Why banks’ biggest risk factor may be employees who don’t speak up

In response to the financial crisis of 2008 and 2009, policymakers put forward a number of proposals to improve corporate culture in banking — from creating a database of bad actors to requiring financial firms to disclose the pay disparity between the CEO and rank-and-file employees.

But executives at big banks said Monday that it is ultimately up to the companies themselves to build healthy cultures. If they are serious about thwarting bad behavior and ensuring that ethical lapses do not morph into full-blown scandals, then the most important thing they can do is encourage employees to speak up when they observe misconduct.

It is not so easy, though. Senior leaders may say that they want to hear bad news, but that doesn’t mean lower-level employees are eager to share it with them.

“Good news tends to travel up much more quickly” than bad news does, Elizabeth “Betsy” Duke, the board chair at Wells Fargo, said at an industry conference on bank culture hosted by the Federal Reserve Bank of New York.

From left: Cathy Bessant, Chief Operations and Technology Officer, Bank of America; Michael Corbat, CEO of Citigroup; and Roger Ferguson, CEO of TIAA.

During panel discussions at the one-day conference, senior leaders discussed a wide range of issues around improving culture, from setting the tone at the top to paying attention to the results of employee surveys.

But they acknowledged that one of their biggest challenges — one that strikes at the heart of the lingering worries over whether megabanks are simply too big to manage — is convincing employees to come forward and share bad news with leadership before a matter gets out of hand.

“By the time an issue gets to me, it’s too late,” said Michael Corbat, the CEO of Citigroup. “I say that nothing good happens on Friday afternoon after 3 o’clock. [If] my phone rings ... it’s always [someone who is] fessing up about something … and can’t go home without escalating it.”

Duke offered a similar warning, discussing the experience of being on a board that was blindsided by damaging information. When she joined the Wells board in 2015, the organization’s once-marquee reputation was still in place. A year later, Wells was embroiled in a full-blown reputational scandal.

“You can imagine how shattering it is to realize that there are things going on in your organization that you are just not seeing,” said Duke, who was promoted to chair in January.

In an autopsy issued last year of the fake-accounts scandal — in which employees created roughly 3.5 million unauthorized accounts — Wells placed some of the blame on former employees, including retail executive Carrie Tolstedt, who they said intentionally withheld information for senior leaders.

The Fed’s culture conference offered fitting first day of retirement for Bill Dudley, whose term at the helm ended Monday morning. John Williams, the former head of the San Francisco Fed, succeeded him as president and CEO.

“This is the first day of the rest of my life,” Dudley said during his opening remarks, drawing laughter from the audience.

Dudley witnessed a number of scandals during his nine-year run as the New York Fed’s president, including the London Whale debacle in JPMorgan Chase’s investment bank, the manipulation of the Libor benchmark rate and the Wells Fargo fiasco.

Dudley has argued that regulators and legislators have a role to play in reforming the industry’s culture and said that one way they can do so is to take a closer look at the incentives banks have in place. He has advocated, for example, that regulators encourage companies to defer senior leaders’ variable compensation for five to 10 years, and, in the meantime, use that pool of money to pay regulatory fines or help stabilize the firm in the event of a crisis.

“The financial crisis and subsequent scandals had called into question the industry’s trustworthiness in a fundamental way,” Dudley said. He acknowledged that some of his ideas, particularly on compensation, “seemed to fall on deaf ears.”

During panel discussions throughout the morning, bankers shared examples of how they encourage employees to elevate problems within their own companies.

Roger Ferguson, the president and chief executive of TIAA, said that one of his direct reports recently scored poorly in a survey of his employees, who reported that they “weren’t so sure that they felt safe to speak up” about potential problems. So Ferguson set a goal for his direct report to improve on that score on the annual culture survey.

“When he managed to do it, I brought it to the board’s attention, and we managed to increase his compensation more than it would have been otherwise,” Ferguson said.

Similarly, Bank of America plots on a grid the results of “certain elements” of its annual employee survey, and uses the results to make decisions about promotions, organizational restructuring and “other, more difficult decisions,” said Cathy Bessant, its chief operations and technology officer.

“It’s a very meaningful part of every opportunity that we have to change our organization,” Bessant said.

Throughout the day, CEOs urged their colleagues to be very aware of the natural tendency of employees to only share good news with their bosses.

James Gorman, the chairman and CEO of Morgan Stanley, described the “tyranny of success,” in which companies fall into the trap of thinking that the way they have been doing business for a long time “must be right,” he said.

Gorman pointed to the mortgage securitization market before the financial crisis, describing the misleading way products were sold and the misunderstanding among buyers about the risks they were assuming.

“It helps to be a little paranoid and a little scared,” Gorman said.

Meanwhile, Duke, whose company is struggling to rebuild its reputation, said she expects Wells to rebuild trust “at varying speeds” and “little by little” with regulators, customers and the broader public.

Duke said that restoring trust at Wells is important not just to the bank’s customers, employees and investors but also to the banking industry as a whole.

“Every institution has its issues, and they go by the wayside,” she said. “But everything that tarnishes one institution tarnishes our industry, and we have to be careful that we don’t think, ‘Oh that’s just them.’ The public doesn’t really distinguish between the problems of this institution versus that institution.”

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Workplace culture Corporate governance Workforce management Consumer banking Michael Corbat Citigroup Wells Fargo TIAA Bank of America Federal Reserve Bank of New York
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