Speaking at a New York conference on “Reforming Culture and Behavior in the Financial Services Industry: Expanding the Dialogue,” William Dudley, President and CEO of the Federal Reserve Bank of New York, emphasized that, in his experience, “people respond far more to incentives and clear accountability than to statements of virtues and values.” From Dudley’s perspective, statements of virtues and values are “worthy and necessary, but remain aspirational or even illusory unless they are tied to real consequences.” Moreover, observing that “deep-seated cultural and ethical problems have plagued the financial services industry in recent years,” Dudley stressed in his Oct. 20, 2016, prepared remarks that “restoring trustworthiness” must be the ultimate goal of reforming culture and behavior in the industry.
Along these lines, Dudley stated that “a trustworthy financial services sector will be more productive and better able to support the economy. Reliable financial intermediaries can help increase the flow of credit, promote economic growth, and make the financial system more stable.”
Incentives, accountability. “To put it very simply, incentives drive behavior, and behavior establishes the social norms that drive culture,” Dudley stated. “If the incentives are wrong and accountability is weak, we will get bad behavior and cultures.” Accordingly, to assist supervisors and managers in evaluating their firms’ incentive structures, Dudley posed several questions, including:
- How is compensation determined?
- In particular, is questionable conduct … consistently reflected in decisions about compensation and promotion?
- Do risk managers have the appropriate authority to challenge frontline revenue producers and prevent activity that is questionable?
- When people speak up to point out potential conduct issues, how are they treated?
Noting that reform requires the efforts of both the private and public sectors, Dudley indicated that he continues to offer proposals toward reforming the financial services industry’s culture. First, there should be a “database of banker misconduct” to combat the problem. Second, there should be a “baseline assessment” of the culture “in order to measure progress,” and he recommends “an industry-wide survey” in that regard. In addition, Dudley suggests that supervisors and managers should be “thinking hard” about how technological change will influence “incentives, behavior and culture.”
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