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Based upon the sad fact that banks and the banking industry are held in historically low esteem, and upon the assumption that failings in bank culture contributed to the financial crisis of 2007-09 continue to dampen the country’s economic recovery and undermine the long-term prospects of the industry, banking regulators and supervisors have focused increased attention on the need for cultural reform within the industry.  We have discussed this topic in past Alerts and note here that the Federal Reserve Bank of NY recently devoted a whole webpage to the topic.

Specifically relating to new expectations of boards of directors, we wish to point out the newest report of the Group of 30 entitled “Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform.”

While this report fortunately fell short of calling for additional regulations, it did recommend that there must be a “sustained focus on conduct and culture by banks and the banking industry, boards, and management.  Firms and their leaderships need to make major improvements in the culture with the banking industry and within individual firms.”  With respect to bank boards, the Group of 30 recommended (among other things) that:

  • Boards should ensure that oversight of embedding values, conduct, and behaviors receives continuous attention in their agenda setting, with explicit delegation to the CEO and executive team the primary responsibility for ensuring that the “tone from the top” has a clear and consistent “echo from the bottom;”
  • Boards should include in their published charters their responsibility for oversight of values and conduct;
  • Boards should ensure that their oversight processes specify how the board responsibility of oversight is exercised;
  • Boards should be satisfied with the bank’s statement of values, code of ethics, code of conduct and whistleblower policy;
  • Boards should be satisfied with the broad approach to communication of these policies throughout the institution;
  • Boards should have diversity, including the mix of different mindsets and viewpoints, as well as nonfinancial industry experience to add value to management;
  • Boards should regularly receive monitoring information on culture and values and build a reputation, values, and conduct dashboard to monitor progress and facilitate debate;
  • Boards should regularly review with the CEO the individual results of the CEO assessment and adherence to firm values by direct reports;
  • Boards should ensure that the CEO and executive team are highly visible in championing  the desired values and conduct;
  • Boards should ensure that there is adequate flexibility in the CEO and executive team remuneration arrangements for them to exercise the necessary judgments on employee promotion of culture and adjust rewards as necessary;
  • Boards should ensure that significant consideration is given to the extent to which CEO and executive team candidates have demonstrated the commitment to promote the firm’s desired values and conduct;
  • Bank boards should maintain a regular dialogue with supervisors on their institution’s standing relative to peers on cultural issues.

While these recommendations are by their terms applicable only as recommendations from a non-public organization and then only to the largest institutions, over time they may be applied as the measuring stick by which examiners will review all bank cultures and the performance of all bank boards.