enda twomey - operational risk · 1) excessive risk taking led to ﬁnancial crisis 2007 – 2008...

EndaTwomey12thOctober2018

WebinarIden%fyingtheKeyLeversof

UnderstandingandShapingCultureandBehaviouralRisk

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Disclaimer:Theviewspresentedinthissessionarepersonalviewsofthespeakerandcannotbeinterpretedasanyotherpersonororganisa:on.

A.Introduc%onWhathavetheseIns%tu%onsgotinCommon?

190519891992

187920072008

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A.LearningObjec%ves

1)  Whatdowemeanbycultureandriskculture2)  Thinkingaboutthechangingfaceofmanaging

cultureandbehaviouralrisk3)  Understandinghowsocio–psychologicalfactorsare

shapingapproachestomanagingbehaviouralrisk4)  LearninghowoperaIonalriskmangerscanuIlise

theseapproachesinbuildingmoreresilientorganisaIons.

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A.2008–2018-AdecadeofTurmoil?

WhyisRiskCultureimportant–let’srecall1)  Excessiverisktakingledtofinancialcrisis2007–20082)  FollowedbyconductriskfailuresCostofPPI-£40BillionesImatedprovisionsinJuly,2018-Bloomberg3)NobodyisimmunetoconductriskissuesTheconsensusisthatanabsenceofastrongriskculturewasattheheartofthefinancialcrisisandconductriskfailures.

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A.WhyisthisImportant?-ConductCostsProjectReport

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A.WhyisthisImportant?–TheBigpicture1.   Strategyimplementa%onandrisk

managementneedtobecorrectlyalignedtoavoidtheprudenIalandconductfailuresofthepast

2.  ConductfailuresarepuWngcustomercentricstrategiesattheheartoffirms’approaches

3.  Improvingoverallfirmperformanceisfocussingon

i.  ensuringthattheorganisa%onalcultureissupporIveofthefirm’sstrategyand

ii.  thattheriskcultureissupporIveofsoundriskmanagement

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B.SowhatismeantbyCultureandOrganisa%onalCulture WhatismeantbyCulture?

1.  "thatcomplexwholewhichincludesknowledge,belief,art,morals,law,customandanyothercapabili:esandhabitsacquiredbyman(sic)asamemberofsociety.“E.B.Tylor

2.  CambridgeEnglishDicIonarystatesthatcultureis,"thewayoflife,especiallythegeneralcustomsandbeliefs,ofapar:culargroupofpeopleatapar:cular:me.“

WhatismeantbyOrganisa%onalCulture?1)  “Thewaywedothingsaroundhere”(MBower1966-TheWilltoManage:

CorporateSuccessThroughProgrammedManagement)2)  “ApaFernofsharedbasicassump:onslearnedbyagroupasitsolvedits

problems…whichhasworkedwellenoughtobeconsideredvalidand,therefore,taughttonewmembersasthecorrectwaytoperceive,thinkandfeelinrela:ontothoseproblems”(ESchein1992-OrganisaIonalCultureandLeadership)

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B.SowhatisRiskCulture

1.  RiskculturecanbeseenasasubsetoftheoverallcultureoftheorganisaIon2.  TherearenumerousdefiniIonsforexample

i.  “…thenormsofbehaviourforindividualsandgroupswithinanorganisaIonthatdeterminethecollec%veabilitytoidenIfyandunderstand,openlydiscussandactontheorganisaIonscurrentandfuturerisk….FSB2013

ii.  “thevalues,beliefs,knowledgeandunderstandingaboutrisksharedbyagroupofpeoplewithacommonpurpose,inparIculartheemployeesofanorganisaIonorofteamsorgroupswithinanorganisaIon”IRM2012

3.  ExcessiverisktakingisregardedasademonstraIonofinappropriateriskculturehoweverexcessiveriskcontrolcanalsobedetrimentaltotheachievementofobjecIvesandwhatistheappropriateriskcultureisverymuchcontextdependent.

4.  RiskcultureisadynamicsocialprocessandnotjustaboutindividualapItudesandbehavioursandheavilyinfluencedbybothexternalandInternalfactors.

5.  Wedon’tlackformodelsaroundRiskCulture!

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B.DriversofRiskCulture-InternalFactors1.   RiskmanagementFunc%on-thestatusoftherisk

managementfuncIonandemploymentofcentralisedversusdecentralisedmodel

2.   ThreeLinesofDefence-howwellarIculatedareeachrolesandwellembeddedaretheyinpracIse

3.   RiskAppe%teFrameworks-howeffecIvearetheyinpracIse4.   RecentRiskHistory-thefrequencyandseverityofrecentrisk

events5.   Natureofformalandinformalorganisa%ons-howwellare

theformalriskgovernancestructuresoperaIngandwhatisthepowerandinfluenceoftheinformalnetworkswithintheorganisaIon.

6.   Incen%veStructures-excessiveincenIvestructurescanundermineriskculturethroughexcessiverisktaking

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1.   EconomicCondi%ons–theappropriatebalancebetweenriskcontrolandrisktakingacIviIesshouldbe(!)heavilyinfluencedbytheeconomiccycle.

2.   Compe%%on–anargumentcanbemadethattheexcessivecompeIIonleadtoexcessiverisktakingpriortotheIrishFinancialcrash.

3.   Technology–thespeedandintensityofeventscanbeexacerbatedbytechnologicaldevelopmentsandmayrequireariskculturalresponse

4.   Stakeholders–MeeIngstakeholder’sexpectaIoncaninfluenceriskculture

B.DriversofRiskCulture-ExternalFactors

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B.ViewsoftheFinancialStabilityBoardonRiskCulture–RiskCultureStandardModel!

1.  TheFinancialStabilityBoardissuedguidance(2014)tosupervisorsaswhattheyshouldbelookingatwhenexaminingriskcultureinfinancialinsItuIons.

2.   Founda%onalElementsofaSoundRiskCulture:RiskGovernance;RiskAppeIte;andCompensaIon.

3.   IndicatorsofasoundRiskCulture:

i.  TonefromtheTop;ii.  Accountability;iii.  EffecIveCommunicaIon

andChallenge;andiv.  IncenIves.

hkp://www.fsb.org/wp-content/uploads/140407.pdf

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C.However–RealityofWorld

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C.LookingforunderlyingSocialPsychologicalReasons-Example-NybergReport

MISJUDGINGRISK:CAUSESOFTHESYSTEMICBANKINGCRISISINIRELAND-REPORTOFTHECOMMISSIONOFINVESTIGATIONINTOTHEBANKINGSECTORINIRELAND–NybergReport.

1.  Excessiverisktakingacrossindustryfacilitatedby“Herding”

2.  ExcessiverisktakingwithininsItuIonsfacilitatedbypervasive“Groupthink”

hkp://www.bankinginquiry.gov.ie/Documents/Misjuding%20Risk%20-%20Causes%20of%20the%20Systemic%20Banking%20Crisis%20in%20Ireland.pdf

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C.LookingforOtherAnswers–TheDutchModel

DNB’s(theDutchCentralBank)missionstatement“seekstosafeguardfinancialStability…”“Inlightofthatmandate,wemustkeepacloseeyeonanythingthatmayputthatthisfinancialstabilityinjeopardy.Naturally,thisincludesafinancialIns:tu:on’sbehaviourandculture”FrankElderson–ExecuIveDirectorDNB

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Premises1.  IncreasingrulesandregulaIonsisnotenough–percepIonofbeing

incontrolbutlimitstowhatcanbeachieved2.  ConnecIonbetweenbehavioursandcultureandpublictrustand

ulImatelyfinancialstability–needtoconInuallybuildtrustandreputaIon

3.  BehavioursandculturearepartofasoundbusinessoperaIons-needtoidenIfyaninsItuIon-wideviewandmissionstatementonappropriatebehavioursandcultureandeffecIveprocessestoidenIfyandmanagebehavioursandculture

Fundamentalidea-poorpakernsofbehaviourscanbealeadindicatoroffinancialproblemswithorganisaIonalpsychologyunderpinningapproach.



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Overview•  WhyThisBook?PartI-FoundaIons•  TheRaIonalfortheSupervisionof

BehaviourandCulture•  ModelandBasicAssumpIons•  SupervisoryApproachandMethodologyPartII-PracIse–FocusonGroupeffecIveness•  DecisionMaking•  Leadership•  CommunicaIon•  GroupDynamics

PartII-PracIseFocusonChange•  CapacityforChange•  CultureChange

PartIII–FutureDevelopments•  ErrorManagementinFinancial

InsItuIons•  TheWayForwardforeffecIveExternal

SupervisionistoInfluenceInternalSupervision


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MadeinJapanTheJapaneseparliament’sindependentinvesIgaIoncommikeecitedthefollowingunderlyingdynamicsandculturalelementsascontribuIngtothedisaster1.  Alackoftrustbetweenthemajor

players2.  Areluctancetoescalatebadnews3.  AspectsembeddedinthenaIonal

culture“Ourreflexivesobedience,ourreluctancetoquesIonauthority,ourdevoIonto‘sIckingtotheprogram’,ourgroup-ism,andourinsularity…..alongwithaneedtosaveface.”(InvesIgaIonCommikeereport)

C.LookingforOtherAnswers–DNB–GroupDynamics

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C.LookingforOtherAnswer-DNB-GroupDynamics

Oneofthedriversofbehavioursisgroupdynamicswhichcaninfluencedecisionmaking,leadershipandcommunica%ons,thereforeessenIaltounderstandandassessinggroupdynamicsAssumpIons1.  RelaIonshipbetweenGroupDynamicsandGroup

Effec%veness2.   SocialProcessesingroupsthatunderlineGroup

Dynamics3.   AssessmentisatmomentinImeandinaspecific

context

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C.LookingforOtherAnswers-DNB-GroupDynamics

1.   GroupComposi%oni.  Diversityandperformanceofgroupmembersii.  Size

2.   GroupClimatei.  NatureofInterpersonalRelaIonshipsii.  Cohesionsiii.  DealingwithConflictiv.  BalanceTaskandRelaIonshipOrientaIon

3.   StatusDifferencesi.  LookingatDynamicsbetweendifferentGroups

IndictorsforAssessingGroupDynamics

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D.LookingforOtherAnswers-Corrup%ngBarrelsvBadApple FocusofakenIonwhenitcomestomis-conducthasbeentheindividual’sfailings.LetsgobackinImeandintothefieldofCriminology…….1.   EdwinSutherlandin1939coinedanddefinedwhite-collarcrimeas“an

offensecommikedbyapersonofrespectabilityandhighsocialstatusinthecourseofhis/orheroccupaIon”

2.  Developedthedifferen%alassocia%ontheoryofcrimewhichproposesthatthroughinteracIonwithothers,individualslearnthevalues,aWtudes,techniques,andmoIvesforcriminalbehaviour

3.  AsSusanSibley(MIT)focusingonEthicsandEthicalTraining,commentsthatthemostimportantcontribuIonSutherlandmakesishisemphasisesoncontextandsocialorganisa%onratherthanexclusivefocusonindividualchoicemakingac%vity.

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D.LookingforOtherAnswers-U%lisingaTeamClimatePerspec%ve–W.Scholten

1.  Thisbookprovidesinsightsandtoolsformanagersandexternalsupervisorswithinfinancialservicesthathelptodefineandassessteamclimatesinordertopreventfuturemisconduct.

2.  AssessingtheTeamClimate:i.  IneffecIveErrors

Approach?ii.  OutcomeInequality?iii.  DysfuncIonalMoral

TeamClimate?

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•  Thewaythatateamdealswithtaskrelevanterrorsmayfacilitatemisconduct

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ImprovingTeamClimate1.   Leadershipiskey2.  Improvingthe“Corrup%ngBarrel“TeamClimateCharacterisIcs

i.  ImproveErrorApproachii.  ReduceOutcomeInequalityiii.  ManageEmoIonalconsequencesiv.  ImproveMoralClimate

3.   ConflictstoResolvei.  ContradicIonbetweenastrongcontrolenvironmentandanopennessabout

errorsii.  ContradicIonbetweenperformanceandcompliancegaolsiii.  ContradicIonbetweenalegalandalearningapproachregardingmisconduct

whichhastakenplace

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E.LookingforOtherAnswers-JustCultureApproach

AfundamentalelementofastrongriskcultureisensuringthatriskinformaIoniscommunicatedupanddowntheorganisaIon.1.  A“blameculture”withinanorganisaIoncaninhibitthisidealbuta

“noblame”culturecanhavetheimpactofreducingaccountability.2.  Otherindustriessuchthemedicalprofession,nuclearpowerand

aviaIonhavebeenexaminingthisissueandhavedevelopedtheconceptofa“JustCulture”.

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E.LookingforOtherAnswers-JustCultureApproach

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Final,FinalThoughts!!

RiskCultureConversa%ons-2028

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QuesIonsandComments

•  ContactDetails:•  EndaTwomey,HeadofIrishChapter– Telephone:+353872262502– E-mail:[email protected]– URL:www.ior-insItute.org

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