We're Only Human: Culture and Change Management

September 05, 2019
James Hennessy, Senior Vice President
Remarks at Westminster Business Forum Policy Conference: Culture and Conduct in Financial Services – The Impact of New Regulation, Developing Healthy Work Cultures and the Role of Senior Managers As prepared for delivery


Good morning, ladies and gentlemen. It’s a pleasure to be here at the Westminster Business Forum policy conference. I look forward to sharing with you the approach the New York Fed has taken toward the reform of culture and conduct in financial services. Some of our work runs parallel to what was discussed this morning: fostering greater accountability within firms and by their leaders. Other parts may be less well known: for example, our emphasis on the education and training of the next generation of the financial services workforce. I will also discuss where I see our efforts focusing in the future, including the importance of better understanding the process by which individuals and organizational cultures change. But before I go any further, I should make clear that the views I express today are mine alone, and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.

New York Fed’s Culture Initiative

The New York Fed’s Culture Initiative has stemmed from the continuing "evidence of deep-seated cultural and ethical failures" within the financial services industry.1 As this conference attests, progress has certainly been made in creating greater awareness of the problem. Some firms and regulators have made significant headway in implementing culture reform measures. We must also acknowledge, however, that major misconduct continues in financial services across the globe. In the past two years alone, headline scandals have involved money laundering, bribery, international sanctions evasion, and consumer abuse. Not surprisingly, public trust in the industry remains extremely low.

Concerns about misconduct in financial services, the cultural norms within firms, and the sustainability of the industry over the long term are germane to the mission of a central bank such as the Federal Reserve. As discussed in a New York Fed whitepaper on the topic,2 misconduct can affect the stability of firms and the financial system broadly. It can seriously damage an individual firm’s reputation among consumers, investors, regulators, and the general public. Customer attrition and legal penalties can, over time, impair a firm’s balance sheet and its resiliency. And widespread misconduct may cause market participants to lose confidence in the financial sector as a whole. We should also never lose sight of the moral harms that misconduct entails. Fraud is just the beginning. Violations of anti-money laundering laws and trade sanctions, for example, facilitate the activities of terrorists, drug cartels, human traffickers, and rogue nations.

Aims and Areas of Activity

Accordingly, from the start, the aims of the New York Fed’s Culture Initiative have been threefold:

  • Reduce incidences of misconduct;
  • Promote the development of healthier cultures within firms and across the industry; and
  • Increase public trust in the financial services sector.

These are long-term goals. They have to be, given the ever-shifting nature of organizational culture and the constantly evolving external environment. There is no silver bullet, no one-time "fix" for culture. Experience teaches, however, that with sustained effort, significant progress can be made over time.

To advance our aims, our work to date has focused in four areas: awareness, research, supervision, and education.

Awareness has involved convening industry and the official sector to discuss the ongoing need for reform and to provide updates on progress and new approaches. We do this every year to encourage firms to actively manage their cultures, beyond maintaining traditional compliance programs. Actively managing a culture requires a conscious, multi-pronged approach that aligns behavior with a firm's purpose and strategy. The effort must be embraced by management and fully incorporated into the firm's activities related to leadership and communications; governance structures and accountability; financial and non-financial incentives; employee lifecycle management (recruiting, on-boarding, training, performance management, off-boarding); and measurement and assessment of culture as evidenced through behavior.

Regarding research, as I mentioned we have published a white paper on misconduct risk, and periodically engage with academics through informal consultations and by hosting academic workshops. We are currently planning a large academic conference for the coming year.

We have encouraged attention, collaboration, and collective learning among bank supervisors through convening the Supervisors Roundtable for Governance Effectiveness. This group of 20 supervisory agencies from 15 jurisdictions around the world share emerging and evolving practices for supervisors to use in the assessment of culture and behavior at firms.

And, most recently, we have launched the Education and Industry Forum of Financial Services Culture.3 This group brings together business school deans and professors and senior representatives from financial services firms to improve the training of the next generation of the financial sector workforce. The Forum looks to promote the recognition of the complex ethical components of financial decisions and the development of future leaders, both while in school and as they progress through the ranks at firms. The Forum’s first work product will be a series of case studies that present such business and ethics dilemmas. The goal is for these case studies to become an integrated part of business school curricula, undergraduate economics courses, recruiting, and employee training.

Additional Lenses to View Culture

In each of these areas of activity—awareness, research, supervision and education—we have maintained our fundamental concentration on the problem of misconduct. Significantly reducing the scale and frequency of misconduct is central to our mission as a supervisor and a central bank. As our understanding of misconduct has grown through our various efforts, we have also become increasingly cognizant of the many elements that influence organizations in developing healthy work cultures. In an effort to build a more nuanced appreciation of these factors, we have tried over the past year to approach culture using three distinct lenses:

  • First, by drawing on perspectives from non-financial disciplines, such as behavioral science;
  • Second, by considering the opportunities and challenges of technological change; and
  • Third, by recognizing the importance of workforce composition and dynamics.

Each figured prominently in our most recent culture conference in June.

Lessons from behavioral science are, perhaps, the most influential. For example, many of you may be familiar with the book by Daniel Kahneman, Thinking, Fast and Slow. Kahneman divides human decision-making into two systems. "System 1" uses associative, subconscious memory to make quick judgments. "System 2" employs reason in a slower and more methodical way. The two ways of thinking are sometimes nicknamed "the gut" and "the head." While we may believe that most of our actions result from System 2 deliberation, in fact we mostly rely on System 1 reactions. In terms of ethics, this suggests that individuals usually default to automatic decision-making. What affects that quick, automatic thinking? Millennia of human evolution and a lifetime of learning, for certain. But group norms also shape our automatic, associative judgments. Organizations need to recognize phenomena such as these when devising ways to influence the behavior of their employees and improve their cultures.

Technological change holds both great promise and risks for the development of healthy cultures. New technology enables monitoring of employee and customer behavior as never before. This has its upsides, which may include early detection of misconduct. For example, some data scientists maintain that network analysis of communication patterns among employees may identify or even predict problem areas within an organization. At the same time, we know that bias can infect automated outcomes. Algorithms and analysis are only as reliable as those who write code and interpret data. In all of this, there is the danger of regarding people as objects of measurement, rather than as beings of inherent worth and irreducible complexity. We will likely have to deal with technological advances that both support trustworthy human connection and exacerbate social distancing.

The composition and dynamics of the workforce in financial services have also been evolving. One development is the entrance of a new generation of young workers, many of whom may exhibit different styles of communication and distinct motivations. At the risk of generalizing, younger workers are digital natives, less interested in hierarchy, seek continuous feedback, and are eager for their work to have an immediate impact. Moreover, many of the newer entrants to the workforce do not want to stay at one firm for more than a few years. All of these factors present challenges to the development and maintenance of a coherent organizational culture. They probably also introduce greater diversity of thought, perspective, and experience to the financial services sector than ever before. These demographic shifts may necessitate new ways of achieving cultural goals, including considering how employees are most effectively incentivized and engaged.

Understanding the Change Process

My colleagues and I plan to continue to employ these three lenses—insights from non-financial disciplines, attention to technology developments, and awareness of workforce changes—in our Culture Initiative work in the coming year.

I expect we will also emphasize a fourth lens, one that focuses more closely on the human processes within change management.

Much of this morning’s discussion rightly centered on the importance of building an environment of psychological safety in organizations. I would like to take this discussion a step further. In addition to psychological safety, we also need to take greater account of the on-going processes of individual and group change.

It is estimated that upwards of 70 percent of organizational culture change efforts ultimately fail. That’s a sobering number for those of us who advocate for industry culture reform. What is at the root of this failure? No doubt there are many causes, but it seems to me that one of the main reasons is the failure to recognize that while change can sometimes occur in an instant, it takes most people’s perceptions and feelings a much longer time to adjust and move ahead.

Change is often mistakenly conceived of as a linear process—highly rational and almost mechanical in nature. In fact, human change is fundamentally emotional and iterative, involving irrational, but very ordinary motivations and multiple stages of testing, failure, and advancement.

In addition, and perhaps because they are by nature forward-leaning, many leaders tend to see the desired end state of change—that is, the goal or the future—much more clearly than their followers. As a result, leaders may not always appreciate how much time or support is needed for the stages of learning that are necessary for real change to take hold across an organization.

The author William Bridges has addressed these dilemmas, and has proposed a well-regarded theory that describes organizational transition as a three-phase process.4 I won’t go into great detail this morning about Bridges’ theory, but his basic ideas are straightforward enough to describe in my remaining time.

The first phase of organizational transition is called "Ending, Losing, and Letting Go." In this phase, leaders help employees deal with their tangible and intangible losses stemming from change, and mentally prepare to move on.

The second phase is called "The Neutral Zone." This involves helping people move through the change period, making the most of confusion and uncertainty by encouraging employees to experiment and innovate.

The final phase of transition is "The New Beginning." In this period, leaders help others form a new identity and discover a renewed sense of purpose that make changes lasting and effective.

The second phase—The Neutral Zone—is perhaps the most unrecognized and most important step in organizational transition. According to Bridges, critical psychological realignments and re-patterning take place in this Zone. It is an uncomfortable place. Most people try to get out of it as quickly as possible, either by rushing ahead toward the future or retreating into the past. Bridges counsels, however, that spending meaningful time in The Neutral Zone is crucial. This is where the creative potential of transition is fully realized and true transformation takes place. Bridges’ further insights about The Neutral Zone—for example, the need to properly mourn the past before the future can be embraced—also ring true to me, both on an individual and group level.


As I noted earlier, significant strides have been made in establishing the importance of culture in firms and the financial industry as a whole. Many of the key levers that help create healthy cultures have also been identified. But more work needs to be done to understand how these various levers of change function.

For the New York Fed's Culture Initiative, increasing the likelihood of successful culture reform may well depend on developing greater practical insight into the winding, sometimes fitful, and almost always long-term processes of individual and organizational transformation. By viewing culture reform through the human change process, rather than solely through the end changes we wish to see occur, we may become aware of previously unseen obstacles and discover fresh paths to get to our sought-after destination. In closing, I would like to reiterate a message from John Williams, the current President of the New York Fed. In a recent speech,5 he stated that while the journey toward reforming culture in the financial services industry is a long one, we are optimistic that we can and we will make progress. Thank you.

1 William C. Dudley, Ending Too Big to Fail, Remarks at the Global Economic Forum, New York, Nov. 7 2013.

2 Stephanie Chaly, James Hennessy, Lev Menand, Kevin Stiroh, and Joseph Tracy, Misconduct Risk, Culture, and Supervision, Federal Reserve Bank of New York, Dec. 2017.

3 Education and Industry Forum on Financial Services Culture.

4 Bridges, W., Managing Transitions: Making the most of change, Da Capo Lifelong Books, Jan. 2017.

5 John Williams, Banking Culture: The Path Ahead, Remarks at Building Cultural Capital in the Financial Services Industry, June 4, 2019.

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