ICYMI: In a speech from June 2022, Frank Elderson, Member of the Executive Board and Vice-Chair of the Supervisory Board at the European Central Bank (ECB), discussed how culture impacts governance and how this may be reflected in the ECB's future supervisory efforts.
According to Elderson, the behavioral patterns within an organization are the product of both individual behavior and the underlying culture that acts as a breeding ground for that behavior. He stressed the need for dialogue and the importance of closely examining the behavioral drivers of decision-making in banks.
"It is important for a bank to identify and be aware of the structures, beliefs and group dynamics which echo throughout the entire institution and which may pose a risk to its performance and stability," Elderson said. “Banks' management bodies should be attentive to these intangible but real underlying drivers of behaviour.”
As a part of the ECB's supervisory efforts, it assesses the effectiveness of firms' governance systems. Culture and conduct risk are matters of governance and, therefore, something to which boards should attend, as well as industry overseers. Supervisors are increasingly looking to evaluate an organization's culture, to explore how a firm’s management has learned from past failures, and how they plan to improve culture in the future.
"It would seem that the least that we as prudential supervisor can do is ask the pertinent questions and challenge banks to look beyond governance in the stricter, more standard sense," Elderson concluded.