Regulator in the Boardroom?

Hector Sants, "Culture Inspector"?

You may have heard a rumour circulating that the FSA wants to put a 'culture inspector' on the board of banks and other financial institutions. As Anthony Hilton writes in the Evening Standard recently, this is a canard but it is not necessarily a bad idea.

...trust won't be restored until people have confidence in the City's ethics and in many cases these are inseparable from the firm's culture. So, vague though the term is, culture is going to be a continuing concern for regulators, politicians and the public.

This continuing concern can be traced more accurately to a speech last month by Hector Sants, Chief Executive of the Financial Standards Authority when he said:

It is crucial that we improve behaviour and judgements. To do this we must address the role that culture and ethics play in shaping these.

Sants went on to suggest how this might work:

For regulators, the starting point should be that we want the firm to have a culture which encourages individuals to make the appropriate judgements and deliver the outcomes we are seeking... The regulator's focus should therefore be on what an acceptable culture looks like and what outcomes that drives... It is neither feasible nor desirable for the regulator to specify the type of culture a firm has, nor the measures and metrics by which this should be assessed. What should matter to the regulator are the outcomes that the culture delivers and that the firm can demonstrate it has a framework for assessing and maintaining it.

This is the crux of the issue - can firms demonstrate that their culture governance framework (assuming they have one!) is robust, accurate and produces a culture tied closely to its corporate strategy. Of course, this is much harder and complex than at first glance. Just think how such a framework might work in your team/department before considering how such a framework can be rolled out across a major institution, and still retain its usefulness.

Developing such a culture governance framework is further complicated by Sants' further correct observation that:

... a box-ticking approach to regulating culture will not work. The regulator must focus on the actions a firm takes and whether the board has a compelling story to tell about how it ensures it has the right culture that rings true and is consistent with what the firm does.

So where does that leave Boardrooms in the City? Simply, they need to act rapidly to develop a culture governance framework that can stand up to regulatory scrutiny. While the FSA won't proscribe a framework tool, boards need to develop one based on leading academic research and best practice. In this, board members should look to the Governance Beyond Boardroom network for where to start.