De Nederlandsche Bank – supervising culture directly
Based in Amsterdam, De Nederlandsche Bank is the Dutch central bank and is responsible for supervising the financial sector. An important objective of its current strategic plan is the restoration of trust in the financial sector. To recapture trust, it says banks must continue to work on an ethical culture, sound remuneration policies and sustainable business models.
The Dutch central bank concluded from the 2008 financial crisis that an organisation’s behaviour and culture had a significant bearing on the level of risk in banks and financial services companies
. As a result, from 2011, it started explicitly supervising behaviour and culture at the institutions for which it was responsible. The aim was to shed light on two main questions:
- What influence do individual actions on the one hand and group dynamics on the other have on financial performance, risk and integrity of the institution, and how does the prevailing culture facilitate desirable behaviour and restrain undesirable behaviour?
- What measures are needed to mitigate the risks related to human behaviour?
By looking at the root causes of behaviour, the bank believes that risk can be reduced and financial problems can be prevented, but it shies away from prescribing one particular culture. It believes behaviour and culture are matters for the board. Its own work focuses on verifying whether the risks attached to particular cultures and behaviours are managed properly. “This is why we expect institutions to keep evaluating the effects of their own behaviour and culture and to aim for ongoing improvements.”
From 2011 it assigned behaviour and culture to a dedicated Expert Centre and recruited a team of professionals with relevant expertise including governance, risk, change management and organisational psychology. Up to July last year, the bank had performed 54 assessments of culture. In 34 of these cases, it found fundamental risks in the area of behaviour and culture.
Among its concerns were that management boards did not generally have sufficient expertise in behaviour and culture, and there was still too much emphasis on content-based leadership. The stated intentions of the management were not convincing. Proposed measures did not always go far enough and were not consistently implemented. Executive directors did not sufficiently abide by the values they themselves set for their organisation.
The bank said it found that management boards in financial institutions do not always give due weight to the interests of stakeholders when making decisions. Important risks are thus overlooked or they are not discussed in sufficient detail and decisions are not challenged. Instead, there is often a tendency towards “consensus and optimism” and the perception may emerge within boards or parts of the organisation that dissenting opinions are not appreciated.
The central bank’s approach focuses heavily on the approach of the board and senior management. Supervisors spend less time looking at how culture is built up from the grass roots and on the use of techniques designed to embed desirable values. However, it says there should be an ongoing public dialogue aimed at accelerating the pace of change in the financial sector. The public must be convinced that the changes have filtered down to the very core of institutions.
The seven elements of an ethical culture, De Nederlandsche Bank, 2009, www.dnb.nl
Behaviour and Culture in the Dutch Financial Sector, De Nederlandsche Bank, 2015, www.dnb.nl