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The Evolving Board
Defining good Corporate Governance - and why we need it more than ever
In recent years, the Swiss Financial Services Sector was faced with a multitude of reputational storms, many of which were caused by poor corporate governance. To survive in such a complex business environment, banks are still undergoing structural changes - ranging from organisational to personnel to technological. But what is the key for a successful agile strategy that enables banks to successfully cope with these environmental changes? The answer lies within the definition of good corporate culture.
Unlocking the potential of corporate culture
The incorporation of a strong corporate culture, based on the right employee values, drives the urge to prevent reputational damage, whilst securing a healthy and ethical business. The FINMA 2016 Annual Report states that Switzerland, as the world’s leading private wealth management hub, must protect its financial system from misuse. Also FINMA Chief Executive Officer Mark Branson has highlighted that “a culture in which bank employees feel personally committed to combatting money laundering” is essential (FINMA Annual Media conference 2016).
Latest FINMA regulatory requirements
A FINMA circular letter, published in November 2016, re-defines the regulatory requirements of corporate governance, risk management and the internal control system for banks in Switzerland. Applicable as of 1 July 2017, the revisions stipulate three lines of defence:
- A re-definition of the role of the board, with an emphasis on its composition, as well as board members’ professional experience and expertise.
- A new assessment of the risk tolerance of a bank through quantitative and qualitative considerations of a risk governance framework.
- Bank governing bodies (e.g. board and chairman) to focus on defining and communicating the commercial strategy and principles of its corporate culture, instead of merely defining the internal control system through new controlling measures.
Swiss and foreign corporate culture
The Swiss regulatory framework for banks formally integrates corporate culture as part of the governing body’s responsibility. But this emphasis on culture is not only specific to Swiss regulators. It can also be observed in European regulators, such as the European Banking Authority (EBA), which gives its board the responsibility of overseeing risk and corporate culture. Other examples are the FCA and the UK Senior Manager Regime (SMR), which have increased resources for their “most significant work-streams” on culture.
What action should board members take now?
Although board members spend more time than ever discussing culture, values and expected behaviours, most recognise that firmer action should be taken in this area. The question we hear most frequently from Chairmen and Chief Executives is “how can we oversee corporate culture in a practical and pragmatic way?”.
Here are some achievable steps that board members can take to embed a well-functioning corporate culture in business activities:
1. Bring corporate culture onto the agenda
Board members must recognise that a healthy corporate culture does not only serve to protect the corporate image, but can be a valuable asset and a competitive advantage for the company. In fact, it will help drive differentiation and attractiveness for clients and high-potential job hunters who care about the bank’s reputation and core values.
Connecting purpose and strategy to business practices is a key factor to grow a healthy corporate culture. Culture should be part of every board member decision-making process, from strategy development and implementation, to remuneration and nomination decisions. Organisations monitoring culture found that not only more robust risk-taking behaviours were created amongst employees, but that the overall organisational performance was enhanced. As such, board members should place corporate culture firmly onto the agenda.
2. Successfully lead corporate governance
Good corporate governance and accountability should be led by example at a top management level. Chairmen and CEOs need to be able to demonstrate that they are developing the firm’s culture through the governing body and oversee the adoption of culture in day-to-day management. In many organizations an identified executive - such as the HR Director - supports both the Chairman and CEO in corporate culture related matters.
3. Assess and enhance existing activities
Board members should assess the efficiency of existing activities to develop a healthy corporate culture. Most organisations already have initiatives underway which help reduce behavioural risk, review remuneration frameworks and optimise the acquisition of talent, diversity and succession. The key to success is the alignment of these disparate projects.
Management boards should look to leverage existing management information (MI) that provides insight into the organization’s culture. With the vast amount of information, the challenge is to effectively filter data for the board. Chairmen and CEOs increasingly demand explicit MI and whistleblowing within the organisation to promote an open culture where employee concerns are raised to higher instances.
A second key element in the MI system is to develop a self-learning organisation which develops an institutional memory through a post mortem of incidents and explanations of decision-making processes.
Key questions for boards
The ultimate questions for a board revolve around the evaluation of the corporate culture:
- What is the ROI of your culture?
- How does your corporate culture impact your brand value?
- To which extent can reputational damage affect your brand value?
To build and maintain a healthy corporate culture, we recommend the board to be the driving force behind embedding core organizational values. Particularly relevant are employee risk awareness, correct information management and the nurturing of successful culture-developing activities. With corporate governance properly applied, companies will be better shielded against reputational meltdowns in the years to come.