Catching the Wind, Keeping the Balance: The Role of Risk Culture in Financial Services

Culture is more than simply “how we work around here” – the set of norms tacitly shared by everyone within any company.

Culture is what we aspire to, how we show up on our best days and, crucially, it’s the worst behaviors that we are willing to tolerate. While it is important for every organization to understand culture as a shared set of agreements, and the behaviors that are encouraged and permitted, it is specifically imperative for financial services leaders today.

While much has changed since the Global Financial Crisis, today’s complex world demands financial services leaders to understand the motivations and behaviors at work in their organization’s culture, taking on unconscionable risk when they do not. This extends beyond the (real and virtual) walls of each individual company – the risk of not understanding the cultures within financial services firms could upturn our entire global economy.

A strategic tension lies at the heart of every financial services institution; to safeguard funds while also taking risks to finance the global economy. This requires a delicate balance, like that of a ship at sea – catching the wind of trends, making strategic bets, and maintaining the ballast/balance of risk aversion. Evolutions in the geopolitical and economic landscape can be understood as tides and weather systems that require leaders to re-calibrate. At these moments, the way that people collectively behave – culture – must often shift and calibrate as well. A well-managed, well-understood culture can help an institution maintain a steady course through even the stormiest seas. And a culture that isn’t understood by the leaders can take down the most impressive-seeming institutions.

2023 has already seen numerous institutions that seemed to have bright and steady futures suddenly becoming case studies for risk mismanagement. The story at each institution differs, but the overall message remains the same: the policy-and-governance-led way that leaders across financial services have considered risk to date must be materially reconsidered. For financial services leaders to manage their inherent risks, they must understand behaviors and culture with greater accuracy and depth than ever before.

When aiming to understand your culture, why are policy and governance no longer enough?

Imagine this scenario: one of your senior team leaders – lets call her Becky – consistently praises a member of her team for closing a high number of deals. You have also received hints that this team member plays fast and loose when it comes to some regulatory requirements. You face a dilemma: do you adhere to the rule book and interfere to potentially cause Becky’s team to fall behind compared to the competition? Or look the other way to allow Becky’s team to run things differently?

Culture is shaped by what is rewarded and what is punished. If others continuously hear Becky’s team praised for their successes, and fail to see their own increasingly risky behavior reprimanded, these teams are becoming a part of a self-reinforcing behavior pattern. This is what we mean by culture. While this example may feel removed from the C-Suite, this behavior cascades down from top all the way through the organization. Transparency into firm culture is crucial to understand the level of risk at play within the daily behaviors across each team.

What must each leader do to gain a better, deeper understanding of their organization’s culture?

1. Put culture on the agenda: Leaders must recognize that culture is not an intangible concept, but a reflection of every employee's interactions, therefore demanding a prominent place on the leadership agenda. This demand enables a sharp focus on the positive and negative elements of a company’s culture; forcing leaders to take off their “rose-colored glasses” around culture and treat risk-prone habits with the same analytical basis they approach any other key agenda item. By embracing analytical thinking, leaders can make evidence-based decisions and implement targeted strategies to strengthen risk resilience. However, if leaders are dismissive of culture issues, the day-to-day workings of their teams becomes opaque, missing out on the benefits that transparency entails.
   
   
2. Share risk responsibility across ranks and wings: Risk management should be viewed as the responsibility of every executive, extending beyond the risk function. Organizations should consider silos among managers and teams a risk factor. Regular collaboration between traders and risk officers, bankers and auditors, account managers and legal teams should be the norm, not the exception. Leaders must create mechanisms to gather information on their team’s interconnectivity, as well as the behaviors and attitudes of folks within them, placing emphasis on anonymity and bias elimination in data collection. This offers leadership an accurate perspective on the views of employees at all levels, increasing transparency into their culture. Together, data and dialogue can provide evidence to reward leaders who are pioneers of a collaborative culture, where risks are called out and acted upon quickly.
   
   
3. Maintain consistent preparedness: Rather than breathing a sigh of relief after surviving a crisis unscathed, leaders should view such events as opportunities for scenario planning and self-examination. Ignorance is not bliss—it is risk. Therefore, it’s essential to encourage a culture of continuous improvement. Promoting a proactive approach to risk management goes beyond traditional employee sentiment surveys; it involves leveraging advances in behavioral economics and cognitive science to give leaders the accurate data they need to make decisions. This prepares the business for times of disruption, and forces risk threats to become addressed internally well before it has the opportunity to become a media scandal.

Financial services will always involve the constant calibration of risk. Nevertheless, there is a remarkable opportunity to minimize your organization’s risk profile. By moving from a sentimental, superficial understanding of your culture to a nuanced, clear-eyed view, you will open dialogue, increase individual accountability, and make use of data to deliver outstanding client solutions.

Authors

• Gretchen Anderson leads Russell Reynolds Associates’ Global Culture capability. She is based in New York.
• Tal Friedler is a member of Russell Reynolds Associates’ Financial Services knowledge team. She is based in London.
• Cem Turan leads Russell Reynolds Associates’ Financial Services knowledge team. He is based in London.