Supervisory framework for assessing conduct and culture in the financial sector Femke de Vries De Nederlandsche Bank June 17th, 2014

2 DNB The Asch Experiment

3 DNB Pre-crisis supervision

4 DNB Post-crisis supervision

5 DNB One of the causes of the crisis: not so much inadequate governance structures, but board and management behaviour within these structures People determine a company’s performance Risks relating to behaviour may already be apparent, while financially everything seems okay: Behaviour has predictive value with respect to future financial performance Early intervention may prevent future problems More rules alone will not prevent the next crisis Why supervision on culture & behaviour?

6 DNB Methodology

7 DNB Conduct and culture is one of the pieces of the puzzle Financial analysis (financial experts) Conduct and culture (psychologists) Assessment of business models (strategic experts) IT Risk (IT auditors) Integrity risk (experts)

8 DNB Culture Leiderschap: voorbeeldgedrag en bespreekbaarheid Besluitvorming: evenwichtig en consistent Communicatie: transparant

9 DNB Supervision on culture and behaviour  Het toezicht van DNB is gericht op het identificeren en voorkomen van risico’s die kunnen voortvloeien uit cultuur en gedrag.  Het toezicht van DNB is gericht op het beïnvloeden van instellingen om deze risico’s te verkleinen of elimineren.  Naast traditioneel toezicht (solvabiliteit en liquiditeit) en niet in plaats van.  Identifies risks that may emanate from behavior and culture:  both risk based and “at random”  Risk based in case of:  Incidents (financial or non financial)  Lot of changes in the board or sr management in short period of time  Financial problems  High risk appetite  Non compliant behaviour  Assesses these risks to cause institutions to eliminate these risks  Focus on the question whether leadership, group dynamics and decision making contributes to the (economical) performance of a firm  We will intervene in case of riskfull behavior or lack of follow up

10 DNB Decision Making + Board Effectiveness Desk researchInterviews Survey & Self- assessment Observations (meetings and log) Discussion of findings Reports First intervention Start of second intervention = tracking follow up Methodology

11 DNB What is your opinion?  Culture cannot be translated into audit standards  Assessment of culture and behaviour should be part of any SAI risk analysis  SAIs can play an important role in stimulating neccessary culture changes in public sector organisations

12 DNB Results

13 DNB Case-Findings

14 DNB Case-Supervisory approach Report (on paper)  Send to management and supervisory board => supervisory board and shareholder become involved, leading to several actions  Bank itself replaces CEO and CFO and look for new CRO. DNB is involved in short list and selection  Intensive follow up with respect to leadership, group dynamics and decision- making  New board is receiving coaching on behavioural change.

15 DNB Key areas Culture change requires permanent attention of directors and auditors

16 DNB General impact of supervision on culture & behaviour effect Inter ventio n cause Actual changes we see:  governance and staffing: changing board composition  changes in decision making processes:  more structured decision-making processes,  better preparation of decisions,  more involvement of key control functions,  evaluation of complex decision making,  organizing constructive challenge and debate  more facilitative leadership styles  better information-sharing between the management and supervisory board

17 DNB Final comments  Every organization and every group may be affected by leadership problems or adverse group dynamics  DNB has found risky situations pertaining to culture & behavior and has caused the institutions to eliminate these risks  We also found good examples  However, there is still a lot more awareness needed and improvements to be made, which will take a lot of effort and time (change takes time!)  Permanent Board commitment and attention for culture & behavior within financial institutions remains required to prevent adverse effects from behavior and insufficiently considered decisions

18 DNB What is your experience?  Our SAI is committed to an ethical culture and behaviour within our own organisation  Our SAI has invested in facilitative leadership  Our SAI systematically organises internal and external challenge, dialogue and debate  Our SAIs decision making process is frequently evaluated