How Banks Are Using Behavioral Science to Prevent Scandals
Efforts to deal with corporate malfeasance, employee misconduct, and ethical failings are falling short. Nowhere is this more visible than in the financial sector. More than $400 billion has been paid in fines since the 2008 financial crisis. But one corner of the industry offers hope: It is using behavioral science tools to identify risky behavior early on.
Some of Europe’s largest banks — ING Group and ABN Amro in the Netherlands and RBS in London — have created behavioral risk teams composed of professionals trained in organizational psychology, anthropology, forensics, and other disciplines. Each team has a direct reporting line to the chief audit, compliance, or risk executive. Teams also have the independence and autonomy to conduct companywide reviews and assess business units in which they perceive behavioral risk.
Let’s look at how the RBS team operates. It engages in “deep dive” reviews of areas that warrant attention, zeroing in on small groups (fewer than 500 members) selected according to input from internal and external stakeholders, including members of the internal audit, compliance, human resources, and legal teams. It searches for in-depth, granular insights specific to certain “subcultures” where ethical lapses may be occurring.
“We often ask people in the target groups, ‘If you were us, where would you go?’” says Shweta Pajpani, a senior manager on the team. “People have hots spots in mind from their interactions, bankwide dashboards, and measurement reports, and their insights are valuable to our team.”
Once the team selects a business unit for examination, it assesses it in the following five ways:
Surveys. These go to the entire group under review and include statements that can elicit responses ranging from “strongly agree” to “strongly disagree.”
Confidential conversations. The team holds a series of one-on-ones with employees who together make up a representative sample of the group. Discussions are conversational in tone and aimed at illuminating typical behaviors — for example, patterns that may be driving poor outcomes.
Focus groups. These are held with no more than 10 people at a time. Like the one-on-one conversations, they are aimed at gaining insights into behavioral patterns in and the climate of the area under scrutiny.
Examinations of the formal environment. The team looks at policies and processes such as leadership communication, governance structures, and performance measurements.
Independent observations. Team members attend leadership and staff meetings and observe employees working at their tasks to gain a perspective on things such as group dynamics and interactions.
The team’s findings are shared with executives of the unit in question, who are expected to act on any recommendations for change within a specified period of time. Because RBS’s behavioral risk team is part of the bank’s audit function, its findings are considered “audit” points that need to be addressed.
Other banks take slightly different approaches, but the efforts we have studied share certain characteristics:
Executive sponsorship is critical, given the teams’ broad remit.
Teams are small, typically having just five to 10 members with diverse backgrounds as outlined above.
Effectiveness is difficult to measure, given that the goal is to mitigate risky behavior at an early stage. But one way to estimate the ROI would be to look at the cost of the team over a number of years and compare it with the fines the organization might be expected to incur if the risky behavior continued and led to regulatory enforcement actions.
Direct employee engagement is crucial. Although surveillance technology can play a role — companies can monitor conversations, chat rooms, email, and so on — people themselves lie at the core of teams’ efforts. They are central to helping a team understand the formal environment — the risk management and governance framework, available knowledge and training, human resources, IT systems, and work procedures — in the groups they are studying. They are also essential to understanding the informal environment, or culture: such things as the clarity or opaqueness around decision making, which individuals are promoted, what gives certain people status, and how engaged employees are in what they do every day.
Wies Wagenaar leads a team of eight behavioral scientists at ABN Amro. Here’s how she describes its methodological framework: “We believe the behavior of our employees and leadership and the choices that they make are the outcome of all the signals they get from our organization as a whole.”
Mirea Raaijmakers, the head of ING’s behavioral risk team, explains, “In all workplaces there is a risk that the way people behave could potentially lead to negative business outcomes. This type of risk relates to the way things are done in an organization and the invisible drivers underlying these behaviors. It is about how decisions are made, how people communicate, whether they are able to take ownership, how group dynamics and beliefs drive behavior, and how this could lead to high-risk behaviors.”
The steps these banks are taking could be applied across a range of industries. That would mean taking organizational development to the next logical level: engaging employees directly to understand the environment in which they operate. With an internal group of “neutral consultants” who can serve as the conscience of the organization, companies can unearth the values, norms, and beliefs that lie beneath the surface and assess whether they are productive or subversive. In the case of the latter, the behavioral risk team can recommend interventions to change the organization’s culture.
As the behavioral risk teams at these European banks can attest, the key to preventing ethical scandals is identifying risky behavior before it’s too late.
by Henry Engler and Anna Wood, April 28, 2020, Published on Harvard Business Review
Image by Gerd Altmann from Pixabay