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In mid-2018, following its Prudential Inquiry Report, APRA wrote to 9 banks, 16 insurers and 11 superannuation funds asking them to conduct their own self-assessments, and hinted rather strongly that others would be wise to follow this lead.
APRA’s letter was short and not prescriptive. It asked boards to lead by assessing themselves against its report, and consider the issues of depth, challenge, and insight.
APRA has now had the chance to review all those self-assessments, and has carved out its thoughts.
Lesson number one is clear
In an era when strong culture and accountability are essential competencies, if a regulator formally asks you to do something - even if it seems a smidge on the vague side - pay careful attention. You could be marked on how you respond, not just on the response itself.
If you take the exercise seriously, you’re at least part way there. But whip out the checklist, and it’s straight to the bottom of the class.
Importantly, the results of these self-assessments continue to reinforce that the weaknesses identified in APRA’s report persist in many organisations. In particular, there are industry-wide challenges in non-financial risk management, the clarity, cascading and enforcement of accountabilities, and the understanding of and adverse impact of risk culture.
Organisations are overwhelmed with implementing substantial regulatory reform and remediation programs, both for customers, and on themselves. However, APRA observed that they are tending to adopt tactical, activity-driven solutions, rather than engaging in true self-reflection to identify and fix the root causes of what has gone wrong.
Although APRA rated most institutions as ‘good’ for the level of depth and challenge demonstrated in their reports, when it came to delivering insights into themselves, they didn’t fare as well.
APRA was particularly scathing of the risk culture assessment. The assessments themselves were particularly languid, many drawing only on their engagement surveys to understand culture. Moreover, remediation activities focused on reparation of systems and processes, and not on decision-making, leadership and communication. There was a failure to recognise the connection between purpose, values and culture. And that culture is itself the sum of mindsets, beliefs and norms within an organisation.
Despite identifying numerous problems in their own organisations, APRA observed that boards and senior management were far less critical of themselves, and were at risk of being immune to the drivers of their own problems:
‘Many self-assessments noted that the institution is generally well governed, with a respected and suitably challenging board, strong executive leadership teams and a good tone from the top, although at the same time acknowledging weaknesses spanning most or all chapters of the Final Report. This raises the question of whether boards and senior management have a potential blind spot when it comes to assessing their own effectiveness.’
This seems to say something important about intelligent, experienced people, and their ability to fully realise their own shortcomings. Cognitive dissonance is that rather uncomfortable feeling we get when our beliefs and the sheer truth of a matter collide, and can’t be reconciled without some kind of compromise.
As Juliet Bourke Deloitte Human Capital Partner and author of Two heads are better than one says: ‘Leaders find it hard to connect their mindsets and behaviours (individually and as a collective) to organisational culture outcomes.’[i]
When we believe we do a great job, and yet something profound has gone wrong, something has to give. When things have gone wrong, they can often be explained through mistakes, or bad apples, or the system, or complexity.
After all, as we say, these things happen.
There is little doubt that boards and senior management will hear more. APRA’s follow-ups will include its remuneration paper in mid-2019, the strengthening of prudential expectations, and potentially higher operational risk capital requirements on some organisations.
The BEAR regime will expand to superannuation and insurance, and APRA will consider more targeted thematic reviews on governance, accountability and culture.
If they have not already had feedback, boards should expect to hear from APRA soon with its thoughts on whether their self-assessment was sufficiently self-critical in light of the weaknesses they themselves identified. Some will need to justify, or provide APRA with more insights on, their own findings in their self-assessments.
Organisations and leaders with the self-awareness and humility to see something of themselves in what has gone wrong on their watch and elsewhere in the industry, will ultimately set themselves apart. This is what will speak volumes and transform culture and accountability in an authentic and impactful way. But it requires the courage of leaders to look beneath the ‘what’ and examine the ‘why’. This will in effect, mean they may need to seek out and face into their own failings with stark clarity and honesty - and then begin the hard road of resetting both their direction and their views of themselves.
[i] In research on inclusive leadership with a 4,100 strong global survey of employees, Bourke and Andrea Espedido found that only a third of leaders (36%) saw their leadership capabilities as others did, another third (32%) overrated their capabilities and the final third (33%) underrated them. Even more importantly, rarely were leaders certain about the specific behaviours that actually have an impact on being rated, in this instance as more or less inclusive.
Rosalyn is a partner in Deloitte's Melbourne office in the Governance, Regulation and Conduct practice. She specialises in supporting firms to design and assess frameworks to treat customers fairly, including the development of conduct, product governance, sales practices and complaints handling frameworks.