Posted: 31 May. 2016 15 min. read

Mitigating risk through diversity of thinking

The financial services sector has not been far from the front page of most major newspapers since the Global Financial Crisis. Recent headlines include revelations about alleged misconduct by several of the large banks around the world, leading to calls for increased regulatory scrutiny.

Incoming Financial Conduct Authority chief Andrew Bailey recently commented that the culture in the banking sector had “laid the ground for bad outcomes… where management is so convinced of their rightness they hurtle for the cliff without questioning the direction of the travel”. From an Australian perspective, ANZ’s Andrew Cornell argues, “such conduct and culture issues being raised are not exclusive to the Australian banking scene, [and in some respects] reflect how Australia is catching up with the rest of the world”.

In Australia, pressure from the Federal Opposition for a Royal Commission Inquiry into [conduct of the] industry is mounting, with a specific focus on “culture”. In other jurisdictions; calls for similar investigations are also being raised. So how can the financial services sector look to address conduct and cultural issues in a holistic manner that extends beyond the traditional regulatory-driven response?

One approach to the myriad of issues is a diversity of thinking, a concept that is increasingly viewed as essential to the creation and promotion of environments where outcomes of creativity, problem-solving, and decision-making are enhanced. Andrew G Haldane, Chief Economist, Bank of England recently endorsed the power of diversity from a number of angles, commenting that, “decision-making diversity makes for greater systemic resilience”.

A growing number of studies support the business case for creating a diverse workplace, but companies still have a long way to go in creating truly open and inclusive environments where the real benefits of diversity of thinking are realised. Research on diversity across the Big 4 professional services firms, including Deloitte, finds that although “firms recognise the commercial need for diversity as a result of changing demographics and globalisation, [this recognition is largely limited to] the presentation of demographic statistics”. Diversity of thinking needs to extend beyond this to question old values and practices and encourage open-mindedness.

Kevin Nixon, Managing Director of Regulatory Affairs at the Institute of International Finance in Washington DC (following the global financial crisis), Executive Director – Head of Regulatory Reform for the Westpac Group, and current leader of Deloitte’s Financial Services Industry Regulatory Centres of Excellence globally, believes there is absolute value in creating work environments where a holistic view of diversity of thinking is promoted. One role he sees it playing is driving better risk management decisions.

Why do you think the diversity of thinking is important in the financial services sector?

KN
: … to me, even calling it important is to say that there’s a relative scale of whether you should have a diversity of thinking or not. I believe it’s a must-have, because if you have people who are coming at a problem, no matter what the problem is, all with the same perspective, all with the same experience, all with the same educational background, you are not going to get the right outcome, it’s as simple as that. Particularly when you start to talk about risk… we are talking about very large institutions, with very diverse practices, with diverse customer bases, and very diverse employee bases.

What firms need the most is to challenge the way they do things. And you get that challenge by bringing in people who don’t come from the industry, perhaps have not had the depth of experience in risk management even, but can bring light to different processes, different ways of thinking and importantly, how different people will react in given situations.

There is growing discussion of late around conduct and culture issues across the financial services sector. What do you see as the key connections between conduct and culture across the sector and diversity of thinking?

KN: if you look at something like conduct, there is the black letter law… here is the rule that we have to implement to follow that regulation. It doesn’t require a diversity of thinking [as it] just requires someone to say, here’s the law, this is how you comply with it. If you do this it’s right if you do this, it’s wrong. A single person can do it, and it doesn’t solve a conduct issue.

Conduct is about how people behave and respond to those frameworks. What incentives you have in place, what drives human behaviour, what drives the choices people make, and by putting those rules in place, what alternatives are you giving people? What freedoms are you giving them? What expectations are you giving them? And in that case, you can almost see straight away that you need the legal person in the room to talk about what the law is, [but you equally] need someone with behavioural experience, [and] you also need someone in the room who has done [or developed or implemented] that task before.

And then, of course, there’s culture. I think having a diversity of thinking around culture is highly important. Again because for all people, your own views are formed by your own experiences and you can be the most empathetic person in the world, but what you really need is a challenge in your thinking.

In terms of maturity of financial services, both locally and overseas, do you believe there are sufficient challenge and diversity of thinking to make successful risk decisions?

KN: I think it depends on the part of the institution that you are looking at. I tend to think that the people who enter the traditional areas of banking, pursue generally don’t come from other sectors as much as what you could.

I think in some areas of investment banking, particularly financial markets you do get people coming in with different backgrounds on a regular basis [which promotes greater diversity in approaches and thinking]. I think that my comment overall would be that I don’t think that they [financial services] have the right level of diversity of thinking and challenge embedded in their culture.

Have you got an example you could share where you have seen the diversity of thinking working well in practice?

KN: I have seen the attributes that make for a good trader… being able to think quickly on your feet, and challenge the herd.

[When] trading in financial markets, the markets are at any given price, at any given point in time, because the consensus believes that it’s the right balance of supply and demand, with all the information available. And you could argue, and many do, that there’s a 50/50 argument of whether the market will go up or down if everything is fully priced.

The way you make money in markets is by challenging the way people are thinking… [and] I have seen that people can come in from very diverse backgrounds and be very successful in that marketplace.

You call out ‘challenge’ as an important characteristic in addition to diversity. Can you elaborate on this?

KN: Challenge is slightly different from diversity, as I think there is a culture of not challenging or not speaking up [in financial services], which is a general problem neutral to diversity. The reason [why companies] benefit, in a business sense, from a diversity of thinking is the challenge to the way of thinking, the challenge to the way of doing things, or understanding what might happen, thinking about what could go wrong when someone with a different perspective looks at the same problem.

… We will do our financial services clients a service by bringing in other industry perspectives. … The financial services industry often likes to think that it’s different and highly specialised. It is highly specialised, but risk is risk, risk of processes not working, risk of systems failing, risk of people failing. I’ve been in interesting conversations where we start to talk about risk inside a bank and you have an officer who has been a safety officer at a mining operation, brings a completely different perspective, but that perspective can challenge the status quo and the way people do things… I think this is critical…

Earlier you talked about social diversity and the outcome really being an inclusive culture. So if society is not inclusive, do you get the level of diversity of thinking that you need more broadly?

KN: … diversity is a symptom of the level of inclusivity in an organisation or society. Diversity is the outcome, not inclusion. And inclusivity for me means a couple of things. Perhaps I’m an idealist but if you’re evaluating someone’s business skills and what they bring to a team from the perspective of optimising team outcomes, then the business skills and what they bring should be all that matters. And that shouldn’t favour one person over another because of gender, race, orientation, and all those sorts of things… [if] you can encourage that sort of thinking, and the way you do that is by recognising bias, both conscious and unconscious, both in institutions and within yourself [we are able to create a more inclusive culture]

If you can encourage inclusivity, and actively fight biases that stand in the way, then diversity will happen.

For further information contact Catherine Pinfold or Rochel Hoffman.

References

[1] http://www.telegraph.co.uk/business/2016/05/09/dont-be-so-arrogant-incoming-fca-boss-andrew-bailey-tells-bank-b/

[2] https://bluenotes.anz.com/posts/2016/04/culture-should-be-a-shareholder-metric/

[3] Haldane, A. G. 2016, ‘Speech: The Sneetches’, Bank of England, 12 May, available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech906.pdf

[4] Edgley, C. et al. 2016, ‘Diversity and professionalism in the Big Four firms: Expectation, celebration and weapon in the battle for talent’, Critical Perspectives on Accounting, 35, pp. 13-34.

Meet our authors

Cat Pinfold

Cat Pinfold

Client Manager, Risk Advisory

Catherine (Cat) is a Manager in our Risk Transformation Practice. She has 15 years of Human Capital experience across Financial Services and Manufacturing in some of Australia and New Zealand's largest firms.  She has worked across a broad range of Human Capital disciplines and change programmes.

Rochel Hoffman

Rochel Hoffman

Senior Manager, Risk Advisory

Rochel is a Manager in the Sustainability Services team with over 5 years of experience working with clients, in both advisory and assurance capacities, across a range of sustainability areas. Rochel has particular expertise in assisting companies across the mining and broader Energy and Resources sector with responding to emerging sustainability risks and opportunities, including GHG emissions and energy reporting, water, stakeholder engagement and supply chain issues. Rochel is a former Young Voice Director on The Deloitte Foundation Board.