Banking Culture Reform: The Role of Accountability in Preventing Misconduct

Ciaran Walker 00:00
The evidence suggests that majority of misconduct is actually situational. It's really good people doing bad things in the context of particular pressures that they find themselves under.

Evan Norris 00:10
And so, the question to me is how to engage people and to think you know specifically about the work that they do, and how, if they haven't identified what all the risks are adequately, it can lead to real problems.

Kelly Richmond Pope 00:24
I'm a barrel believer, like, let's study the barrel. Let's understand the barrel. Because, yeah, the apple, that's the start of it, but the barrel is the problem. I'm not a believer of there's one bad apple. I believe that the barrel has something wrong with it.

Joe McGrath 00:39
Professionalization is about influencing industry-wide norms so that people can learn positive behaviors from their peers.

Jeremy Brisiel 00:49
This is Banknotes: Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

Toni Dechario 00:59
Hello. Welcome to season four of the New York Fed's Banking Culture Reform podcast. 2024 marks 10 years since we held our first culture conference. So, we're dedicating this season to a topic that's animated discussion about culture and financial services throughout the past decade: the concept of accountability. What is accountability? How can it be nurtured on an individual, firm-wide and industry-wide basis? What grows in its absence, and how can financial services firms prevent the normalization of fraud, misconduct and other symptoms of low accountability? This was a topic at our conference this past spring, and we're bringing back three of those panelists, plus one co-author to dig deeper into these questions. My name is Toni Dechario, and I'm a member of the New York Fed's culture team.

I'm here today with Joe McGrath and Ciaran Walker. Welcome Joe and Ciaran. I'll start by asking each of you to introduce yourselves. So, Joe, let's start with you.

Joe McGrath 01:53
I'm Joe McGrath. I'm an associate professor in the law school at UCD in Ireland, and I specialize in white collar crime.

Ciaran Walker 02:01
Hi Tony. Delighted to be on the on the podcast today. So, I'm Ciaran Walker. I'm a practicing lawyer based in Dublin with the global law firm Eversheds Sutherland, and obviously my specialization is financial services regulation.

Toni Dechario 02:14
So perhaps each of you could briefly describe how you ended up having an interest in financial services culture and accountability in particular.

Joe McGrath 02:25
So, I started my PhD back in 2007 just as the global financial crisis was about to hit, and I was researching white collar criminality at the time and how we punish corporate financial crime, how we regulate it, and over time, I became more interested in the causal factors which precipitate misconduct. The way people engage in bad behaviors, and then how we try to prevent bad behaviors from occurring in the first place. So, my research evolved a little bit. It's now less about how we punish bad behavior or why good people do bad things, but now more about how we can help good people do better things.

Toni Dechario 03:12
I like that the way that you put that, Joe. In previous episodes of this podcast in our first season, one of the questions that we asked every person was, why do good people do bad things? So, I like the evolution of that for us as well. Ciaran, how about you?

Ciaran Walker 03:29
Yeah, so for me, Toni, so I practicing as a lawyer for 35 years or so now in various industries, not just technology, services, telecoms, media, airline regulation. And I worked for regulated firms that worked in the regulator and also in a law firm. So, I've seen a lot of these issues from various angles. And throughout my time in practice, I've just been fascinated by the human angle to this, the human behavioral angle, why people behave in certain ways, particularly around the core question is, how do you influence humans to behave in compliance with the law? And you know what levers are more likely to work or what levers are less likely to work? And also I'm fascinated by, you know, how people can justify to themselves acting on unethically. And you know, the years, plenty of insights into that. I've had a lot of discussions with regulators, academics, lawyers, fellow lawyers and economists around all of this. And a lot of I found a lot of the discussions were unsatisfactory in terms of how people actually behave. And so post financial crash, in 2007, 2008, the regulators, financial services regulators globally, started looking more into the culture aspect of behaviors. And I found that work particularly, say the work of the Dutch regulators, DNB, around supervision of conduct and culture. Fascinating. I just found that a kind of richer insights, and then had the good fortune to meet up with Joe, and we were doing some lectures together, and then Covid hit, and we said to maybe why not just write an extended article together. And an extended article became the book.

Toni Dechario 05:17
Well, thank you. Well, so you, mentioned the book, and I want to, I want to kind of click on that. I'll name check the book for you. The book that you co-wrote is called New Accountability in Financial Services; Changing Individual Behavior and Culture. I'm a big fan. I find it really comprehensive and useful. Could you briefly describe it and give kind of the elevator pitch of the book, if you will?

Joe McGrath 05:46
Sure. Thank you for name checking the book available in all good bookstores and hopefully some of the bad ones as well. But the book is a critical examination of new individual accountability regimes in Ireland, in the UK and Australia. And really, we're just trying to explore which are likely to have an impact on behaviors, on culture in the financial services sector. And that's based on a legal analysis of those regimes, but it's also informed by regulatory theory, behavioral psychology, and at their core, those kinds of regimes, those individual accountability regime, they're corporate governance arrangements. They're designed to make it clear who is accountable for what in large, complex organizations. They're not really designed, or primarily designed, I would say, to be sanctioning mechanisms, not really or primarily designed to hold people liable when things go wrong, but they can do that. Instead, they're primarily designed, I think, to be ex ante corporate governance regimes or preventative regimes. They require people to take reasonable steps to prevent wrongdoing, so senior managers have to take reasonable steps to ensure that breaches of regulatory requirements and misconduct don't arise in their areas of individual accountability. These kinds of regimes also codify conduct standards, such as the requirement to act with integrity, due skill, care and diligence and so on. And so really, the core arguments in our book, is that the law alone, enforcement alone, is probably an insufficient tool, in itself, or on its own, to compel behavioral and cultural change, and that really, if you want to change behaviors, you have to understand that behaviors are a result of a whole complex interaction of factors at the individual level, like incentives and your organizational level culture, but then also industry-wide and structural level factors too. Now we're arguing this book that these regimes don't have a positive impact on behaviors, but to have lasting behavioral and cultural change, we also need to address industry-wide norms, including the morals of the marketplace that influence individual behaviors. And that issue of wider industry norms is not really addressed in these kinds of individual accountability regimes, which are really focused on addressing behavior at the individual and firm level, but that we still need to consider those morals of the marketplace if we want to successfully change behaviors and culture right throughout the industry.

Toni Dechario 08:37
Okay, thank you, and I think we'll take each of those in turn. But before we get into both the individual behaviors that that you believe are addressed as well as those that you think still require addressing, maybe we can get into a little bit of definition first. So, Ciaran, can I ask you to tell us what accountability is in your view?

Ciaran Walker 09:00
Yeah, sure, Tony, and it's a very good question. It's important to be clear on what we mean when we refer to the term accountability, because it's not, for example, it's not actually defined as such in the in the legislation introducing these regimes. And a definition, I like, is one actually provided by the famous Adam Smith in his 1754, book on The Theory of Moral Sentiments, he said, “a moral being is an accountable being. An accountable being, as the words expresses, is a being that must give an account of its actions to some other that, consequently, must regulate them according to the good liking of this other." So basically, there's two elements to accountability, and it's important to distinguish them. The first element is obligation to give an account to another person and maybe the regulator, but it could be somebody else also. And I think even Adam Smith understood that there's a power to doing that that influences people's behaviors just simply by virtue of having to give an account of what one has done or not done to the third party. Adam Smith, going back hundreds of years, talks about that that may regulate people according to the good liking of the other. So, we're social beings, that alone influences behaviors. So, the second element of course is the potential consequences if an unsatisfactory explanation is given. When we talk about accountability, a lot of people typically leap to the immediate conclusion, well we're talking about sanctions, aren't we really going after individuals? Yes, that's an element of it. But as Joe said, it's not really the primary element of it, and actually that's how it's played out in practice. So, the UK individual accountability regime has been in place since March 2016. There's actually only been a small handful of sanctions cases against individuals since then. That's eight and a half years ago. And the Irish regulator has also said, Look, we don't see a material increase in sanctions cases as a result of this new regime. So of course, sanctions is an arm to the whole regime, but really it's more about corporate governance, ways of preemptively finding ways to put people on the spot so that they're encouraged and facilitated to improve behaviors. And the behavioral science around this suggests that accountability can improve behaviors. On the corporate governance point, it's just no harm to mention also that, you know, it is a basic principle of good corporate governance anyway, you know, for example, the 2015 Basel Corporate Governance Principles for Banks talks about an importance of a clear allocation of responsibilities and accountability within banks, so it's a basic principle of good corporate governance anyway.

Toni Dechario 11:46
Could you talk a little bit, Ciaran, while we're with you, about how you see the relationship between accountability and conduct?

Ciaran Walker 11:53
Yeah, sure. So, the relationship, I think, is this. The research suggests that accountability basically makes people more focused on their responsibilities and improves ethical decision making in a number of ways. So, the first, and I guess the most obvious way, is that it makes them, it makes them unable to hide behind others. So, the buck stops with them, in relation to that. In the UK, for example, so, after the financial crash in 2007-2008, and there were various scandals like LIBOR et cetera, there was a UK parliamentary mission report into all of that in 2013. And one of the findings of that was that at the most senior level, the most senior people often tended to be willfully blind to misconduct. They're quite happy to accept the benefits of increased profitability. Really didn't want to know too much about, though, any potential misconduct. And in fact, as described in that report, they talked about the most senior people donning the blindfolds, so looking elsewhere, so they couldn't be held individually to account. And of course, the other excuse that's often used by individuals in that situation is when they say, yeah, okay, I was in the room. It did happen. I was part of the decision-making process. But look, we're all a part. We all made that decision, so we're all equally guilty, and nobody's guilty, that’s generally described as the Murder on the Orient Express defense. And again, same thing, an individual accountability regime targets that it says, well, no, you can't just syndicate the blame here or syndicate the responsibility. It's down to you. So that's the first and I guess, most direct way in which accountability is aimed at improving behaviors, I think, is likely to lead to improvement for that reason alone. Yeah, the second area, I think, is a slightly more subtle area or second, reason, how it might influence behaviors, is around, when you're accountable as an individual, you're more likely, it's more likely to encourage, if you like, more effortful, reasoned thinking. Daniel Kahneman talked about system two thinking, rather than system one, which is more instinctive, which can often contain cognitive biases. So basically, if you're the individual on the hook, the chances are you might stand back a little bit and say, I better think about this a little bit more. And so that leads to, rather than instinctive, sort of just get out with that sort of approach. It leads to a slightly more reflective approach. Now, what impact might that have on behaviors? Well, there is some research that says that actually does, and other researchers have looked into this, and they found that when you shift from that more instinctive system one to a more reflective system two type thinking, it does produce actions that may mitigate unethical behavior. So, there's some evidence of that. Then also interestingly, when researchers have looked at well, how have the individual accountability regimes played out in practice in a number of countries. So, Elizabeth Sheedy, for example, an Australian academic she looked at how this has played out in Australia. And one of the points that she posited, posits is precisely that. That it has actually led to more reflective thinking by individuals at a senior level, which has mitigated behavioral biases, so that has led to an improvement in conduct behaviors. That might seem like a small shift, but I think it's important. And I think one of the key reasons why it's important is this, is that when we talk about misconduct, we often think in terms of bad apples. You know, maybe there's something about the character of the individual. They're a flawed individual. It's their character. It causes them to do certain things. But actually, the evidence suggests that the majority of misconduct is actually situational. It's really good people doing bad things in the context of particular pressures that they find themselves under. You know, a classic example of this will be, you know, the famous Zimbardo Stanford Prison Experiment. We all know about that one. The other one, actually, one of my favorites is another one is the Princeton Theological Seminary experiment. And this was Darley and Batson back in 1973, in which they got various seminarians to go to a hall, walk past, down an alleyway to go to a hall, to give a brief speech. And what they found was that a lot of these seminarians actually ignored a, well it was an actor, but an individual who appeared to be in distress, lying by the street. These seminarians were actually in a rush to give a talk on the parable of the Good Samaritan, and while focusing on that, they completely ignored this poor individual who appeared to be in distress. So, there's another example of situational pressure on people. Good people will do bad things. If you get these people to do, just stand back a little bit. I think the chances are it might improve behaviors, and the evidence suggests that that may do so. It is generally described as finding ways to get around people's cognitive biases that we have, or our bounded ethicality. Now, of course, having said that, like I'm not suggesting by any stretch, but this is the solution. It's a partial solution. It assists in getting good people to understand they need to reflect a little bit more to achieve the right ethical outcome. The reality is also we just have to accept that we as humans have an extraordinary capacity to rationalize a misconduct also, especially if this misconduct is normalized in the industry. So that you know, one of my favorites is, I'm big into cycling, and you know about the Lance Armstrong scandals about drugs and all the rest of it. And there's been various books written about that, and one of them is by his, one of his ex-teammates, Tyler Hamilton. And he wrote about that. He said you could have hooked us up to the best lie detectors on the planet and asked us if we're cheating, and we'd have passed, not because we were delusional, but because we didn't think it was cheating. It felt fair to break the rules. So, there you go, even a situation where it was blindingly obvious that they're breaking the rules, they had no difficulty rationalizing themselves if it was okay in that particular circumstance.

Toni Dechario 18:26
That's a that's a wonderful example. I love that example that you gave that this is, this is just the world that we're playing in. I had nothing to do with creating this world. I'm just playing according to the rules. And actually that that brings me to my next question, which is we went back to Adam Smith in talking about, what is accountability and what does accountability mean? Do you think that there is a particular issue with accountability in financial services versus other industries, and I don't know, Ciaran, maybe, maybe you want to take this question?

Ciaran Walker 19:04
Yeah, sure. Well, I think accountability should, should be a principle of good governance at any industry. But there are certainly very specific angles to this in financial services. And you know, firstly, when you look at the scale of misconduct that's gone on, you know, we can look at the amount of fines globally is an indicator of the scale of the issue. Yeah, we've all lived through the financial crash in 2007-2008, but the financial services industry is so interconnected that if there's a problem in one or two banks, it is likely to have a knock-on effect, just by the nature of financial services, because it's so important. It's so traumatic, I think, for society, as we all know so that is a major differentiating factor, I think. Another factor, I think, relating to this is the critical importance of trust in financial services. You know, trust is so key. So, if people lose trust in a financial institution as a risk of, say, a run on if it's a bank, a run of the bank, or something like that. That's why it's so important for the industry to maintain trustworthiness. And so, you know, what do we make trustworthiness? Well, you know, key aspects of this are that the individuals involved are competent and capable. And the difficulty of financial services, there are so many opportunities for unethical actors to engage in unethical activities, you know, because of things like conflicts of interest and informational asymmetry, as between a professional institution and their customer.

Toni Dechario 20:48
So not necessarily a particular issue vis-a-vis other industries, but more important to get right than perhaps in others.

Ciaran Walker 20:59
Yeah, because when things go wrong. They go horribly wrong, basically, as we know. That's our all our experiences.

Toni Dechario 21:05 As we know well to, you said, we all lived through 2008 and to Joe's point, the three of us did, but increasingly, you know, more and more people didn't, kind of as we get farther away. Joe, and I'll mention that Joe spoke at a conference that we held at the New York Fed in June, and that's available on our website if people want to hear more from Joe. And Joe, one of the things that you mentioned at the conference, and you also talk about this in the book, is how easy it is to rationalize behavior given what you call the morals of the marketplace. And you mentioned the morals of the marketplace briefly at the start of this, but could you describe what the morals of the marketplace are?

Joe McGrath 21:50
Sure. So, the morals of the marketplace are the industry-wide norms that inform organizational cultures and which in turn inform individual behaviors. So, we can have incentives which operate at the individual level, group think at an organizational cultural level, and then you have industry-wide norms at that structural level. And when we think about how we're trying to improve behaviors and to reduce misconduct, our focus is usually on influencing organizational cultures and firms, but often the broader morals in the marketplace remain unchanged. And arguably, that's what's really influencing behavior. So, the morals of the marketplace essentially refers to the idea that firms will push as far as they can to get a competitive edge in a market, and that can mean sometimes acting unethically, as long as it's legal. So, there's research going back decades, which suggests that where there are information asymmetries in a market. For example, unethical firms are incentivized or likely, even sometimes, to take advantage of customers, and sometimes ethical firms might have to follow them, to do the same or be pushed out of the market. Quite costly, really, to be an ethical firm in those kinds of circumstances, it's also, you know, much easier to rationalize misconduct on the basis that everyone is doing it. You know, a lot of that research that was conducted on this idea going back decades, it was conducted in the secondhand car sales market, but you can see how that might actually apply to the financial services sector too. You know where there might be, in some circumstances, at least relatively low level of financial literacy among consumers, where the future oriented nature of financial services products might make them harder to understand. So, if we just think about this for a moment, if someone wanted to sell you an expensive car, and if they said that car might work, it might not, you'd be really skeptical. But that actually happens all the time in financial services. You know, if you if you buy an expensive pension, you might be told that the value of your investment might rise or fall. That's kind of the equivalent of being told your car may or may not work. So, we need to think a little bit not just about, you know, factors at an individual level or cultures within particular firms. We need to think about changing the broader morals of the marketplace and industry initiatives are really important. We know lots of banks and financial services in terms of doing really great things to change their own particular cultures, but it's changing the morals of the marketplace that's key. And truthfully, I'm not sure that an enormous amount really has changed there in terms of financial literacy, in terms of competition in the market and so on. I think the thing that's probably really changed at the structural level is arguably the relative intrusiveness of the regulator usually, as you were saying earlier on, after some sort of scandal where politicians and the public get angry, that has really driven change. And again, just to be really, really clear, that's not to say that industry initiatives are not valuable, they are really valuable, but what we might call meta regulatory strategies work best. That's where industry is required to work and own its own work and own its own governance arrangements and take responsibility for its own affairs, but it's overseen by the state, who can hold people and organizations accountable when necessary.

Toni Dechario 25:45
We spoke earlier about kind of the individual versus group, or kind of marketplaces, you just described it, issues, and we've spoken a bit about how accountability regimes applied at individual firms can help kind of overcome some of the individually driven accountability questions that might arise. But you now raise a different issue, which is this more kind of meta, broader industry question. You've had a proposal for how this could be addressed, or how we could begin to address this, which is the idea of professionalization. And I'll kind of let you describe maybe Joe, what do you think could first of all, what is professionalization and what you think could be achieved by it?

Joe McGrath 26:44
Sure. So, I think a lot of our focus in financial regulation is on regulation by the state. And generally, I think, you know, we have a particular focus on the activities of maybe a financial services regulator. And as I said earlier, that's really important, but it is only a partial picture. So regulatory theory, particularly responsive regulation, you know, smart regulation and so on, really suggests that the most effective way to regulate the financial services sector is a pyramidal approach to regulation. And so, a pyramid has three sides, as we know, the first side is the side we often think about, that's regulation by the state, and then the second side is maybe various forms of self-regulation. So that's, you know clearly where industry is playing a role itself, and then the third side is played by public interest, third parties, and that might include consumer groups, parliamentary committees, and so on. And the idea is here that each of these three sides will work together to influence behaviors in the industry. At the core the idea behind professionalization is that it's harnessing that second side of the pyramid, the power of industry itself. And you know, at its core, professionalization is about influencing industry-wide norms so that people can learn positive behaviors from their peers. So again, the core argument here is that it can help bankers develop a pro-social identity, where bankers owe duties to society which exist independently of the profit-driven nature of banking and hierarchy of financial firms. So, you know, thinking about this kind of from a broader perspective, just as lawyers would see themselves as part of something larger, as officers of the legal system or the justice system. You know, to what extent could bankers also see themselves as part of something bigger, as officers of the financial system? And that doesn't mean that banking has to have, or necessarily should have, all the attributes, all the profession, like law or medicine, and it wouldn't make sense, I think, for example, for the banking sector to regulate itself. But there's still ideas behind professionalization that are useful and valuable. And you know, I would agree with the idea in the Parliamentary Commission on Banking Standards report back in 2013 that banking doesn't really possess the core characteristics of a profession, that it covers a very wide range of activities, perhaps it lacks a common core of learning, perhaps responsibility supplies don't necessarily trump self-interest. But even when recognizing all of that, it's still recommended that bankers embark on what are called a trajectory towards professionalization. So, what does that mean? Well, broader professionalizing banking might mean rethinking about the way bankers are trained. It might mean a re-articulation of the purpose of banking. It might mean the establishment of a representative body sets higher standards for its members and the regulator, and it might mean using peer pressure to regulate behavior more. I think there are significant challenges to further professionalization. I don't think it's a panacea, but I still think it's a useful lens or trajectory which might be followed in certain circumstances.

Toni Dechario 30:38
What do you think the mechanism is by which professionalization affects behavior?

Joe McGrath 30:45
Yeah, there's a lot of really great research in regulatory theory and criminology and behavioral science, which suggests that groups are moral anchors that we learn what's right and wrong from those around us, just in the same way as we can learn good behaviors from a group, we can also learn bad behaviors from a group. Ultimately, we're really social animals, so we want to belong to our group. We do that by replicating the behaviors of other members of our group. Professionalization then has that potential to internalize ethical norms through a process by which industry engages with its members to articulate norms that exceed regulatory standards, and then through asserting those standards, but by asking its members or acquiring its members to observe those standards, really using peer pressure, which, as we know, can regulate behavior. And professionalization is tapping into that, the potential to generate industry-wide normalization of good behaviors, because once behaviors become common in the group, it becomes a moral norm, and then breaching that norm, when you've invested all your identity in that group, isn't just breaking a rule, it's betraying your sense of self. That's a really important steering and disciplinary mechanism.

Toni Dechario 32:10
Right? So, the ability to kind of create a group identity exists and to decide kind of, what are the components, what are the norms that are a part of that group identity? And then by kind of embracing people into that group, you create a situation where they don't want to be excluded from the group. They don't want to be ostracized, and so they have to kind of behave according to the norms of that group is kind of in a nutshell, my understanding of how you're how you're describing that is that, is that a fair description?

Joe McGrath 32:49
That's very fair. We're really tapping into that idea, which the Dutch central bank kind of espoused years back and said, look, peer pressure, great way of regulating behavior. Professionalization, then, is the mechanism by which we tap into that we harness that power.

Toni Dechario 33:07
How much appetite do you think there is for something like this? Like, how would it work in practice? How would it come to be?

Joe McGrath 33:13
So that's a harder question to answer, I think. And again, I want to start off really positive here and say, look, I think industry has shown, has shown a huge appetite for really positive cultural change. You know, there's so many examples of, you know, different kinds of firms promoting psychological safety and so on, and whistleblowing and all sorts of positive aspects of positive culture. And we saw a lot of those discussed at the Fed conference on culture. So, I certainly don't doubt any of those very genuine regimes. But I'd also be very careful about overestimating how much has really changed in the financial services industry over a number of years. And it's not that the initiatives that industry have taken aren't valuable. They are, but I do think they've largely been precipitated by political intervention, public pressure, that kind of intrusive approach from regulators I mentioned earlier that's really driven a lot of change. So, industry is taking those important steps to drive change, but typically they operate at the firm level, not at the industry-wide level, which is really key, which is what we're trying to tap into here. The main thing, I think actually, with changing the structural level, operating across the industry as a whole, is the relative intrusiveness of the regulator. So, if professionalization has progressed, it's probably because the state is exercising pressure.

Toni Dechario 33:26
Ciaran, I'll turn to you and see what you'd like to add to the conversation about professionalization.

Ciaran Walker 35:00
I think if you look at some of the initiatives that are going on at industry-wide level, you know, there's some ground for encouragement. I think. You know, what I see is, you know, for example, in relation to training, I feel the standard of training, industry-wide training, you know, the banking, for example, in Ireland has fantastic educational programs, and is ever developing those programs. So that's a positive and including in relation to ethics, both Joe and I help teach on some of these programs, so we're familiar with them. So that's one area where I think things have improved for the better. I think also, when you look at, I do feel that industry recognizes that there's an industry-wide benefit to improving ethical behaviors and not just being wholly dependent on whatever the regulator says. You know this, for example, the UK body, which does some interesting work here, the Financial Market Standards Board, and it works, particularly in wholesale financial market, as I understand it, but also works with regulators. But the idea behind it is tries to develop standards, global standards of conduct that are industry generated with input from regulators who are very keen, I think, and rightly so, to get industry themselves to engage with this. Because what I find is that if you have direct industry engagement in their own standards of conduct, they're more likely to buy into it. Also, you know, the Irish regulator has said, I think the UK regulators more or less said the same thing, look, we're not going to issue detailed guidance on what we mean by the individual conduct standards because it's context specific. Now I can understand that to some extent, but there was a UK industry body that produced report in 2019, and they said, look, the regulator's not going to develop detailed guidance in this, so really, the industry should do that. So, there is a sense within the industry there's a benefit to doing that, because most people, not everybody, but most people, want to do the right thing, and industry is probably best placed to produce more detailed guidance that actually more clearly expresses and addresses precisely the type of issues that their particular aspects of the industry face on a daily basis. And you know, if they're industry generated, chances are they can be changed more frequently, but the likely to be more targeted, and they're likely to get more buy in from the industry, and even just the process of engaging with the discussion around them and finalize them will lead to people buying into them more. It's human nature if you feel that you've had a more direct personal involvement in the process leading to whatever the outcome is. Chances are you more interested to buy into it.

Toni Dechario 37:57
Well, and it's interesting, isn't it, that the call for regulation feels ironic to me, given that this is about accountability and ownership, right, and going back to your description of Adam Smith's definition of accountability, which justify yourself, you must be able to justify yourself, not have somebody else tell you what, what the justification is. But for you to be able to do that, right?

Ciaran Walker 38:27
We're still left situation where somebody would say, okay, I'm faced with situation x. So, I'll reflect on this now. How? But even if you reflect on it more, and you've set your individually accountable, there's a better of time and guidance there, because if you don't have any sort of guidance, you're also going to look to peers say, okay, what do we do in this situation? And depending on who the peers are, you relied on, you may get a more or less ethical answer. And there's always this temptation to rationalize, of course, as well.

Toni Dechario 38:57
Right.

Ciaran Walker 38:57
And that's why I do see a benefit in the industry, engaging more fully, and then some. Just taking a little bit more of the burden, simply because lots of people in the industry, they're in the same situation, they're dealing with certain issues on a practical day-to-day basis, they would, well, I know from my practice, they would welcome guidance, just to get a clearer steer on what's normal and what's appropriate. We all like to believe we act ethically, but we all face situations where there are tough choices to be made, and guidance will be welcome, and it may well not come to the regulator.

Toni Dechario 39:34
And we all believe that we'll act ethically, but we act totally differently in different contexts. You know, another conversation that we had in an earlier season, was with David Gross, who at the time was, was at HSBC. He no longer is, but he talked about how he's both. He's English, so what I would call soccer. He calls football. He's both a football fan and a rugby fan, and there are very different norms within those environments. And he behaves totally differently at a football game than he does at a rugby game because the people around him are acting differently. And so, it's not that we behave necessarily unethically according to the local context, right?

Ciaran Walker 40:26
Yeah, exactly. And that's a very important point. We all have different circles of influence, and how we behave, for example, within our families is quite different than how we might behave with a group of friends or so, you know, whether it's rugby or football, soccer or whatever. But then similarly, how we behave within an organization is one thing. But then if we get an understanding of what are our peer group thinking, that's a different circle. So, if the industry-wide guidance or indicators are, well, this is what you should do in this type of situation. That has the potential to be influential, I think.

Toni Dechario 41:00
Yeah, such an interesting concept. Thank you so much for talking about it. I have one last question for both of you, which is, if people listening want to do any further reading, obviously, I recommend your book. Is there any other reading, watching, listening that you found particularly helpful on this topic?

Ciaran Walker 41:20
Thanks for the plug for the book. Actually, I have to say, well, back at you. I think the New York Fed's website is fantastic with the resources that it lists in this area. It's a fantastic resource for people to go to, and there's just more and more being done in this area. What's interesting to me is that it's so multidisciplinary, so just having to keep on top of, you know, the psychology, the sociology, the anthropology, the law, it's fascinating. So much being written on it. And your Fed website is a very good resource, I think, to give people some guidance on it.

Toni Dechario 42:03
Thank you. How about you Joe?

Joe McGrath 42:06
So again, I would echo Ciaran suggesting about the New York Fed website, it's great source of information. And you can also check out some of the pieces that Ciaran and I written together, and those are all listed on my own faculty web page in UCD. I've also collaborated with Weike Scholten, Dr. Wieke Scholten.

Toni Dechario 42:26
Wieke is also a former podcast guest.

Joe McGrath 42:30
I listened to that podcast. I thought it was great, Wieke's work is superb. In terms of additional projects, I'm working on at the moment, just started a project on a new book project on professionalizing banking, funnily enough, but just at the start of that, but hopefully by the end of next year, that should be out.

Toni Dechario 42:51
Oh, wonderful. I can't wait. Well, thank you both so much. Really appreciate your time and your fascinating proposals. Nice to see you.

Ciaran Walker 43:01
Pleasure.

Joe McGrath 43:01
Thank you.

Ciaran Walker 43:02
Thanks Toni.

Toni Dechario 43:03
For more conversations like this, to watch a recording of this year's culture conference, or to access publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance and culture reform.

Ciaran Walker 00:00
The evidence suggests that majority of misconduct is actually situational. It's really good people doing bad things in the context of particular pressures that they find themselves under.

Evan Norris 00:10
And so the question to me is how to engage people and to think you know specifically about the work that they do, and how, if they haven't identified what all the risks are adequately, it can lead to real problems.

Kelly Richmond Pope 00:24
I'm a barrel believer, like, let's study the barrel. Let's understand the barrel. Because, yeah, the apple, that's the start of it, but the barrel is the problem. I'm not a believer of there's one bad apple. I believe that the barrel has something wrong with it.

Joe McGrath 00:39
Professionalization is about influencing industry-wide norms so that people can learn positive behaviors from their peers.

Jeremy Brisiel 00:49
This is Banknotes: Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

Toni Dechario 00:59
Hello. Welcome to season four of the New York Fed's Banking Culture Reform podcast. 2024 marks 10 years since we held our first culture conference. So, we're dedicating this season to a topic that's animated discussion about culture and financial services throughout the past decade: the concept of accountability. What is accountability? How can it be nurtured on an individual, firm-wide and industry-wide basis? What grows in its absence, and how can financial services firms prevent the normalization of fraud, misconduct and other symptoms of low accountability? This was a topic at our conference this past spring, and we're bringing back three of those panelists, plus one co-author to dig deeper into these questions. My name is Toni Dechario, and I'm a member of the New York Fed's culture team.

So, I'm here today with Kelly Richmond Pope, welcome Kelly.

Kelly Richmond Pope 01:45
Thanks for having me.

Toni Dechario 01:46
Could we start off with you just briefly introduce yourself?

Kelly Richmond Pope 01:50
Yes. So, I feel like I wear a couple different hats depending on what time of the day it is. So, by day, by day, morning to midday, I'm an accounting professor at DePaul University, and I teach a graduate forensic accounting class, which is my love, and then, well, my cost managerial accounting class is also my love too. So I teach those two classes, and then by night, I am a fraud investigator, true crime game designer, and so by night, I'm searching and scouring the world for investigative stories that I can use to not only teach my students but business professionals about how to search for red flags and understand the barriers that they need to put in their organizations to protect their organizations from fraud, waste and abuse. So, I run a company called Red Flag Mania. So sometimes I'm a book author, depending on who I'm talking to. I wrote a book last year called Fool Me Once: Scams, Stories, and Secrets from the Trillion-Dollar Fraud Industry. Sometimes I'm a podcast host, so I wear a couple hats, but really, I do all these different things, but all under the one umbrella of fraud.

Toni Dechario 03:12
Okay, so why the umbrella of fraud? What made you become so clearly passionate about this topic?

Kelly Richmond Pope 03:19
Fraud affects everybody, every business, every country, every industry. And it's this universal problem that I became fascinated with years and years ago. I'm not going to tell you, because that would tell you how old I am, but this problem that, it's just keeps growing and growing and growing, and I often ask myself, why, why does this keep happening? And my answer to it is people. I mean, people are, we are flawed computers, and we make a lot of bad decisions, and a lot of good ones too, but a lot of bad ones. I'm just really fascinated by the human experience when it comes to the opportunities that present themselves to us. So, although I am an accountant, I'm a CPA, I think I am also a social psychologist, like I'm a couch social psychologist. So I think if I were to go back to school, that's probably what I would have gotten a degree in, because just the way we rationalize decisions is just fascinating to me, and where I think the merger of accounting for me really awakens me and excites me is accounting information is a combination or a collection of decisions, regardless of what that number is, it is a collection of a bunch of decisions by a lot of different people, a lot of different stakeholders that have competing goals. And so, understanding that number is really, really important. And then you add on to that. You have something called the notes to the financial statements that nobody ever reads but explains all of the numbers. And if you read them, put those two things together, you are, it's almost like this painting or a puzzle that you can solve. And so that just fascinated me when I was really young, so I started, I took my first accounting class in high school, and I realized then that I really was, I loved money, not to be rich, not from that perspective, but loved money because of the power that it gives the decisions that it has, or the power it has over people's decisions. I realized that at a really early age, and I wanted to study it, and so that was going to either be accounting or finance.

Toni Dechario 05:49
Do you think there's been a change in terms of people's willingness to commit fraud and whether, whether that's, you know, white lies, or I was recently talking to somebody about the, you know, what was called the ATM glitch on Tiktok, where people were check kiting, but not calling it that, and filming themselves doing it as if it was this loophole that they were exploiting at an ATM as opposed to committing fraud. And it made me wonder, like, has there been a shift in our understanding just generally about what constitutes appropriate behavior and lies and fraud and what doesn’t, and can you see that in the numbers?

Kelly Richmond Pope 06:35
I think that there has been a shift, but that shift has really been in people's understanding of what they think they should have and how long it takes to get it. And so, you think about again, I'm going to date myself, and I might date you as well. But if you think about years and years ago, we weren't exposed to the rich and the famous, we didn't know how they lived, we didn't know how they traveled, we didn't know what they ate. And then something called social media happened. I remember being little watching Lifestyles of the Rich and Famous.

Toni Dechario 07:13
Lifestyles of the Rich and Famous.

Kelly Richmond Pope 07:14
Yes, that was the precursor to all right, you remember? And you were sort of like, wow, but if you didn't watch it, you didn't know. And so now you think about how strong and prevalent social media is. It gives us this opportunity to peer in the lives of people that we would probably not even interact with on a regular basis. And so now you see people having exotic trips, going to like exotic restaurants, and buying things and doing things. And so, I think that what has changed is people's understanding of, well, they can do it, I want that too. Or they're my friend because I'm connected with them on some type of social platform. So, I think our idea of having things makes us want it now, and it may not be for us. So, I think that that's changed. I think that people are willing to try, because this idea of getting caught sometimes is so, can be so small. Two professors at University of Toronto said this quote in one of their articles, and they said, "Corporate fraud is like an iceberg. A small number is visible, but what lurks below the surface you just can't see." And so, like, that's really what fraud is. And so what's lurking below the system or the surface now, I think more people are just sort of touching at it, because they're curious about it. And so I think there's been a shift. But I think the shift has really started with us, with people, what people want, with the risk that they're willing to take, and that's a little scary.

Toni Dechario 09:00
So, if you think about it in terms of the fraud triangle, which you spoke about at our conference in June, and if people want to actually hear more from Kelly, I should mention, they can go to the New York Fed's culture website and find a recording of that panel, which was our first panel the conference this year. And you talked about the fraud triangle, and one of the sides of that triangle being pressure. And it sounds like this, access to information about what's possible, perhaps can actually also contribute to pressure, to that pressure part of the triangle.

Kelly Richmond Pope 09:40
I think people are willing to try. You know, I think that business, business transactions are complex, and I'm not sure that everybody always understands all the regulations around the decisions that they're making. And, you know, the risk reward. If I do it and don't get caught, the reward is so much higher. You know, the likelihood of getting caught might just be so much smaller, but so they're willing to try. I also think, and I don't want our listeners to think that I think the world is terrible and everybody's terrible, but I do think that people have the desire to please others, and so a lot of times performance metrics are based on rise in stock price or just success that might be unrealistic. There's another quote that I wanted to share I was reading this article, and the title was, "How pervasive is corporate fraud?" And a group of researchers were trying to put a number to this, this question. And there was a quote that they said that to me, just sort of makes the hairs on the back of my neck stand up. And it says, research shows that in normal times, one-third of corporate frauds are detected in normal times, one-third. So, what that means to me is, what about the two-thirds that's undetected and that's in and that that would be two thirds in normal time is undetected. So, when times are turbulent, what does that number actually mean? So, I think that it's a huge problem. I don't know that I will be the person to solve it, but I do have questions around it, and so that's really where my interest, my passion, my drive, really keeps to around this. You mentioned the fraud triangle, and if anyone's not familiar, the rationalization pressure and opportunity. And what I wanted to do when I wrote my book was really explore that rationalization component of the triangle, and really break down this idea of what a perpetrator is, and so all perpetrators, under the Kelly Pope beliefs, all perpetrators are not these intentional perpetrators who are set out to defraud their organizations. That's not everybody. That is some, but not everybody. So, what I wanted to do was to open the conversation up to well, why is this problem so bad? It can't just be all of the con artists out there. It's not that can't just be everyone. And so, in my book, I talk about these two other categories called accidental perpetrators and righteous perpetrators. And an accidental perpetrator, I'm going to describe this person, and it might be someone, it might be you, it might be someone you know. But just hear me out. Just hear me out. They are a team player. They are a people pleaser. You ask them to do something, they don't push back because they trust you. They trust the system, and that level of trust is what could lead them down a very slippery slope. I'll use myself an example. So, in my academic environment, if my president came to me and said, hey, Kelly, I need you to we're trying to start this new project. I just need you to sign off someone from your department. Can you just sign it? And because I trust my president, because I trust the process, because I trust that, probably he and someone, some of his aides, looked at whatever I'm signing probably more thoroughly than I will I just sign it. And that can happen. I never would have intended to be engaged in something unethical, but if that person was my trust in that person allowed me to be engaged in a situation like that and so that accidental perpetrator, sometimes, a lot of times, from the people I've interviewed are your accountants, they're your doctors, they're your bankers, they're your lawyers, they're your nurse practitioners, they're your chiropractors. They're people that think, oh, I I'm not getting any personal gain. I just, I didn't need to do this, but it happened. That's the accident. Perpetrator, the righteous perpetrator, is a little different, because they are your stars in your organization. They're your rainmakers. They might be a C suite person. They might be your leaders, and they believe that the rules don't necessarily apply to them. This whole system works because I'm here and I cannot follow a rule to help somebody else out that's your righteous perpetrator. So those, those archetypes that I just described, are very different from the intentional perpetrators that the movies are made of, or the podcast, the true crime podcast, are made about. These other sorts of corporate minded people can also engage in fraud for very different reasons. I remember when I was studying fraud early in my earlier days now, but always read these the profile of a perpetrator, and they would sort of give these attributes, and I would just say it's everybody. It can be everybody, so it's sometimes when you box things off that allows you to think, Oh, I'm not that profile. That's not me. Actually, you are. It's all of us. And so that's why internal controls are important. That's why the training, effective training, is important. Because it is all of us, it's our peers, it's our neighbors, it's all of us. That's a long answer to your question.

Toni Dechario 15:20
Well, I want to get into many different pieces of that you touched on, a lot of different things that I want to make sure that we get into. But before we do that, I want to back us up a little bit first and talk about accountability. This year, we've had kind of a theme of accountability throughout our conference and as well as this podcast season, we're talking about accountability. And I wanted to get your take on kind of what the relationship is between accountability and the propensity for fraud.

Kelly Richmond Pope 15:56
I was really thinking about it. And when I think about accountability, the people, the word that comes to mind are our whistleblowers, because they take accountability to a whole new level. I mean, it is deeply personal for them, and it's interesting the plight of the whistleblower and their relationship with accountability, because they're the ones that feel a need to speak up, because they are accountable. Not only are they accountable to society, they're accountable to your organization, they're accountable to themselves in a different way. And yet we treat this person that holds accountability so dear in such a very negative way, and so we have to change that, because they are, they really are our leaders, our beacons of hope, as to what accountability really should mean in an organization, because they realize that if I don't speak up, then who? And I don't think we all have that type of bravery. I know I have been very self-reflective in the type of work that I've been doing, because I do these on camera interviews with white collar felons, whistleblowers and fraud and so when people hear that, they're probably like, oh my goodness, I want to hear that the perpetrator interviews. I mean, those have to be fascinating, but really what makes me pause in my footsteps, is when I'm interviewing the whistleblowers, and I ask myself, could I be could I be them? Could I do what they do? Do I take accountability as serious as they do, to the point that it could destroy my life, it could destroy my family. I could lose my money, and yet they still persevere. Those are the interviews that really make me say, wow, I want that person in my inner in my organization, and can I be more like that person? So, accountability through the eyes of a whistleblower is, I think, a very important and very personal experience that I think we all need to explore.

Toni Dechario 18:00
So, let's go there. You have a game on your website. And anybody who's listening, I would encourage you to go to Kelly's website, which is kellyrichmondpope.com and play and go into the games section. It's the first game on that page, and I will say it really changed my perspective on both those who commit fraud as well as my own likelihood of blowing the whistle. I think you find, as you said, Kelly, when, when taking your tests, both the test of and I'll describe them very quickly here. You know you can, you can kind of go in, into the fraudster mode, and you have committed a series of frauds. And Kelly asks us why, and we have a kind of multiple choice about why we did it. And she'll tell us what type of fraudster we are, and then we can, we can go into the whistleblower test. And we've been bystanders, essentially, to a series of frauds, and were asked whether we would blow the whistle. And the thing that really stunned me when I took it, I tried to be very honest with myself when taking it and I would not blow the whistle in every case, there were multiple cases where, when I was really honest, I thought, yeah, no, I don't want to be anywhere near that. I just want to walk away and forget about it. But as you say, what does that say about my own level of accountability and so how do people respond to you when they take that test?

Kelly Richmond Pope 19:45
So, I'm glad, first of all, I'm glad you took it. It's interesting, because when people so when I describe it, I said there's two paths. We can play the fraudster path, and I'll tell you what type of perpetrator you would be, or we could play the whistleblower path. First of all, most people want to play the perpetrator path because they think, ooh, well, again, I want to know. I want to know. But what's interesting about the whistleblower path is there's a lot of things at play that's happening here, and so there's something that I want to talk to us, the listeners, about, and that's the bystander effect. And I'm not sure if they're familiar with the bystander effect, but it's this, it's this social psychology theory that says we all like to think that if we saw something bad, we will report it, and we all think that we would, but the bystander effect tells us that, in reality, most of us don't want to. We won't do what we think is inconvenient. We don't want to get involved. And so, this really ties into that, that whistleblower experience. And so, two theories around why the bystander effect happens is around pluralistic ignorance and diffusion of responsibility. And so, when we talk about what pluralistic ignorance is, imagine when you're in the classroom, say you're a student, go back to your college days, high school days, and you are reluctant to ask a question, because you think that nobody else in the classroom has a question. You don't want to get embarrassed, so you're reluctant to raise your hand. That's pluralistic ignorance. Diffusion of responsibility is even more interesting, because what that tells us is, the greater number of eyewitnesses, the less each witness was responsible to help. So in this idea that when you say things like, you know, I don't even want to be around this because you think somebody else might report it, so somebody will get to it, and this kind of situation happens in the classroom and the boardrooms and executive meetings, because you don't necessarily want to bring it up, but somebody else probably will, so I'm just going to let it slide and so that's how things fall through the cracks. So, you know, you think about the research behind the behaviors. So that game is sort of like merging my love of games and my interest in accounting and financial transactions, but then that social psychology piece of what is happening with our thinking and our decision making when we're presented with some tension, what will we really do? And so, I wanted people to think about tension actually, before it actually happens to them in real life. So that's where the game came.

Toni Dechario 22:21
Yeah, like everything, it kind of takes practice in thinking about these things, yeah.

Kelly Richmond Pope 22:26
And they're basic things. So, I don't, I don't want anyone listening to think it's, it's something complex. I mean, some of the scenarios are, for example, if you ordered an expensive briefcase or handbag, and then the second day another one came, would you send it back, or would you keep it? You would be surprised how many people, the people, the honest people in the audience that you work with say, "Oh, I'm keeping that bag. I'm not sending it back." You know, that's, that's fraud. You know, like you didn't, you didn't buy two, you bought one, and you knew you bought just one. So, it's some of these just really small missteps that that we interact with, but those missteps can grow and grow and grow. Many of the perpetrator interviews I've done, they all say and in almost about 20 minutes into it, I didn't wake up one day and say, today I'm a commit fraud. It didn't start that way. It was these really small, small, small things.

Toni Dechario 23:21
Let's flip to the perpetrator side of your game, which is, which is so fun to take at the end of the game, you're, you're told what type of perpetrator you are. I was a Robin Hood perpetrator; I think is what you called it. You've mentioned two other types. Can you just walk us through kind of the types, and what do you think is most common?

Kelly Richmond Pope 23:44
Sure, I've had about 10,000 participants thus far play the game. And so, there are three different perpetrator types you could be. You could be an intentional perpetrator, an accidental perpetrator, or a righteous perpetrator, which is where the Robin Hood syndrome person fits in. And what I found is most of my participants. So let me give you a profile, most of them are either auditors, internal auditors, CPAs, in a financial institution. So very professional people. A lot of them hold licenses, professional licenses, so they have some accountability to something higher than just themselves. Okay? And what I'm finding is, of the population of those three different categories, about 20% are intentional perpetrators, which, okay, we have a few people out there that are, they might not realize why they're doing it, but they if they see an opportunity to get something that gives them an advantage, they will. But what I'm finding is the larger percentage of people, it's about evenly split between our accidental perpetrators and righteous perpetrator categories, which is not bad news, and I tell you why. I know I'm saying the word perpetrator, but accidentals and righteous can be saved with internal controls, with effective training, because what an accidental perpetrator is, just by definition is they are a team player. They just feel like that they don't have an out, and they have to do this to help their boss, help the team, but if there is an inappropriate internal whistleblowing channel that they have been trained upon, they probably would use it. And a righteous perpetrator, what that is saying is this whole idea of the Robin Hood syndrome. I'm going to rob from the rich to give to the poor, what that's actually saying is, if I'm going to defraud my organization, it's only going to be to help someone you know, help someone external. Now, again, you're breaking the law. We understand that, but it's your why you're doing it. We can save those kinds of people in our organization. So, I was really encouraged to see that the numbers so far are showing accidental perpetrators and righteous perpetrators being the higher categories, because I feel like with rule, with regulation, with internal controls, with training, and really talking about how fraud and a lack of ethics can happen. We can fix that. It's the intentional perpetrator. We can't really help them much. So, think about like your Bernard Madoff's of the world. Bernard Madoff would be an intentional perpetrator, I mean, and he was able to use his power to benefit him, and he was untouchable, like no one questioned him. And so, he is a very hard person to stop when you have someone that powerful. But there have been numerous people, and you probably have never heard of the names of the accidental perpetrators, because they're your internal rank and file employees that are following the rules and just sort of get tripped up in a situation. So, Andrew Johnson was the Director of Financial Services, worked for a now defunct company called Nicor Energy, and was listening to the C suite, and they didn't want to hear what the accounting numbers told them. And so, he felt like, I got to make this work. I got to fix it. You know, they're counting on me. And, you know, I just want to keep everybody happy. He wasn't thinking about, I'm going to get a bonus and go buy a Lamborghini. That's not what he was thinking. He was thinking, how can I help? You know, how can I help my organization? So, I'm, I am encouraged by the larger number of accidental perpetrators and righteous perpetrators. So, Toni, you're in good company. You're in good company because we can help you. You know.

Toni Dechario 27:47
I'm salvageable.

Kelly Richmond Pope 27:48
You're salvageable. Absolutely, absolutely. Because if we talk about these issues more in a more impactful way, and really are honest about how these things happen. I mean, you think about people are working in very stressful environments with very aggressive goals. How are they supposed to reason through those things? And so, I think the more we talk about what really happens, we could save the accidentals and the righteous and maybe a few intentionals.

Toni Dechario 28:16
Wonderful. Well, let's talk a little bit about, like, how that works. You know, we mentioned, we spoke very briefly about the concept of practice. And I'll say for this series, I also interviewed Joe McGrath, who was on your panel, and his co-author, and they spoke about kind of that, that pause and that shift from automatic thinking, from, you know, what Kahneman called system one and system two thinking. And so, I wonder if you have thoughts about how to perhaps insert pauses, or kind of other ways that firms, and these are financial services firms, and so there's a lot of regulation, right? There are a lot of rules, but other ways that kind of behaviorally firms can help people to pause and think and gather more information.

Kelly Richmond Pope 29:14
You know, what I think firms can really do is, I'm going to add to Joe's conversation, because what I think we have to add to that is how we are rewarded. Because if aggressive, risky behavior is rewarded, then that's what, that's the message that you're sending to people to do. So, I can stop, and I can pause, and I can think. But if my, if my conservative thinking is not going to be rewarded but my aggressive thinking is, then you're teaching me how you want me to behave, regardless of the regulation, regardless of the code. You're showing me that what you really want me to be is aggressive and a risk taker, and you really don't want me to be a rule follower and conservative, you really don't. So, I think what organizations have to do is really pay attention to how they are rewarding and incentivizing people's behavior, because that sometimes speaks louder than anything.

Toni Dechario 30:13
And the other thing that struck me was the kind of information that we can all get caught up in this. This is not, we all think of ourselves as ethical people. I would never do something like that, right? And so therefore I don't need to be on the lookout for it, because that's just not me. I'm not that person. And this can kind of happen to anyone accidentally, as you pointed out.

Kelly Richmond Pope 30:37
Absolutely Toni. And here's the thing, it's why those scenarios in the game are so simple, because something sometimes what I do when I am in an audience of professionals or executives, I will ask, raise your hand if you're ethical. Whole room raises their hand, of course, of course. And then 30 minutes into the talk, we'll play that game and the debates that we will have around what is okay and what is not. I'll give you an example of a scenario. There's a scenario that says it's time for your compliance training. And instead of you going through each question, reading them and answer them, you just sort of, you just guess and just figure it all out. You didn't read anything. You just signed it at the end, saying that you went through every question, and is that okay? Sure it is. I mean, groups of people, sure it is, and they say, well, they should make the training more interesting, and I would do it. So you're passing the blame to someone else. The question is, did you do what you said you are going to do? And your answer is, it's okay for me to lie and say I didn't. I had a group of, this was a Financial Services Training that I did. I had an organization that said, we do this all the time. Actually, what we do is we designate one person that goes around to everyone's computer and does the training for them, so that they will get it all right, so we can keep moving, so it's not a disruption. And so, I mean, they openly admitted this, and this is the same group of people that, at the very beginning, raise your hand if you're ethical, everybody raised their hand. And didn't see anything wrong with this. So, what I said is, well, let me, let me switch the scenario. What if you are a surgeon about to perform brain surgery on an 80-year-old woman, and you didn't go through the health protocols, you had somebody else that came in and just did it for you, and you weren't even aware of something that had changed? Is that okay? Oh, that's different. Actually, it's not, but, you know, it's this rationalization of people that I'm fascinated by. I think when we can have honest, real conversations about these scenarios, there's a self-reflective moment with people I know, I have had many self-reflective moments, doing these interviews with perpetrators, and what I find, even for myself, is I'm like, wow, I see how it happened. Would I have done something different? I'm not sure. Would I have spoken up? I'm not sure. So, it's having these moments of tension that cause us true self-reflection. I think it's the start. I think organizations are far too regulated in the way that they do ethics training, the way they do fraud training, current training, it's not just, here's the definition of, it's let's experience what this definition feels like. And I want to get your feedback around it. And that, to me, is real. It's very valuable, and we don't do that enough.

Toni Dechario 30:44
Something that you said about kind of, well, everybody does it this way earlier made me think about the kind of apple versus barrel question. So, I'm curious on your views, having studied so many incidents throughout your career. How often would you say you have kind of an apple problem versus a barrel problem?

Kelly Richmond Pope 34:08
Toni, it's always the barrel for me, you know. It's the barrel because I'll give you a perfect example. So, I told you I wear a couple hats, and so I don't know if I said filmmaker in that in that list. But years back, I did a documentary called All the Queen's Horses, and it's about the largest municipal fraud in U.S. history. And so, their City Comptroller, Rita Crundwell, had embezzled $53.7 million over a 20-year period. And although the media was talking about the apple that was Rita. I was fascinated by the barrel, which was the city of Dixon. How does one person think that they can walk into a situation and steal $53.7 million over 20 years and get away with it for 20 years? I'm fascinated by the barrel, the village. What is the environment that allows a person to do this and grow up in it? So, I'm a barrel believer. Like, let's study the barrel. Let's understand the barrel. Because, yeah, the apple, that's the start of it. But the barrel is the problem. I'm not a believer of there's one bad apple. I believe that the barrel is, the barrel has something wrong with it.

Toni Dechario 35:21
Yeah, these things are all happening in context. So, I want to go back to the whistleblower portion of your game, because that also relies on context, I think, and how we think about whistleblowers is at least socially kind of driven, right, we think about what the impact might be on us if we blow the whistle. And kind of how people think about whistleblowers. You think about all of the words that are used for those who speak up, like tattletale and rat and you know, there are worse ones also. And so, I wonder if you could talk a little bit about how organizations that want to kind of change that perspective on whistleblowers and help people to feel more positively about blowing the whistle. What kind of steps can they take?

Kelly Richmond Pope 36:16
Well, I think first, organizations have to be honest with themselves. Do you really want whistleblowers? Do you really want them? Because if you really do want them, we have to show that we celebrate their value some type of way. I've seen organizations that publish a monthly or quarterly newsletter that talks about things that people have found and highlights them and celebrates them, awards them with different things. So, I think if we really want them, that's our first question. Then if we want them, we have to think about, how do we uplift them? How do we celebrate them, how do we publicize what they're doing? Because then I think you see a culture shift, because then people recognize, oh, my voice does matter. I do think someone wants to hear this. I do think I should expose this. I'm not going to be demonized. But if you never talk about them, if you never celebrate them, you're really not sending the message that they are valued and a valuable asset to your organization. If you're never talking about it, you really have to ask yourself, are you really interested in whistleblowers in your organizations? Because how are you showing that you are? How are you making people feel valued, that that aspect of their voice is needed? And so, I think we have to start there.

Toni Dechario 37:32
One last question I want to ask you before we get to your recommendations, is you mentioned that one of your many hats is helping to identify red flags. Red Flag Mania?

Kelly Richmond Pope 37:46
Yeah, yeah.

Toni Dechario 37:47
So, could you share with us just some of the red flags that you might encourage organizations to keep an eye out for?

Kelly Richmond Pope 37:57
It's a great question, and I think the industry really matters. And what, what I try to teach is, I give a person a scenario and ask them, you know, what are the red flags that you see? I think what we have to remember is red flags can be both non-financial and financial. So, I'll give you a real basic example. We, in one of our games that we created, so Red Flag Mania is an investigative gaming platform, and so one of the games that we created, you're launched into this scenario, and there's this non-profit that's losing money, and you have a lot of financial and non-financial information. And so, there's an interviewee that says, "Well, I noticed that we started slashing programs and we stopped giving donuts and food out in one of our programs that was around outreach to the community." Some people might not think that's a red flag, but it's definitely a red flag. So, you have to pay attention, because if programs are being cut, a program that that is focused on earning you money, getting you donations, why would you cut that? What's going on? So, paying attention to red flags is key. I'm trying to think of some really good ones. Because you know, when you think about, I'm going to put my straight accounting hat on, when you think about things like the just looking at your balance sheet or income statement, if you have a period, if you're saying that your sales are going up, like they're through the roof, sales are great. If your sales are great, then there is a correlation between your inventory going down. So, like there's, there are some natural things. Something's going up, something's going down. So, you can't, you start to notice that when you take your accounting class, that there are some accounts that go together. There's some movement that makes sense. So, if you are an industry outlier, if you're in an industry, everybody is experiencing a slow period, and you're the one that's not, that could be a red flag. Why are you doing so much better than everybody else? That would be your WorldCom example. So, everyone else in that industry was at a very lower, depressed market at the time, and then WorldCom is just, you know, soaring. Why would that be? So, I think I can't give too much of a specific answer without knowing the industry and the context. But what I do, what I would say, is, when you are sitting with an organization, understand what their services and then understand the things that naturally flow up and down with the service. And so, you understand these things, not only from reading like the MDNA and the annual report, but also reading those notes to the financial statements, the notes you got to read the notes. I know it's hard, I know it's long. That's the longest part of those financial statements, but your story is there. You can put the pieces together there, because everything is explained in the notes. You can't just look at the number. You got to look at the back, the backup behind the number, and that's in the notes. So those red flags are going to pop out there, because you're going to say, they said this happened this quarter. So why doesn't this reflect this in that number on this financial statement? So, you just have to put pieces together.

Toni Dechario 41:28
You mentioned at the conference, the concept of culture audits, and that this might be an effective way to help understand what sort of context you've created within your organization. How would you recommend people go about starting a culture audit?

Kelly Richmond Pope 41:45
I think first, you have to understand, first the environment that you created, because people may be very reluctant to share. And so, you know you might have to break down that barrier. But are you familiar with white hat hackers and what they do?

Toni Dechario 42:00
Yes.

Kelly Richmond Pope 42:00
So, a cultural audit is very similar to what a white hat hacker is going to do. You know, this white hat hacker is going to come in and they're going to tell you, you know, they're going to hack into your system and show you all the problems that you have. I think a cultural audit is very similar. You need to create a scenario, and it could be almost like how some organizations do phishing schemes, how they do testing of phishing, where you create a situation, and would anybody be willing to share? Would anybody be willing to tell? And that will tell you, first of all, if you even have this open-door policy where people will share. So, you create a situation and see if anyone's willing to report it, because if they're not, then that's, if they're not willing to report that it might be relatively minor, just imagine all the things that they're not reporting. We're going to go back to that comment in good times, only one-third of fraud is detected in normal times. So just assume in normal times, two-thirds is unreported. So, we need to figure out some type of audit to get people to talk whether that is verbally talking, whether that is using an internal hotline. We got to get the information out of them. So, you have to first figure out if people would share. And so, I think creating a scenario.

Toni Dechario 43:24
It's a fascinating proposal. It's like Undercover Boss a little bit.

Kelly Richmond Pope 43:27
Yeah, it's exactly like Undercover Boss, but that's why I started by saying you have to understand, do you have that type of culture where people feel as though you could, you could do that with them. And I don't know that all organizations have that, but yes, it is exactly that. I mean to say it differently, hack your own system, sit down and tell people, if you were going to defraud this organization, how would you do it? And you have to convince them that this is a safe space. But you would be surprised how many people would say, well, because we only require one signature or two signatures, and the two signatures that we do require, it could be someone in the same department. This is how we could do it. And you would start hearing all of the holes that are in your system. You would also hear people's comfortability with talking either to peers or to a superior, and so that's how you fix it, because it's going to come from the inside. Because, again, you want people to feel accountable. How can you feel, how can people feel accountable by making sure they're heard, and if they never feel like they're heard, they're never going to feel accountable.

Toni Dechario 44:40
I love that. I think we'll finish there. My last question is, just, where would you direct people who are interested in learning more? Both your own website, again, which is kellyrichmondpope.com, that's where you can find the game. It's really revealing and thought-provoking. You mentioned your book, Fool Me Once, but other readings or listenings, watchings that you would recommend for people who are interested in pursuing these questions more?

Kelly Richmond Pope 45:11
You know, I think I have a very unique approach as to what makes me think, what makes me be more reflective? So, I think I listen to a lot of, I read and listen to a lot of things outside of my discipline that really forced me to think differently. So, I listened to a lot of story-driven like true crime podcasts, in thinking about, what are the red flags? Why did they have any type of internal hotlines? Why did they have a whistleblower protection program like, what was the tone at the top? So, I, what I try to do is listen to things that allow me to apply some of that theoretical concepts that I know into a very general type scenario. So, I think that most of us are, we know the rules, we know the laws, we know the regulations, we know them all. But what we don't get enough practice in is applying them to something. So, I try to find things that force me to apply the scenario. So, like FTX, for example, reading about FTX. Whenever I read about FTX and that collapse, I always think about, well, why didn't they have any type of internal audit committee? And if they did, these are the questions that they should have asked. Or why did the investors not ask really good questions such as this? So yes, I do read, you know, all the theoretical and, you know, regulatory things too, but I need to apply it to somewhere, because I don't want to apply it when my job is on the line, like I don't want to apply it, then I want to have practice applying it before that. So that's why I do it that way.

Toni Dechario 46:55
I love that. Thank you, Kelly.

Kelly Richmond Pope 46:57
Thanks this was fun. And thank you so much for inviting me.

Toni Dechario 47:02
For more conversations like this, to watch a recording of this year's culture conference, or to access publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance and culture reform.

Ciaran Walker 00:00
The evidence suggests that majority of misconduct is actually situational. It's really good people doing bad things in the context of particular pressures that they find themselves under.

Evan Norris 00:10
And so the question to me is how to engage people and to think you know specifically about the work that they do, and how, if they haven't identified what all the risks are adequately, it can lead to real problems.

Kelly Richmond Pope 00:24
I'm a barrel believer, like, let's study the barrel. Let's understand the barrel. Because, yeah, the apple, that's the start of it, but the barrel is the problem. I'm not a believer of there's one bad apple. I believe that the barrel has something wrong with it.

Joe McGrath 00:39
Professionalization is about influencing industry-wide norms so that people can learn positive behaviors from their peers.

Jeremy Brisiel 00:49
This is Banknotes: Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

Toni Dechario 00:59
Hello. Welcome to season four of the New York Fed's Banking Culture Reform podcast. 2024 marks 10 years since we held our first culture conference. So we're dedicating this season to a topic that's animated discussion about culture and financial services throughout the past decade: the concept of accountability. What is accountability? How can it be nurtured on an individual, firm-wide and industry-wide basis? What grows in its absence, and how can financial services firms prevent the normalization of fraud, misconduct and other symptoms of low accountability? This was a topic at our conference this past spring, and we're bringing back three of those panelists, plus one co-author to dig deeper into these questions. My name is Toni Dechario, and I'm a member of the New York Fed's culture team.

Today's guest is Evan Norris, a partner at Cravath, Swain and Moore, and a former prosecutor for the Eastern District of New York, where he prosecuted a number of high-profile cases.

Toni Dechario 01:51
Evan, welcome and thank you for being here.

Evan Norris 01:54
Thank you.

Toni Dechario 01:54
Could you start off by telling us a little bit about what interested you in issues related to accountability and culture?

Evan Norris 02:01
Good to be with you. Thanks for having me. Tony. You know, I think I got interested in issues related to accountability from my career as a prosecutor. I was a prosecutor for about 10 years in the Eastern District of New York, and had an opportunity doing that to do a range of different types of cases, from mafia cases when I was a young prosecutor, which I loved, to international business crimes to cyber crimes and other types of cases. And as time went on, especially getting into the business crime area, the question of large organizations and accountability within large organizations, it became a major topic in our investigations and in resolution of matters with big organizations. I would say it really came from there. I left government about six years ago, seven years ago now, and have continued in this similar sort of work, now representing companies primarily who are facing compliance challenges. So it's been a journey that has seen me switch from one side to another, but a lot of through lines during that period.

Toni Dechario 03:24
And during that time, you've seen a lot of cases of misconduct, all different types of misconduct, I imagine, and so I suspect that you probably have a theory of the relationship between accountability and the preponderance of misconduct within an organization. Can you speak a little bit to what you see is the relationship between the two?

Evan Norris 03:44
Yeah, I don't know that I have an overarching theory. I think each organization is different, and so I don't know that I have one that that sort of covers every organization that I've dealt with. But certainly, you know, over time, I think I've come to view the challenges in the area in a couple of buckets. One is organizations where there has been some type of severe misconduct, criminal behavior, bribery, other things like that, where everyone knew what they were doing was wrong, and that's sort of one type of issue for an organization to confront. What I frankly see more of and spend more of my day-to-day dealing with, are situations where the organization is confronting the fact that even when people are not trying to do a bad thing or are not paying a lot of attention to what they're doing, they're stumbling into conduct that can have real ramifications for the organization. So it's not out and out misconduct. Sometimes it's innocent mistakes, sometimes it's not enough attention to what the rules are, but the consequences can be quite severe for organizations to not be able to deal with those types of issues. And I guess I would say the latter type is probably the most challenging to deal with. In other words, organizations trying to confront really complicated regulatory environments, really complicated compliance challenges that require sustained attention from not just the lawyers and compliance professionals, but the people doing the day-to-day work. That that is more challenging, in a sense, than how to just ensure that people don't do bad things. To me that the sheer complexity of what it means to be compliant for any large organization means that if you take this work seriously, having success is really quite difficult.

Toni Dechario 05:51
As a prosecutor for the Eastern District of New York, you prosecuted the FIFA case, and I think there's, you know, a lot of interest around that case. It's very well known. I wonder, for those that perhaps don't know it as well, could you kind of give us some of the broad outlines of what the circumstances were in that case?

Evan Norris 06:13
Sure. So, as I said before you know, when I started out as a prosecutor, I did mafia cases. As time went on, I started doing more international criminal matters of different types, and there was one point when I was working with a team of FBI agents on an international business case, and they brought to me a new investigation that they were conducting, and asked if I wanted to do it with them. And over time, this became the FIFA case. A team of prosecutors where I worked, FBI agents, IRS agents, all worked together in an investigation, really, of the business of international soccer. Really two main facets of the case. One was World Cup hosting rights. So there was an aspect of the investigation that focused on bribery and corruption in connection with the decision of which country or countries would get the World Cup. But frankly, the bigger part of the investigation, in the end, related to bribery impacting the commercialization of soccer. And by that, I mean FIFA is the, you know, the international, global governing body of soccer. But underneath it are these other governing bodies. Some are continental, some are national, some are sort of regional, of different types. They all own these various properties. The main property they have are the games that they sanction, so tournaments and different types of games. And over the 70s and 80s, the officials that sat in these organizations overseeing these events, realized that they were sitting on top of something very valuable and so a phenomenon started that we came to investigate and prosecute, which was these governing bodies and the people who oversaw them wanted to commercialize the rights that they held exclusively. They held exclusive rights to a tournament in South America or North America, say, and that meant broadcasting, tickets, internet, everything else. And this, this species of company called a sports marketing company, emerged that wanted to buy those rights and then sell them downstream for quite a bit of money. And the investigation really centered on the relationship between the people in the governing bodies and the people in the sports marketing companies. The folks in the governing bodies realized that they could demand personal payments bribes in connection with their decision of which company to award these rights to. And what we came to learn in the investigation was that there was really widespread bribery at almost every stage of every decision in connection with the awarding of these rights year after year after year. The you know, the president, the general secretary, sometimes the soccer officials on the boards of these organizations would simply just come to expect personal payments before they would sign any contract. And that's really what the investigation ultimately centered on was, was bribery that touched the United States in some way in connection with that basic sort of aspect of soccer. And of course, just the explosion of interest in international soccer has grown so significant that the bribe payments also grew right. Beginning of our case, the bribes were in the, you know, five or six figures. You know, by the end, people were demanding million dollars, sometimes even over ten million dollar bribes in connection with signing contracts. It was really quite remarkable.

Toni Dechario 10:14
Wow. That's wild. My understanding also is that it, it kind of permeated, started to permeate the whole organization. And I'm curious about your perspective on like, what the mechanism was by which this became just kind of normal operation, day-to-day operations like nothing to write home about within the organization.

Evan Norris 10:43
Yeah, I think it. First of all, I think it's an interesting topic, especially for American listeners, because the soccer, sports in the United States really is a business, and people are accustomed to seeing it as a business. And it's, I think, maybe not hard for people here to realize the sort of prominence and the significance of these governing bodies, right? People can't name the heads of the various governing bodies in the United States, but they're quite a different, different thing in other countries. They're quite significant and

Toni Dechario 11:23
Like they're famous.

Evan Norris 11:25
They're famous. They're almost as if they're political figures. The ability to get, especially to be the head of a National Soccer Federation in a country requires skill and connections, similar to what you'd expect for someone who can become a head of, sorry, a head of state. And similarly, in these continental organizations, it really rewards people who have, you know, tremendous sort of business connections and networks. But in the end, I think what, what attracted people to want to hold those positions was some, you know, some interest in soccer, some sort of, there was glamor that sort of attached to it over time.

Toni Dechario 12:08
Status.

Evan Norris 12:09
Status, a lot of perks. The ability to fly first class and stay in fancy hotels, to go to the World Cup, to go to other big sporting events, were all perks that came along with the job, and then I think over time, another essentially a perk that came with it, was people just associated with that job, was the ability to just be enriched through this contract process, right? And so I think it just got stitched into what it meant for someone to hold the position of power in the business of soccer. I'm not saying everyone, every single person did it, but well, it was quite rare to find someone who held one of those positions who wouldn't take money. It was quite unusual. So I think it just became stitched into what it meant to do that job, why you got interested in the first place, and then if you came and had it and did it, you'd almost be out of your mind not to take this tremendous additional perk. And people sometimes held these positions for decades.

Toni Dechario 13:18
You mentioned, like the glamor and the status. And I'm always kind of trying to think of, you know, what folks in financial services can learn from other industries and from experiences like this. I've recently been watching a new television show on HBO about the financial services industry, which is which has a lot of bad behavior, and it's got me thinking about old movies about Wall Street, like Wall Street, or American Psycho or, you know, there are kind of a handful of movies about bad behavior on Wall Street. It's interesting to me, because I don't think the filmmakers intended to lionize the people who were behaving badly, but they almost became glamorized. It became like kind of cool. People loved Gordon Gekko and Patrick Bateman. And it sounds like there's kind of a similar like, this is glamorous. There's a lot of status involved in this. You're wealthy, and you're not even really hiding the fact that you become wealthy doing this. And, you know, I don't think you necessarily have the answer to this, but I wonder, like, what, what the antidote is, to remind people of like, this isn't actually glamorous, right?

Evan Norris 14:27
Well, in the case of soccer in particular, I think one of the antidotes is simply adding to the equation the fact that there might be some consequence. I think you know, one thing that happened over course of decades, really, is people involved in this world of international soccer, you know, saw themselves as participating in something that wasn't quite business, wasn't government and was sport. And a lot of people and other parts of the world sort of talk and think a lot about how sports is something special because of significance for people's lives and the passion that comes with it, but also use that to bootstrap a bit and say there should be no regulation of it. That it should be treated differently from business. And I think, I think that you can imagine that taking hold and people really kind of coming to view that, especially if they never see any consequence coming to anyone for having engaged in any type of illegal behavior, right? It would be sort of a natural thing to assume this really is different. This is just part of what is, right? This is this world, and it's okay to participate in it, and it must be so, because nothing ever has happened. So, I think part of what has now changed, of course, is that folks can now visualize and see that there can be moments when there's a consequence to that behavior. And I think that's probably pretty significant for folks. I think if you zoom out though and ask, sort of more broadly, how to avoid people glamorizing the people who take advantage of position and succeed, I don't, I don't know that I've got an answer to that one, but I think, in terms of what at least causes people to pause, certainly one piece of that puzzle is you might get caught.

Toni Dechario 16:35
Pausing has, has been a little bit of a theme with the folks that I've been talking to this season, actually, for the podcast, is, how do you insert that pause? And there are various ways that you can insert a pause before, before taking a decision and recognizing, wait a minute, am I doing something wrong here? Because sometimes, as you said at the outset, you may be unaware. I mean, the FIFA cases probably is an extreme one. You know that they were clearly breaking the law, and probably all knew it, but there are kind of smaller breaches that can be taken unawares, and that's, as you said, a much more challenging issue, I think for firms. I wanted to talk to you a little bit along those lines about a question that we've been asking for a few years now, which is the apple versus the barrel question, and you've seen a lot of cases of misconduct in your career and investigated a lot of misconduct in your career. How would you characterize the preponderance of apple problems versus barrel problems?

Evan Norris 17:41
I guess what, and I alluded to this before, I guess I think that, however problematic bad apples are, the bigger challenge for organizations, I suspect, is how to deal with the again, not the intentional, the outlier, the intentional misconduct, the person who really goes, takes a step out of the law of the norms of the organization, but rather, everyone who thinks they are acting consistently with what the organization wants and what is good for the organization, and are in good faith, frankly, in doing that, and nonetheless are engaging in or contributing to some type of compliance violation. I think if I had to guess that that is more significant and a bigger problem and a harder nut to crack.

Toni Dechario 18:38
Can you give some examples, some kind of concrete examples about what you mean by people who think that?

Evan Norris 18:44
Yeah, I think, you know, I think in particular with, you know, complex regulatory regimes I've certainly seen in my time since leaving government, examples where big companies all have mature compliance organizations, you know, good lawyers, good compliance professionals, good leaders, and understand that, you know, a significant part of their business and their ability to succeed is not just doing their business well and making money, but is having a strong compliance organization. So, everyone's rowing in the right direction, in the same direction. And yet, when you get down to the level of the people doing the work, while everyone understands at a big level, because they do their annual compliance trainings, they know what the core regulatory regimes are that they've got to comply with, really don't understand how their daily work fits into that bigger puzzle. So, I'm thinking here about whether it's about money laundering or sanctions or data integrity, various types of processes where, when you break it apart, there are a lot of people contributing to the functioning of the business, where some misstep or some misapprehension of what the rules are can really set the organization down a bad path. And I've seen examples where the individuals sort of fulfilling the roles that are quite significant in terms of whether the company commits a sanctions violation or commits a money laundering violation, for instance, don't understand how their job relates to being able to stay on the right side of that equation. Just don't get it and not because they're not good, smart people and dedicated employees, but because it's one thing to know conceptually what the law is and what the basic things are that can't be done, and it's another thing to translate that into the minutia of day-to-day tasks which are in our complex business world are highly complex and often changing and that translation, I've found is really hard to achieve, both hard for the compliance organization to adequately communicate to everyone for doing their jobs. What does it mean for you specifically to help us not have a violation, and then for the people doing it, being able to translate what they learn in their trainings into what you know, inevitably, is some amount of discretion they have in carrying out their day-to-day jobs that sort of just, I see it as a complexity issue, and it's just awfully hard to get that, to get that right.

Toni Dechario 21:51
You get kind of caught up in the day-to-day of what you're doing, and forget to again, pause and take a step back and look at the bigger picture and how it fits in. How do you advise clients to address that problem, to address that issue?

Evan Norris 22:09
I mean, this is the, this is the, the hardest piece, I think.

Toni Dechario 22:12
And hard to generalize of course, and every example is its own thing.

Evan Norris 22:15
I mean, I think there are a number of things where I think. Certainly, you know, one opportunity to really get at this type of issue comes from a misstep, comes from a problem. A client has had a problem with a regulator or has had a problem that they've discovered internally that has, you know, resulted in some type of sanction, then that focuses minds, and it focuses energy on how to fix things, how to remediate and get it right. And clients that are really, I think, successful, understand that that does present, as painful as, whatever the resolution of the problem may be, it presents an opportunity you have sort of wind behind at your back, if you've got, you know, leadership focused on the fact that we can't let that happen again. And we have, you know, remediation commitments, perhaps to a regulator that we need to meet. And one thing that I think that organizations do, and that gives them a chance to really make progress in this area, is that there's been a misstep, and so now they're trying to fix it, and they're putting energy into that. The hard thing, of course, is, while it's understandable that you might put a lot of energy to make sure you don't do that thing again, that doesn't necessarily help you in sort of figuring out how to sort out what all the unknown risks are that are unrelated to whatever the misstep is. You know.

Toni Dechario 22:15
Or potentially not unrelated,

Evan Norris 23:44
Or potentially not unrelated. So, to me, and, you know, the conference that we did a few months ago, I've been thinking quite a bit about behavioral economics and Gary Klein, one of the folks we talked to then.

Toni Dechario 24:02
He's also been on a podcast.

Evan Norris 24:04
Yeah. So, he has this lovely idea, which I know is quite well known about, the pre-mortem, right? And this idea for organizations that I think can be most successful is trying to identify things like that. How to engage both the compliance folks as well as the business folks in interesting discussions about what their day-to-day work is and where there are pitfalls. And so, one thing that was interesting about what Gary talks about there is, it's sort of a method of forcing people to, not just about compliance, but before you go down a path of whatever the new project is, say, all right, assume this thing failed, why did it fail? And that's, to me, a good way of causing people to think about something differently.

Toni Dechario 25:04
It also, you know, he described the pre-mortem on this podcast last year as well. And I think it gives permission in a way that the question, what could go wrong doesn't, right? It's, you don't, if it's my idea and I'm your boss, and I'm asking you, what could go wrong, you don't want to tell me. You know all the ways in which my idea is terrible, necessarily. But if I tell you it has gone wrong, and you need to help me figure out what happened, it's an entirely different mindset.

Evan Norris 25:36
Yeah. And you can see that being successful in a in particular in a business context for a company, because the value of being able to start to have that discipline, to engage in that type of discussion before you embark on the project is clear enough. If you think that this will help you have more success, you know, in the business process, then there's no real barrier for organizations to adopt that type of thing. I think it's tougher in the compliance context, because to me, the bigger barrier is people associate, have a tendency to associate compliance training, all these things as just being boring, right? And they don't bring the same level of attention and energy to the compliance discussion, unless something really has gone wrong, they don't bring the same level of energy and attention to it, they would do a business process. And so the question to me, in talking to clients, especially those that are not dealing with a crisis, but rather trying to just improve their overall compliance organization, is how to engage people and to think specifically about the work that they do and how, if they haven't identified what all the risks are adequately, it can lead to real problems. That I think is the single most difficult thing to do, how to make compliance effectively interesting, because if it's boring, it means people aren't paying attention, and means they're not really taking lessons, and they're not thinking carefully about that aspect of their work.

Toni Dechario 27:08
There's also an issue, I think, when it comes to compliance, because there are so many rules and regulations, you can kind of leave your judgment at the door, right? It's kind of, you're just like, going to follow the letter of the law and not think much about the spirit of the law. How do you, in heavily regulated industries, get people to embrace the spirit of the law and not just the letter of the law?

Evan Norris 27:36
I think it is about trying to not have it be all normative, right? Not have it all be messages that you commonly see in compliance trainings about doing the right thing, though that is important and critical, of course, and you have to have it. You know, adding another element here, which is, if you can make this part of the work a challenge and get people into the habit of, whether it's through a pre-mortem about compliance, making it interesting such that they want to engage. I think that, to me, seems like the best way to get there, that if you can start to have discussions about risks and about compliance challenges in a way that people find actually stimulating and interesting, I think they have to be engaged. I don't think it can be passive. I don't think it can work through a, you know, a course you take. Again, you have to have the online trainings, and you have to know all the rules, but I think the ability to take it to another level requires interaction, right? We all know that no one's really able to sustain enough attention to something that they're just listening to, to be able to identify new risks that haven't been identified before or take that next level. And so I think creating and stitching into the day-to-day work, some type of regular engagement between legal and compliance folks and the business folks that sort of forces a real conversation about, you know, here's a new rule, let's, you know, strip this down and go back to basics here. Make sure everyone knows why we're doing what we're doing and isn't simply sleepwalking through, maybe we've been sitting on a violation for a long time, or maybe this new rule is going to expose something, don't know, but let's just use this as an occasion to talk through what is our process and how does it make, how does it ensure compliance with this organ, this new rule. And forcing people to talk and to be able to explain it, I think hopefully, can be interesting, but certainly it can do is it can identify, if you have, you have people, even at mid-level management or senior management, who don't really understand the thing I talked about before, which is how their day-to-day work relates to achieving compliance with the rule. The whole objective of the business is not to be spending time doing this. And yet, if you could have this type of brainstorming session that you might see with a new project connected to compliance and surrounding a new rule, for instance, and people actually engaged with that discussion, you could imagine that that actually starts to surface things that you know, passive participation and trainings won't.

Toni Dechario 30:44
And I think probably also builds a sense of kind of back to our accountability theme, a sense of ownership, that those online trainings isn't going to create, and that the kind of more passive acceptance of compliance requirements isn't going to create. There's this kind of active ownership of how your work affects outcomes. I wanted to talk a little bit about the problem of recidivism. I think that it's a somewhat widespread problem. We tend to see sometimes organizations getting into trouble with kind of a whack-a-mole approach. Often getting to the root of an issue is expensive, and I suspect that you spend a fair amount of time encouraging your clients to get at a root versus at a symptom. I'm curious about what kind of reaction you get. What do you see as kind of an appropriate response, organizational response to, to misconduct within an organization?

Evan Norris 32:03
I think it's really, it really does come from the willingness to see it as an opportunity. So often with clients, even in an internal investigation related to some type of misconduct, there may be appropriate disciplinary action to be taken, but quite often, the majority of what we might end up recommending in terms of changes isn't at the level of any individual personnel, it's about processes to ensure that it doesn't happen again. And I think there's a natural desire by people, especially the further removed from the issue, the further removed they are from the issue, to want it to be as coherent and simple as possible. And so this must be about that person or that group of people, and so deal with them and move on. But so often that the real answer is there might have been a person or two that was engaged in some type of misconduct, but if you look at it seriously, you peel it back, there are many different areas that would benefit from real attention and a review and, you know, a willingness to change, even if it's not sort of specifically and sort of directly linked to what happened. And so, I think the organizations that are, see the opportunity coming out of out of out of some misstep, to make real changes at that level, I think are the ones that have much more success than the ones that try to take as narrow of an approach as possible, who see whatever happened is just being about a bad apple. That's likely the surest way of guaranteeing that you'll see a repeat of it.

Toni Dechario 34:09
It's kind of often, isn't it a form of willful blindness, kind of, I don't want to know. I don't want to, I don't want to find out. In part, you know, I spoke to another lawyer recently who has a great phrase for not wanting to know, which is fear of finding out, but I think you know he was referring to finding out outside of having counsel, find out, because, of course, if you have a lawyer, find out they don't have to tell anybody else, and you can, you can fix the problem. And so what would you say is the main reason people don't, in the case of working with a law firm where they have, where their lawyers don't have to tell anyone. What would you say is the kind of driver behind why people don't want to do this? Is it primarily like this is just going to be a lot of work and a lot of money, and I want to move on from this?

Evan Norris 35:11
Yeah, I think it's, um, I think people view it as expensive and as detrimental to the bottom line and as distracting from the core mission of the organization. And while there may be expense, certainly is expense associated with trying to deal with one of these issues, I think the folks that can look further down the field and see what happens if you don't deal with a problem well, and watch, look a few more moves down the chessboard. I think know that, again, you use the opportunity of the problem to bolster the compliance work that invariably, everyone's got to be doing, because that'll not only help you make sure that this thing doesn't happen again, but also just make progress, sort of more broadly, and getting the organization more and more compliant. I think some folks really get that. A lot of our clients really get that, that if you take too narrow of a view, too short term of a view, that you're really just creating further problems down the line. But there are, of course, always those who want every issue to be as narrow as possible and as small as possible. And you know, in part, it's a little bit like the soccer officials from a long time ago. It's, it's, there's a natural tendency when you don't see anything happen, to start to believe that that's not an issue. Just cross it off your list, right? And I think there were a lot of people who did that and that investigation, that we found, right, who just got used to it, and it wasn't particularly special at a certain point. That's just what they did when they signed contracts, they took bribes, and you know that that happened over as years went into decades, then that's just part of what that job entailed. And I think similar for anyone else, like there's the likelihood, if you deal with a problem in your organization in a narrow way, do as little as possible to remediate it, there's probably a likelihood that you know, there won't be any major consequence that attaches to it. And so you might win that bet. But I think it also means that if you lose that bet, the consequence of being found out or the consequence of what may come down the road is much, much bigger. I haven't taken that approach. And the organizations that are more successful, I think, realize they don't want to take the bet of the narrow view and getting away with it, but they want to take the sure thing, which is, you know, deal with problems holistically and try to really continuously improve. And what that means is not that you'll ever be perfect or that problems will cease happening, but just that it really does reduce your risk long term of any particular problem emerging that has a really catastrophic impact on the organization. I think they're right about that.

Toni Dechario 38:27
Is there anything we didn't cover that we should?

Evan Norris 38:30
Yeah, the one thing I will say that as I was thinking about this conversation today and pondering the FIFA case, was one of the moments that always stuck out to me, a fellow who was caught on a tape recording, of course, he didn't know he was being recorded, talking about the risks that he faced, and this was at a point in our investigation when a lot of people were aware there was something going on with law enforcement. And smart guy, the head of a company, you know, said something like, you know, describing what they were doing. I think he was going on and paying the bribes, you know, is it bad? Yes, it's bad, you know. Is it illegal? Yes, it's illegal. If you look back in the context of what we've been doing all these years, you know, it's a problem, and asking himself the question, answering the question, was completely aware of it. And again, as I was thinking about coming and having this conversation today, I thought, you know, if I were sitting on top of one of these organizations, one thing I would want to be trying to figure out is how many people are sitting inside my organization where, if their mind was really focused, that this guy's mind at this point was focused, he was scared, if you really can focus people on risk, how many people are there in the organization that as eloquently and precisely identify, here's where the risks are, right? And it's not just, you know, they're doing something illegal, but if really put a lot of energy into it, you know, pretty certain that within every organization, whether it's through a pre-mortem or some other mechanism, there are people who are seeing risks, and that's not coming out right, that isn't, that hasn't found its way to the compliance folks or the legal folks or whomever. And the task, again, come back to where we started on how to make organizations more successful, I think, is how to identify those people and get them to participate in these discussions, because you know that there are people who know, you know, there are people who sort of do think about these things and if you can really force them to engage consistently, if they can identify that there's a problem that's looming, that can really pay real dividends if you can get them to identify it, and then you could figure out how to fix it before it becomes a really big problem.

Toni Dechario 41:05
And get them to kind of feel a sense of ownership of, I have this information, therefore it's my responsibility to say something. I wondered, when you were quoting this person who said, Is it wrong? Yes, it's wrong. Is it illegal? Yes, it's illegal. There was an implicit, but after, after that.

Evan Norris 41:30
None at all. And this one, that's part of what was so interesting. It wasn't, yeah, nothing defensive. It was just a pure, here's what's happening right now. This is bad. We're in some trouble, and we've known it, known it for a while.

Toni Dechario 41:47
Because one of the, one of the things we've been talking about this season is also the concept of rationalization as such a powerful kind of mental tool that we have, and we almost automatically rationalize something that we want to do. And, you know, the task I think of helping, of trying to pause again before we automatically fill in that rationalization, I think is an interesting one, interesting challenge to try and figure out, how do you do that, and how do you kind of combat the rationalizations that people have, that we all have, for whatever it is that we want to do?

Evan Norris 42:33
Yeah, no, I think that's right. And I think again, going back to Kahneman,

Toni Dechario 42:39
it wouldn't be a culture podcast, if you didn't quote him.

Evan Norris 42:42
And the thing that he talks about that I always find interesting as I think about this subject, is, and I try to apply it to my own life, is we just have such a strong desire for things to be coherent and neat and tidy that we've developed these great mechanisms to just get rid of the random mess. And very often the answer is, what just happened is random, or what just happened isn't sort of easily describable by something neat and tidy. It's really complicated, but we all want it to be simple and straightforward in every aspect of our lives. And sometimes that works, and sometimes that's an okay sort of mechanism, right? But I think in this area, how to stay comfortable in the complexity and in the, you know, clear-eyed thinking about risk and what the causes of risk are, there's really such a premium on encouraging people to not make it neat and tidy and have a simple answer. But if the answer is, there are 18 elements to this puzzle, then that's the answer, or if the answer is, there's some randomness and there isn't always clear cause, then that may be part of it too, but not knowing that, that's a tendency we all have, and really trying hard to fight back against it in this area, I think is really an awfully important piece of this work.

Toni Dechario 43:24
Okay, that's great. Thank you. Last question, do you have any recommendations? You've mentioned Daniel Kahneman a couple of times, is there anywhere else that you go for reading, watching, listening, that you found useful to you in thinking about these issues?

Evan Norris 44:29
Gosh, I guess the irony is, sometimes I'll read things that are derivative of Kahneman, Klein, a few of these other good thinkers, but I always find they get oversimplified.

Toni Dechario 44:46
Because we want to simplify them.

Evan Norris 44:47
I end up going back original. It doesn't mean I have good answers on how to apply it to my work and to business organizations, but that's sort of part of the point of this stuff, which is there's no simple, there's no quick list, right? Making 10 bullet points about how to apply Dan Kahneman to business organizations. There's a lot of those lists out there, but they're not that rich and they don't really hit at the issue we're talking about, which is how to really engage in critical thinking about this stuff. So, in the end, I just go back to the to the original ones.

Toni Dechario 45:22
Thanks very much, Evan.

Evan Norris 45:23
Thanks for having me. Good discussion.

Toni Dechario 45:25
For more conversations like this, to watch a recording of this year's culture conference, or to access publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance and culture reform.

Summary

• New York Fed's Culture Initiative Overview 0:00
• Evolution of the Culture Initiative 8:24
• Susan Ochs' Workshop on Accountability 13:48
• Balancing Innovation and Integrity 23:08
• Recognizing and Rewarding Culture Carriers 30:59
• James Gorman's Perspective on Industry Change 37:45
• Future Directions for the Culture Initiative 40:39
• Closing Remarks and Acknowledgments 44:34

Ciaran Walker 00:00
The evidence suggests that majority of misconduct is actually situational. It's really good people doing bad things in the context of particular pressures that they find themselves under.

Evan Norris 00:10
And so, the question to me is how to engage people and to think you know specifically about the work that they do, and how, if they haven't identified what all the risks are adequately, it can lead to real problems.

Kelly Richmond Pope 00:24
I'm a barrel believer, like, let's study the barrel. Let's understand the barrel. Because, yeah, the apple, that's the start of it, but the barrel is the problem. I'm not a believer of there's one bad apple. I believe that the barrel has something wrong with it.

Joe McGrath 00:39
Professionalization is about influencing industry wide norms so that people can learn positive behaviors from their peers.

Jeremy Brisiel 00:49
This is Banknotes: Banking Culture Reform. The views expressed in this podcast do not represent those of the New York Fed or the Federal Reserve System.

Toni Dechario 00:59
Hello. Welcome to season four of the New York Fed's Banking Culture Reform podcast. 2024 marks 10 years since we held our first culture conference. So, we're dedicating this season to a topic that's animated discussion about culture and financial services throughout the past decade: the concept of accountability. What is accountability? How can it be nurtured on an individual, firm-wide and industry-wide basis? What grows in its absence, and how can financial services firms prevent the normalization of fraud, misconduct and other symptoms of low accountability? This was a topic at our conference this past spring, and we're bringing back three of those panelists, plus one co-author to dig deeper into these questions. My name is Toni Dechario, and I'm a member of the New York Fed's culture team.

So as part of our reflection on 10 years of the New York Fed's culture initiative, today, on the podcast, we're going to do something a little bit different. I'm joined by my colleague Tom Noone, and Tom and I are going to discuss the New York Fed's culture initiative a bit, and also highlight some of the moments from the 2024 culture conference that we weren't able to include in other episodes of this season, especially some of the other speakers that were at the conference. So hi, welcome Tom.

Tom Noone 02:08
Thank you, Toni. For listeners, I'm Tom Noone. I'm an attorney at the New York Fed. I joined the bank in 2013 as a litigator, but I settled down in the regulatory group soon thereafter. My day job involves the full regulatory alphabet, but as a side gig, I get to work with you, Toni and your colleagues in supervision on the bank's culture initiative, and we'll talk about how I got involved with that and our reactions to this year's conference.

Toni Dechario 02:37
I didn't know you were a litigator when you joined the New York Fed. I learned something new about you already today, I don't know if I've ever actually talked on the on the podcast about what I do on the culture initiative. So, I run what we call our awareness and dialog work, and that's all of the culture initiatives work that is kind of externally facing, that includes our conference, as well as this podcast and other aspects of it. Can you talk a little bit about kind of your role in the initiative?

Tom Noone 03:06
Sure, the lawyer in me, though, is required to say first that the views I express are my own, not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

Toni Dechario 03:16
JB says that for us in the opening.

Tom Noone 03:18
Okay, so on the culture initiative, I help out pretty much wherever I'm needed, and that's sort of in line with how I got started on this, which was my boss's boss's boss at the time, Tom Baxter, the legendary General Counsel at the New York Fed, told me that there was this cool project that needed some help, and I figure I was the new guy at the time and had time to spare, so I was assigned to it. And over the years, I've helped out at the conferences, and more recently, have run a group called the Education and Industry Forum, which brings together business school professors and bankers to work on some educational products that could be used in classrooms and in training programs at firms. So, we have a series of case studies, for example, that highlight ethical dilemmas facing junior employees at banks.

Toni Dechario 04:07
And actually, we should mention that some of those case studies can be found on the EIF's website. So that's the Education and Industry Forum for financial services culture, right? Highly googleable.

Tom Noone 04:21
And it's a webpage on the New York Fed's public website.

Toni Dechario 04:24
So, you have been, as you mentioned, part of the culture initiative, since its inception in 2014 Can you talk about kind of what drew you to the culture initiative, what initially interested you, apart from being told?

Tom Noone 04:37
The way the New York Fed came around to culture was very appealing. The whole culture initiative acknowledged from the outset that there are limits to what statutes and regulations can achieve in terms of behavior. And I liked the idea that laws don't have all the answers. This was, by the way, not the party line at the time. We were only a few years after the Dodd-Frank Act was supposed to ensure that we never repeated the financial crisis. But neither the Dodd-Frank Act, nor the crisis itself, really appeared to sufficiently deter misconduct, which was beginning to characterize the industry, frankly, in the minds of policymakers and the public. Now, this was a really big problem, because you needed public support during the financial crisis to take the steps required to sustain financial stability. And I think if the opposition to preserving the financial system were to rise from the levels of 2008 to something more consistent with the frustration people felt by the time 2012 rolled around, we'd have a very difficult time getting popular support to intervene if needed, and that would be sort of what they call, in Fed speak, a macro-prudential problem. But there are also plenty of what they call micro-prudential problems too. The industry really was facing a litany of scandals, some large and involving multiple firms, some small, involving just one firm, but it was becoming more than anyone was willing to tolerate. So, we needed a solution beyond a legal one. And the thought was, well, there, there are norms within firms, within the industry that influence the way people behave, and maybe we should start paying more attention to those. That's the origin of the culture initiative, and I thought that was really a humble and brilliant way of approaching supervision and the role of the central bank. To sort of get beyond the technicalities of law and regulation and look at other factors that motivate behavior.

Toni Dechario 06:58
So, I'll stay on the mission for now, before we get into kind of the implementation of that mission, have you seen any changes to that mission in the 10 years that you've been involved in this initiative?

Tom Noone 07:09
Well, there definitely changes noticeable at the conferences over 10 years. I remember the first conference, everyone being very nervous. Bankers didn't know if they were called there for scolding. The regulators didn't know what they would say if they were to scold, since our whole premise was we don't have all the answers, and the reason for convening people was to try to shine a spotlight on the issue, rather than chastise or command particular solutions. I also think that at the early conferences, there was a lot of convincing that needed to be done that culture is something worthy of attention from senior management, from senior policy makers and from all of the other people that surround the industry, from lawyers and outside law firms and journalists and academics too. And a lot of people were in the mode of convincing decision makers that this was a topic worth pursuing. When I looked around the conference room this year, I thought, well, we're past that, and people really are coming to say, well, here's what we think works, here's what doesn't work, here's what we know, here's what we don't know, but are curious to find out. And so, the conversation had just such a different tenor now than 10 years ago.

Toni Dechario 08:37
So, my origin story, I haven't been with the culture initiative for as long as you have. I joined a couple of years later, in 2016. And I came from having been a direct supervisor of firms, you know, within the Fed supervision. And what drew me to it was, as a supervisor, you know, having kind of direct insight into the firms that we supervise, having conversations with them all day, every day, essentially. It was so interesting to see that, like different organizations have kind of different personalities. And I think that's always true in terms of the way that people are going to approach their regulator, right? But I think it's, it was also true if you spend enough time at a firm in seeing interactions with one another, and kind of seeing patterns of behavior that then became outcomes, and trying to understand, like, oh, what's the line between those patterns of behavior and the outcomes and like, is there some place on that line that can be interrupted to try and resolve the outcome? And that was kind of what drew me to the culture initiative and to the questions that we ask. And I would say, you know, I haven't been there from the beginning, but in the years that I've been there, we've had a market kind of change in the types of conversations that we're having. Like you said, I think in the beginning it was kind of much more of a report out from the industry on, why did these things happen? Why did these scandals happen, and kind of, what are you doing to fix this? Whereas today, I think the conversation's gone much, much deeper, and we're asking actual experts, right? I think, you know, after a couple of years, we realized, oh, like we regulators are definitely not experts on culture, and the bankers aren't either. This isn't what they do. This isn't what any of us studies. And there are experts out there. There are all these people who study human behavior, whether that's like an anthropologist or a philosopher or neuroscientist or, you know, kind of the range of people that we can draw on, I think, kind of dawned on us at some point, and we expanded. And the other difference, and you mentioned this as well as I think we were much more focused on misconduct in the early years and kind of fixing misconduct. And we've evolved to kind of understand, like if you take something away, you have to fill it with something else. And so, we've become much more focused on, how do you generate positive behaviors, versus rooting out bad behaviors? That's still important, of course, but that we need to combine those.

Tom Noone 11:24
Just picking up on something you mentioned about your perspective as a supervisor and seeing that there are real differences among firms. We run a small program at the New York Fed for first-year law students, and these are people who, during the course of their summer with us, are interviewing for jobs at law firms, and they say routinely, oh, gosh, I've gotten to the point where I can't tell the difference among them. And those of us who've been at firms are able to say, wait a sec, no, there are differences. And it's really great to have people in with the perspective to look across an industry and give some feedback on what's similar, what's different, and where those differences matter. So, supervisors, I think, have a lot to add to the conversation that the industry, I think, is actively engaged in, because they bring a perspective that very few other people have.

Toni Dechario 12:22
Okay, so without further ado, maybe we can bring it all together and bring some of the conference to the podcast. So, one of the central questions we've been thinking about this year in all of our programming is how to create and sustain a sense of accountability. We've had several interviews on the podcast this year, and our interviewees actually were all speakers at our conference as well, and there were some ideas and suggestions from other speakers at the conference that we also wanted to highlight. So, we'll talk about a few of those now. And if anybody wants to watch the conference in its entirety, you can find it on our website. So, the first one I want to highlight was Susan Ochs who gave a workshop at our conference where she highlighted four different elements that can impact accountability, and she challenged the audience to identify ways that these elements can be adjusted to enhance people's sense of accountability. The four elements were autonomy, seriousness, group size and technology. And while I'd love to play them all, because she had a great take on all of them, the one that I'm going to highlight is group size. So, Susan describes a subway experiment example, which I really enjoyed, because I think it's relatable and very memorable as well as quite practical.

Susan Ochs 13:46
Okay, group size. There's some interesting research. This goes back. I know all my academics here will know this, there's research from the 60s that was conducted in New York City on a subway train, and researchers had an actor pretend to be in some kind of distress, and they monitored whether the number of people on the train impacted whether or not somebody came forward, right? Did people feel accountable to come forward? And what they saw pretty clearly was that the more people were on the train, the less anybody stepped forward. So, the larger the group you're in, the less you feel accountable to do anything. And this is a problem when you're in an organization that has more than one person, which I think most of us are in, right? So how do we, how do we navigate being in a large organization, right? So down here, you're feeling anonymous, you feel less accountable. Now you could say, okay, well, we want to just make sure we're creating smaller subgroups, right? We want people to kind of identify with a group that maybe is a subset of their larger division of their larger organization. And that's all well and good. The problem can also become you wind up with divergent subcultures, which you also don't want, right? So again, here, this is the idea of, can you create a space that feels smaller for people, so that they feel a little bit more accountability while also still staying connected to the larger mission of the organization, and again, trying to balance these two. If you're only talking about the large stuff, you can people can feel anonymous. If you're only talking about the small stuff, people can start to wind up in subcultures that are disconnected. So, you want to, like, find a way to connect those two. And so, there's some ways to do that, right? You can think about organizational groups, you can also help people understand their own specific role within the organization. So back to that Subway example, you can imagine if you were an EMT on the subway, on that train, you might feel differently about your level of accountability and whether you step forward than all the other random people on the train, because you know that you have a unique role and specific skills that are going to be valuable in this context. Now, once again, though, if you're in a whole train full of EMTs, you might be like, well, you know, Toni's got it, so I don't really need to worry about it, because everybody here is trained, right? So again, thinking about helping people understand their unique role and how it's important to this particular group and the larger organization.

Toni Dechario 16:07
So, like I said, I really liked that because it was very practical. I think group size is something that's often within our direct control. And I also really liked it because it touched on a theme that other folks talked about at the conference, as well as actually in our podcast this season. Evan Norris spoke to how important it is for people to understand how their specific skills and their specific roles are actually central to outcomes and actually make a huge difference. And you really need people to understand you matter, and this is the way that you matter, and this is why, you know, you really need to feel accountable for your piece of this.

Tom Noone 16:46
Yeah, this was, I think, one of the high points of the conference. And by the way, Susan is so good at these conferences. She's done a number of them, and she's the rare person who has a depth of knowledge both of organizational culture and organizational behavior and finance, and she can put the two together in a way that few people can. Now, I don't know Susan, but I often have the sense when we're done with some interaction with her, of being a junior associate again and being in Jennifer Newstead's office. Jennifer Newstead was a partner at my law firm. She's now the General Counsel of Meta, and she's hands down, the smartest lawyer I've ever worked for. And I would come out of the office thinking, oh, man, I wish I could play that back. Well, now, with Susan on this conference, we can, and it was really beneficial for me to be able to go back and listen to what Susan had to say slowly, because there's so much in there, and I think I'm just not quick enough to pick up on it in real time. But Susan's comment about the subway and this series of tests that I didn't know about hit home, and not just because I'm a straphanger, the comment reminded me of something I see very often in my day job. And Toni, you may see this too. We'll be in a meeting at the New York Fed, and no one wants to take accountability for something, and it's a particular thing: writing the first draft of a proposal. My colleagues at the New York Fed are really good at criticizing first drafts, so good, in fact, that no one wants to be the person to write them. But ultimately, someone has to do it. And I think that, you know, the larger the group, the more difficult it is to be the person to volunteer for this. But this, this is a real accountability problem, and it's something that we see in the supervisory context too, where there's a decision made by a group in a large organization, and this is just a fact of life, of how decisions are made in large organizations. Group, decision making has pluses and minuses. On the one hand, there's a potential to structure decision making with diverse inputs, but on the other hand, it's perhaps easy to be less risk averse when there's no personal stake.

Toni Dechario 19:01
To be less risk averse. So, are you suggesting that low accountability suggests high risk taking?

Tom Noone 19:08 Yeah, and that's why I think the UK introduced accountability mapping as part of its senior managers regime, and it's the same reason that Bill Dudley proposed performance bonds for senior leaders and material risk takers at banks at our first conference in 2014. They get at the same issue. And I think the other thought I had listening to Susan's comment again was that it really poses challenges to what people had to say later in the conference about designated naysayers.

Toni Dechario 19:41
But I want to back you up for just a second, because you mentioned a couple of things that listeners may not be super aware of. Accountability mapping is one. Can you briefly describe what that is?

Tom Noone 19:53
Sure, I think this was what some people see as the cornerstone of regulatory reforms in the UK that aimed at changing behavior in the industry, and this was part of a package called the senior managers regime.

Toni Dechario 20:10
A part of which we discussed with Joe McGrath and Ciaran Walker on another episode of this podcast this season, but we didn't talk about the accountability mapping.

Tom Noone 20:18
Sure, it has a longer name than senior managers regime. But for senior managers who are the leaders of firms and certain, I think, material risk takers, there are in the regulations in the UK, particular responsibilities that must have a person assigned to them as the accountable party. A couple of those 20 or so responsibilities, by the way, mentioned the word culture, and have to do with the culture of an organization, but others have to do with, you know, sort of key checkpoints and decision-making processes, especially around risk management. Having someone who is pre-designated before decision is made with accountability for a certain set of decisions and their outcomes gives that person skin in the game, because there's accountability to the banking authorities, I think, potentially to prosecutors too, for things that go wrong if you're assigned to that particular area.

Toni Dechario 21:17
And there's nothing like having your name next to something to focus the mind.

Tom Noone 21:20
Yeah, well, I think that it's originally about a hanging or something, but yes.

Toni Dechario 21:24
Oh goodness. Okay.

Tom Noone 21:27
Having your name on something helps too.

Toni Dechario 21:30
Yeah, yeah, okay. So, some really practical recommendations I think, coming out of Susan's talk were try to manage the size of a group, because the smaller group you have, the more likely the members of that group are going to feel accountable for outcomes and for making a decision and for owning that decision. Great. So, what were some of your favorite moments from the conference?

Tom Noone 21:50
There was one that stood out to me about whether you could sustain cultures of integrity and cultures of innovation at the same time, and this was a question directed to Gary Klein and Regina Joseph.

Audience Member 22:05
So, I'm curious what the panel thinks about whether there's any tension between a culture of imagination and a culture of integrity? Because it strikes me that maybe there are particular traits or norms that you would see in a really strong culture of imagination and creativity and innovation that might be at odds with one of integrity, just curious about what you think.

Gary Klein 22:29
So, the research, I mean, imagination, curiosity, we all resonate to those things. But the research suggests that someone who comes up with innovative, unexpected ideas, people discount it, because people distrust creativity and distrust novelty. And organizations that I've studied almost always say we want innovation, but you look at what they do, and they're afraid of innovation. And insights are disorganizing. And if you're running an organization, an insight is going to cause you is going to require you to make all kinds of changes. And so, there's a real barrier within organizations to listen to insights and to act on them.

Regina Joseph 23:19
I totally agree 100% and I've seen this over and over and over again, because I also come from a corporate background in addition to, you know, working in think tanks and everything. But I think that that is precisely the reason why having a system, having a process, you know, whereby you can mitigate some of those problems where there is a natural aversion to novelty. And, you know, yes, everybody wants innovation, but to implement a system whereby innovation is maintained as a paramount objective, that is virtually nonexistent in almost every single organization, and I've worked for Sony, I've worked for Liberty Global. I've worked in corporations that take innovation as part of their pride, and yet these are some of the most hidebound organizations in the world, because they have existing systems. You know that if you want to change that system to facilitate an innovation, there are going to be a million barriers you're going to have to cross in order to get to that, and that is difficult.

Tom Noone 24:27
What I really liked about the question and the answers was that there was a candid acknowledgment that sustaining cultures of innovation is really hard. And frankly, if you're going to do that, you better be very purposeful about it. But even then, it may not work the first time or the way you intended. And so, I really like that there's that dynamic to the conversation that I think represents a lot of the conversation we have at the conferences these days.

Toni Dechario 25:01
The thing that I really liked about that clip was also the acknowledgement that you have to be very intentional about kind of doing maybe some of the more practical and some might say, boring stuff to get that innovation, so you have to kind of lay the systemic groundwork in order to get people into that mindset, and to get people to feel comfortable like they can be creative and be accountable for raising issues. And so, you know, Gary Klein in this clip, doesn't describe the pre-mortem, but actually last season, we had him on the podcast, and he goes into detail on how exactly to conduct a pre-mortem. And it's actually a very specific exercise with very specific things you need to do. And I think that's actually been quite popular. He talked about it again at the conference, and then this season on the podcast, Evan Norris raised it as kind of something that really stuck with him, as something that he wants to practice. And I myself have practiced the pre-mortem. I did it just before the conference this year, in fact, and we came up with a number of things that kind of could have gone wrong, that might not have come up if I had just posed the question, what could go wrong, versus okay, it has gone wrong, what was it? I found it really effective. And then the system specifically that Regina proposed was quite different. She's a super forecaster, and she recommends to get good forecasts, to get people to raise up the information that you actually really need from them, you need to submit those forecasts anonymously. And what's interesting to me is one of these approaches could work in any environment, and a different approach actually might be called for, depending upon what your context is and how comfortable people feel speaking up.

Tom Noone 26:58
Yeah. And I think that you know idea of having a system to promote innovation isn't intuitive, so I sort of think of systems and processes as at odds with innovation. You're standardizing something. But Regina and Gary are both saying, in essence, that the revolution can become an institution, and I am cautiously optimistic that that's the case. There was another time that Gary had a method that really got me thinking or commentary on a method, and that's when he talked about how institutionalizing dissent doesn't always work out the way you want. The sort of having a devil's advocate assigned at a committee to, you know, to raise difficult questions, has two unexpected consequences. The first is that you know, everyone sort of looks at that person says, well, those aren't real challenges they're just their job is to make stuff up. And the second is, everyone getting back to the subway example, everyone thinks, well, it's that person's job.

Toni Dechario 28:08
Not my problem.

Tom Noone 28:09
To flag issues and criticize them. That struck me as important for two reasons. First, we tried the devil's advocate or institutional dissent process for you know, in our recruiting for that summer program I mentioned, and I thought it worked pretty well, but sitting there listening to Gary, it got me thinking, oh, crap, maybe it's not working as well as I thought. And second, it got me thinking about the role of compliance in general, because their job is to raise questions about, you know, adherence to not only public laws and regulations, but private policies and practices. And we at previous conferences made a big deal about saying that compliance needs to be at the table. They can't be siloed. They've got to be part of the business conversation and I'm wondering, thinking about Gary's comment, whether people sitting around that room are thinking, well, it's not my job to raise the concerns about this policy or that law, because, oh, that's compliances job. I don't need to think about that.

Toni Dechario 29:18
The same could be said for risk. And so, you really need to create systems that let people know, actually it is your job.

Tom Noone 29:25
Yeah. Exactly.

Toni Dechario 29:26
And here's the space in which you can say what you need to say.

Tom Noone 29:29
The process you have in place needs to anticipate that response. It needs to be informed by what we know about human behavior.

Toni Dechario 29:37
That actually segues nicely to the next speaker that I wanted to highlight, which is Constantinos Coutifaris. And he talks about culture carriers, and how, by rewarding culture carriers, you can help demonstrate to everyone else the types of behaviors that you want to see more broadly.

Constantinos Coutifaris 29:58
And I want to answer it by piggybacking on something that Kelly said earlier about how it is very difficult for new hires or junior employees to speak up and actually contribute to the culture. How do you make it safer for them? One way to do so is through creating psychological safety so that they feel safe to speak up. They're not reprimanded. Another way is through awarding culture carrier awards, which is casting a light and saying, okay, those are the role models of our culture that exist within the organization. So, emulate them. And then people follow their lead, and then it becomes sort of ingrained into the culture to behave that way. So how do you spot them. One of my favorite ways of how, you know, we first start spotting them with Adam on this research, is we went around, and we asked a simple question. We asked to individuals. We said, If I could talk to one person within the organization, where, if I spend 10 minutes with them, observing them, talking to them, I understand what culture looks like. The culture here looks like at its best. Who would that be? So, we kept asking that question, and then you hear, actually, the same name is going to pop up. And then we spend time with them and understand, what do they do? And we ran studies with hundreds of participants to understand how, you know, what are some of the activities that they do? And we really found two types of culture carriers. You know, one are the sort of the culture vigilantes, as we called them, which are the individuals who really go around and confront others, and really, it's your accountability agents. Really, that's what culture vigilantes are. So, they go around, and they'll see somebody behaving in a way that is inconsistent with the culture, and they'll go and productively engage with them and explain to them that that's inconsistent, right? And then the other type of culture carriers are culture reformers, and those are the ones that actually try to promote change and add new norms and values to help the culture grow, so that the culture doesn't become a cultural museum. So, the problem is, and I'll end with this point, is that organizations actually, when we looked at the performance evaluations of the culture carriers, they were actually lower performers. So, there were, there were rated as lower performers. And that makes logical sense into some of it. It takes a lot of time to actually be an accountability agent and go around and do that really important work. Also, sometimes managers themselves get defensive. It's like, so you're doing my work now, like, you know, as an employee, you're contributing to the culture. So that's reasons why they're rewarded, you know, not, not as highly as others. So, it's really important to reward all contributions, not just the work that you do. It's also how you contribute to the culture in other ways. And I think that's also consistent with this new proposed 2016 rulemaking on incentive-based compensation, how, and it's resurfaced now from the FDIC and others, of it's not just the financial metrics that should determine compensation, it's also non-financial incentives, and maybe carrier awards and recognition needs to be a non-financial metric. And I'm really happy to see some financial institutions actually having those type of awards, because I do think they can help make it safer to speak up from the bottom up.

Kelly Richmond Pope 33:28
I want to make sure I understand. Yeah, so the culture carriers get lower rankings, lower performance ranking.

Constantinos Coutifaris 33:34
Yes, they're rated as lower performers on average than the non-culture carriers.

Kelly Richmond Pope 33:41
But we should be, I don't want to be ranked lower, though, so that's risky.

Constantinos Coutifaris 33:47
Well, which is why I think performance evaluations, as I said, need to include not just performing your job, but also how you contribute to the organization in other ways. I think it shouldn't be lower.

Kelly Richmond Pope 34:00
Okay.

Constantinos Coutifaris 34:01
So, the people that literally like, have this and really make this really important contribution to the organization don't get any rewards from it, which is very unfair. They end up leaving. You lose essentially, those individuals because you don't evaluate them in a holistic way.

Kelly Richmond Pope 34:19
So, change the system, change that, and you'll get them. You'll be able to have this person, this culture carrier, award them.

Constantinos Coutifaris 34:28
And then other people within the organization will role model that behavior more, because they'll sort of see the benefit of it, the organization cares about it, awards, you know, culture carriers, you know, recognizes them every year. So that's the change that needs to happen.

Kelly Richmond Pope 34:41
Like an influencer.

Constantinos Coutifaris 34:42
Yes, yes, or accountability agent or accountability influencer, whichever way you want to put it, but yes.

Toni Dechario 34:48
So, I should note that the other speaker that you hear at the end there is Kelly Richmond Pope, who was also a guest on our podcast this season. And I really loved that exchange, because I think that her reaction is kind of everybody's reaction when they hear what Constantinos said about how culture carriers are often actually rewarded less than other people. You know, either because they're kind of doing their boss's job and their boss doesn't like that, or because they're spending all of this time trying to model appropriate culture behaviors, rather than just moving on and getting their work done. It takes time. And that was shocking to me.

Tom Noone 35:33
Yeah, I was thinking that you've got culture carriers and counterculture carriers, and you know, you want to make sure that your system for assessing and rewarding and promoting people promotes the people you want as culture carriers. Being a culture carrier seems to me to be value neutral, right? Your organization may have sets of values you desire and then other sets you don't, and you want to make sure the people you're promoting are carrying, embodying, demonstrating, instructing on the values that you want, not the values you don't. And I think what happened for a long time in the industry was, you know, promotions were based on financial bottom line and productivity, and not as much based on the values of an organization. And if you don't believe me, listen to James Gorman, who said just that towards the end of the conference.

James Gorman 36:30
So, I think you know, what's changed is time. Time heals. The weakest were wiped out. The professionalization of management was a major advance in the industry. There had been, you know, an industry which historically been built around whoever the best producers were, and that they may also be the best managers, but not necessarily so. So, I think there was a change in understanding of what it took to manage a complex financial institution, and those of us who lived through that crisis, which I did, never want to see another crisis like that again. So, we had a strong sort of moral incentive, not financial, but moral incentive, to ensure it didn't happen again, because it nearly, it nearly sank the whole economy.

Tom Noone 37:23
I'm so pleased James Gorman participated at this conference, not only because it was a nice sort of bookend to the decade. He was on a panel at the first conference. He was a speaker at the most recent one, but I'd also point out that James Gorman came and sat in the audience for many of these conferences, and he talked about why he did that and does things like that. And it's because he said that he wants to show that Morgan Stanley, his bank, is part of a broader community, and that, for me, was perhaps some of the best evidence that at the end of 10 years, there's been a change. Hearing the CEO of one of the largest firms speak, I thought credibly about the organization that he leads being part of a broader community seemed to tie into so many of the themes that we've been trying to shine a spotlight on for the last decade. Particularly the idea that the decisions that bankers make in their day-to-day jobs have consequences for the broader economy, for the lives that people lead far removed from Wall Street, and to hear a leader of the industry say that on his way out as sort of a parting reflection meant to me that something has changed here, and that's a reason to keep at it.

Toni Dechario 38:43
I think that sums it up beautifully. I can't top that. I can't, I can't add to that. That was, that was wonderful. Thank you.

Tom Noone 38:49
Well, that's very nice for you to say, Tony. But could I add one more thought, which is Paul Volcker wrote a memoir called Keeping At It. Paul Volcker is sort of the patron saint of central bankers, or at least of Fed bankers. And I want to say thank you to our colleague, Jim Hennessy, and you don't get to say thank you to your colleagues in public very often, and this is about as public as I get, but I really want to thank Jim, who leads the culture initiative at the New York Fed, for keeping at it, and for really, for me, representing so many of the virtues of Paul Volcker, of high mindedness, deep thinking, commitment to public service year in and year out. So, thank you Jim for leading us.

Toni Dechario 39:39
Thank you, Jim. So, with that, perhaps in closing, we can talk a little bit about what's ahead for the culture initiative. We do hold a conference every year in the spring, and of course, we've been putting this podcast out regularly every year. But there is one request that I want to put out, which is, we're always looking for ways to build bridges. So, as I mentioned at the outset, we bring together the industry regulators from around the world as well as academics, those in professional services that are interested in this topic, and kind of a range of people that are interested in both culture and financial services. And we think there's a lot of value in the cross pollination of ideas among those groups and in bringing kind of both an interdisciplinary as well as across industry perspective to this work. And so, whenever there are ideas about how we could do a better job of pulling people together and getting people to work on these problems in an interdisciplinary way, we're all for that. So, I would put out a request for recommendations in ways that we can better build these bridges. And then my final request is, I don't know if people know this about Tom Noone, but Tom, you're a very big reader, and you absorb a great deal of content on many interesting topics, culture being one of the big ones. And so, I wonder if you could share with us any books. I think, I think your primary form of content is books, but any books or other media that you find particularly helpful in thinking about these questions.

Tom Noone 41:37
This is the question that I like to ask at conferences, and you get a range of responses from, you know, what's the latest business treatise and management treatise, to some popular books on network science and evolutionary biology, but a few that I like, let me just I might highlight one, and that's The Silo Effect by Gillian Tett. I don't think we can talk enough about silos. Or as she says they're sometimes called in Japan, octopus pots. It's an issue that I think comes up again and again in culture. Now, in some respects, you can see every culture problem as a silo problem. But Tett's book is really, it's very readable, and frankly, I would maybe go from there to say, read anything by Gillian Tett. It's all very good. But then read broadly. I think some of the best insights I have about navigating the New York Fed's culture come from just reading novels, particularly of novels where you've got storytelling from different perspectives in the same story. So, everything from Bleak House by Charles Dickens to Lincoln Highway by Amore Tolls. Stories that tell a tale with multiple narrators, I particularly like. It's just a really great way to get inside people's heads, and to remind yourself that in every situation, context, there are different viewpoints that you should consider.

Toni Dechario 43:04
This is what it's like to have a conversation with Tom Noone. Thanks Tom very much. It's been great.

Tom Noone 43:11
Thank you.

Toni Dechario 43:12
For more conversations like this, to watch a recording of this year's culture conference, or to access publications and other resources related to banking culture reform, please visit our website at newyorkfed.org/governance and culture reform.