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Lessons for bankers from disasters that didn't have to be

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By Gene Ludwig, Susan Krause Bell and Wayne Rushton

If corporate leaders are ever tempted to play it fast and loose, the catastrophes of the 737 Max and Deepwater Horizon (which is still an issue) both illustrate how hiding problems from a regulator can end up being a terrible mistake.

Had Boeing and BP executives heeded the warnings issued by their own employees and shared them with those responsible for regulatory oversight — had they responded to the red flags in real time — the companies would likely have avoided the subsequent catastrophic consequences.

That should be an object lesson for every company subject to regulation.

Painful as it may be in the short run to be transparent about a mistake or problem, the endgame is often much worse after energy is spent keeping the truth from those who need to know.

Admittedly, the temptation to keep quiet can be powerful. Red flags do not always turn into actual problems, even as sharing potentially damaging information can affect a firm’s bottom line.

But obscuring a problem is rarely worth the downside risk. As with Boeing and BP, a poor compliance attitude within an institution often leads to a self-defeating outcome over the long run.

But it’s not just that. Regulators explicitly look for signs that management can self-identify potential problems. And that’s why it behooves executives to be forthcoming. Providing regulators a view into a potential weakness signals a willingness to deal with problems head-on.

Financial regulators are particularly prone to take notice, if only because strong management is a central element of any supervisory assessment.
While being transparent with regulators is simple in concept, compliance can trip up the best executives.

First, internal transparency is a clear prerequisite. That is, managers need to be capable of identifying emerging risks, compliance breaches and similar weaknesses before they are first exposed by regulators.

To get there, front-line employees must be empowered to follow reporting and escalation protocols. For managers, that means doing more than promulgating written policies that purport to set certain expectations.

It means repeatedly setting an open tone at all levels and locations. Absent that culture, when a financial regulator chooses to impose an enforcement action, they’re likely to be armed with ample documentation of communications breakdowns, both intentional and inadvertent.

Second, much as executives should never stifle communication with regulators, those interactions should be coordinated. A regulatory liaison must be empowered to record and track an organization’s communications to ensure internal awareness and accountability.

That requires something of a balancing act. Employees at all levels must be in position to identify and report internal risk and compliance issues to management, and the board. Certain circumstances may lead employees to bypass those protocols using whistleblower programs.

But a sufficiently robust risk and compliance program should render whistleblower channels a rare necessity. Executives need to make sure that their direct reports and others in the company understand that when it comes to bad news, they won’t “shoot the messenger.”

If a company’s internal processes are properly constructed, executives won’t have to deal with an investigative team’s conclusion that internal early warnings were ignored or even suppressed.

That’s when regulators are most apt to lose confidence in a company’s executive team. All of this requires constant diligence. The details will vary depending on the business, size and nature of government oversight.

But the core questions senior managers should ask themselves regularly remain the same: Is every issue of concern within the organization reaching us? Can we be confident we will self-identify issues before regulators do?

Some corporate disasters happen due to forces largely out of a company’s control. But all too frequently, evidence revealed after a problem typically indicates that the company could have addressed the problem ahead of time.

Even worse, in many instances, employees are shown to have hidden the early indicators on purpose. That’s why the damage over the long run often isn’t worth the risk inherent in the initial cover-up.

Internal transparency should be at the top of any company’s agenda. If it’s not, executives are bound to run into the teeth of an unnecessary regulatory and reputation problem somewhere down the line.

Gene Ludwig is founder and CEO of Promontory Financial Group. He is also a former comptroller of the currency.

Susan Krause Bell is managing director of Promontory Financial Group, and a former senior deputy comptroller for bank supervisory policy at the Office of the Comptroller of the Currency.

Wayne Rushton is managing director at Promontory Financial Group and a former senior deputy comptroller and chief national bank examiner at the OCC.

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Compliance Risk management Financial regulations Crisis Management Active management Workplace management
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