The Problem with Banks' Results-Driven Culture

Managing by the numbers has long been standard practice at banks. The reason is simple: Results are black and white. Employees are either ahead of the curve or behind it.

This managing approach has the potential to create a major problem. It can encourage employees to go to extreme measures — including lying and covering up subpar results– in order to reach key performance goals.

We see evidence of this issue in the near-constant headlines about banks running afoul of laws and regulations. The mortgage-securities settlements of Bank of America and Citigroup, along with the lawsuit against Barclays for allegedly misleading investors about its dark-pool trading, are among recent examples.

The issue is not that people working in banks are inherently duplicitous. It’s that they are under a great deal of pressure from top management, often operating under the perception that their jobs are on the line. Meanwhile, employees who would like to speak up and disagree with questionable behavior are afraid they will be punished if they do so.

Even banks not engaged in deceptive practices are at risk of inadvertently facilitating a dangerous environment because they, too, emphasize results without demonstrating a solid understanding of behavior. For example, a traditional loan officer's incentive pay is often driven by sales and profit goals, without any accountability for risk management.

Moreover, a results-driven culture makes it harder for banks to identify key problems and successes. Like an X-ray, it may give management a general idea of what's happening but obscure important details that can impact the diagnosis.

Banks will continue to wrestle with these problems — and the legal complications that follow — unless management builds and applies a scientific understanding of behavior. Bank overseers are already focusing on this issue. Martin Pfinsfraff, who oversees large-bank examinations at the Office of Comptroller of Currency, recently told the Wall Street Journal, "We look for patterns of behavior that reinforce a strong or weak risk-management culture both within and across lines of business."

Managers must understand the positive and negative behavior that drives results. With the effective use of positive reinforcement for actions that truly improve performance, they can increase the strength and stability of their banks.

One way to emphasize integrity and successful risk management is to pinpoint specific behaviors that are consistent with the desired culture at all organizational levels, so that employees have a clear model to follow. Bank management should correct any instances of unwanted behaviors and hold back from celebrating good results until they know the behaviors that produced them. Soliciting anonymous feedback from employees and customers on whether the bank is carrying out its commitment to its stated values can also help management gain better insights into the bank's success in exhibiting these desired behaviors.

Bank leaders must also work to shift the culture so that employees who spot problems feel comfortable coming forward. Punishing employees who try to shine a light on any inappropriate behavior is the worst thing a bank can do. Even more subtle examples of "shooting the messenger" will have a dampening effect on sharing bad news. But whether or not managers like it, hearing and accepting bad news is necessary for improvement.

David Uhl is senior vice president of consulting services for Aubrey Daniels International.