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The Cultural Issues in Banking Safety and Effectiveness

The Cultural Issues in Banking Safety and Effectiveness

by Edgar Schein

Society of Sloan Fellows Professor of Management Emeritus and Professor Emeritus, MIT Sloan School of Management

May 15, 2022

Compendium

Perhaps surprising to many, a detailed analysis of how to reduce risk and improve organizational safety is, in fact, also the best way to achieve the conditions necessary for long range excellent performance. A recent article offered a related analysis, with the banking industry might better protect themselves from conduct related scandals, risk management failures, and other events that increase risk and undermine productivity and excellence.1 [See also the Our View Article Culture & Conduct Risk in Banking

Here, I wish to elaborate on that article, offering a number of additional points and detailed discussion of risk management in industries or organizations where work is becoming more complex, and where excellence in performance is more and more essential.2, 3These remarks are based on my long experience in consulting on safety, risk, and performance improvement in a variety of different industries, and my work of the last six years on organizational improvement processes with my son, Peter Schein.

Point 1. Know the particular risk factors in your particular industry

It is tempting to assume that risk and safety issues are basically the same in all industries, but this turns out not to be the case. You need to figure out your risk factors and what to do about them based on where your industry fits along a broad dimensions of different types of risks in different industries identified by René Amalberti, a French safety expert.4 He presents his comparative dimension in a metaphorical manner by asking: “In your industry do you feel more like a small fishing boat captain or the director of a blood bank?” His point is to make you aware that the management of your risks depends very much on: 

  1. the nature of the tasks that you are trying to perform,
  2. the degree to which the technology of that performance is well understood and manageable,
  3. the degree to which you can predict changes in your various environments, and
  4. the degree to which your processes are supervised and monitored by outsiders, government agencies, laws and the courts.

The degree to which you can control or be controlled in each of these areas then tells you how much your industry or organization must train its leaders to be skillful in controlling and managing the things that are not well controlled. In the fishing boat industry you can control very little and therefore you are dependent on the fishing boat captains being talented and well trained in maintaining safe operations. If you are in the blood bank industry your technology and regulations cover much of your operations so your focus can be on those few elements in the supply chain, testing, and administration that are highly visible and predictable, but also quite limited.

You can ask yourself where your kind of banking fits on this dimension and, therefore, what your particular risk elements are. Are you more like a high hazard industry such as fishing boats, nuclear plants, airlines, pharmaceuticals, mining and extraction, or are you more like consumer goods, restaurants, various kinds of services such as a blood bank where some of the uncontrolled factors are known and less depends on the skill and training of the operators. If your organization has some form of safety committee, locating yourself along this dimension and identifying the areas of high risk becomes essential.

By high risk we should mean what kind of accident or deviation from normal operating procedure would not just hurt you but would put you out of business. For example, in working with an Audubon organization that had parks and trails and ponds and summer camps, we surmised that people hurting themselves on the trails and suing the organization would be far less damaging than if it was discovered that in one of the summer camps a counselor who had been hired by the organization had sexually harassed some of the young female campers. Recognizing this risk focused their safety concerns on how they staffed their summer camps.

Senior executives and board members need to be highly aware of this risk dimension above and beyond how it relates to what regulators are holding board members accountable for.

Point 2. Learn how your industry is influenced by the “macro culture” in which it operates, and the occupational cultures that influence executives and employees.

By macro culture we mean the cultural elements that derive from your country’s culture and the cultures of your executives and employees. What is considered to be safe or unsafe, what is considered to be ethically legitimate or not legitimate, and what is considered to be legal or illegal will vary by country and by the training of the employees in the bank. Words like “corruption” or “ethics” or “bribery” may not only have very different meanings in different countries, but what kinds of behavior fall within the scope of those terms may be different may be different as well. Context will undoubtedly influence how a given bank and its employees define these terms for themselves, quite independent of what the bank’s headquarters policy, located in another country, may promulgate as formal principles or rules.

This issue not only influences what the risk factors are but even basic operations. I once helped a Swiss bank executive in figuring out how best to manage a dilemma. Orders from the parent company, which was in the UK, were vague and therefore very difficult to implement. When the executive raised this issue and asked for clarification, he was told that the orders were quite clear and he was expected to do what was appropriate. Not only was he unsure of what to do, however, but he was quite worried that was quite worried that he was expected to do “the right thing” without really knowing what the parent company considered to be “right.”

On the matter of employee occupational culture norms, it is quite possible that different educational programs in finance and accounting present different boundaries to the students as to what it is OK to do or not OK to do. Bank managers who have come up through the system in their particular country may have learned ways of doing things that they take for granted to be OK, only to find out that they are now in a bank that has somewhere different standards. These new standards may be so taken for granted that no one bothered to explain them to the new manager until after that manager had unwittingly created a scandal. It is also possible that what are considered to be the norms of behavior might differ if the promotion system favored primarily executives conservatively trained in finance and accounting or executives who were entrepreneurial and daring. 

Every bank needs to have not only a “safety culture” task forces to think through what kinds of risks are created by country and occupational cultures, but to check for variations in what are considered to be appropriate limits of behavior in different parts of the banking system.

Is it possible that the ship that ran aground and bottled up the Suez Canal last year did so because the captain of the ship refused to pay the “normally accepted bribe” to the guide boat captain?

I would think that banking has many areas, especially around the rules for lending money, foreclosing on loans, covering up accounting errors, etc. that should be written up as a booklet of ethical dilemmas and what to do or not to do that is distributed to new employees and discussed regularly. Employees at all levels of management should be encouraged to bring forth questions around behavior that they are confused about.

Point 3. Create an industry self-monitoring and training function

I spent five years on the advisory committee of INPO (Institute for Nuclear Power Operations)—an independent organization funded by the 100 or so nuclear plants in the U.S. nuclear power industry. INPO has as its mission to evaluate each plant on a regular basis to ensure that it meets the licensing requirements of the Nuclear Regulatory Commission and to provide feedback, remedial suggestions, and education and training in areas where a plant’s standards have slipped.

INPO also does research and analysis to build what they consider to be a requisite “safety culture” for all members of the industry and creates educational and training programs to promulgate these. INPO connect closely with a similar organization in Europe called WANO and with the IAEA in Vienna. In this industry, as should be the case in all industries, there is a positive emphasis on what is a well-run nuclear plant, not just what is a safe one. It is in this industry that we see the clearest example of high levels of open communication and trust up and down the line as being the core process of what they call their safety culture.

It is the absence of trust and open communication up and down the line that is usually associated in other industries with poor quality work and marginal safety. By concentrating only on fixing things after something is going wrong, too many firms fail to concentrate on enhancing the things that are going well and that produce high-quality performance, innovation, and adaptiveness that is increasingly needed.

Is there any kind of consortium or group of banks that is already doing something like this or should the banking industry begin to evolve a program that would help the whole industry to maintain high standards of excellence and safety? In the manufacturing world and also in Health Care the emphasis on “improvement,” derived from US fascination with the Toyota production system and the whole “quality” movement that came out of our engineering culture. In many healthcare organizations that we have worked with the quality and improvement emphasis gets much more attention than the safety issue because it creates a broader perspective for thinking about organizational effectiveness. This issue connects closely with the need to develop better community relationships and to explore ways of banks collaborating with each other rather than competing.5

As an aside it should be mentioned that INPO is very successful in its monitoring and training, but has been remarkably lax or unsuccessful in convincing the public and the community that nuclear energy is today quite safe. The U.S. public continues to be scared of nuclear energy in spite of the fact that most scientists agree that it will have to be used in place of fossil fuels along with solar, wind and other sources if we are to slow down global warming.

Does banking have a similar public relations problem in some communities in that we cannot assume that a community automatically trusts a bank in the light of past scandals? Is there an Industry equivalent of info that collects information about effectiveness and safety and circulates that to banks?

Point 4. Involve the board and the executive suite in risk and safety management

My active interest in safety surfaced early in my career when I learned on a trip to South Africa in 1969 that supervisors in the gold mines believed that the native employees were not only disrespectful and untrustworthy because “they never looked at you in the eye, they were “shifty eyed.” The supervisors had to be given special cultural training to learn that: “In the native culture it was in fact disrespectful to look directly at a superior!” Once this had been cleared up, a second cultural issue arose with direct safety implications. The normal blasting operations sometimes left unexploded sticks of dynamite deep in holes. Management decided that the best way to prevent employees from poking into these holes and unwittingly setting off new explosions would be to put up posters of snakes coming out of these holes on the theory that the employees would be frightened and stay away from the holes. The accident rate went up and it was only discovered after many conversations with employees that precisely because they were frightened of unseen snakes, they would deliberately try to get them out by poking sticks into the holes! When asked what should be done to prevent this, the employees were very clear in saying that the management should simply put up a poster saying “Dynamite--do not poke into holes”” and the word will get around quickly that everyone understood why not. Management had unwittingly perceived the employees to be far less intelligent and responsible than they actually were by showing snakes instead of sticks of dynamite in the posters.

The point of the story is to highlight how senior management tends to operate from its own and often misguided beliefs and assumptions about how risk and safety should be handled, or, even more dangerous, the task of safety management is entirely given over to some other function. Yet it has been shown over and again that employees see things and do things with major implications for safety, and that management either deliberately or unwittingly sets barriers to such critical information circulating up in the organization. Management tends to tell, to make up rules and announce them without really investigating whether those rules will actually make the place safer, or as in the South African mines, actually make it less safe because they never asked the necessary questions until after the accident happened.

In my management classes I often asked the students what it meant to them when they were first promoted to supervisor or manager. 

it is the absence of trust and open communication up and down the line that is usually associated in other industries with poor quality as well as marginal safety.

With high regularity the answer was almost always “Now I can tell others what to do.” While this might have worked in the days of the assembly line and industry viewed as a giant machine, it is less and less valid as a definition of management today and is gradually being replaced by what we are calling “Humble Leadership” where “humility” is not defined as a personal trait, but as the leader’s ability to situationally recognize her or his lack of information and dependency on others to figure out what to do.6

Point 5. Replace the dictum “Everyone should learn to speak up” with “We need to promote a climate that makes everyone feel psychologically safe.”

The issue of what exactly is management’s responsibility for the creation of trust and open communication bears directly on the often heard proposal to “encourage a speak up culture” which paradoxically puts the burden on the employee who feels that it is actually not safe to speak up because he or she has seen the bad things that happen to whistle blowers who identify things that are not done correctly, or have had personal experiences of not being listened to. How to fix this is complicated as the following examples from my consulting with New York’s Con Edison utility will highlight.7

An electrical worker underground sees a set of corroded circuits that may generate an outage or explosion. He reports it to his boss who says “thanks” we’ll report it upstairs. The boss puts it into a package with all the other reports he has gotten that day and sends it to the vice president for safety who now does two things: he gives a list of danger areas to his technical staff for triaging and he looks over the data to see which departments are having the most trouble based on the number of reports from different departments.

When he has identified those departments he talks to their line managers who then call up the supervisors and ask the following question: “We noticed that your crews have an unusually large number of timeouts and reports of problems; can you look into that and let me know what might be going on there.”

The supervisor is annoyed at having been singled out and lets his crew know that they are calling too many timeouts and are seeing too many problems. The supervisor may even challenge some of the safety concerns by given crew members by implying that they are “wimpy.” From that point on anything that is even a little ambiguous fails to get reported, and what the employee has learned is that it is not in fact safe or even worthwhile to speak up, even if a program has been launched by senior management on the importance of speaking up.

In the meantime senior management is blissfully unaware that they have unwittingly created increasing safety risks for the sake of productivity and scheduling by their request to find out which crews are having the most problems because they don’t want customers complaining about their outages.

Banking is not vulnerable to such life-threatening safety issues, but is it possible that a supervisor observes questionable loans being authorized and has had a similar question from his branch manager about not being productive enough or failing to meet scheduled sales targets, and that this same supervisor ends up wittingly or unwittingly encouraging such questionable loans in the future? Is it possible that senior management at headquarters is actually unaware that it is their desire for productivity that is creating both the questionable behavior and the hiding of it.

The CEO has heard the talk about encouraging speaking up, announces to the entire bank the need to encourage speaking up but remains unaware that the normal productivity pressure create behavior that is unsafe yet remains invisible. An even worse possibility is that a level or two below senior executives middle managers are caught up in this lack of psychological safety and may be unwilling to tell the CEO what is actually happening until there is a major exposure and a scandal. For example, we may cynically believe that the CEO of Wells Fargo must have known what was happening and should be held accountable, but it is actually possible that key information about unsafe practices was hidden and perpetuated because of productivity and schedule pressures. Is your bank relying too much on exhortation to speak up and failing in creating a more psychologically safe environment? How would one do that?

Point 6. Build more openness and trust throughout the organization by:

  1. Reducing professional distance and impersonal transactional relationships, and
  2. Increasing more personal relationships at every level.

Both excellent performance and safe practices depend upon the free and open flow of information up and down the hierarchy that creates the high level of trust that problems will be identified and dealt with. Those high levels of openness and trust must begin at the very top and gradually be cascaded down through the hierarchy by each managerial level building more personal relationships with their direct reports, their peers and their own bosses.

This sounds utopian but you will find in your most excellent banks that this is precisely how they operate from the board on down, and you will find executives who not only understand that it is their own behavior that must change first to avoid the unwitting creation of an unsafe climate, and have learned how to do that.

When organizations function as transactional hierarchies, based on clear roles and tightly enforced rules, they function well if the tasks they perform can be routinized and stabilized. One might assume that banking lends itself to such a machine model of organization and management. The growing concern about the safety of some banks, following the collapse of some others, suggests that the task of banking itself has become more complex and more vulnerable to rapid changes in the technical and social environment.

As tasks become more complex, adaptation to changes in the environment begin to require adaptive not only capacity in the operation at the front line. Such capacity will only be acquired through information on what is possible and what is desirable, and that has to become more widely distributed among all levels and, therefore, makes the organization as a whole more dependent on such information

  1. flowing freely up the organization and
  2. information about what is to be done and what is appropriate to be done flowing freely down the organization and laterally.

Only if senior management and even the board recognizes the need for more personal relationships even across hierarchical lines as a prerequisite for building openness and trust, and creates a reward system that encourages every level to become more personal open and trusting, will the organization become adaptive enough to maintain excellent performance in a rapidly changing technology and social environment. There are no silver bullet solutions to getting there, but the organizations that are trying to do that are focusing more on the nature of relationships in the organization, more on the use of humble leadership and other relation building concepts such as humble inquiry.8, 9

One approach that is seen increasingly so in the health care industry is to use more “Humble Inquiry,” learning to create more personal relationships by getting to know each other better in the work context, collapsing professional distance, learning to work in interdependent teams, and, in summary, seeing leadership as a “team sport,” rather than acts of individual heroism.10, 11

Point 7. “Practical Drift” as a particular safety problem in the nature of the work itself

The work of an organization can be technically designed but ultimately is done by humans and brings with it various human characteristics. No matter how carefully a job is designed and no matter how carefully we train people in how to do it, it is human to begin to see variations of how the job can be done. These variations have been labeled “practical drift” and can be either improvements and how the work can be done or deviations which create safety problems.12 It has also been observed that such variations can become normalized and forgotten until an accident reminds us that those variations became routine and accepted, though they were never sanctioned.13

Is your bank relying too much on exhortation to speak up and failing in creating a more psychologically safe environment?

An early example was the “banking” of work by employees in the Hawthorne studies of Western Electric. Crews were trained to wire units in a certain way and the industrial engineers set a target of how many such units were to be produced in a given work day. It was called “straight line output” and seemed to be working very well as “a fair day’s work for a fair day’s pay.” However, what the observers saw was that on some days the crews felt energetic and produced more units than the expected number and hid the extra units to be available for those days when the crew was tired and was producing less than the target. “Over production” was also carefully hidden because the workers believed that the levels achieved on the good days would become the new required norm in the pay for piecework system. 

The Con Edison top level Environmental, Health, and Safety Committee which included the CEO and all unit heads met weekly and acknowledged that they saw examples of practical drift in all the work. But they had not focused enough on the need to observe and monitor such behavior to determine whether it was improvement or dangerous. It was decided that the coaches and trainers who initially trained new or promoted employees in their new jobs had the additional responsibility to visit and observe the trainees after they were on the job for some months or even years to determine whether practical drift had occurred and with what possible consequences. Innovations could then be added to the training, while deviations could lead to sanctions and retraining.

Is the work of banking susceptible to this kind of practical drift and are there mechanisms in place to discover it, evaluate it, and either institutionalize it or eliminate it?

Point 8. The problem of compliance with rules

The issue here is complicated because there is no one answer to why employees ignore or actually disregard and disobey things that are clearly stated in the rules and enforced by supervisors. I collected examples and put them together in the following chart to illustrate reasons and what the organization may do about various of these reasons. (See Table 1 Below)

TABLE 1: WHY PEOPLE DON’T COMPLY WITH SAFETY RULES, FOLLOW SAFETY PROCEDURES OR REPORT UNSAFE CONDITIONS

 TypeIn the Field ManifestationsRemedy
Lack of knowledge, skill, know-how or experience

“I didn’t know this was a hazard”

“I didn’t know what to do because the reality was different from what I learned in training”

Formal education and training

Practice, on the job training, coaching by more experienced workers

Overconfidence

“Nothing bad ever happened to me before doing it this way, so why worry now?”

“I’ve been in the field long enough to know how things really work and what shortcuts are ok and make work easier”

Credible stories from close calls or actual incidents

Personal accounts of lessons learned from credible sources, trusted coworkers

Macho Self-Image

“I can do this job in spite of the hazards”

“I can be a hero and others will respect me for it”

“Only sissies or novices do it the standard way”

Personal counseling and coaching

Employees examining and redefining the norm of what is heroic

“Practical Drift”Confidence in short-cuts that have been invented, have been found to be ok, make work easier, and have been passed on by old timers to newcomers

Regular review by trained staff of how work is actually being done

Adoption of methods that are better

Retraining in correct procedures

Appropriate discipline for compliance failure after retraining

Social Norms

“We all do it, no one ever said anything about it, why make a big deal about it all of a sudden”

“I know its not by the procedure in the book, but that’s how we do it around here. Do you want to fit in and do it our way or do you want to cause trouble for all of us”

Norms only change when the employees who hold them get involved in the change process and decide on a new norm

Acceptable risky behavior has to be defined as highly risky and unacceptable

Mistrust of Authority

“They lied to us before about what was safe or unsafe so how do I know they are telling us the truth now?”

“I tried to tell them about what was not safe but they did not listen (or did not act or respond)”

Training of supervisors in listening, responding and conflict resolution

Training supervisors to communicate clearly with managers

Mixed or Unclear Incentives

“My boss tells me to comply with all the safety procedures but he still wants the job done and let’s me skip steps”

“My boss (or co-workers) don’t like it when I slow the job down because of some safety issue”

Re-examine middle management incentives and discipline to determine whether productivity pressures outweigh safety concerns

Change incentives and back up with extensive training

Work Group or Work Peers Self-esteem

Not wanting to embarrass one’s own group or work peers.

To protect collective “face”

Reluctance to “rat out” a fellow worker who is not complying with a rule

Clear and consistent messages from all levels of management that safety and open communication is a top priority, reinforced by close monitoring of immediate subordinates to insure that incentives are appropriate
The Ultimate Reason“If I comply with the procedures I can’t get the job done”Ask the employees with genuine humble inquiry why they are not following procedure, listen, and then either retrain or change the procedure

It is the last item, what I have called “the ultimate reason,” that is the most troublesome because it is not clear when the deviation is “breaking the rule,” and when it is “positive practical drift,” as the following true example will illustrate. In the underground electrical work the wearing of shields to protect the eyes was an absolute rule, violation of which led to instant dismissal. In one such case of immediate firing of one of their best splicers, the supervisor and the next level manager could not believe that this person with such a good record had failed to wear his shield so they brought him in to get the whole story.

The employee reported that he was in the middle of a splicing operation when the high humidity totally fogged up his shield and produced a high risk that he would mess up the splice because he suddenly could not see what he was doing, so he lifted his shield just when the supervisor arrived and caught him. The manager then learned that this could happen frequently in the summer months and that they had never responded to previous reports of this problem. In fact they remembered instances where employees had been praised highly for their dedication to the work even if it involves some personal risk. What triggered this current incident was that safety concerns suddenly became a higher priority which meant tighter enforcement of the rules which were already in place but not always enforced. This particular employee was so valued that he was not only reinstated but also was then asked to be on a task force to find a company that would produce eye shields that would be less susceptible to fogging up. They found such a company which led eventually to everyone using the new shields!

The tension between getting the job done to support the productivity needs of the organization and to do the job safely and exactly by the rules is very real and not always easily resolved. I would guess that this tension is high in the banking industry because employees at the front line have a fair amount of discretion in how they handle various financial transactions and how they interpret the rules pertaining to those transactions. The important thing for management to recognize is that safety and productivity can lead to conflicting principles pertaining to some of those rules, but the over arching principle is open communications and the development of trust.

Concluding Thoughts

As must be obvious by now, there are no simple answers to minimizing all possible risks that can hurt an organization or even put it out of business. I have learned, however, that the preoccupation with identifying risks and evolving mechanisms to minimize them is a perpetual problem rather than one that can be fixed by working on all the above points. In other words, just as the maintenance of organizational excellence is a perpetual problem, so the issues of risk and safety are perpetual problems, and must therefore be a primary concern not only of senior management but the organization as a whole all the time.

It would make sense to have regular weekly or monthly meetings devoted to an exploration of how to increase excellence and reduce risk, and to include in those meetings diagonal slices of employees at all levels of rank, seniority, and technical skills. It also makes sense to make improvement and risk analysis a part of everyday conversation, perhaps to open every meeting with a discussion of risks, safety and improvement ideas as Paul O’Neill was famous for doing that when he was chairman of ALCOA.

During my years of consulting at Con Edison I once asked my friend Ellen Langer who was a Professor of Psychology at Harvard and had been writing about mindfulness what she would ask a work crew that was about to go out to do a job that could be risky.14, 15 She provided an answer that I found very useful in everyday life and would propose as a good question for the beginning of any task: “What is different today?”

And if things go wrong, and we are busy trying to understand why something went wrong, she had another question that is the essence of becoming more mindful about all these matters: “What else is happening?” or “What else happened?”

We tend to be far more concerned with identifying root causes, identifying who did something wrong, seeking certainty so that we would know what to fix, and, in the process of seeking causes we become mindless, narrow our perspective and our peripheral vision, and then are likely to miss more than we had realized other things that also went on that may be more relevant both to improvement and to risk management.

References
  1. Tom Reader & Stephen Scott, “Culture and Conduct Risk in Banking: Achieving a Better Standard of Care,” Reuters, Oct. 18, 2021. https://www.reuters.com/article/bc-finreg-culture-conduct-risk-banking/culture-and-conduct-risk-in-banking-achieving-a-better-standard-of-care-idUSKBN2H81DB
  2. Edgar H. Schein & Peter A. Schein, Humble Leadership. Berrett/Koehler, 2018
  3. Edgar H. Schein & Peter A. Schein, Humble Inquiry. Berrett/Koehler, 2021.
  4. René Amalberti, Navigating Safety: Necessary Compromises and Tradeoffs—Theory and Practice. Springer, 2013.
  5. Reader & Scott, 2021.
  6. Schein & Schein, 2018.
  7. Edgar H. Schein & Peter A. Schein, The Corporate Culture Survival Guide, 3rd Ed. Wiley, 2019.
  8. Schein & Schein, 2018.
  9. Schein & Schein, 2021.
  10. Schein & Schein, 2018.
  11. Schein & Schein, 2021.
  12. Scott A. Snook, Friendly Fire: The Accidental Shootdown of U.S. Black Hawks over Northern Iraq, Princeton University Press, 2000.
  13. Diane Vaughan, The Challenger Launch Decision. University of Chicago Press, 1996.
  14. Ellen J. Langer, Mindfulness. Addison-Wesley, 1989.
  15. Ellen J. Langer, The Power of Mindful Learning. Addison-Wesley, 1997.
     

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