By Arab News
By Dr. Mohamed Ramady*
To minimize surprises and potential financial crises in the banking sector it has been argued that regulators need not only review banks’ financial records but also ask questions about their culture and board members’ behavior.
The reason is simple: Today’s undesirable behavior is the root of tomorrow’s banks solvency and liquidity problems, and the seed of a potential financial crisis.
The question then is whether corporate culture and behavior affect companies’ financial performance. Academic research indicates that they do.
How then do regulators go about identifying the major risks that may arise from culture and behavior to nip “bad” behavior in the bud?
Financial records might suggest that everything is fine and the company’s continuity is not under threat, but inherent corporate culture with board and senior management behavior may still pose risks.
Psychologists have highlighted that individual behavior and group dynamics can affect companies’ financial performance, integrity and reputation.
This occurs when there are strong-willed executives dominating the decision-making process, and matters. This can be made even worse if there are different opposing camps on an executive board acting for their own particular interests, combined with pliant senior line managers afraid to voice their dissenting opinions at board meetings due to job insecurity or misguided loyalty to their managers.
The overall aim of supervisory regulators like central banks is to try, as best they can, to identify behavioral and culture factors that can have an adverse effect on operational management and company performance.
Not many central banks have carried out such risk assessments, either because it is a new area for them or they do not have the suitably skilled staff.
It is difficult to impose a one-size-fits-all corporate risk culture oversight, as each business operates within its own frame of reference and customs.
Dealing with intangible risk factors, unlike traditional monitoring of financial results, is less easy to observe as they could be the tip of an iceberg, with most of what matters hidden below the surface, causing most of the damage.
This is where assessing group dynamics and behavior becomes important. One needs to better understand the underlying relationships between and among executives – is it one of collaboration or of competition at board level?
Secondly, attention ought to be paid to decision making, leadership and communication, and whether these contribute to a company’s sound and ethical business operations to reduce its risk profile.
One measure is to instigate periodic interviews with both board and executive management members, and other senior management, focusing on the individual’s role in the decision-making process and personal motivation and beliefs.
If such interviews highlight dominant leadership styles which force through preferred proposals, then the quality of decision making is considered to be compromised.
Another potential risk arises from the fact that dominant leaders tend to surround themselves with management in their own image, which might reinforce corporate unanimity and foster a so-called group think, leading to premature solutions and overlooking potential risk areas.
Dominant leadership sometimes requires opposition and dissent, as these type of leaders should cherish receiving such feedback instead of feeling threatened.
Proper communication channels are then essential, as even if an organization has a clear strategy, risks can arise if the company fails to communicate these effectively to all staff, and a gap develops between management and staff.
Style is also important, as too aggressive, blunt or rude communication will be counterproductive and undermine confidence between management and staff members, hampering an honest two-way discussion.
If that is the predominant company culture, then management will not have an opportunity to make an honest assessment of how staff really feel about the organization and its goals.
In the Gulf, most banks have both executive and independent board members; their backgrounds and experiences are noted in the bank’s annual reports.
Some are charged with overseeing certain functions such as remuneration, while others with more experience are tasked to provide an independent assessment on risk and audit matters.
Only those who know these personalities well are in a position to potentially identify who are the board members most likely to impose their views on others, especially in a culture that defers to someone who has previously held a senior public sector position.
A central bank regulator who might not know these individuals well, approves their appointments based on their resumes.
Carrying out regular interviews, as noted earlier, can provide regulators with a more objective assessment of the current board and management beliefs and culture dynamics.
Some might say this is one more regulatory oversight gone too far and let matters be, until of course problems start to arise and financial reports do not pick up. Fingers would then be pointed as to why and how certain people were allowed to be on the board of directors in the first place.
Organizational culture changes require time and patience. It should be seen as a complementing agent to senior management and board members’ responsibilities, not as a threat, making them embrace such changes and work with external regulators to gain an independent insight on how their company operates.
• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.