by Tom Reader
Associate Professor, Department of Psychological and Behavioural Science, London School of Economics
May 16, 2021
Compendium
Organizational culture theory proposes that behavior within an institution—for example collaboration, speaking- up, misconduct, or risk- taking—arises from the values prioritized by employees and managers. By developing shared norms around the practices that are encouraged (e.g., teamwork) and discouraged (e.g., risk-taking) within an institution, culture acts as a form of “social control” that defines what is important and how people should behave.1 Where values are positive and shared (e.g., on the importance of behaving ethically, or prioritizing customers), conduct and organizational outcomes tend to be enhanced.2 3 4
In finance, academics and practitioners have found that conduct risk can be explained by whether employees and managers form shared values on the importance of managing risk effectively.5 Institutional norms—whether for integrity, open communication, risk management, reporting of mistakes, or performance target pressures— collectively shape organizational behavior that leads to the success or failure of conduct risk management efforts (e.g., breaching trading limits, mis-selling to customers, not reporting suspicious transfers).6
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