those statements. So, I think there's something really powerful within there about organizational purpose and meaning, and how to create an environment in which there is an alignment between what the organization says it's about, and how people see their role within that organization. And trying to achieve that alignment is, I think, an important part of leadership and a part positive culture.

Toni Dechario 15:26
How does having a sense of purpose impact staff’s ability to make good decisions?

Mikael Down 15:34
I think it increases levels of social capital and trust within organizations and allows decisions to be delegated. Because if everyone is effectively aiming at the same target, then you need far less controls in place to be able to monitor whether subordinates are acting in the way that superiors want them to be. It enables a more flat organizational structure that relies less on hierarchy. And that, you know, again, there's been a huge amount of research to show that's much more effective. The interesting angle to this, though, is diversity, equality, inclusion. And saying that there's a common organizational purpose shouldn't imply there's a single view about how to tackle difficult problems. In fact, it's absolutely vital that there's a diversity of views, and those views are all brought to bear in taking decisions and judgments. This is particularly critical for organizations such as yourselves, where you have a public duty, but also organizations such as banks and building societies, where building societies in the UK, savings and loans in the U.S., who have the public mission, really, because that they're licensed to operate derives from their ability to serve their customers and serve the needs of society. They need to be representative of the society they serve in order to do that, in order to be able to ensure in the decisions that are made, that’re affecting customers, they are being taken, factoring in a broad range of perspectives. And I think that's something that has really has certainly over here, and I know in the US as well come to the fore, particularly since events of last year, but there is a long way to go. So, when I talk about having a uniting organizational purpose, it's really important to understand that as something which enables organizations to move forward in the same direction while welcoming a diversity of views and how to do that and how to solve individual issues and problems as they arise.

Toni Dechario 17:33
You mentioned a few things that have happened during the course of the pandemic to influence how organizations expect decisions to be made and how they expect staff to incorporate various perspectives into decision making. Are there other ways in which you think the pandemic has changed the way that people make decisions? One of the examples that occurred to me was the potential kind of isolation of working from home, away from your colleagues, might impact decision making in certain ways?

Mikael Down 18:09
Yeah, so again, we did some research on this. When we ran our survey last year. We did ask a number of questions about whether employees saw their firm's response to the pandemic as being positive, across a whole number of metrics towards employees, towards customers, towards society. And actually, overwhelmingly, the results were very, very positive, which is to the credit of all of those firms operating in phenomenally challenging circumstances and delivering an essential service when we all needed that. The interesting thing is when you cut that by where employees were physically located, because as, you know, it wasn't possible for all employees, particularly in banking, to work remotely. And there was a difference in perception of fairness, of the organization, between those two groups. Those who were remotely based, were more likely to feel that the organization was fair than those that were based on site, which is interesting, and maybe slightly counterintuitive. It's possibly because, you know, leaders were hugely focused on ensuring that the person who's on their own is at home is okay. And actually, the other thing that we found from our research last year is there was much greater connectedness than there had been before between line managers and their colleagues who they're responsible for. They checked in a lot more. And there was a much more of a human type interaction, even though it wasn't physical. When you asked people to describe their leaders, they were more likely to describe them as authentic and human than before. And actually, again, counter intuitively seeing senior leaders in their very nice kind of big home offices, actually was welcomed by a lot of people. They understood that not everyone had the same setup in their home environments, but the fact that they can actually see their bosses or very, very senior people compared to them in environments that made them more human. There was evidence that we had to show that a number of people felt that Zoom meetings were actually a leveler of people who would never normally have been able to intervene or felt able to intervene, because they didn't get their hand up, or their voice up quickly enough. They always felt shy, they were talked over by someone, they had the hand function, which gave them a permission to speak. And these are kind of some really interesting dynamics that at first we didn't predict or think about. I think the really interesting question is going to be, and it's the question on everyone's minds at the moment is, “When things start to unwind, what kind of workplace are we going to design?” And one of the things that we are really trying to emphasize is that you need to build that around some aspects of culture that are really important to bear in mind. Things like communication, decision-making, inclusion, fundamentally organizational justice. How are opportunities distributed? That's going to have a huge impact on the culture of organizations and their effectiveness, and levels of staff engagement and well-being.

Toni Dechario 21:17
I wonder what you think about whether there's something about financial services that drives ethical or unethical behavior and decision-making? Is there something unique to financial services that makes this problem more salient for the financial sector than it is for other sectors?

Mikael Down 21:40
I think, in the many sorts of post-mortems that were conducted of the financial crisis, one of the findings from some of those pieces of research was that the fact that financial services deals in money, makes money more salient, therefore encourages greed. I'm slightly on the fence on that one. But I do think that saliency and the sorts of issues that are salient, are really important and actually drive behavioral norms and influence culture very heavily. Now, if you look at the work that's happened in the banking industry since the crisis, certainly in the UK, a number of firms have made conscious efforts to make the customer perspective, more salient, combined with other interventions, too. There's one firm that introduced quite early on what's called the “yes check,” which is a number of questions that you have, four questions I think, you had to answer before recommending a product to a customer, one of those being something like “Would you sell this product to a family member?” to put the customer at the center of the ethical decision that you need to make in order to take a decision. The other issue, I think, that has become more salient, and I mentioned it before, was equality and inclusion. That's become spoken about much more now. Particularly since the killing of George Floyd and the protests that followed that both in respect of race specifically, but actually more generally, you see senior leaders talking much more frequently and with more authenticity, about the need for greater diversity and inclusion. Now, that's not enough. But it helps to provide the context in which those further conversations and further action can take place. I think the next challenge for the industry is how to make salient environmental issues around climate and biodiversity, where the financial sector has an absolutely vital role to play if we're going to meet the Paris goals and the UN Sustainable Development Goals more generally. I think a big part of that is about making issues part of the day job for people, not something that's done on the side of the desk. I think progress has been made on that front in respect to customer outcomes. But there's a lot more that needs to be done on that, but also a broader range of societal issues, too.

Toni Dechario 23:49
There's also the question, of course, about whether banking in particular bears a greater responsibility because of the unique role that banks play in society, do they actually have to be better than everyone else?

Mikael Down 24:03
Yeah, absolutely. The regulation they benefit from, the depositor protection they benefit from, liquidity support they have access to, these are fundamental reasons why banks have to continue to earn and reinvest in that social license. To my personal reflection, you know, I've been so used to dealing with banks as institutions – you know this, right? – when I was a regulator, when you're a policymaker, you get the front end, which is normally the sort of person that's put to give you a sort of formal position from the firm, and you see it as a monolithic institution. You know, Firm ‘X’ thinks this. Take a step back. It's ridiculous to summarize the view of one firm that has maybe 50,000 employees. And you realize when you speak to people, that people really, really care. Most people turn up to do a great job. And it sounds kind of cheesy, but it's true, but it's actually realizing that there is a very significant number of people across the industry who want to do the right thing. And it's about creating the environments for them to do the right thing, and continuing to highlight where things need to improve, but doing so in a way that also supports as well as shows them where the barbed wire fence is, as it were.

Toni Dechario 25:17
That's so interesting, that there's research that shows that you will behave in the way in which you're expected to behave. That other people's expectations have a significant impact on your behavior. But I was thinking about it and related to what you were saying about people working in banks, reading every day in the press and social media, about how people think they're terrible. How people think they're greedy. How people think that you must be awful, because you're an investment banker who works for this terrible, you know, what was it? Squid? Evil squid organization? And is there the possibility that people's expectations of your behaviors grind you down so much, that ultimately you are going to act in the way in which you're expected to act?

Mikael Down 26:07
Absolutely. And the more you can encourage people to bring their own selves to work – this goes back to the diversity and inclusion point – the more you can move away from that sort of stigma… You've got people who are there to do a job in a way that is consistent with their values, is consistent with their beliefs, and encouraging that has got to be the way forward.

Toni Dechario 26:26
Mikael, you've been doing this for a while now. I'm curious about what keeps you at this, what really energizes you about the work that you're doing?

Mikael Down 26:34
I think the fact that the industry is changing, and the issues are changing so rapidly. So, there is the common themes that are always important in pretty much any organizational context. And these are the core things that we try to measure and monitor, but the external environment is changing all the time. And if you look at the issues now, that boards are grappling with diversity and inclusion, we've talked about technology change, environmental change, ESG type issues, inequality. These are issues that are changing and shifting all the time, and the pressures on boards and executive teams, the needs of society – which banks serve – is shifting and changing, demographic changes, societal attitudes, intergenerational differences. There's never a time to stand still. And you've got to keep alive to how the external environment is continually shaping the internal environment. What are the things you need to continue to measure and monitor, and the things that you need to always ask yourself? What's next? What's going to come that we need to make sure that we're starting to ask the questions now, so we can anticipate where the next little challenges might be? And that's what keeps this fun.

Toni Dechario 27:44
Mikael, I know that in your personal studies, you're looking at artificial intelligence and ethics. Can you talk a little bit about how your work over the past few years led you to this and what you're hoping to achieve?

Mikael Down 27:56
The thing that led me on to it – and the connection to my studies originally – was, we were thinking about our data. And we were starting to build up a really amazing dataset. I was kind of interested in how we could use it, but I wanted us to use it responsibly. And I came across Cathy O'Neill's book Weapons of Math Destruction, which is now very famous but at the time hadn't been around for very long. I use it as an example with my team of how data can be used irresponsibly, and with a broader set of undesirable, unethical outcomes, to understand it myself and to give them some case studies for that. But it kind of inspired me to think about this issue in a bit more depth. The more I thought about it, the more I thought this is kind of quite concerning. And we're used to talking about issues related to AI now, because it's very, there's a lot more awareness about it and research going on into it. But around the time, there wasn't much. And it kind of struck me as something that hadn't really hit the banking industry yet. You know, there were a few fintechs on the fringes experimenting with it. But it was, of course, used heavily within social media, big tech. And I sort of worried about what happens when this translates across to organizations that have absolutely vast amounts of data on customers’ behavior. And there is an opportunity for that to be used as a force for good. But there's also a huge opportunity to be a detriment, whether intended or not. And so, I just thought, “Well, this feels important and interesting.” And there is, of course, always a cultural aspect to this, because when you look at the way in which machines operate, it's tempting to think of them as kind of autonomous black boxes, but they're designed by humans and the decision-making that goes into every single process that leads to the creation and the deployment of a machine learning algorithm through the data cleansing, the engineering process, decisions taken about how and in what way the AI will operate. They're taken by humans. And it goes back to the point we were discussing at the start of this: humans are influenced by their environment, and therefore the environment is going to have a big bearing on risks such as those that are particular to AI. Of course, the fact that AI is so complex makes it very difficult to spot and monitor these risks. And that is also an interesting analogy to the complex derivatives that were traded ahead of the financial crisis, where they were hugely complex. They were traded largely in volumes by people who didn't fully understand what they were trading and the risk that they were bearing… It’s quite interesting parallels with the use of AI. So, what I wanted to get in my research – which will probably need to get narrower, because these are lots of big questions – was actually the lessons from the financial crisis that we can learn, to help inform us and guide us as we seek to deploy AI in a responsible way within financial services, and then what organizational hygiene factors need to be attended to, in order to make sure that stand the best chance of making sure that the design and use of these algorithms are a force for good rather than a force for bad?

Toni Dechario 31:04
Is there any further reading or other media out there that you would recommend for anyone that's interested in learning more about any of the topics that we talked about today?

Mikael Down 31:15
Well, I think if you're new to organizational culture, you can start with Edgar Schein, it's where everyone starts. But it's the pretty much the best place, I think, to get a grounding on it, and why it's important, the methodology. And some really, really interesting case studies within that. I think in a more contemporary age, Gillean Tett's work, her new book in particular, I think, is within the context of financial services, a really interesting study of actually using the discipline of anthropology to understand and observe organizational cultures, including within finance. So that's, that's a good book. I would also recommend Taking the Floor by Daniel Windsor, who has done an ethnographic study within Wall Street, on the culture of the trading floor. And that's an extremely good read, I really like the discipline of ethnography as one, which is a really, really powerful lens to view organizations. And we use some of that as well, with the work that we do. Of course, I would recommend the FSCB website. But also, you know, the compendium that you guys have at the New York Fed, I think is an excellent go to. I use it a lot to be able to find out who's saying what's on this topic from across the world. And it's an excellent place to find out some kind of key speeches or pieces of research or initiatives that are happening across the regulatory community and beyond.

Toni Dechario 32:33
Well, that's kind of you! So final question: you've kind of answered this a little bit in talking about some of your own work, but is there anything, this doesn't have to be related to culture, that you're reading, listening to watching that you can't stop talking about that you want to share with the world?

Mikael Down 32:49
Well, one of them is Mariana Mazzucato's new book Mission Economy. That's, I think, a really, really powerful way of looking at organizing a system across government, private sector, academia to achieve a common goal. So, there's a big study of it in Moonshot. But actually, you know, the application of it is around looking at some of the challenges that face us today, including the imperative to get to net zero. That's something I've read recently, which I thought was very, very thought-provoking. And sort of back to the sort of stuff that I study off the side of my desk on the AI side, I really recommend Deep Medicine by Eric Topol, which is a really good way of actually getting into AI. If you're curious about AI, and you want to understand it, he describes it really, really well.

Toni Dechario 33:34
Thanks so much, Mikael, for being with us today. It was good to talk to you.

Mikael Down 33:38
Good to talk to you, too.

Toni Dechario 33:40
For more conversations like this, as well as publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance-and-culture-reform.

Investment Connection in Puerto Rico
Recovery and Resilience in Puerto Rico
In the face of mounting challenges, the citizens of Puerto Rico have taken the future into their own hands. Community leaders are tackling foundational issues on the Island, such as affordable housing, capacity building, workforce development, recovery & resilience, renewable energy, and more. For this episode, we share their perspectives, examine how Puerto Rico arrived at this crucial moment, and reveal how CDFIs and other impact investors can get involved.

Jose Gonzalez 00:05
I think people have realized in Puerto Rico after the long recession and the challenges of natural disasters, that they cannot simply rely on government, state and federal to resolve all the issues that they're facing.

Rene Vargas 00:20
And every time there's a hurricane or a storm or now, the new chapter, we've band together and help each other. I think it's been imprinted into our DNA because of our experience.

JB 00:33
Welcome to Bank Notes, Recovery and Resilience in Puerto Rico. The views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System. I'm your host, Jeremy Brisiel. Here in the fall of 2020, we're all working to find our way through the Covid 19 pandemic, searching for ways to cope with a global health and economic crisis. What we know is that it will take ingenuity, innovation and community to build better solutions for tomorrow. There may be a model to finding those solutions. And it may be in Puerto Rico. This is that story.

Eduardo Carrera 01:12
My name is Eduardo Carrera, representing the Boys and Girls Club. The Vimenti project in Puerto Rico.

Giovanna Piovanetti 01:17
My name is Giovanna Piovanetti and I am the Executive` President of effect better known as Lendreams .

Roy Torbert 01:22
My name is Roy Torbert. I represent Rocky Mountain Institute, a nonprofit focused on energy transition.

Aurelio Arroyo 01:26
My name is Aurelio Arroyo. I am CEO of Cooperativa Jesus Obrero, a local credit union with sixty years of experience working with communities.

Christina Miranda Palacios 01:34
I'm Christina Miranda Palacios, and I'm the President of the Trust for the Development of Río Piedras.

Rene Vargas 01:38
My name is Rena Vargas. I work for Inclusiv.

Ana Maria Lopez 01:42
My name is Anna Maria Lopez, and I'm the VP of Development and Communications for Foundation for Puerto Rico.

JB 01:49
Those are just a few of the people gathered in a hotel conference room in Puerto Rico in January 2020; to pitch the mission and needs of their organizations to a roomful of potential investors. The pitch event is the culmination of years of work for these community organizations, and the cap of a multi-year program developed by the Federal Reserve Bank of New York called Investment Connection. And why is the central bank best known for setting interest rates, setting up pitch meetings for community organizations in Puerto Rico? Well, that's actually part of the mandate of the bank. Here's Chelsea Cruz and Adrian Franco, the CoDeFi team that worked on that program.

Chelsea Amelia Cruz 02:27
So all 12 Reserve Banks have community development affairs departments. And they're interesting because they were developed originally following the enactment of the Community Reinvestment Act, which Community Development also has a mandate to work on. So we were originally envisioned and compliment to consumer compliance to help them ensure that banks were meeting the needs of low moderate income populations across their respective districts.

Adrian Franco 02:53
It was enacted in 1977 and it was legislation that responded to a practice called redlining. Redlining was when banks were essentially looking at communities and deciding where to offer credit based on the neighborhoods, and no mainly because of characteristics like demographics. But unfortunately, that was a really, really bad for communities of color. And for many, many decades this practice really brought disinvestment to many neighborhoods in the nation. So in 1977, the Community Reinvestment Act, responded to that, and specifically asked banks to meet the credit needs of their communities where they received deposits.

JB 03:34
In response to the redlining practices of certain banks in the 1970s, the Community Development Affairs Departments were created. They still work in their respective districts today. After Hurricane Maria wreaked its havoc in Puerto Rico, which is part of the second district, the New York CoDeFi team sought the best way to support the island.

Chelsea Amelia Cruz 03:53
So following Hurricane Maria, obviously, the Federal Reserve isn't designed to be first responders. So it was important for us that we allow those agencies, FEMA and Red Cross to immediately respond to critical needs: water, food, medical needs, in Puerto Rico. But following that disaster, we really wanted to think about a way that we could begin to uplift the nonprofit community development ecosystem in Puerto Rico because those organizations are really going to be critical in determining the future of Puerto Rico and determining the future services and opportunities that exists for Puerto Ricans.

JB 04:32
The decision from one of the largest central banks in the world was to support the individuals and community organizations in Puerto Rico that could create deep and lasting change for the future of the island. Investment connection was designed to connect those community organizations in Puerto Rico with capital and financial organizations that they otherwise would not have been able to connect with.

Adrian Franco 04:52
Investment Connection itself as a program was launched in 2019, in September, when we called for proposals from organizations across the island, to submit their projects on community development. We've had a submission period of 15 days or two weeks from October 1 to October 15. We received those proposals and then our colleagues in consumer compliance reviewed those proposals to make sure they were eligible under the definition of community development of the Community Reinvestment Act. A key aspect of Investment Connection is to make sure that all these projects are under the CRA, and based on that we were able to communicate to the organizations that they will be pitching their proposals during the pitch event that happened on January 27, and 28th of 2020.

JB 05:44
So this is October of 2019, leading up to January of 2020. This is pre-pandemic. Proposals came in from all over the island from all types of organizations.

Chelsea Amelia Cruz 05:54
They're technically all nonprofits, and that includes the cooperativas, the financial cooperatives on the island, which are a key constituent. They provide key financial services and lending opportunities and they are dispersed widely across Puerto Rico. So for us, it was important to engage both the nonprofit community development community along with the cooperativas in this effort. And ultimately, we received about 40 proposals. Now, we only allowed for one proposal per organization, so that represents 40 different organizations. And it was very diverse. It was a CDFIs community development financial institutions. Again, it was financial cooperatives, it was foundations, it was incubators, it was kind of traditional nonprofit community development organizations and across many different themes.

JB 06:47
And this is the heart of the program, the model that might be essential to communities worldwide as we continue to deal with the pandemic and hopefully, in the not too distant future, rebuild with resilient, innovative solutions. The 30 organizations and investment connection were divided into six categories, affordable housing capacity building, education workforce, health, recovery resiliency, renewable energy, and small business entrepreneurship. Each organization approached each challenge in a unique way. Here's Aurelio Arroyo on the needs for energy resilience.

Aurelio Arroyo 07:20
Well, our project is Guaynabo's Rural Solar Energy Resilience Project is a problem that we are proposing. For neighborhoods in Guaynabo are all rural areas of our city. One of the neighborhoods is the neighborhood that is that our credit union is located, that has vulnerability, in terms of energy system. We all know that after 2017, and the recent earthquake, we had problems with our system. We have an outdated system, frail system, we have problems with the distribution, and we face in 2017, after Hurricane Maria and Hurricane Irma, we face the biggest blackout, the biggest blackout in the history of modern history of U.S. in any jurisdiction, and we have to look alternatives for this problem. Also our energy system, our remaining energy system are running with oil or with fossil fuels. So we have an impact in the environment. And we need to change that. We need to change that because we are living in an island is not a continent. We have a natural resource, beautiful natural resources, but we have limitations. So we need to move to an economically feasible energy system, especially for the people are living in the rural area. That's why we are looking to, we are proposing the Guaynabo Rural Solar, our program. We are proposing a pilot plan. We have to make it feasible, we will make it possible for communities to produce their own electricity. But how to create micro grids when you don't have that community organization, when do you have the realization of the community first? So when do you have the strength in terms of financing for the community as a whole, you have to put in to create and power the people first.

JB 09:26
The rural solar energy project that Aurelio represents is proposing a pilot program consisting of 40 families: ten each in four neighborhoods. The goal is to finance the construction of residential solar systems and build a network of self-sufficient micro grids. Solar power and energy resilience are one of the categories with many strategies. Here's Roy Torbert of the Rocky Mountain Institute on their approach.

Roy Torbert 09:50
So it's focused on the use of critical facility micro grids. Those are renewably powered grids that help provide or provide a resilient service to their community, but particularly financing solution to scale them. We've seen about 23,000 opportunities for critical facilities, only a small fraction of which currently have any support other than the Prepa grid. So we're here to help support that project. So they're about half small businesses. And in our both interviews and a lot of data collection, we find that small businesses, especially after Hurricane Maria, were critical. The remainder is a mix of things like fire stations, hospitals, or health clinics, water pumping, other telecommunication, key government facilities that help coordinate response to disasters between all of them, and they're very spread out across the island, we counted about 23,000. I think it means a fundamental change in how people approach these sorts of disasters to say that, you know, we don't have to reach outside, we don't have to wait on FEMA, we don't have to wait on the Army Corps, we've got solutions to provide basic power needs right away. Typically, these sorts of micro grid systems, including the data we have from the ones we've installed here in Puerto Rico, already, you know, right, as soon as the grid goes down, they've got batteries charged. You know, if you had a big storm, the solar panels will be shaded, but typically, you have enough in the batteries. So that community is going to say, okay, we're good we can we can provide the things we need. That lets us have sort of a home base, you can charge your phones, you can charge your walkie talkies to be communicate, communicative with everyone you need to. For us, that's a fundamental shift. I think it's also a first order difference, not the sort of dependence on you know, surgery by flashlight, that was one of the worst stories after Hurricane Maria. So this is starting with the ones that have the closest connection to life and human safety, and then moving to all the other ones that allow a community to more quickly return to normal operations. So for us, whether it's in Mocha or Ponce, or Torre Alto, the three projects that we specifically pitched, I think that for those communities is this sense of safety and investment in their own energy future. Rocky Mountain Institute now as a global organization has really been an amazing platform and an amazing intervener in all sorts of decisions that I think without, without reshaping, you see a grid like Puerto Rico's, right? One that is imported fossil fuels fragile, not at all involving community participation... Those are the sorts of things that scare us that we do our best to fight against. I mean, this touches on something that I think people here really connect with, which is this fact that Prepa as a utility has failed in a lot of its core services, and I admit has an incredibly difficult job, their leadership is always struggling with one of the most far flung power grids and hardest to maintain of any place I've ever seen. At the same time, I think these communities are saying 'why don't we start our own micro grids?' And this is going to have attention, including with the support from federal funds, when it does arrive into how, what the vision that that future grid looks like. And so I'd connect some of this work that communities are doing to a really powerful counterpoint to what Prepa in essence has been saying with its recent planning, which is more centralized, more natural gas imported. These community micro grids, especially if they're done cost effectively, are the easiest way to say 'that's not our future, we've got a better alternative and we're ready to seize it.'

JB 12:52
The blackout after Hurricane Maria was the largest in U.S. history, affecting 1.5 million residents. And it took 328 days, nearly 11 months to restore power to everyone. So, it's understandable that infrastructure resilience and alternative energy are things that are top of mind for organizations trying to build a stronger future. Safe, reliable and resilient housing is a profound need for the island as well.

Giovanna Piovanetti 13:21
My name is Giovanna Piovanetti, I am the executive President of COFECC, better known as Lendreams.

JB 13:27
That company name is Lendreams. The words lend and dream together. Describes their mission and their aspiration.

Giovanna Piovanetti 13:37
So we are looking to provide for pre-development loans to community development centers across all regions of Puerto Rico, so that they can obtain their initial capital until they're able to obtain additional funding from federal and local sources to develop affordable housing projects. Right now with the earthquakes, I have seen so much need about affordable housing, how so much people need to rebuild their homes, but is there are needed in Puerto Rico more essential players to develop these projects to develop more resilient homes, and how we can integrate the importance of the nonprofit sector as a player toward rebuilding all these houses and developing new resilient homes for people that have suffered the earthquakes and this in addition to the long standing need of Puerto Rico in terms of affordable housing. I think this is the best time to create these fund so that we can provide for loan capital for the needs of these nonprofit developers.

JB 14:48
What makes investment connection powerful and why it may be a roadmap for other communities is the diversity of ideas about how to build a better tomorrow. Micro grids are one way. Affordable, resilient housing another. And for some... one building, maybe the answer.

Christina Miranda 15:04
So I'm Christina Miranda Palacios and I'm the President of the Trust for the Development of Río Piedras. We're proposing to rehabilitate the Paradise Theater as one of the key magnet projects to spark or ignite the transformation of our community. Río Piedras is a community that's, it's an eight barrio community. It's very underserved right now. It has areas that are dilapidated, but it's really the face of Puerto Rico in a small geographic area. It's a building that has been empty and continue to deteriorate year after year. So it's an eyesore for the people that don't have the vision. But it's a jewel in the making for the people that actually have a vision. So getting the Paradise to the community has been a huge win for us. And it's actually it will mean having something that we can say we did this, we're on our way we're moving along. And it will also serve as a magnet initiative to increase foot traffic, people's interest to spark different conversations with the community. But it will also be a place where the community can actually go and have a cultural space that's their own, but that's also shared. So it's, it's a huge win for us. So the Paradise will be a magnet project that will hopefully spark the interest of private investors to come and invest in our community.

JB 16:16
Converting an eyesore into something with vision captures the spirit of so many of these organizations. And certainly there is incredible value in improving infrastructure community spaces and housing. For and Eduardo Carrera and so many others like him, building a successful future is achieved by building a better present for the children of Puerto Rico.

Eduardo Carrera 16:36
My name is Eduardo Carrerra, I'm representing the Boys and Girls Club, Vimenti project in Puerto Rico.

JB 16:41
The Vimenti Project is a one stop shop center based on a two generation approach - parents and children - with a mission to eradicate childhood poverty. The two generation approach is an anti-poverty initiative that provides support for both the children and their parents together. And there's evidence that this approach is one of the most effective to eradicate childhood poverty.

Eduardo Carrera 17:01
When we think about the level of poverty in Puerto Rico, almost six out of 10 children in Puerto Rico live under poverty. And now we know through research that a child that is living under poverty is highly likely to be exposed to high levels of toxic stress situations in their home that contribute to health components that are not good for their develop development. They usually go to low performing schools, thus creating an adult that really can't compete in the in the labor market that adult usually earn less money, they usually is plagued with more disease and, and sickness. And they're highly likely to be involved in criminal activity or being a victim themselves. So when we think about child poverty, we really think about the end result and the end result for Puerto Rico is loss of productivity for everybody. We estimate that discussing our island $4.4 billion in productivity and loss of revenue every year.

JB 18:02
That's 4.4 billion. With a B.

Eduardo Carrera 18:06
We are connecting 50 years of services into a more comprehensive model to address child poverty. For the last year, we began a project that address that issue in conjunction with families. Families come to a physical place where they can find services in the areas of education, economic development and health. And basically, we are presenting the expansion of that project to a permanent facility that can serve additional families.

JB 18:38
The Vimenti project is part charter school, part integral Services Center for the entire family. That comprehensive approach is key to their success. And part of what they're trying to expand on. The Boys and Girls Club of Puerto Rico has been operating since 1967. Eduardo, in fact, went through the program when he was a child.

Eduardo Carrera 18:57
I was the recipient of a lot of blessings and good mentors, I grew up in a housing project where I had the opportunity to participate in a Boys and Girls Club. And my mentor became a lifetime mentor. And at one point asked me to come back and help and get back and these became my cause.

JB 19:20
So many of the participants have incredibly personal connections to the work they're doing.

Eduardo Carrera 19:25
I can I go back to the communities that I grew up. And I see that most of friends family did not were not afforded the same, the same opportunities. And for them that cycle was never able to, to fully break. So to me more than the one story that that is a positive story is the many, many, many stories, the majority of the stories that never break. And for us, we have been able to galvanize people that have the same burden and believe that until that last person in the community have equal chance, our work is done. So we take satisfaction on being unsatisfied with the status quo and hopefully we'll will not get tired.

JB 20:08
Being of the community and working for the community is one of the most consistent themes across all of these organizations, whether it's infrastructure needs or human needs, the same desire for self-reliance, and a new way of operating permeates all the pitches. Rene Vargas,

Rene Vargas 20:24
My name is Rene Vargas. I work for Inclusiv, formerly known as the National Federation of Community Development Credit Unions, and I am a program officer there working with the Puerto Rico CDFI initiative. Throughout all my life, I feel that I've been working with the concept of access. And at some point in other point in my life when I was younger and more vibrant, I work for access for higher education and for students in low and underserved communities to be able to have a college education. And now I have the privilege to work with Inclusiv, to work on the other side of the spectrum to help people have access to credit so that they can build their own financial future and prosper. That's what everybody pretty much wants to do here. I mean, it's amazing I, I'd say it's a life's dream. And I think that one of the only and I want to be specific about this one of the only, and I've never, I don't want to say good, but one of the only... necessary things that have come out of all the natural disasters that we've seen in Puerto Rico is that people have understood that in this particular climate, the actual ineffective bureaucracy that the island has, the only way to be able to do impact and to help people is by doing it yourself. And so our project, or our particular proposal is about financial cooperatives. They pretty much represent the ethos of people helping people, everything they do is for the community to weave, they're part of the fabric of their communities, and are out there with them. And so being able, even from afar, to help financial cooperatives expand the work they're doing, helping their communities making sure that you know they can help themselves is an honor. I think that people have to start thinking that we have and I include myself in this reasoning, we need to start thinking of alternative ways of getting things done. And I think that sometimes we've relied a lot on traditional institutions mainstream, and in my field in mainstream financial institutions. And when you think of banking, you automatically think of x, y, z organization. But we have to start thinking of other ways of getting things done. Ways that are more democratic, that are open that are more transparent. And I think that that's part of the recipe for the situation that Puerto Rico is going through. Right. So I think that the future of Puerto Rico, its people, its communities, its nonprofit organizations. I think that the government is in a period of transition. And I think that eventually, you know, the people are going to understand that they need to, they need to take, because I think that people want to participate in the political process. But at some point, they're going to have to take control of the political process to be able to affect change. Now, change starts in every community. I think that Puerto Ricans are doing that everywhere, the 30 organizations that are here, and the proposals they have and the work that they've done before presenting these proposals. I think it's a pristine example of that. But how I see it is that eventually the people that are here that are working on the ground, there'll be in charge,

JB 23:36
Even with all of these challenges, natural disasters, political struggles, infrastructure weakness, economic recession... One of the bigger challenges is far less tangible in nature, but no less difficult. Here's Nancy Santiago, Vice President of Hispanics in Philanthropy.

Nancy Santiago 23:51
I think it's so easy for folks when they're talking about a group they don't know or understand, to attach these narratives to them. It happens to us all the time, we talk about the differences about how Northerners talk about people from the south, and how people from the east coast talk about people from the west coast. We do that because there isn't a proximity, there isn't knowledge, there isn't information readily available for us to compare and contrast. So then we take this kind of one brushstroke and say everybody's this way. And so some of the difficult narratives that have been happening in Puerto Rico over the years are that we're not educated. And I have to hold up stats that say, but 22% of the bachelor's degrees here are in STEM related fields, we are quite honestly over educated, which is why sometimes we see folks having to leave the island because they can't find the types of jobs that will use their skills and the way they want to use them. So we have to challenge the narrative about things like corruption, and I jokingly tell people 'I'm from New Jersey, we kind of know something about corruption in the state of New Jersey.' There is no difference for me. Yes. Is there corruption? Absolutely. Does it exist in every major city of the US and could I point to examples in just about every major city? Absolutely. For folks to say that that's the only way of life here is just so wrong on so many levels. I'd be like saying the entire city of Chicago is corrupt because they tried to sell a senate seat. That's like saying all of New York City's corrupt because they had a corrupt Attorney General, right? And so we start to think about some of those narratives. And I ask people to challenge that. There's also this false narrative of Puerto Rico gets all of these things. No, we don't, quite honestly, we have the highest tax rate in terms of when you go out there and pay for something at a store higher than any other state in the Union, that we're not being charged federal taxes, maybe. But those taxes are coming in many other ways. So people here share the burden of higher tax bracket than many other cities in the US. And even the kind of narrative of we get all this government support. Even around the aid after Maria, we all know that, yeah, these big numbers are being thrown around. But the amount that actually made it to the island was minuscule compared to what it was supposed to get. So every day, we have to challenge those narratives about the people, the culture, the flow of capital. And I think it's really important that each of us do a better job of not just talking about what Puerto Rico has to offer, but to really push back against the narratives that people have created that are false narratives around the island.

JB 26:26
False narratives are one of those challenges that need constant work: constant work being pushed back on constant work to overcome constant work to rewrite them. Here's Frankie Miranda, President of the Hispanic Federation,

Frankie Miranda 26:38
There has been an issue with the narrative that has been spread out or told about what happened in Puerto Rico and what continues to happen in Puerto Rico. What we have seen with our work with more than 116 programs, community organizations, initiatives here in Puerto Rico, is that there is a bountiful number of innovation, hardworking people, and people that actually took care of their own communities, even when the federal government and the Puerto Rico government had issues reaching out those communities. Philanthropy, the nonprofit sector came together. And there was some also private partnerships that came together, when government couldn't respond. Nobody can be who truly prepared for a natural disaster like it was hurricane Maria, and most recently, the earthquakes that have been affecting Puerto Rico for over a month at this point. But what we keep hearing is that Puerto Rico lacks certain things, when in reality, what Puerto Rico is doing so much to take care of his own. And what we need to do is to provide additional support. That is why this convening is so important, because you're helping us change that narrative, demonstrate that there are very good, very healthy nonprofit sector here in Puerto Rico doing amazing work. They're just understaffed and under resourced.

JB 28:13
So in addition to economic challenges, natural disasters and political disarray, the Puerto Rican community has to confront false negative narratives and rewrite them. There is one narrative that kept popping up in every pitch. While the island currently lacks resilient energy systems, resilient economic systems and resilient Cities and towns. It has a surplus of resilient citizens.

Lucas Arzola 28:35
My name is Lucas Arzola, and I'm representing Parallel 18. It's a global startup accelerator based in Puerto Rico, and I lead operations and the investment initiatives for the program. One of the main goals of Parallel 18 is changing the global mindset around entrepreneurship in Puerto Rico. As islanders we tend to think local: my market is my town or my market is Puerto Rico. So really, one of our goals is to help Puerto Ricans think bigger, you know, think about how their products or services can address problems and achieve clients all over the world, we see that Puerto Ricans are extremely resilient, and the data speaks for itself, and how that pertains to entrepreneurship and what we do is that from crisis comes opportunity. So we actually saw after the hurricane, many entrepreneurs that decided to launch companies based on problems that, you know, came from the hurricane itself, or people that just became unemployed and decided now's the time do their own companies. So we see that definitely there's new opportunities, a new mindset around Puerto Ricans and recovery. We actually launched a campaign called 'El Boricua se las inventa,' 'Puerto Ricans are inventive,' to find those entrepreneurs all over Puerto Rico, that have interesting ideas that we could support. Certainly the future is bright, you know, definitely we are here to support entrepreneurs, investors, mentors, interns, freelancers think every group can benefit by connecting with startups or being around innovation in some way. The best part is now you don't have to go to Silicon Valley or New York to have a tech innovation experience you can do so from right here, Santa Rosa, Puerto Rico. We just invite everybody that feel that they can support a company, maybe they have their own idea for a company to come to us to apply, because we want to hear from all of them.

Ana Maria Lopez 30:19
My name is Anna Maria Lopez, and I'm the VP of Development and Communications for Foundation for Puerto Rico. I think Puerto Ricans as a whole and particularly Puerto Rican entrepreneurs are some of the most resilient people in the world. If you think about all the particularities of Puerto Rico, you know, we just had earthquakes or hurricanes, there's recessions, there's, there's always dynamics at play that force Puerto Ricans to constantly be reinventing themselves and innovating to ride those waves. So resiliency is inherent to our culture. And entrepreneurship is also part of our DNA.

Michael Carroll 31:02
It's self-evident, you go anywhere on the island, and people are upbeat, people are friendly. And there's there is a spirit of entrepreneurship. And despite the lack the disinvestment, in on the island, it hasn't stopped people's enthusiasm. And we'd like to tap into that. Like I said, the missing piece is capital. A little bit of capital go a long way here. My name is Michael Carroll. And I'm the lending director for the local initiative support Corporation, our rural program.

Giovanna Piovanetti 31:36
After Hurricane Maria, our people stand up again. And now after the earthquakes, I know they will, I just think that Puerto Rican people have the will, have the power, have the resiliency. And all these experiences have made us be more strong, more powerful, and has helped us also develop a new nonprofit sector. And new nonprofits will come as player after all these initiatives. And we are now again, at the eye of the national level foundations that want to come and help. I think this is a huge opportunity. And any, I always think that after each disaster, each tragedy, each problem. It also means that a new door is opening for support for more funding, and for new opportunities for people.

JB 31:46
That spirit repeats over and over again, that within these crises is opportunity. That is the definition of resilience. And it may be a roadmap for the way forward.

Roy Torbert 32:46
There's a there's a little story that I like I was here Not long after Maria in the town of Barranquitas and a guy there said, Look, our town is in shambles. You know, we're struggling, but nobody's leaving. We're staying here, we're gonna dig ourselves out from this, we're gonna put the town back together. We talked to the mayor later that day, and he was saying the same stuff. So this sort of like desire as a community to come together support, you know, I'll drive, I'll drive diesel fuel and a generator to someone's abuela if they need it. This is like the community that we really observed. It's one that is incredibly powerful. It's one that for us exactly fits into the same work of saying we can't rely on the centralized power grid anymore. Instead, the solutions are coming from within the community.

Eduardo Carrera 33:26
My, my take on these is that these century, the social issues are not known for the nonprofit sector to own. These are the most pressing issues for the world to solve. So these forces us to get out of our traditional bubble, and to enter into partnerships and agreement, not only with our friends, but also with people that we thought in the past that might not have anything to contribute to the social area.

Nancy Santiago 33:53
In the case of Puerto Rico specifically, there has never been a better time and opportunity to bring people together to work together. That number one makes deals happen, right people willing to come to the table for both good and profit, right? You have that moment here. And quite honestly, if you want to be able to show that you've made an impact, do it in a place like Puerto Rico, that impact will show immediately. I think

Frankie Miranda 34:19
I think that there the Puerto Rico is a fertile ground for innovative investments. Independently, what is your focus area, you're going to find something here. There is so much and there is a unique opportunity that this disaster has opened up. I have my parents talking about renewable energy. I have young people talking about reforestation, and protecting the environment, or how to make community center more resilient. There are so many different opportunities here. And I welcome everybody to look into it to reach out to the Federal Reserve and to reach out to all the participants here because if you're interested in something? I'm sure that we have it.

JB 35:04
The New York Fed remains committed to helping foster an ongoing dialogue between community groups and potential investors looking to make a real impact and opportunities for investment still exist and are as relevant as ever. If you're interested in joining the discussion, please visit nyfed.org/InvestConnectPR. You can also connect by sending an email to NYinvestmentconnection@ny.frb.org

Small Business
Episode 01
Access to Credit & Financing
Claire Kramer-Mills
Small businesses employ about 50 percent of private-sector workers. Claire Kramer-Mills leads the Federal Reserve System’s research on this key driver of the U.S. economy through an annual survey that examines small businesses’ access to financing. She details trends among small businesses, including how they’re performing and securing credit, as well as which firms are seeing the most challenges and where they can go for help. (RECORDED: NOV. 15, 2018)

Javier Silva: Welcome to Bank Notes, a podcast by the New York Fed. For this inaugural series, we’re discussing Small Business. I’m your host, Javier Silva.

In this series we’ll share insights and analysis from the New York Fed on a range of small business issues, including credit needs and challenges. We’ll also hear from small business owners about their experiences: the highs, the lows and everything in between. Before continuing, I would like to note that the views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

Javier Silva: In today’s episode, we’ll learn about the current state of small business from our own in-house experts. Earlier this year, the Fed published the results of the small business credit survey. To hear more about what it means for small business owners, let’s take a deeper dive into the findings with my colleague, Claire Kramer Mills, Assistant Vice President at the New York Fed. Claire leads the New York Fed’s analytic work on community development issues, with a focus on consumer and small business finances. In 2010 she spearheaded an effort to fill a data gap and gather other intelligence on small business financing, leading to the creation of the Fed’s Small Business Credit Survey, which, today, is a partnership of all 12 Reserve banks and over 400 community organizations.

So welcome, Claire.

Claire Kramer Mills: Hi Javier, it’s great to be here.

Javier Silva: So in this podcast we’re going to learn a little bit about the survey and why the Fed cares. We want to better understand some of the challenges faced by small businesses and also hear some of the takeaways for policymakers. So the survey is a partnership and collaboration among all the 12 Reserve banks, over 10,000 small businesses responded to the survey from about 50 states and the District of Columbia. And this effort has been going on for a couple of years. So Claire, why does the Federal Reserve care about small business?

Claire Kramer Mills: Really, put simply, the Federal Reserve cares about employment. And small businesses employ 50% of private sector workers. They’re really important local employers and of course in the aggregate they’re also a key driver of the economy.

Javier Silva: Why a survey?

Claire Kramer Mills: Following the financial crisis, we, like our counterparts throughout the country engaged in a series of focus groups with local stakeholders. And what we learned in speaking to nonprofit service providers, lenders and other interested parties was that they really lacked local information about small business conditions. And because small businesses are such an important employment channel, we really wanted to get a better sense of what they were saying about their health, about their financing circumstances, and tensions that they were experiencing.

Javier Silva: So the New York Fed has held workshops across our district on small businesses, for small businesses, on how to access capital and I’ve heard the term “small business” used often. What do we mean when we say small business?

Claire Kramer Mills: It is a wide universe. In the broadest sense the Small Business Administration definition of small business is any business that has under 500 employees. Practically speaking, most of the small businesses we hear from in our survey have fewer than 100 and typically have $5 million or less in annual revenues. One important thing to note is that there is a big difference between small businesses that are self employed—don’t have any employees on their payroll—and those that do have at least 1 full-time employee other than the owner. So we distinguish between those two.

Javier Silva: Tell us, what’s happening in the world of small business?

Claire Kramer Mills: Well, the last number of years, following the financial crisis, have been eventful years in the small bus space. It’s been difficult, but we have seen improvement in general business conditions and certainly in availability of financing for small businesses, including some interesting innovations in that space. In the last year that we’ve been tracking changes in small business conditions, we’ve seen pretty steady performance reported from the business owners that take our survey. Very steady demand for financing. We do see some challenges in this space, however, particularly for start-ups, small firms, and minority and women-owned businesses.

Javier Silva: There’s a wealth of data in the survey, which includes information on types of firms and firm size. What’s the difference between these types of firms?

Claire Kramer Mills: So the small business universe is really diverse and one of the things that everyone who looks at this space knows, is there are really profound differences between smaller revenue firms and larger revenue firms. In terms of both credit needs and financing needs and experiences, we see really profound differences between firms that are under $1 million in annual revenue and those that have larger revenues sizes. Typically firms in the sub $1 million space—and these are often firms that are starting up, they’re under five years in existence—they really need small denomination loans or financing vehicles. Most of them are seeking roughly $100K or under in financing. And their outcomes also tend to be different from larger revenue firms.

Javier Silva: And so we hear a lot of talk of where firms access capital. Where did some of these smaller firms pull together their financing?

Claire Kramer Mills: Typically, most small firms and again, here we’re talking $5 million or under, typically from our respondents, most of them are going to traditional channels. You know they tend to have some relationship with typically a bank and are very likely to seek financing through that channel. One of the issues, though is for firms, particularly those with under $1 million in annual revenue, while they make seek financing through a large bank or a community bank that they have an existing relationship with, their success at those institutions really varies and differs from larger firms. There tend to be particularly at large banks, the success rate for small firms is much lower than if they go to a community bank or if they seek credit or financing from another channel like a community bank, or an online lender, or a community development financial institution.

Javier Silva: So one question I often hear from small business owners is about online lending. So I’m glad you mentioned it. This type of lending as you know has come on the scene in the last couple of years. How has this source of credit factored in for small businesses in the survey?

Claire Kramer Mills: Yes, there have been really wide innovations in lending following the financial crisis. And as you note, online marketplace lenders or direct lenders have frankly filled a growing space in the market. They tend to be smaller relative to traditional lenders, main street lenders. But they’re a growing share of the market. And part of that is driven by the fact that they are really speedy in their decision-making which is very attractive to small businesses who may be seeking relatively small denominations, but they need that money quickly in order to provide bridge financing. They’ve got a new contract that they need to fulfill, but they’re not going to get paid immediately for that contract so they need that short-term kind of gap financing. And frankly traditional providers just take too long.

Javier Silva: What are some examples of online lenders?

Claire Kramer Mills: So a couple of the big players that you’ll hear are On-Deck. You’ll also hear Lending Club, PayPal, Working Capital is another provider, and everyone who’s every visited a farmer’s market will know of Square.

Javier Silva: Absolutely. So I’m also interested in learning a little bit more what role personal finance plays in the financing of small businesses. So they’ll go to banks, go to online lending, how about personal finance?

Claire Kramer Mills: It’s a huge, huge factor. So you know when we think about anyone who’s had a good idea or thinks they’ve got a good idea and they want to start a business, they tend to bootstrap, right? They’re going to tap into their personal savings, they’re going to tap into friends and family, and kind of close sources. And that’s very often the early stage capital that you use to start a firm. In terms of when a firm gets to a stage of development where they need really to seek money outside of their own personal pockets, they’re going to rely on their personal credit score in order to apply for financing from a bank or another channel. Very often if they’re applying for a loan or a line of credit product, you know, there’s a need to pledge collateral to secure financing. And what we see in our data is that even firms at later stages of maturity and of greater size are still using personal assets as collateral to secure their financing.

Javier Silva: That is quite an interesting point. And so if I understand it correctly, the personal credit and the business credit are one in the same in the early stages of a small business?

Claire Kramer Mills: In the early stages, and even later stages of development—at least as far as collateral is concerned—personal assets still are very, very commonly pledged. In terms of personal credit score vs. business credit score, there are differences as firms mature and grow there tends to be a greater use of business credit, but personal credit is still thrown into the mix.

Javier Silva: And what’s the average amount of borrowing for a small business, for these younger businesses?

Claire Kramer Mills: Yes, for younger businesses in earlier stage and smaller, you know, those things are related. We’re really talking in most cases, $100K or less in credit. The overwhelming majority are $250k or less. And increasingly, you know, that’s a market that’s not super profitable for traditional lenders, and it’s often because newer firms and younger firms don’t have an established track records. It’s a tight lending space for them, you know, which again underscores the attractiveness of alternative providers of capital.

Javier Silva: So once a small business owner has all of their financing together, how are they spending this capital? Where are they deploying it?

Claire Kramer Mills: Well, you know, that’s a question about why firms are seeking capital is a great one. It’s one that we’ve been tracking basically you know since we came out of the recession. And what we’ve seen is an evolution, frankly. The majority of firms coming out of the financial crisis were really seeking working capital. They just needed to kind of keep the lights on and keep operations moving. But now we see that the majority are seeking capital to grow their businesses. It’s because they’ve got new contracts that they want to fulfil and they need either bridge financing or they need the financing to secure and take advantage of a new opportunity.

Javier Silva: In the survey 35% of businesses were either female-owned or had equal ownership and we know Hispanic-owned firms are also rising. What else about small businesses do we need to understand?

Claire Kramer Mills: Well, I think one thing that’s really important to understand that there are profound demographic changes happening in the small business universe. And that has really important and notable implications for employment for America in the future. So 30% of new businesses are owned and operated by immigrants. As of 2016, according to Kaufman information, 24% of new businesses are owned and operated by Latinos. Those are really interesting numbers on the face of it. But when you start to look and unpack, and think about the potential of these firms, one thing we know is that Latino owned businesses are not really scaling to the degree that we might think. And by scaling I mean growing to revenue sizes of $1 million or over. Only 2% of Latino-owned businesses have grown to, in excess of $1 million in annual revenues. To connect this back to the original question of employment, the significance of 24% of new businesses being Latino-owned is really important because if these businesses are unable to secure sufficient capital or are unable to grow, that will have important and negative employment implications for the economy.

Javier Silva: So as these businesses—and all businesses, really—pull together their financing together, there’s a great need for technical assistance. So where can a firm owner go to seek help?

Claire Kramer Mills: There are a lot of local and national networks that provide counseling and frankly free advice to small businesses. One of them best known is Small Business Development Centers which are typically housed at colleges and universities, and they can offer advice and guidance on everything from an idea that has not yet been developed into a formal business, to formulating a business plan and beyond. There are also networks like SCORE, which is a network of retired professionals who provide technical assistance to small businesses.

Javier Silva: And so do community development finance institutions also provide technical assistance?

Claire Kramer Mills: They do. And what’s really novel about community development finance institutions is that they marry guidance with provision of capital. And, CDFIs as they’re commonly known, are able to take a little bit more risk than traditional lenders on their portfolios, so that enables them to tap into part of the market and to serve part of the market that might not qualify at the moment, you know, for credit at the best terms and at the best rates. What we know from our survey, is that though they typically are a small part of the market, they are very good at serving segments that have typically been disenfranchised or left out of the credit market and that the borrowers who work with the CDFIs are tremendously satisfied.

Javier Silva: And so the next step from a CDFI would be a traditional lender?

Claire Kramer Mills: The goal from a CDFI, and frankly from a broad set of players who are now operating in the market, some for a profit, is to really help firms establish a credit track record, a credit history, a reputation, that will enable them to enter the mainstream to seek, as they grow, to seek larger sums of capital for their business, and to obtain capital at the best rates and the best terms.

Javier Silva: And that’s great for communities.

Claire Kramer Mills: It is.

Javier Silva: Claire, I want to follow up on Latino-owned firms. What’s holding them back?

Claire Kramer Mills: That’s a great and pressing question. So, to date, very few Latino businesses, its 2%, have scaled to $1 million or greater in annual revenues. One of the big challenges, of course, is securing capital. Many are not, don’t have enough of a track record, or enough of a history, or a sufficiently high credit score to qualify for traditional capital, and that means that if they’re securing capital they’re doing so at higher rates, which can definitely slow down their expansion. Another, of course, important issue that is tied to capital access is access to procurement opportunities. And really scaling through contracts with major major corporations and large entities like hospitals and the education sector. To date, Latino performance and access to those networks has not been what we would expect.

Javier Silva: So it seems that not only Latino-owned firms, but just firms across the board, are having difficulty accessing capital. And it looks like, from the research, more small business owners are heading to online lenders, and alternative lenders, and other lenders. Why do you think that is?

Claire Kramer Mills: Well, over time what our data have told and us, have indicated, and I think a lot of providers—increasingly new providers instinctively knew—was that the bulk of small businesses are not being well served through traditional channels. And you know, that slows down their growth, and for firms that have not as much of a track record, or don’t have pristine credit, they don’t have a score of 720—they’re going to seek credit through other means. And online lenders have really perfected, or increasingly perfected ease of applying. You can easily upload your documents. You get a decision really quickly. The money is in your bank account in rapid fire. That’s very, very different from traditional lenders.

Javier Silva: So what issues would you raise for policymakers?

Claire Kramer Mills: Well, I think that the online lending space is a new space. It’s evolved quickly and the framework for regulation and transparency has not kind of caught up to speed with where the market is now. The other thing I would point out to folks, policymakers, who are starting to look at this is, the really big difference between the propensity of smaller firms and perhaps less sophisticated firms to seek credit through these channels is much, much higher than larger and more mature firms. And given some questions about transparency and understanding about what those loans really mean practically, I think that is an important issue that we have to tackle.

Javier Silva: So firms on the smaller side are going to these non-banks, or non-main street type of lenders. And CDFIs (Community Development Financial Institutions) and credit unions are picking up some of the slack. But not all of it?

Claire Kramer Mills: That’s right, in terms of scale CDFIs are a venerable channel, but they’re relatively small in the marketplace.

Javier Silva: Well Claire, we heard a lot today and there’s so much more to talk about. Thank you for joining us. This has been a very informative conversation.

Claire Kramer Mills: Thanks so much Javier.

Javier Silva: That wraps up today’s discussion on small business. In future episodes we’ll talk to a variety of small business owners on how they built their businesses. And they’ll provide some practical advice from their own lessons learned.

Episode 02
Built by Generations
Mike Arnoff
Arnoff Moving & Storage started in the 1920s with one truck. Now, 95 years, hundreds of trucks, and five generations later, the company is led by Mike Arnoff and has expanded its services to include logistics solutions. Arnoff takes us through the company’s history, its philosophy, and how its family culture keeps it moving in the ever-changing transportation space. (RECORDED: JAN. 19, 2018)

Javier Silva: Welcome to Bank Notes, a podcast by the New York Fed. For this inaugural series, we’re discussing Small Business. I’m your host, Javier Silva.

In this series we’ll share insights and analysis from the New York Fed on a range of small business issues, including credit needs and challenges. We’ll also hear from small business owners about their experiences: the highs, the lows and everything in between. Before continuing, I would like to note that the views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

When you grow up in a family business, there’s more than just profits motivating you to succeed. It’s family history. A legacy of service. And the future of your family. Today, we speak to the third generation owner of a business that started in the 1920’s with a single truck. Mike Arnoff was "born" into the moving and storage business, and by the age of 15, he worked summers and part-time in his parents’ company—but that was just the beginning. Today, he’s President of Arnoff Moving and Storage.

Welcome, thank you for joining us.

Michael Arnoff: Good morning.

Javier Silva: So let's get into a little bit about your company. We want talk about the origin story, the evolution through time, and get to bring us up to the present day, and talk a little bit about the future. So, Arnoff Moving was started by your grandfather in the 1920s, in Lakeville, Connecticut, which is in the northwest corner of Connecticut. Share with us the story behind how that company started.

Michael Arnoff: So, you know, Louis was an industrious type of guy, and he was sort of the guy around town that could get odd jobs done. So he had a truck, and, you know, if you needed your basement cleaned out or if you needed something moved, he was sort of the guy to go to. And the interesting thing about the community of Lakeville and Salisbury, the town of Salisbury in Litchfield County in the northwest corner, is a lot of New York City families, wealthy families, had homes there, weekend homes, summer homes, whatever it might've been at the time. And Louis became the go-to guy, where, as people were traveling in Europe and going on these extensive trips and buying antiques and items for their home, or adding to their collections, they would call Louis, and say, ‘hey Louis, next week the ship's going to be in down at the pier in New York; can you go down and pick up the cases of all the items that we purchased on the last trip?’ So, in short order, a moving company was established based on the fact that Louis realized he had some capabilities, and he certainly needed to work—he was a young guy and starting to think about having a family—and he went to his stepdad Abraham, and Abraham helped him, loaned him some money, and they established, in 1924, the first truck.

Javier Silva: From our Small Business Credit Survey, we know that many new small businesses don’t typically make it past the first two years. How did it work out for your grandfather? Did he seek additional financial sources?

Michael Arnoff: The local bank in Lakeville, still there today, is called, the Salisbury Bank and Trust Company, and you know, as the story goes, Louis, was, he understood borrowing, so he was working in a business where you made some money on Monday and you spent it on Tuesday and you made some money on Wednesday and you spent it on Thursday. So it's not like he ever had that much money, but he knew that if he needed money, he could go to the local branch of the bank and borrow $25, and which, of course, at that time, was a fair amount of money, and over the next few weeks pay it off $5 at a time. So, as we look back on the family, he was a real borrower. He really understood that. And, um to this day, five generations later, our family still banks with that small bank in Lakeville, Connecticut. They've now of course spread out, and they're more of a community bank, located in three states—Connecticut, Massachusetts, and New York—and it's still called the Salisbury Bank and Trust Company.

Javier Silva: So, the company grew, you found success. What was the company's big break after that?

Michael Arnoff: In 1948, I think probably one of the first real breaks came along, where a national company called North American Van Lines needed an agent in the northwest corner of Connecticut to help service moves. And at that time, Van Lines, which were formed in the middle to late ’30s, were really back-haul agents. So if you move somebody to Chicago from Connecticut, you wanted something on your truck to go back to Connecticut with, it was a place that you could send a telegram to, and say, “Hey, next week, I'm going to have a truck empty in Chicago; do any of your agents have any loads that are going back to New England?” And so, lo and behold this partnership was very good for Louis, and it helped him really build his company, and he became an agent for North American Van Lines, and this year, we'll actually celebrate our 60th year in a relationship with that organization, and we're pretty proud of that long-term relationship.

Javier Silva: So that takes you from being a very small company in northwestern Connecticut to being more of a regional player, and then now, more having more of a national presence with this partnership.

Michael Arnoff: Well, I think that partnership gave him a larger wingspan. It gave him the ability to open up new business opportunities that he wasn't able to service prior to that time.

Javier Silva: Take us through now the ’70s and ’80s and that progression, and then particularly when you joined the company as well.

Michael Arnoff: My dad, Richard, the third generation, joined the company in approximately 1960, and the company was still operating out of its location in Lakeville, Connecticut. At that time, IBM was operating in Poughkeepsie, and they were starting to develop a factory in Fishkill, New York, a town south of Poughkeepsie. And, my dad went and started to market his capabilities for handling sensitive shipments—private collections of art, antiques—to this company that was, you know, a major up-and-coming, growing, massive company, and he was able to close sales. So, within the next 10-year period, he opened a large facility in Poughkeepsie to be able to service their needs, to have a terminal close by their facility, and to have a warehouse to be able to provide storage services for the equipment and items needed in their manufacturing process. So our company still maintained its capabilities of moving families, which we still do today, but he started to diversify in moving equipment, raw materials, and manufacturing machinery.

Javier Silva: When did you join the business? And what was your focus following the expansion of the company to Poughkeepsie and working with IBM?

Michael Arnoff: I decided to join the company in 1984 and really two things were going on at that time. And from a marketing background, my ideas were business development, and we started to look north toward Albany and what was going on in the capital of the state. I'd always realized that the state capitals were very stable economies, and we wanted to have a presence with that stability and start to further develop our office-moving capabilities that had been developed through the ’80s. Also, simultaneously at that time, a lot was going on. There was a lot of development around the Stewart Airport area in Orange County, New York, just outside of Newburgh. So, two things went on over the next couple-of-year period. One is that we opened a warehouse and operation in Albany, in downtown Albany, and the next thing that happened was that we bought our largest competitor in the lower Hudson Valley, out of Newburgh, and took over his operation and developed a further operation in Orange County; with it in mind that this airport was going to develop and there was going to be a lot of opportunities for us potentially at that airport with moving freight and baggage handling, or whatever the case might be.

Javier Silva: So as you took advantage of other opportunities in the region, were you still working with IBM? And, if so, how was that business line developing?

Michael Arnoff: In the early ’80s at that Fishkill site at IBM, they were developing semiconductor chips. The first time I experienced the concept of a clean room was probably around 1985, and equipment was being moved in and out of a clean room, and it's very, very sensitive. The equipment was sensitive, but the environment that you're working in was very, very sensitive. So I started to realize that this was a niche that not a lot of movers, millwrights, or riggers had the ability to do. Movers could move things, millwrights could rig things, but none of them had really experienced, working specifically in a clean-room environment. So I realized that that was potentially an opportunity for us to specialize and differentiate ourselves from our competition.

Javier Silva: Tell me more about diversification into different business lines. How did that set you apart from your competition?

Michael Arnoff: So continuing to develop our company and diversify our company, one of the things that Louis—going back to Louis's days—he moved a lot artwork. He had built relationships with the New York City auction houses, and he had private collectors, and he had this expertise of being able to move sensitive shipments. So we started a marketing campaign in the late ’80s to the New York City art community telling Louis' story, and telling our story that here we took what Louis was capable of doing, and Richard took that to sensitive equipment, and we still have these two real strong capabilities, and customers in the metropolitan Boston—Washington, D.C. corridor started to realize that we could service their transportation, storage, and crating requirements.

Javier Silva: What’s your company’s philosophy?

Michael Arnoff: What Dad always taught us was, whether you're moving China, or packing China that somebody bought at Tiffany's, or whether they bought it at Woolworth's, it's their possessions, treat them the same, it doesn't matter where they were purchased. We take that sensitivity today, we treat everything as sensitive, because we don't know to you whether that dish or that piece of equipment has a different level of sensitivity than the one next to it. So maybe it was your great-grandmother’s, and maybe it means something, it has some level sensitivity to you, and maybe it's a Rembrandt, and maybe it is worth a few million dollars. But if we put the same level of sensitivity to everything that we move, it's the success of the end result.

Javier Silva: In the New York Fed’s Small Business Credit Survey, banks—particularly small banks and credit unions—are a key source of financing. Can you describe your relationship with your bank?

Michael Arnoff: So our banking relationship is always very important. And when I say important, it almost becomes more than just a professional relationship; it needs to be a professional level of intimacy where the bank has an ability to understand what we're doing, because we're in such a specialized industry. What we found is that some bankers really don't understand what we do, so it's our job, the same way we educate a customer about what we do when we're talking to a new customer, we need to educate the banker so that they understand why we need to go buy that particular trailer that's custom built for us and why we just can't go to a lot and buy just a trailer off the lot. The custom-built trailer's twice as much as just the regular trailer that you see going down the road. So my goal has always been to try to educate the banker so that he really understands. Of course, he's being educated by our CFO with our financial information, but I think it's important in building the relationship with the banker that the banker really, truly knows who we are. I, more than twice a year, invite our bankers into our facilities, to different facilities, take them on a tour, show them what we're doing, whether I take them to the crating shop, and they actually see that. And I find that these guys love it. I mean, they love getting out from behind the desk, right? Sometimes they want to roll up their sleeves and cut a piece of wood, but I think it's important for them, because we're not, you can't open up a book and get a rating on who we are. We're not just the typical manufacturer. We're not just a typical trucking company. So it takes time for them to understand who we are. And that can be a hindrance sometimes because I just can't go into any bank and get a loan; I need a relationship with my bank.

Javier Silva: So shifting gears for a moment, what were some of the challenges you faced over the years? For example, how did something like 9/11 affect your business?

Michael Arnoff: We have what we call our base business, our residential family moves, and then we have our logistics business, which is basically our business to business. It's machinery, it's office moving, it's warehousing and distribution services. So 9/11 hits, and basically within a day or two, the logistics business comes to a screeching halt. People aren't buying equipment, people aren't allowing artwork to be transported, the insurance companies are putting a halt on art exhibitions. Over the course of the next year, government funding for art exhibitions was pulled back. So that whole, for about a year or two, period of time, that business really slowed way down. Companies weren't buying machinery. It was a scary time. People who needed to move were still moving, so some of our business focus was shifted to the residential. We certainly had a fair amount of people moving out of New York City, so we had some level benefit there, and we could shift some of our assets and some of our drivers and helpers and some of our talent, our labor assets, into the residential moving business, so that became the mainstay of the company, and because of that diversification, it became a success driver for us.

Javier Silva: What came after that? Can you tell me about other challenges you’ve had along the way?

Michael Arnoff: So, we plug along after 9/11. By 2003, 2004, the logistics business is starting to pick up steam again. The housing market by 2005 is a record-breaking year for us with residential moves. By 2008, the housing crash affects us dramatically by that part of our business—that business unit—coming to a screeching halt. So previously, we withstood the pressures of our logistics business coming to a screeching halt. If houses aren't selling, people aren't moving. It's just plain and simple. So now, here we are a few years later, fresh in our mind from 9/11, and we're going through another dramatic down in one of our business units. So here, we did just the opposite. We started to shift talent and trucks and staff from one business unit to another business unit. We put a lot of emphasis, marketing emphasis, in 2009, in 2010, on the semiconductor industry, on the industry that transfers art, on special products, on warehousing services. And we really focused our marketing attention away from the residential and family moves to the logistics business.

Javier Silva: As your residential business was slowing down as a result of the financial crisis, what was your financial strategy to get through that period?

Michael Arnoff: As a business owner and certainly one of the things that may have kept me up at night during that period of time was how are we going be responsible for our debt? So, when one part of your business—at least one part of our business, when I'd look at our diversified business units—starts to falter because of the market, we have to shift gears pretty fast. And at that time, we set up a bit of a war room in our office, we got our marketing team in place, and we said, okay guys, this is not now a long-term, this is not what's going to happen next year or what's going to happen three years from now in a marketing plan; this is, we need to shift gears today for tomorrow. And we have employees, long-time employees, that are expecting to come to work tomorrow, and we have truck payments that are going to be due in 25 days, or whatever the case might be.

So we need to take those assets, and again, Javier, we look at our trucks, right, our equipment as assets. We look at our drivers and helpers and employees as major assets of our company. Our warehouses also, those are our three primary assets—how can we deploy our warehouses and our labor, our drivers and our helpers and our equipment to shift gears, right?

So if at that time, when the housing market crashed, and we had crews that were predominantly moving families, can we take them and shift them to doing equipment relocations? Can we give them a high-speed training over the weekend, to be able to understand and shift gears? Now listen, not every employee wants to do that, right? But then it's up to the employee to decide that here's what the company's going to do, let's be open and frank, let's communicate to the employees, which is what we did. We had a company-wide meeting, I stood in front of them, I promised that no one was going to lose their jobs as long as they were open-minded and were willing to shift gears with us, and I'll tell you it was success. It was hard. It was hard for all of us. But I think it's the way it was communicated.

You know, I look back on it, and someone sometimes says to, you know, after 30 years in a job, what's your biggest success? Well, maybe that's probably one of my biggest successes is that we were able to maneuver out of that housing crisis, and shift gears, and today we look back on it and it's a blip in the road. And for Arnoff we came through it, and you know what? We're better for it. And we proved to employees that they could shift gears, and, you know, you have long-time employees that do the same thing every day, and they don't realize that they have talent to do something else. So in the long run, it made us better.

Javier Silva: I want to circle back to your workforce. What is your approach to your workforce and staffing your business?

Michael Arnoff: So, Arnoff has a significant family culture. We're a family business, five generations. We really put a lot of emphasis on training. We've always hired young men and women. Sometimes it's their first job, sometimes that's summer help. You know, they might be a college student, so it might be their first summer job. So we have experience in working with a younger workforce. But most recently we found a great success in hiring veterans. Fifteen percent of our workforce today are veterans, in all areas of our company, from management, right on down to entry-level. Last year we were awarded by the American Legion, New York State's Employer of the Year. We're very, very proud of that. Because of the training that we do, because of the benefits that we offer veterans, in some cases we've made some exceptions and accelerated the benefits for those that need it, you know, as a family business, we can shift gears pretty quickly, so we can help when needed. And the veteran workforce is a workforce that sometimes needs that little added care and concern. I think what's important is, we have a saying at Arnoff, "Suit up and show up." Veterans know how to suit up and show up. And what I mean by that is, not only put your uniform on when you come to work every day, but come with the right attitude, and come to work, and be ready to execute. We're in a service business. We're not sitting necessarily in front of a machine, pounding out some specific part. We're in front of a customer all the time. We're out in the field. So we need employees that can embrace a customer, understand customer service.

Javier Silva: So about 15% of your employees are veterans. In terms of the rest of the workforce, how much training do you do? Walk us through the other 85%.

Michael Arnoff: Okay, so sometimes we get a guy with a CDL-A. He's got 500,000 miles under his belt, and he's looking for a new job. So that's great. Maybe the training that he gets is a little different than someone that comes in as a driver’s helper and says, “Someday I'd like to be a driver,” right? So we do have a mentorship program where someone like that can be mentored by a senior driver. The senior driver gets additional compensation for being a mentor, so he gets some remuneration for that, but he also gets some accommodation from the company and in his success at the company. Drivers and helpers are an important part of our business, but we also hire a lot of administrative staff to help run our company, whether that's in the financial team, whether that's in our customer service team, or whether that’s in our sales and marketing team. So we hire people that don't necessarily know. We could bring in a salesperson that has sales ability, but they don't know anything about logistics or they don't know anything about, they've never moved before. So we provide training in those areas, whether it's a webinar or whether it's some type of industry training that we can latch onto from one of our trade associations, or you know we have had success with local community colleges, in the Hudson Valley specifically, in the northern Hudson Valley, both at Adirondack and Hudson Valley Community, or in the lower Hudson Valley, at Dutchess Community. Through the SUNY system, we've had some very good success.

Javier Silva: I'm glad you mentioned that because the workforce development is a huge issue, particularly in the middle skill-jobs sector, which is where I think a lot of your employees fit in...

Michael Arnoff: Most, right.

Javier Silva: And these are really great-paying jobs, so it's a nice pathway for folks, particularly who do not have a four-year college degree and are looking for a solid job, I think going through this path is actually beneficial.

Michael Arnoff: You know, and we promote from within. I mean, I know it's hard when somebody leaves a particular position because now you have got to fill that position, but what's it all about? It's about helping people have a better life, right? If making more salary is what's needed or maybe it's a better job or maybe they do have interest in being a bookkeeper and we can send them in the evening to a bookkeeping class at the community college, isn't that better for them, and isn't it better for us? So that's been the culture and the strategy.

Javier Silva: From our research on Small Businesses, we know they’re a big driver of job creation. And it’s clear from talking to you today that family business, in particular, is important to you. How do you do relate to other small business owners? What do you do to help them?

Michael Arnoff: So I think, to some respects, when you ask me that question, it's more of a personal question than, so maybe I take off my president’s hat of Arnoff Moving and Storage, and sort of answer as Mike Arnoff. I feel it’s a responsibility to give back to the community, not necessarily defining what the community is, you know. But I think my passion is more to try to talk to people that are in family businesses. I’m very intrigued with how family businesses develop. I'm very proud of our family business. I like to tell our story. I hope that by meeting with other family business owners, and especially maybe the younger generation that's thinking about getting into the family business and they're scared or they don't know what to expect, maybe there's an ability for me to help them share my successes. And a lot of it is the simple word “communication,” how I communicate with the fifth generation. At this point in my career, I'm really the coach; I'm really the mentor. I have three leading managers that are in the fifth generation that have joined our company. They’re working side by side with managers who I hired 20, 30 years ago. Our vice president of sales, I hired, I think he's in his 34th year. He's one of the first people I hired when I came back to the company. So he's working side by side with my son. There's integration there, so it's not necessarily he's working with me every day, although we work at the same company, but he's working with another senior manager, and how's that relationship working? So if I can share those successes with someone else and give back, I feel an obligation to do that. I mean, we've had a lot of successes. We've grown our company significantly. We're excited about that. We're excited that the future looks very positive, especially with what's going on in the economy right now. All of that is going to help us. Manufacturers are going to buy more equipment. I believe with pent-up demand in the Northeast to buy a new house or to improve the house that you're in, with the capability to borrow money, it's only going to benefit every one of the diverse business units that we operate in to help us grow our company even further.

Javier Silva: So, you've built your company on diversification, going into different areas, right? But you have one common theme. I mean, you have your warehouse, you have your workers, you have your trucks. In terms of opportunities and challenges, what are you thinking in terms of the next couple of years? What do you see as an opportunity for your company?

Michael Arnoff: One of the newest services that we provide, business units that we have, is a delivery service what we call Final Mile Delivery Service, where companies that sell products, primarily large products online, need someone to deliver them from a particular warehouse to the end user. So what we do is we work with manufacturers who, let's say, make mattresses, and they deliver in a truckload of mattresses to us that are sold online and now need to be delivered in a, let's say, a 200-, or 300-, or 400-mile radius of our warehouse facility. So, we provide a service to deliver those mattresses. And it could be pool tables, it could be kitchen cabinets, it could be windows and doors, things that maybe you traditionally went to a store to buy, and now with the advent of the Internet and Amazon and all the different channels that we have, that model’s changing. So we built a network of delivery service throughout New England to be able to service this business. And I envision that that's going to continue to expand and expand, and I'm hoping that the investments that we're presently making in that business is cutting edge, and it's going to potentially change a part of our company significantly in the next two to three years.

But again, going back to our banker, right? So, I have to take our banker through that facility and through that process and that thought pattern for him to understand what it is that we're doing, because if he looks at it on paper, sitting at his desk back at the office, he just sees that Mike needs 10 trucks, and he's got 10 drivers and 10 helpers going out in this scheduled delivery, and to him it's a trucking service. But it's not just a trucking service. It's a specialized business unit that's going after a major change and a trend of how people are buying things. So it's my goal to teach him that so that he understands that when I need to buy five more trucks, he understands what the business model is that's going to be able to afford to pay the debt.

Javier Silva: So it's the online retailing meeting the bricks and mortar of the transportation?

Michael Arnoff: Exactly.

Javier Silva: Well, Mike, clearly you have a passion for your employees, for your family, for your business. We wish you the best of luck now and going forward with all that you do. Thank you for joining us here today. We appreciate your time.

Michael Arnoff: This was a lot of fun. I really appreciate it.

Episode 03
Staffing in a High-Tech Age
Ranjini Poddar
Ranjini Poddar was in law school when she and her husband started the staffing firm Artech Information Systems (now Artech, LLC) in 1992. She is now the CEO at a time when the Bureau of Labor Statistics says there are almost six million contingent workers in the U.S. Poddar explains how Artech grew into a $450 million minority and women-owned business with more than 7,000 employees worldwide. (RECORDED: SEP. 18, 2018)

Javier Silva: Welcome to Bank Notes, a podcast by the New York Fed. For this inaugural series, we’re discussing Small Business. I’m your host, Javier Silva.

In this series we’ll share insights and analysis from the New York Fed on a range of small business issues, including credit needs and challenges. We’ll also hear from small business owners about their experiences: the highs, the lows and everything in between. Before continuing, I would like to note that the views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

With the rise of companies like Uber and Airbnb, you’ve probably heard of the gig economy. But gig workers aren’t the only ones on temporary assignments. According to the Bureau of Labor Statistics, there were 5.9 million contingent workers in the U.S. in the spring of 2017. And to connect those workers with the companies and governments that employ them, there are businesses like the one co-founded by our guest today.

Ranjini Poddar is the CEO of the staffing firm Artech Information Systems. Back in 1992, while she was working her way through law school, she co-founded Artech with her husband who had just earned his MBA. Artech is now a $450 million company and the 11th largest IT staffing company in the U.S., with more than 30 offices. How did it get there? Ranjini takes us through how Artech went from a small business to a successful company with more than 7,000 employees around the globe. 

In today’s episode, my colleague Brian Manning serves as moderator for a conversation with Ranjini.

Brian Manning: Ranjini, thank you for joining me today.

Ranjini Poddar: My pleasure. Nice to be here.

Brian Manning: Well, there’s going to be plenty to talk about, as far as your firm goes, but before we get there, I just want to ask you a little bit about your background, if you could tell us how you came to start and run your own business.

Ranjini Poddar: Sure. So I immigrated to the U.S. with my parents when I was 8 years old, and my dad had his own small business when I was growing up. And, he had founded it shortly after we arrived. And when I was very young, I mean, probably 11 or 12 years old, I used to help him out with all matter of things. And I still have this vivid memory of doing analysis on a VisiCalc spreadsheet on an Apple computer, all very extinct products now, when I was about 12 or 13. And really kind of worked with him summers in high school and so forth, and I grew up around a business. It teaches you the components of having a business and things that you think about. And I think I always kind of had that mindset. So essentially what happened is I went to college, ended up in law school. My husband was doing his MBA, and when he graduated we were kind of debating. He had prior to go doing his MBA, he had worked in the IT field as a consultant.

Brian Manning: Okay.

Ranjini Poddar: And so he knew of the industry. And when he graduated, we were debating whether he should go look for a job or we should start a business. And we kind of decided to take the plunge and start Artech at that time. So I was a full-time student, and he had just graduated. So I would help him with everything other than doing the sales and marketing aspects, you know, anything I could do sort of on a part-time basis.

Brian Manning: Okay.

Ranjini Poddar: That's how we started out.

Brian Manning: I know from your biography that you have a background in law. Why did you decide to switch from law to into IT staffing?

Ranjini Poddar: I think going to law school was a little bit of a tangent for me. I applied to law school, and I was fortunate enough to get into Yale. So I ended up going to law school and worked for a large law firm on Wall Street, doing corporate law, doing M&A and securities work and everything else that a large corporate law firm does. And I really enjoyed it. However, five years in, I had two children, a commute, was trying to work the number of hours that were required to be worked at a firm like that, and really didn't have a path to making partner. And Artech at that point was at an inflection point. My husband had basically been running it, and we had grown but not enough. We were in danger of kind of being left behind.

We were a little too small to be competitive in our industry, and so we had engaged a consulting firm to help us in terms of strategy. They had prepared a two-day retreat, and they wanted me to join because they knew I had been involved and give my thoughts in terms of how we could grow. At dinner one day, the leader of the firm turned to me and said, “Well, why don't you join Artech? I mean, this looks like something that you would really excel at.” And I had never really seriously thought about that before. I mean, there are a lot of reasons not to, including working with your husband on a full-time basis and leaving a legal career that you've trained for three years and worked in for five years, and while I had a very pedigreed background, once you step out of it, then it's very hard to get back into it. So I really thought about it long and hard and ultimately decided to make the jump and do it. And I guess it's one of the best decisions I've made in my life.

Brian Manning: Why don't you tell me about Artech? What is the firm? What are some examples of things that you do?

Ranjini Poddar: Artech is a workforce-solutions company. We operate in a few different areas. The primary one is we do onsite consulting primarily in the IT area but also a bit of engineering and other types of professional skills. And what that basically means is a lot of our clients are Fortune 500 companies or government organizations that have contingent staff that rounds out their workforce. So anywhere from two to 10 percent, typically, of their workforce may be contingent as opposed to being full-time employees. And in the IT area in particular, we find that talent that meets our clients’ needs and employ them and deploy them to the client’s site.

Brian Manning: And are these mostly temporary positions, or do you end up placing people for the longer term or permanently, ever?

Ranjini Poddar: So, it tends to be a mix. I mean, we specialize in contract work, so typically they're working at our client’s site anywhere from, you know, six months to a year, often longer. It just depends on the client's needs. So it could be as long as two or three years. Sometimes the client will hire them as full-time employees if they have a need and they have a headcount availability and they like the work that the staff member is doing. And sometimes it's just straight contract work, and the person finishes that project out and goes on to the next one.

Brian Manning: I'd like to know a little bit more about your business model and how the company is structured. You're going to have your own employees who work for the firm, and then you're going to have the contract employees that you're placing with clients.

Ranjini Poddar: Essentially, our employee base is split into a couple of different components. So we have what we refer to as our corporate employees, which is basically our internal staff, and they can be management/support functions such as accounting, HR, IT; or our core functions, which are really sales and recruiting. So that's one component of our employee base. And then the second much larger component is our billable staff, and that's the talent that we are typically employing on a contract basis. So we are the employer of record, but we are typically just employing them for the duration of the contract. And they are deployed out to our clients’ sites.

Brian Manning: Okay. So, you specialize in IT, and that's going to be something that would apply across industry groups. What different types of industries are you providing workers for?

Ranjini Poddar: The major users of contingent staff tend to be in a few different industries: telecom, financial services, sort of high-tech engineering type of companies, government organizations, pharmaceutical firms. Really, it's across the board. And so we have about 70 Fortune 500 companies that are our clients, and then an additional 50 or so that we're actively engaged with that are not necessarily Fortune 500.

Brian Manning: Are there particular skill sets that are in demand right now?

Ranjini Poddar: The technology is constantly changing, so I think what you would typically think of, such as mobile app development, data analytics, big-data type of skills. Java is perennially in demand. There's always a shortage of really talented App Dev folks. So it really runs a broad spectrum. I think the demand ebbs and flows depending on the industry and the location.

Brian Manning: So, to come back to your workforce for just a minute, can you tell me about how you go about identifying, recruiting, and possibly training the workers that you're going to be placing with your clients?

Ranjini Poddar: As far as the staff that we place at client sites, it falls into several different buckets. Typically our clients are looking for—they're typically paying premium pricing for—someone who's going to come in and be ready to go on day one and finish a deliverable in six months to a year.

However, there are certain positions, more junior positions, where our clients may be looking for folks that can be developed. So we are often looking for college graduates or working with colleges in terms of their outplacement offices and trying to identify that talent. Again, because we're in the contingent workforce business and we're employing these folks for a defined time period, the training really depends on the nature of the contract.

Brian Manning: Tell me a little about your approach to running Artech. How do you think about the services that you provide?

Ranjini Poddar: My personal philosophy has always been client first, and whenever I make a decision in terms of how I'm running the business or what I'm doing with Artech, then I'm always thinking about how does this service the client, and how does this help us meet our client needs? And I think that sort of philosophy has helped us structure ourselves to deliver first to the client and really build long-term partnerships with them and not take a short-term approach. And as a result of that, we have focused on building dedicated teams for our enterprise customers, which has really allowed us to get to know our customers and their needs and provide the right talent to them in the right amount of time.

Brian Manning: To build those effective teams, how do you find and manage the talent that you recruit for clients?

Ranjini Poddar: We have collected a huge candidate database over a period of many years. So I think we have about 12 million unique candidates in our database right now. And over a period of time, we've qualified a lot of folks with the technical skill sets and also have built a database of their experience. If we have deployed them on one project, they've come off, and then we’ve deployed them on another project, so we've built that experience level. So I think, obviously, the ability to tap into that information quickly, because a lot of it has to do with speed to market and how quickly are you able to access the talent and fill the client's needs.

Brian Manning: As you know, every year we run the Small Business Credit Survey which tracks economic conditions, financing needs, and credit availability for small businesses. How did you finance Artech’s growth? What sources of funding did you look to?”

Ranjini Poddar: Early on it was really about getting some initial funding from friends and family, and that helped us get through the first year or two. And then it's really been all financed from either the profits of the company or bank financing. So we've been fortunate—I think we've been prudent in terms of how we've invested and getting the right type of financing at the right time and have had very strong relationships with our banking partners who have really supported us through our growth.

Brian Manning: So, you've been in business since 1992, or thereabouts?

Ranjini Poddar: Yes.

Brian Manning: Can you tell me about some early challenges you may have faced and what you might have learned from them, or learned as the business was growing?

Ranjini Poddar: I think the first is, of course, developing a strong customer base, or really any customer base. I think my advice to folks that are thinking of starting their own business is to really define what you want to do or what's the service you want to provide or the product you want to sell. I think a mistake that many entrepreneurs make is you're hungry for business, and because you're hungry for business, you think any business is fine. And so you try to sell yourself as being able to do anything and everything, and prospects see right through that because they know that you're a small firm and you cannot do anything and everything. And I think that also hurts you because you're not able to articulate a value proposition to your prospects, and it's more difficult to land clients.

So my first advice would really to be very clear and really turn away—it doesn't even come to turning away but articulate to your prospects, “No, this is something we don't do. This is our sweet spot. This is what we do, but this is what we're not good at. And I don't think I could in good stead tell you that we can provide a good product or service in that area.” And we are much larger, so our scope of services are much broader, but I still do that today, when a client comes to us and says, “Well, can you help us with this?” And it could be in a geography. For example, recently a client came and said, “Can you support us in Latin America?” And we said, “Look, these are the geographies that we have operations in. We'd love to be able to support you there, but we don't have operations, and we wouldn't be a right fit for you,” because you can get spread too thin and not be able to execute well.

Brian Manning: Well, this actually provides a nice segue into my next question which is, over the years, you've expanded into new states and now into new countries. How do you decide when to enter a new market?

Ranjini Poddar: We work nationally across the U.S. We have employees in about 40 plus, 40 to 45 states at any given time, but we have client-facing locations in about 15 to 20. It varies. And our decision in terms of expanding in the U.S. is really built on client relationships. So if we have, for example, about three years ago we signed a contract with a major bank that had operations in six major markets in the U.S. And at that time we were really only active in one or two of those markets. So as a result of that contract with the bank, we ended up expanding our operations to all six of those markets, because we saw the opportunity, we knew if we built our internal team and operation, we would be able to drive revenue. So in the U.S., we really use that as a method of sort of a cornerstone account or two to decide, okay, you know, I'm going to do business in this particular market. And then once we land that account then we expand around it.

Brian Manning: As Artech has expanded over the years, what challenges have you faced? For example, did you have any particular difficulties during the financial crisis?

Ranjini Poddar: You know, we were actually very fortunate for a very odd reason. At that time, we were not very exposed to banking and financial services in terms of our client base, and we were highly focused in terms of system integrators and technology firms. And they, of course, felt the secondary impact, but they didn't have the primary impact of the financial crisis. So we actually ended up growing through those years and actually didn't feel much impact at all. Today, we are much more exposed to banking and financial services. I think three to four of our top 10 accounts are banks now, so if something similar was to happen today, we'd have to manage through it much differently. But over the last 26 years now, we've managed the firm through a few downturns. The dot com—well, we started out during a recession and have gone through, have managed through— and continue to grow and be profitable through—two or three downturns. So I think we're prudent in terms of our management practices.

Brian Manning: Okay. So, the company has grown a lot over the years. Was it organic? Were you out there making acquisitions?

Ranjini Poddar: Most of our growth has actually come organically. You know, there was a period of time where we had double-digit, year-over-year growth. That's obviously much harder to attain when you're a much larger firm, but we have done three acquisitions along the way. They have all been, you know, relatively small acquisitions relative to our size, about $20 million in revenue, plus-minus, for each one. And we did the first one in 2011, then ’14, and then ’17. And it was really around geographic markets that we felt that we found a great firm that was a strong fit culturally with Artech and had a client base that was not significantly overlapping. So we were trying to fill a geographical gap as well as acquire clients, and, of course, the internal team. And that's been a great educational experience, or development experience. For me personally, I've learned a lot through doing those acquisitions, and I think it's definitely contributed to our growth and our capabilities.

Brian Manning: What have you learned? What will be some of the key lessons from doing acquisitions?

Ranjini Poddar: I think first and foremost is really about culture. You know, I think we didn't realize how significant that was before we did our first acquisition. And I think that was—I think all three have been successful in terms of that they have all been additive to our business. And I wouldn't say that any of the three that we've done have been unsuccessful. However, I feel the last one we did has been the most successful because we were really able to identify the cultural fit, learning through having done others and learning the mistakes. So it's, I mean, everyone says this, that it's all about the culture.

Brian Manning: Tell me about your experience being the head of a minority and woman-owned business, and how does that affect how you run the business and how you manage the business?

Ranjini Poddar: It's obviously a lens through which I live my life and manage Artech. Many of our clients actually have programs that support diversity in their supply chain, and many have been very helpful in terms of our growth, in terms of supporting us through our growth, and helping us grow our capabilities and driving business. Internally, I think, we have a different feel because we have a very diverse team internally. There are folks from all types of backgrounds and religions and perspectives, and I think, frankly, that makes us a lot better because some of our competitors are perhaps, sort of have grown up a certain way and only have one viewpoint, whereas I think we have very divergent viewpoints. So I think we often come to a solution—I guess a solution would be the right word—a solution for a client that may be, you know, that’s the result of five different types of input as opposed to five different people saying the same thing.

Brian Manning: What is your outlook for the business over the next few years? Do you see any particular opportunities or challenges?

Ranjini Poddar: So our industry typically tends to be a leading economic indicator, and I think I've been waiting for the other shoe to drop now for quite a while. And so far, knock on wood, it hasn't. It just seems to be chugging along, and the demand seems to be endless. And the only constraint is the supply of talent. So yeah, I mean I think it's the crystal ball that I don't know that anyone can answer, which is when will the economy turn? Right? But even when it turns, I mean, IT has become so integral to any business that while our clients will of course cut back on their investments, they still need to maintain and they still need to make investments. So it's just a matter of magnitude.

Brian Manning: What advice do you have for current and aspiring small-business owners, and would you do anything differently knowing what you know now?

Ranjini Poddar: Oh, there's probably a list of 1,000 things that I would do differently, if I knew what I know now, 26 years ago. But coming back to the first part of your question, my advice would really be around, you know, I think I'm a little bit of a different type of entrepreneur in the sense that I don't have any big, wonderful ideas. I'm not going to invent the next Tesla or whatever the next gadget is, but what I am good at is executing on a plan, creating a plan and executing on it. And I think a lot of entrepreneurs, they have ideas but they don't focus on the execution. And ultimately you can have all the ideas in the world, but if you're not able to execute on it, then you're not going to make money, and if you're not going to make money, then you're going to go out of business. So, I would really give the advice to any new business startups is to really create your plan. And it doesn't need to be set in stone. I mean, you're always adjusting it and modifying it based on market conditions, based on what you're learning, based on where you are finding success. But really at least create a plan and focus on executing it.

Brian Manning: So, Ranjini, thank you very much for joining me today. It's been a pleasure speaking with you.

Ranjini Poddar: I had a great time. Thank you for all the wonderful questions, and I hope the audience finds some of my advice useful.

Episode 04
Shipping Milk From Farm to Table
Kevin Ellis
Kevin Ellis grew up on a dairy farm, and in college he discovered a passion for business. But that didn’t keep him away from agriculture for long. He’s now the CEO of Cayuga Milk Ingredients, a small business that processes milk from 30 family-owned dairy farms in New York’s Finger Lakes region. Ellis talks about how Cayuga got started and how it’s impacting the dairy market. (RECORDED: AUG. 6, 2018)

Javier Silva: Welcome to Bank Notes, a podcast by the New York Fed. For this inaugural series, we’re discussing Small Business. I’m your host, Javier Silva.

In this series we’ll share insights and analysis from the New York Fed on a range of small business issues, including credit needs and challenges. We’ll also hear from small business owners about their experiences: the highs, the lows and everything in between. Before continuing, I would like to note that the views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

According to the U.S. Department of Agriculture, the United States produced more than 215 billion pounds of milk in 2017. Today, we’re going to introduce you to someone who is on the front lines of that production. No, he’s not a farmer. He’s Kevin Ellis, the CEO of Cayuga Milk Industries, a small business that processes milk from 30 family-owned dairy farms in the Finger Lakes region in New York. The company ships it to places near and far, even as far away as Kuwait. Today we’ll learn about Cayuga Milk Industries—how it got started and why this small business is making an impact on the dairy market.  

Javier Silva: How did you get into this business? How did you become the CEO of Cayuga Milk industries?

Kevin Ellis: I grew up on a dairy farm in upstate New York, just south of Syracuse.

And I went to Cornell University in animal science, where I wanted to be a vet, but I ended up having a keen interest in business, and I came out and got into finance. And I first started financing farms and got into business consulting, and it was during that time of doing business consulting where I met many of the current members of Cayuga Marketing and the investors in Cayuga Milk Ingredients. So, I had gotten into finance in Rochester, New York, in doing commercial real-estate finance, and I got a call from one of the farmers that is currently a member of Cayuga Milk Ingredients, wanting to know if I would entertain coming to work for them in developing a value-added milk-processing venture.

Javier Silva: Tell us a little bit about Cayuga Milk industries. What is it?

Kevin Ellis: Who we are is a group of 30 farmers who came together as Cayuga Marketing to sell their liquid milk from the farms directly to manufacturers throughout the Northeast. Cayuga Marketing created Cayuga Milk Ingredients, which was invested in to be a market for their milk. So today we manufacture high-grade, high-quality dairy ingredients from that raw milk from those farms, in addition to selling that milk around the northeast area to other manufacturers.

Javier Silva: Oh, interesting. So, how does that work? What are you pulling apart?

Kevin Ellis: So milk in its basic form is fat, it's protein, and then it’s other solids such as lactose. So when we bring it into our plant, we separate the cream off it, and we sell the cream off to further processors for half-and-half and heavy whipping cream and ice cream, and we also have a customer that makes cream cheese with the fat portion. And then what's left is the skim milk. We take the skim milk, and we harvest the proteins out of that, and we can either sell them in liquid form or we can dry them and sell them in a dry powder form that's used in the sports-nutrition industry, it's in clinical nutrition, and then also in further food processing like cheese manufacturing. And then we also manufacture high-grade skim milk powder that's used to make other milk products in countries that don't have dairy cows, such as one of our customers in Kuwait takes the milk and reconstitute it for fluid drinking milk.

Javier Silva: What was the size of the company when you started at Cayuga?

Kevin Ellis: Well, when I started at Cayuga, I was employee one, and now we have 72 employees, and we basically grew it from nothing into what it is today. We were actually, it was a collective group of farms that were marketing their milk through another organization, so really didn't have sales per se. It was more of a negotiation as a collective bargaining group, more or less. You know, our annual budget was maybe $300,000, $400,000. It wasn’t a big enterprise. So, when I came my initiative was to build a value-added processing plant. So I worked on that for a few years, and then when we finally launched, the company that we were selling our raw fluid milk with basically asked us to leave. So we ended up creating two companies. So we had to figure out how to also market all of our milk as well as process the milk. That wasn't always our original plan. So the one company had to be created in about three and a half months, so it took some effort. And today we’re probably better off for it, but it was pretty stressful at the time.

Javier Silva: One of the aspects that we focus on at the New York Fed through our Small Business Credit Survey is how business owners access the financing that is essential to starting or growing their businesses. Can you share with us how you got financing to start and grow Cayuga?

Kevin Ellis: Well, luckily, we finance today with a company I used to work for, so I knew their capabilities, I knew how they operated, but frankly when we took over operations, we had $350,000 in the checking account, so we had to figure out, first, how to pay the farmers. I think the first farmer payroll was near $8 million, so we had to get creative in a hurry. And we convinced our lender to work with us on a borrowing base because, not only did they finance the company, but they financed the farms, so they knew it was in their best interest to find a workable solution. When we financed the company, the manufacturing plant—it was $104 million investment, and we used traditional bank financing to put that together, but we really didn't have any equity. We have some strong farms in the group, and they were able to leverage their farm assets to be able to put money into the new venture, and we capitalized that to about 45% equity, and then the rest came in as syndicate debt. So, we have five participants in our syndication on that side of it. It was a lengthy process of, I call it creative finance, a lot of what we did.

Javier Silva: So for our listeners that may not be familiar with syndication, what does that mean exactly, you have five syndicators?

Kevin Ellis: Syndication is a group of bankers that work together because none of them want to take all the risk themselves. So it's a way to spread risk. And typically you'll have a lead bank, and the lead bank will then syndicate it out. And what that means is they partner. They'll sell pieces of the loan to other parties to decrease their risk.

Javier Silva: Did you apply for any grants or other types of funding from either New York State or other entities?

Kevin Ellis: We did. I applied for every grant that I could possibly think of. And at the end of the project, we were awarded just over $5 million dollars in grants from the state. And I did apply for one USDA grant, which that's the only one we didn't receive, actually. So all of the money came from New York State.

Javier Silva: Were there any financing options you didn’t pursue?

Kevin Ellis: We did consider, but didn't go down the path of VC or angel financing. I had enough knowledge of that industry where I knew the kinds of returns that they were expecting weren't the kind of returns that agriculture typically can throw off. We want to find strategic partners because more or less farmers think generational. They don't think short term. They think about making an enterprise for the next generation. So we knew that type of funding wouldn't fit our mantra.

Javier Silva: That makes sense in terms of thinking over to several next generations to keep that farm going within the family. It's more important than other factors, I imagine. Since the collective is really a group of small businesses, how do you work with these farmers to help them succeed—because if they succeed, you succeed. So how do you work with them to help them be more efficient with what they're doing?

Kevin Ellis: Well, honestly, we look at all different avenues to assist them, whether it's through bulk purchasing. We've just gone through an exercise where we've looked at buying supplies in bulk, that all the farms can take advantage of bulk purchasing versus purchasing by themselves. We have a full-time staff person that works with the farms, and we do that because it's more economical to have one staff person that works for us than each farm finding 30 different ways of dealing with the same issue. And she works for the farms on OSHA compliance and some other endeavors and translation services and those types of things. We're also in the early stages of looking at a captive where we could all share in a risk profile to get insurance possibly a lot cheaper, and just working together to make sure that we're always trying to benefit each other. But I don't want lose sight of my primary job and the primary job of Cayuga Milk Ingredients is to provide a profit back to the farms, which will increase their sustainability long term.

Javier Silva: Can you tell us how your relationship with the farmers has evolved over time? Thinking back to when the company started, what’s different today?

Kevin Ellis: One of the reasons that farmers or this strategic group of people would build a processing plant is because they want to understand and be closer to the markets that they're serving. And when we first started up my farmers were milk producers. They didn't have a lot of market insight. They didn't get a lot of feedback from the marketplace. And I think one of the things that's changed over time and I've been very transparent with my investor group about is what is happening in the market. Good, bad, or indifferent. We are very transparent, and we watch the trends, and I try to bring back opportunities in real time so we can move quickly. And one of the great things about my farmer group is they’re very creative and open minded, and they move quickly. So when they see an opportunity, they'll seize it. So that's one of the things that we've been able to do with our new company is that I'll come back and I’ll say, There’s a trend here with non-GMO, and there’s interest in non-GMO, and they'll do it. At the end of the day, if there's more benefits than there are negatives, we'll do it. So it has, the discussions in the boardroom have changed quite, quite a lot in the last 10 years.

Javier Silva: So it sounds like you're serving demand and serving the market rather than producing, if you kind of think of it that way, thinking about how do we serve the market?

Kevin Ellis: It starts with me. I'm a 100% market-based, and it's trickling down to the farm now, where they know—and I hear them discuss it now, where I know—they talk about well we're here to serve a market; we're not here to produce products. It's changed their mentality.

Javier Silva: Let’s talk about your workforce. You know, you're located in an area that’s not as dense as other regions, especially particularly downstate. So how do you go about attracting talent to Cayuga Milk and keeping talent, especially for more specialized positions?

Kevin Ellis: You are right; it's hard. We're not in a populated area, and it’s been a region that has lost employment over time because of the decline in industrial-type businesses and manufacturing. It’s been outsourced to other countries. One of the things that I was very keen on early on and I knew that the only thing that separates a good business and a great business from a bad one is the people that are at the business. We started hiring people two years ahead of when we thought we were going to run our first products. And I was very cautious that I made sure that I hired the right management team around me. One of the best things I did is I put in a referral program, and I pay people for referrals that stay on board for six months. That's been the best recruiting policy I've ever had, and it's really solidified our workforce. And now we're respected as a great place to come and work.

Javier Silva: Now in terms of growth, what type of skill sets are you looking for now in your company in terms of take it to the next level?

Kevin Ellis: Very simply, I want somebody with strong computer skills and the aptitude and ability to learn. I don't care where they come from, if they have the ability to learn and the right attitude and they have some computer skills, I'll take them.

Javier Silva: You'll take them, you’ll train them. They’ll learn on the job and fit right in.

Kevin Ellis: Absolutely.

Javier Silva: So it's really more the mindset, kind of their work ethic of what they bring to the table, and you'll do a lot of the training that’s needed.

Kevin Ellis: Yep. We have a saying: Hire the heart, and train the mind.

Javier Silva: So shifting on to challenges, what keeps you up at night?

Kevin Ellis: So right now, we're going on the fourth year of, what I would call, a dairy farm recession. What that means is we're very much in a commodity market place, and we have a global overproduction of milk. And any time you have an oversupply, it drives prices down. So the prices have been driven down so low at the farm level that on average farms have basically broke even for the last four years, so there's not a lot of money for reinvestment. It's created a climate of negativity. It's been a tough first four years of our business because there's not a lot of optimism in the industry. We're making headway in moving up, what I would call, moving up the value chain in higher-paying markets. And it's just not coming as quick as some of my farmers would like to see, but it's coming, and we've become a known commodity in the world market at this point.

Javier Silva: Can you describe what you mean by moving up the value chain?

Kevin Ellis: It means we've gone from basic products—that there's little differentiation in—and moving into products where there's high levels of differentiation. You don't compete on price as much.You compete on the services and the good that you offer that's different and unique than what others are offering.

Javier Silva: What’s an example of that?

Kevin Ellis: Case in point, we're one of the only non-GMO project-verified, non-organic producers in the United States. We’re in a kind of a new realm, all of our own, and we keep doing other value-added ventures where the competition is much, much less. So the margin opportunities are much greater.

Javier Silva: What’s on the horizon for you and Cayuga?

Kevin Ellis: So what I see coming in the next two years is a migration into consumer products that are in line with what we do today. Today we're taking a perishable product, we're moving it into a powdered product that's non-perishable, that has a two-year shelf life. We're looking at moving into the retail market with a similar product that most in the industry will refer to as aseptics, which is ambient-temperature distribution, which means that this product will be processed under high temperature and then sealed hermetically. Then it will last up to a year at ambient temperatures. That will change the whole industry in that the whole industry today is built around cold chain. And when you move into ambient temperature, the transportation is cheaper, the warehousing is cheaper, the product discards are less because it's not spoiling, and it's going to change the way we can deliver goods. And I always think about Amazon marketplace. It's a perfect way to distribute milk products in the future; it’s direct from the factory to the household.

Javier Silva: What advice do you have for other small businesses, not just in this industry but just across the board?

Kevin Ellis: The biggest thing that I have found from starting a business from scratch is it's unlikely your business plan is going to be correct. So my advice is to stay open minded, stay resilient, and persevere, because one of the things that my farmers have taught me is that perseverance is 90% of the way of winning the game, you know. So there's many times I would have just quit, and my farmers just kept pushing me along, and we just keep pushing forward and persevering. And that is my advice for anybody that's getting into small business is it's unlikely you're going to be right. Stay open minded, stay creative, and persevere through it—and you'll be successful.

Javier Silva: Thank you for joining me today. We wish you and the team the very best for continued success.

Episode 05
Advice for Small Biz Owners
Mike Arnoff, Kevin Ellis, Ranjini Poddar
What did our small business owners wish they had known when they started? What have they learned? For current and future small business owners, we pull together our guests’ best advice on starting a business, developing relationships around financing, working with clients, and training and retaining a diverse workforce.

Javier Silva: Welcome to Bank Notes, a podcast by the New York Fed. For this inaugural series, we’re discussing Small Business. I’m your host, Javier Silva.

In this series we’ll share insights and analysis from the New York Fed on a range of small business issues, including credit needs and challenges. We’ll also hear from small business owners about their experiences: the highs, the lows and everything in between. Before continuing, I would like to note that the views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

Over the last four episodes of Bank Notes, we heard from small business owners about their experiences starting and growing their businesses. We’ve also heard from our own small business expert at the New York Fed about how she’s worked to collect data on small business financing – and what the landscape looks like for access to credit. In this episode, we pull together some of our guests’ best advice. Throughout our conversations with business owners, we sought out detail on what they wish they knew when they began their businesses. What were there pitfalls to avoid? What tactics to focus on? What could our listeners take away from their experiences and apply to their own efforts to build a small business? The advice covers four categories, including starting a business, developing your banking relationships and associated financing, working with clients, and training and retaining a diversified and successful workforce.

In our first clip, we hear from Mike Arnoff, President of Arnoff Moving and Storage. You might remember Mike from our second episode, in which he talked about his multi-generational family business. The company began with just a single truck in the 1920s and has grown into a national logistics company. Mike tells us exactly what every small business owner should consider when starting out.

Michael Arnoff: Got to find something that you're passionate about. And I know I'm not the first guy that's coined that phrase, right? We've heard it over and over again, but it's so true. We work a lot hours, right? Our lives are filled with work. You’ve got to love work as much as you love Saturday afternoon, right? Whatever you do on Saturday afternoon, whatever your thing is, you’ve got to love work as much as you love that. And that's hard for some people to even grasp that concept, but I really believe in that, And I think that's been one of my biggest success drivers is I love what I do. Not every day is great. You have to be prepared for that.

Javier Silva: Ok, so you have what you’re passionate about. What should you do to turn that passion into a business? Here now is Ranjini Poddar, co-founder and CEO of staffing firm Artech Information Systems. Before she grew Artech into one of the largest IT staffing companies in the country, Ranjini was a corporate lawyer focused on the businesses of her clients, not her own. She talks about playing to your skill set.

Ranjini Poddar: I think the first is, of course, developing a strong customer base, or, really, any customer base. I think my advice to folks that are thinking of starting their own business is to really define what you want to do or what's the service you want to provide or the product you want to sell. I think a mistake that many entrepreneurs make is you're hungry for business, and because you're hungry for business, you think any business is fine. And so you try to sell yourself as being able to do anything and everything, and prospects see right through that because they know that you're a small firm and you cannot do anything and everything. And I think that also hurts you because, you know, you're not able to articulate a value proposition to your prospects, and it's more difficult to land clients. So my first advice would really to be very clear and really turn away—it doesn't even come to turning away but articulate to your prospects, “No, this is something we don't do. This is our sweet spot. This is what we do, but this is what we're not good at. And I don't think I could in good stead tell you that we can provide a good product or service in that area.”

Javier Silva: Ranjini speaks about the importance of knowing who you are as an entrepreneur, and understanding your role in creating and executing a plan for your business.

Ranjini Poddar: Oh, there's probably a list of 1,000 things that I would do differently, if I knew what I know now, 26 years ago. My advice would really be around, you know, I think I'm a little bit of a different type of entrepreneur in the sense that I don't have any big, wonderful ideas. I'm not going to invent the next Tesla or whatever the next gadget is, but what I am good at is executing on a plan, creating a plan and executing on it. And I think a lot of entrepreneurs, they have ideas but they don't focus on the execution. And ultimately you can have all the ideas in the world, but if you're not able to execute on it, then you're not going to make money, and if you're not going to make money, then you're going to go out of business. So, I would really give the advice to any new business startups is to really create your plan—and it doesn't need to be set in stone. I mean, you're always adjusting it and modifying it based on market conditions, based on what you're learning, based on where you are finding success, but really at least create a plan and focus on executing it.

Javier Silva: Turning to banking and finance, we heard quite a bit from each of our business owners about how they consider financing, and their unique approaches for making it work for their own companies. If one thing is clear: there is no one-size-fits-all when it comes to financing. Mike brings his bankers into the fold of the company, and teaches them what Arnoff Moving & Storage is really all about. Here he talks about his on-the-ground tactics.

Mike Arnoff: So our banking relationship is always very important. And when I say important, it almost becomes more than just a professional relationship; it needs to be a professional level of intimacy where they, the bank has an ability to understand what we're doing, because we're in such a specialized industry. What we found is that some bankers really don't understand what we do, so it's our job, the same way we educate a customer about what we do when we're talking to a new customer, we need to educate the banker so that they understand why we need to go buy that particular trailer that's custom built for us and why we just can't go to a lot and buy just a trailer off the lot. And the custom-built trailer's twice as much as just the regular trailer that you see going down the road. So my goal has always been to try to educate the banker so that he really understands. Of course, he's being educated by our CFO with our financial information, but I think it's important in building the relationship with the banker that the banker really, truly knows who we are. I, more than twice a year, invite our bankers in to our facilities, to different facilities, take them on a tour, show them what we're doing, whether I take them to the crating shop, and they actually see that. And I find that these guys love it. I mean, they love getting out from behind the desk, right? Sometimes they want to roll up their sleeves and cut a piece of wood, but I think it's important for them, because we're not— You can't open up a book and get a rating on who we are. We're not just the typical manufacturer. We're not just a typical trucking company. It takes time for them to understand who we are. And that can be a hindrance sometimes because I just can't go into any bank and get a loan. I need a relationship with my bank.

Javier Silva: Now Ranjini talks about her initial financing and how important it is to use it wisely.

Ranjini Poddar: Early on it was really about getting some initial funding from friends and family, and that helped us get through the first year or two. And then it's really been all financed from either the profits of the company or bank financing. So we've been fortunate. I think we've been prudent in terms of how we've invested and getting the right type of financing at the right time, and have had very strong relationships with our banking partners who have really supported us through our growth.

Javier Silva: Working with your banking partners or seeking out financing only works if the fundamentals of your business work. So how do you create a business that services the needs of your clients? Here’s Ranjini, giving the lesson from a professional services approach.

Ranjini Poddar: My personal philosophy has always been client first, and whenever I make a decision in terms of how I'm running the business or what I'm doing with Artech, then I'm always thinking about how does this service the client, and how does this help us meet our client needs? And I think that sort of philosophy has helped us structure ourselves to deliver first to the client and really build long-term partnerships with them and not take a short-term approach. And as a result of that, we have focused on building dedicated teams for our enterprise customers, which has really allowed us to get to know our customers and their needs and provide the right talent to them in the right amount of time.

Javier Silva: And, if you’re selling something to the family down the street, like, say, moving and storage services, how should you think about your philosophy and approach to clients? Here’s Mike’s view.

Michael Arnoff: What Dad always taught us was, whether you're moving, or packing China that somebody bought at Tiffany's, or whether they bought it at Woolworth's, it's their possessions, treat them the same, it doesn't matter where they were purchased. So we take that sensitivity today. We treat everything as sensitive because we don't know to you whether that dish or that piece of equipment has a different level of sensitivity than the one next to it. So maybe it was your great-grandmother’s and maybe it means something. It has some level sensitivity to you. Maybe it's a Rembrandt, and maybe it is worth a few million dollars. But if we put the same level of sensitivity to everything that we move, you know, it's the success of the end result.

Javier Silva: Switching gears now, we spent a lot of time through our first four episodes talking about workforce. How do you hire the right workforce for your business? How do you train, retrain and retain employees that help support the kind of growth you want to see? And, how do you build a culture that works for you? In our first clip on this topic, we hear from our third business owner of the series, Kevin Ellis, the CEO of Cayuga Milk Industries. Cayuga is a fascinating business that works cooperatively with dairy farmers throughout the Finger Lakes region of New York to market and sell their products around the world. Considering Cayuga is in a rural location, and has a need for highly technical staff, we wanted to understand Kevin’s approach to hiring.

Kevin Ellis: You are right. We're not in a populated area, and it’s been a region that has lost employment over time because of the decline in industrial-type businesses and manufacturing. It’s been outsourced to other countries. One of the things that I was very keen on early on and I knew that the only thing that separates a good business and a great business from a bad one is the people that are at the business. We started hiring people two years ahead of when we thought we were going to run our first products. And I was very cautious that I made sure that I hired the right management team around me.

Javier Silva: How does Ranjini, as the head of a minority- and woman-owned business, think about diversity as she manages her company?

Ranjini Poddar: It's obviously a lens through which I live my life and manage Artech. As I said, I kind of consider myself sort of a one-and-a-half generation. I don't feel first generation, and I'm not quite second generation, but it impacts, in many different ways, of course. Many of our clients actually have programs that support diversity in their supply chain. And many have been very helpful in terms of our growth, in terms of supporting us through our growth, and helping us grow our capabilities and driving business. Internally, I think, we have a different feel because we have a very diverse team internally. There are folks from all types of backgrounds and religions and perspectives. And I think, frankly, that makes us a lot better because some of our competitors are perhaps sort of have grown up a certain way and only have one viewpoint, whereas I think we have very divergent viewpoints. So I think we often come to a solution or a—I guess a solution would be the right word—a solution for a client that may be, that’s the result of five different types of input as opposed to five different people saying the same thing.

Javier Silva: Diversity also includes diversity of background and experience. One particular group that Mike Arnoff has sought out and brought on board is Veterans. In his view, Veterans bring an important skill set to his workforce, and contribute to the culture. So how has that worked? Here’s Mike.

Michael Arnoff: So, Arnoff has a significant family culture. We're a family business, five generations. We really put a lot of emphasis on training. We've always hired young men and women. Sometimes it's their first job, sometimes that's summer help. You know, they might be a college student, so it might be their first summer job. So we have experience in working with a younger workforce. But most recently we found a great success in hiring veterans. Fifteen percent of our workforce today are veterans, in all areas of our company, from management, right on down to entry-level. Last year we were awarded by the American Legion, New York State's employer of the year. We're very, very proud of that. Because of the training that we do, because of the benefits that we offer veterans, in some cases we've made some exceptions and accelerated the benefits for those that need it.

You know, as a family business, we can shift gears pretty quickly, so we can help when needed. And the veteran workforce is a workforce that sometimes needs that little added care and concern. I think what's important is, we have a saying at Arnoff, "Suit up and show up." Veterans know how to suit up and show up. And you know what I mean by that is, not only put your uniform on when you come to work every day, but come with the right attitude, and come to work, and be ready to execute. We're in a service business. We're not sitting necessarily in front of a machine, pounding out some specific part. We're in front of a customer all the time. We're out in the field. So we need employees that can embrace a customer, understand customer service.

Javier Silva: “Suit up and show up” is a wonderful ethos, and it’s a culture that Mike values. But you can’t just bring people in because of their spirit; you have to support them once they’re in the door. Hear how Mike does that. And by the way, a CDL-A is a type of commercial driver’s license to operate the tractor trailers that Mike’s team uses to transport goods around the country. Here’s Mike.

Michael Arnoff: Okay, so sometimes we get a guy with a CDL-A. He's, you know, got 500,000 miles under his belt, and he's looking for a new job. So that's great. Maybe the training that he gets is a little different than someone that comes in as a driver’s helper and says, “Someday I'd like to be a driver” right? So we have a mentorship program where someone like that can be mentored by a senior driver. The senior driver gets additional compensation for being a mentor. So you know, he gets some remuneration for that, but he also gets some accommodation from the company and in his success at the company. Drivers and helpers are an important part of our business, but we also hire, you know, a lot of administrative staff to help run our company, whether that's in the financial team, whether that's in our customer service team, or whether that’s in our sales and marketing team. So we hire people that don't necessarily know. We could bring in a salesperson that has sales ability, but they don't know anything about logistics or they don't know anything about, they've never moved before. So we provide training in those areas, whether it's a webinar or whether it's some type of industry training that we can latch onto from one of our trade associations. Or you know, we have had success with local community colleges, in the Hudson Valley specifically, in the northern Hudson Valley, both at Adirondack and Hudson Valley Community, or in the lower Hudson Valley, at Dutchess Community. Through the SUNY system, we've had some very good success.

Javier Silva: What’s another way to bring the right people in the door? You can leverage the networks of your current team. Here’s what Kevin has done.

Kevin Ellis: One of the best things I did is I put in a referral program, and I pay people for referrals that stay on board for six months. That's been the best recruiting policy I've ever had, and it's really solidified our workforce. And now we're respected as a great place to come and work.

Javier Silva: In episode four, Kevin talked about his approach to hiring. And it might surprise you.

Kevin Ellis: Very simply, I want somebody with strong computer skills and the aptitude and ability to learn. I don't care where they come from, if they have the ability to learn and the right attitude and they have some computer skills, I'll take them.

Javier Silva: You'll take them, you’ll train them. They’ll learn on the job and fit right in.

Kevin Ellis: Absolutely.

Javier Silva: So it's really more the mindset, kind of their work ethic of what they bring to the table, and you'll do a lot of the training that’s needed.

Kevin Ellis: Yep. We have a saying: Hire the heart, and train the mind.

Javier Silva: We heard a lot of great advice from our business owners but we haven’t yet revisited our small business expert. We talked again with Claire Kramer of the New York Fed to hear her key takeaways for new or aspiring business owners. Here’s her best advice based on the research and data she’s compiled.

Claire Kramer: I think what we’ve learned over time is that business owners are “creatives.” They are people who are very good at developing a product or a service. And certainly are optimists, I think almost universally. But while they are very good at bringing a product or a service to market, very often they are so immersed in the day-to-day operations of their business, that they simply lack the time to take a step back and think both about their medium- and long-term business goals and plans, as well as, I would call it developing a capital strategy for their businesses. Most businesses start really either as bootstrapped operations from the personal savings of the business owner or owners, or through networks of family and friends providing financing and early stage investment. And by that I mean we have found, through our surveys that business owners tend to, understandably, rely on their personal credit scores and personal collateral early on in their business. But, as the business matures, and in order to grow the business to scale, one really needs external financing. And it’s really challenging to do that if you don’t build a reputation for your business financially. And by that, I mean something as simple as opening a business credit card for the business and paying that back regularly. What that helps you do is establish a really good credit reputation and a good credit score which is going to make getting a line of credit or a loan, at affordable terms, much easier later on.

Javier Silva: We also asked Claire to share some of the unique cuts of the data from the most recent Small Business Credit Survey to build a broader understanding of different business owners’ experiences. Here’s Claire.

Claire Kramer: So one of the interesting things about the survey—and really why the survey was created—was to help fill information gaps. Most recently, we partnered with the Small Business Administration, the SBA, at their suggestion. What they had observed was that there has been a secular decline in small business ownership by veterans. And, for a long time, there was a lot of speculation that this was related to some of the financing challenges that veterans experienced, but we didn’t really have any data to look at. The Small Business Credit Survey helps to fill a data need, by asking questions specifically of veteran-owned businesses. And being able to compare veterans to non-veterans.

And what we learned by comparing the two groups is that, you know, vets have some real challenges. They are deployed, they spend time away—that’s time not necessarily spent building credit history or a solid and stellar credit score. And when they come home, the amount of financing that they need to start and grow a business are really similar to your standard business, typically amounts less than $100K. But whereas, you know, they’ll tend to look first to large institutions, those large institutions are often making automated credit decisions and they’re based on credit scores. And that tends to be a barrier to access for veterans. I think the implication that we are putting forward in our research is that first there are opportunities, of course, for vets to get assistance in building credit histories and credit scores. And there may be useful products that would help them do that. But also to raise awareness among veterans of the many resources that are out there. There are specific community development financial institutions that are targeted, focused on veteran needs. There have been really terrific outreach opportunities and outreach products and programs that have been developed in the last several years, including by very large financial institutions. So I think the opportunity for veterans in the financing realm is to think about nonconventional sources, smaller sources of financing.

We’ve been doing a lot of analysis on segments that we believe are demographically interesting. So, we know, for instance, Latinos are starting 1 in 4 businesses in the United States. We also know that those businesses generate more than $700 billion in gross sales. So they’re a sizable economic force. But the typical Latino business doesn’t grow over $1 million in annual revenues. So there’s a barrier to growth, there’s a ceiling to their growth at this moment. So we started to look at the dynamics of what was going on in Latino businesses and we found some interesting things. First we compared overall, their performance to that of non-Latino white owned firms and didn’t see, in the aggregate, much difference in terms of profitability or revenue growth. But, what we did see was a higher instance of reporting two types of financial problems: 1) managing operating expenses and 2) the ability to get credit for the business. So we focused in on specifically this credit access issue. And the reason we did is that operating challenges are pretty ubiquitous across the small business universe. But when we dove in to the credit experiences of Latino businesses, we found that they run the gamut of—you know, if you’re a small Latino business you have problems, if you’re a larger, and you’ve grown to scale, you still cite credit shortfalls as part of your challenge. And so that’s I think a really important thing to first of all acknowledge this problem exists. And second to think about solutions.

So we most recently, in November, held a forum at the New York Fed to foster a discussion about some of the growth challenges that Latino-owned businesses are experiencing specifically. But also to talk about some innovations that are happening, both locally and nationally, to address the issue. So what we’ve learned and what we’ve heard is it’s critical for Latino-owned businesses to do two things. First of all, build a plan and write it down. This helps in pitching your business, cultivating your sales. It also helps you at points where you may encounter an investment and investor opportunity. The second is to build and grow a network. And this is essential because as you grow your business, as you enter new stages, you’re going to encounter new issues, new problems, and also new opportunities. And drawing on the experience of people who’ve done this before, who can walk you through the steps, who can walk you through the counsel is absolutely paramount.

Javier Silva: And finally, Mike and Kevin both offered some motivation and encouragement for those uncertain and rough times. Here they are.

Michael Arnoff: You have to take risks. You have to be careful about the risks that you take. And I think innovation. You’ve got to be ready to innovate and change and shift gears, because the world is, you know, we have no clue, right, what tomorrow's going to bring. We have no clue, you know, what six months from now is going to bring. And we’ve got to be prepared to turn the ship to the right or turn the ship to the left. I, you know, it's easy for me because I run a small business, so I'm capable of doing that, but that's what excites me. That's what really, when I get up in the morning and get ready to go to work, that's what I love about it.

Kevin Ellis: The biggest thing that I have found from starting a business from scratch is it's unlikely your business plan is going to be correct. So my advice is to stay open minded, stay resilient, and persevere, because one of the things that my farmers have taught me is that perseverance is 90% of the way of winning the game, you know? So there's many times I would have just quit, and my farmers just kept pushing me along, and we just keep pushing forward and persevering. And that is my advice for anybody that's getting into small business is it's unlikely you're going to be right. Stay open minded, stay creative, and persevere through it—and you'll be successful.

And this wraps up our episode. Thank you to Mike Arnoff, Kevin Ellis, Ranjini Poddar and Claire Kramer for sharing their experiences in this podcast series. To our listeners, we hope you find this series useful as you seek growth and opportunity. I’m your moderator Javier Silva. We look forward to speaking with you again on future programs.


The views expressed in these podcasts do not represent those of the New York Fed, or the Federal Reserve System.

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