Groucho redux: culture soup

August 2016 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

Writing in London in February 1946, an unwell George Orwell felt frustrated by the content of his morning post. He felt so perturbed, he responded by drafting an essay on prose style that was published, in April of that year, in the high-brow literary and art critical magazine Horizon. Though far from his best essay, ‘Politics and the English Language’ contains the usual level of Orwell insight. The thrust of the essay is summed up in the now-famous phrase which appears in one of its later paragraphs: “if thought corrupts language, language can also corrupt thought”.

Almost exactly 70 years after the publication of Orwell’s essay, the Deputy Governor of the Bank of England and CEO of the Prudential Regulatory Authority (and, by now, CEO of the Financial Conduct Authority) Andrew Bailey stood to speak at a conference just four miles due south of Orwell’s Islington home, at the Oval Cricket Ground. Dr Bailey, an economic historian by training and an enthusiastic cricket fan, would have felt on safe turf (almost literally). His topic that day: a regulator’s perspective on culture in financial services. He opened by noting the importance of culture: “[T]he culture of firms and the people that make them up – and of course therefore the culture of industries insofar as it can be generalised – is of the utmost importance to financial regulators. Culture matters a great deal.”

Yes, it does. But so does precision, especially when you are a regulator. Precision requires clarity of language for, as Orwell argued in that 1946 essay, without clarity of language, clarity and quality of thought will suffer. And, at least in relation to culture, suffer it has. Regulators’ thought on culture has corrupted language and their language has corrupted thought.

The pressure for regulators to address culture has come from the same series of events that led to ‘regulators’ being plural: the failures of the Financial Services Authority during the events leading up to the global financial crisis in the period 2007 to, well, perhaps, even until now. In the wake of its performance before and during the crisis, the FSA was broken into the Prudential Regulatory Authority (which was set up as a subsidiary of the Bank of England) and the Financial Conduct Authority. Both have been increasingly active and bellicose on the subject of culture; neither has a handle on what culture is, what it means or what it does (not that it ‘does’ anything; a point to which we will return). But, then, nor do a lot of other people; it’s a common problem.

Speaking to Forbes magazine in 2012, Harvard Business School’s Professor of Leadership, John Kotter, said: “Here is the problem: First, virtually no one clearly defines what they mean by ‘culture’, and when they do they usually get it wrong. Second, virtually no one has read the original research that shows why culture – when clearly defined – is so important, how it is formed, and how it changes.”

In Dr Bailey’s case, recognising the importance of culture is not enough. At no point has either current regulator stated what they understand ‘culture’ to mean and, to the extent that they have tried, they have usually got it wrong; they do not understand why it is so important, how it is formed or how it changes. Kotter’s accusation lands squarely on both the PRA and the FCA. These distinctions matter; these entities set policy and regulation; they also enforce it supervisorily – they are the arbiters. Let’s take a closer look at Bailey’s turn at the Oval, as he has been CEO of one and will now be CEO of the other.

In defining culture, Bailey observes that culture “...is a product of a wide range of contributory forces: the stance and effectiveness of management and governance, including that well used phrase ‘the tone from the top’; the structure of remuneration and the incentives it creates; the quality and effectiveness of risk management; and as important as tone from the top, the willingness of people throughout the organisation to enthusiastically adopt and adhere to that tone. Out of this comes an overall culture.”

There are two problems here. The first and most obvious is that ‘tone at the top’ is ill-defined; it is an over-used phrase that is frequently used carelessly. What is ‘tone’? As it appears to whom? And observed by whom? And what is ‘the top’? The phrase first appeared, influentially at least, in 1987 in the report of the US National Commission on Fraudulent Financial Reporting, known as the Treadway Commission. The Committee of Sponsoring Organizations (hence COSO) of that Commission then absorbed it unquestioningly into their interpretive guidance in 1992.

Despite its many flaws, that guidance was, in turn, picked up wholesale in the PCAOB’s guidance interpreting the SEC’s regulations pertaining to internal control under §404 of the 2002 Act US PL 107–204, better known by the name of its Congressional sponsors: the Sarbanes-Oxley Act. In all that time, there has never been a satisfactory explanation of the phrase, which is clearly a metaphor. Metaphors can be helpful but they can mean very different things to different people. And any tone a supervisor hears consistently in an organisation is most likely to be caused by tinnitus.

The second and more serious problem with Bailey’s statement is a lack of acknowledgement of the complexity of culture and its emergence from the entirety of attitudes and behaviours of the people in any organisation, and that each group of people will have emergent attitudes and behaviours or ‘cultures’; that is, an organisation will have multiple complementary and conflicting cultures and any person will be subject to, as well as contributory to, multiple cultures both within and outside the organisation. All of these collide and enmesh; from the collisions and interactions, new and evolving layers of cultures will emerge. Supervisors unschooled in culture and untrained in anthropology or sociological observation – albeit potentially knowledgeable and experienced in their own disciplines – will interpret what they see through their own lenses, prismatically, through their own cultural, educational and professional experiences, expectations and contexts. This is inescapable.

Many people think that, even without training in anthropology, sociology, psychology or other observational ‘social sciences’ (from which, explicitly, we exclude financial- and macroeconomics), they understand culture by virtue of exposure to it. However, receiving anaesthesia does not bestow on the recipient thereof the 13 years of post-secondary training necessary to enter the professional register as an anaesthetist. While the disciplinary ground around culture is contestable and, indeed, highly contested, familiarity with the debates in these fields is an essential precondition for contributing meaningfully to them and to judging the results. Especially as a regulator, you cannot dumb this stuff down just because it suits you to do so; at least, not constructively, not without consequences.

Bailey talks of “a failure of culture” but, as alluded to above, culture is not instrumental: it doesn’t do anything, therefore it cannot ‘fail’. He continues: “Culture has (sic) laid the ground for bad outcomes”. No, it hasn’t. People have done those things; people must be held responsible, accountable.

Aside from the dreadful mix-up between accountability and responsibility in the new senior managers’ regime, that regime and other recent financial regulations make executives responsible for, in Bailey’s words, “forming and implementing a positive culture throughout the organisation”. Again, this fails Kotter’s test of understanding how culture is formed. It simply misunderstands and misrepresents what culture is or how it forms or changes, how it emerges and is transmitted between groups and people.

Remarkably, and despite multiple intercessions that demonstrate a contrary inclination, Bailey states: “As regulators, we are not able, and should not try, to determine the culture of firms. We cannot write a regulatory rule that settles culture.”

For many years, the PRA and FCA and the FSA before them, have written rules that have strongly and deliberately influenced the culture – or, at least, the attitudes and behaviours that are so important to the emergent formation of culture – of financial sector firms and of the advisers and regulators with whom they intersect and interact. Unintended consequences have been legion. This was all pointed out very clearly by an excellent study of culture in financial services by LSE professor Michael Power and his colleagues in 2013. The lessons therefrom have clearly not been learned at the PRA or the FCA; the humility that a close reading of that work ought to have instilled is notably absent at either, at least as it pertains to culture.

In his 1946 essay, Orwell observed: “the slovenliness [in the sense of carelessness] of our language makes it easier for us to have foolish thoughts”. The PRA and FCA are full of people, often from a common set of disciplinary backgrounds, who are diligent and capable. Dr Bailey is certainly one of them. But those backgrounds seldom relate to a nuanced understanding of the formation and change of culture or its observation.

On the subject of culture, the UK financial regulators appear woefully lacking both in technical knowledge and humility: they don’t know enough to know what they don’t know; that does not seem to stop them using the language. On culture, both organisations – and many other contributors to the debate on organisational change in financial services – appear out of their depth and guilty of overreach. Their enthusiasm for a topic which is outside their disciplinary knowledge and experience will serve no-one well. It is time for them to revisit their enthusiasm for culture or, in Kotter’s words, read [and understand then apply] the original research. In the meantime, they should be more careful about the language they use about culture; it matters.

Peter Bonisch is the managing partner of KBMstrategy. He can be contacted on +44 (0)20 7060 7475 or by email: peter.bonisch@kbmstrategy.com.

Peter Bonisch

KBMstrategy