Contributions to the Supervisors on Supervision Stocktake
Should culture, and the conduct proclivities it may promote or discourage among employees, factor into supervisory engagements?
“When reputational risk crystallises in a big way, customers can flee the business in a manner not dissimilar to a financial run. Sometimes, no one wants to be seen dealing with a firm after disgrace precisely because others are walking away. Such business ‘runs’ can, today, be triggered by whatever catches the moral spirit of the times. Like a bank run, no one sees it coming until it’s too late.”
If culture is important to supervision, then what factors make it challenging to assess?
“[The question is] whether non-financial risk has descended, via a culture of compliance with voluminous rules, into merely a cost of doing business. This, crudely, amounts to: read rule, interpret it in a way favourable to the business, monitor compliance, accept there will be violations, pay fines, carry on.”
What are the consequences for failing to consider the influence of culture in assessments of governance effectiveness?
“Given how very basic (and so, historically, well understood) SVB’s vulnerabilities were, it suggests the executive faced little challenge at the board, or that any meaningful challenge was swept aside or deflected.
If, contrary to my assumption, no one on the board did understand the now obvious vulnerabilities, there is the question of whether board members had pressed for a risk oversight process that would flush out the risks behind strong headline returns. And, if not, there is the still more-basic question of whether the board had a tolerably decent process for identifying and filling gaps in its own expertise.
Hence, operational risks can run through a board itself. Shareholders, and their agents, with check lists and so on, might not get that.