Culture & Conduct

TCC - Culture Overview

FCA -Transforming for the Future of Work

Culture Overview

TCC

Olivia Fahy,

Head of Culture

Emerging from the fog: how will hybrid working shape company culture?

Nobody yet knows exactly what the future world of work will look like, and with the COVID-19 pandemic far from over, it’s likely to take some time to become stable. ‘Hybrid’ has taken first place as the descriptor of choice for the future workplace – a more flexible future that takes the best of office working and combines it with the benefits of the virtual workplace. Sounds straightforward enough, but as with any organisational change, it’s likely to be anything but.

The move to a virtual workplace in 2020 meant organisations were faced with the unexpected challenge of not only shifting to a remote-working model, but also trying to manage and sustain their culture in an environment that was suddenly completely dispersed. Culture is often described as ‘the way we do things round here’. It becomes much harder to observe, understand and manage when ‘here’ ceases to exist as a single physical place, instead replaced by kitchens, bedrooms and spare rooms across the country, connected by Wi-Fi and VPN networks.

As we start to take tentative steps back to offices, businesses are facing a new challenge – how do they cultivate and maintain their culture in the currently unknown workplace of the future?

An opportunity to remould culture

The length of time without direct social interaction with colleagues will have changed mindsets and eroded the norms that existed in the office. This isn’t necessarily a bad thing. Time away provides an opportunity to eradicate some of the previously normalised and therefore accepted behaviours that shouldn’t exist in the workplace. However, new behaviours and norms have also emerged as the workplace has become virtual, which firms will have to grapple with.

Organisations need to carefully consider what culture they want to bring into the future world of work, and can’t just hope for the best. It’s well known that culture change takes time – it’s deeply embedded within organisations and can be very resilient to attempts to change it.

Healthy cultures don’t just happen. Unless you’re a new company, you’re unlikely to have the opportunity of building your organisational culture from scratch, but, as cultures have fragmented in the prolonged time away

from the workplace, organisations are now being provided with an opportunity to re-set and rebuild their cultures. To do so, leaders need to be clear on what aspects of culture they want to carry forwards, and which are best left behind.

Cracks starting to show

As the novelty of working from home wears off, it’s started to feel much more like living at work. The prolonged time spent in the remote workplace, coupled with the impact of the external environment has caused cracks to appear that are reflective of unhealthy cultures. Microsoft’s 2021 Work Trend Index shows that 54% of global survey respondents feel overworked, 39% feel exhausted and nearly 1 in 5 say their employer doesn’t care about their work-life balance. As your employees are the people making the decisions that affect your business, these sorts of statistics matter - overworked, exhausted employees could be more likely to make decisions that lead to increased conduct risk. This also isn’t the type of environment that employers should want to cultivate or sustain as they move back to offices. Research also

shows that the isolation felt in our personal lives as a result of lockdowns is also being felt at work – networks have shrunk and companies have become more siloed than they were before the pandemic. You can’t bump into someone virtually; creating truly spontaneous meetings has proved a challenge and a lot of individuals have keenly felt the loss of this aspect of work-life. The loss of these types of spontaneous interactions can have a negative impact on both inclusion and innovation as, aside from the social aspect, they also broaden and reinforce networks and connect different areas of organisations.

The rising role of purpose

The social contract between employees and employers is also changing, especially as younger generations enter and move through the workforce. Employees want more from their companies than just a steady paycheck, and are willing to be vocal about it. We’ve seen the evidence of this over the last year – last summer, the global Black Lives Matter protests led to employees calling firms out for their failure to make any sort of real progress

in relation to diversity and inclusion, and more recently junior employees have started demanding change with regard to their working conditions, no longer willing to tolerate gruelling working hours just because ‘it’s the way things are done’.

This expectation for firms to both do and offer more, particularly from a social and environmental perspective, is ever increasing, not just from employees, but also from consumers, shareholders and regulators. The role of purpose in driving healthy cultures in financial services has seen a surge in attention in the last few years, elevated by the interest from the FCA who, in 2020, published a Discussion Paper sharing a range of insights on the role and importance of purposeful cultures in financial services. In the paper, the FCA said they wanted firms to ‘realise the benefits of having a purposeful culture’. Research published by the CIPD on Responsible Business Through Crisis shows that firms with a focus on values and purpose have realised these benefits during the COVID-19 crisis - organisations who had built responsible business into their core purpose

before the pandemic were helped through it as a result.

Purpose provides direction for the people that work for you, inspiring motivation and loyalty.

To do this, purpose needs to be done right – it needs to be more than platitudes, a snappy slogan or words displayed on the office walls and computer backgrounds. For purpose to make a difference it needs to be authentic, meaningful and embedded throughout an organisation, guiding decisions and behaviours. Employees will be able to tell the difference between leaders who are truly purposeful and want to build purpose-led organisations, and those who just pay lip service to the concept. If it’s the latter, then they might respond by going to work for a competitor whose organisational purpose resonates with their own individual sense of purpose.

Leading the way

Research carried out over two decades by McNulty and Marcus has found that crises are most often over-managed and under-led. The arrival of a crisis often causes leaders to shift into command-and-control mode however, the COVID-19 crisis has seen an evolution in leadership roles and styles to suit the virtual workplace. Hierarchies have been flattened, and skills such as listening, self-awareness and empathy - already increasingly recognised as core skills of effective leaders - proved powerful in enabling better connection and engagement with staff. Staff who, given the external environment, wanted to see leaders who were authentic, human and showed emotion, rather than remote, separate and invincible.

Leaders with these sorts of interpersonal skills are also those who will be more successful at creating an environment of psychological safety within their teams and organisations – another crucial ingredient for healthy cultures in the future of work. Having psychological safety at work means that employees feel they can freely express their opinions and

share ideas, even unpopular ones, without negative consequences. It is a well established ‘secret ingredient’ of effective teams that leads to learning, innovation and growth. Psychological safety also plays a key role in supporting inclusion and allowing diversity to flourish.

Diversity of thought

Building diverse and inclusive cultures should be a top priority for firms thinking about the future of work. A lot of efforts in relation to diversity are focused at the top of organisations, increasing diverse representation on boards and executive committees to reduce the risk of groupthink. However, diversity isn’t just needed at the top, and efforts should be focused throughout an organisation to build a pipeline of truly diverse talent – focusing on cognitive diversity as opposed to purely cosmetic diversity.

Over the last year we’ve seen increased flexibility in where, how and when people do their jobs. Continuing to allow and encourage

this type of flexibility could increase access to the workplace for candidates from a broader range of backgrounds, and make it easier for parents and carers to juggle their responsibilities.

However, putting policies in place to increase diversity will only get you halfway there. In financial services, despite efforts such as the Women in Finance Charter, senior levels of organisations are still dominated by men and continue to be nearly as male as they were 15 years ago. Many organisations have a better diversity balance, particularly in relation to gender, at more junior levels which is lost as employees progress. So, firms don’t just need to focus on increasing diversity, but also on understanding what it is about their systems, structures, processes and culture that is inhibiting the retention of diverse employees.

You shouldn’t write a prescription without first diagnosing the illness, and in the same vein firms shouldn’t assume they can create true diversity without understanding what needs to be changed within their organisation to increase and retain under-represented groups.

Trying to create diversity without inclusion isn’t sustainable - a sentiment shared by the FCA who have said on multiple occasions that the value of diversity will not be realised without an inclusive culture.

Research carried out by McKinsey has found that diverse groups, including women, LGBTQ+ employees, people of colour and working parents, are having the hardest time as a result of the pandemic, both in the workplace and with balancing home and work life. A new study also suggests that ‘Zoom fatigue’ is worse for women than men. This is the sort of insight and understanding firms

need to gather to ensure they build a future of work that is fit for all. Leaders have a real opportunity to reconsider and redesign their organisation’s systems, processes and structures so they work for everybody, and to underpin these with a culture that is purposeful, safe, diverse and inclusive.

Flexibility for a hybrid future world of work

There is not going to be a one-size-fits-all approach that can be taken and applied to the future of work. Organisations will need to determine what works for them and how they combine the best aspects of both the physical and virtual office to create a working environment that works for both the business and all its employees. Gathering employee insight to feed into any decision-making is key so that organisations put policies in place that address the true needs of employees, rather than the business’ perception of what is needed.

From those who love working from home and never want to return, to those who are desperate to get back to the office, and everyone in between – the challenge for firms is to design a future world of work with the flexibility to appeal to everybody, and to create a culture that will drive the behaviours you want to see in the hybrid workplace of the future.

Transforming for the Future of Work

FCA

If we cast our minds back 5 or 6 years to how we thought of or understood conduct, it is evident that we have already travelled some way into the future. The larger wholesale banks, among others, launched numerous conduct and culture change projects and the Financial Conduct Authority (FCA) itself, as a new regulatory format, came into being. The global pandemic is the latest proof that times continue to change and the world of work, not just in financial services but everywhere, needs to respond.

The pandemic forced a rapid change where entire industries adjusted infrastructure, policies and processes thereby enabling most of their staff to work from home (and the FCA was no different). Wholly new forms of conduct risk emerged and known risks spiked

to new levels. Think of the staff member of one bank using an ironing board in the bedroom as a desk while a roommate, who worked for another bank, took their turn at the kitchen table. Neither of them was operating under the usual access to information, level of supervision or had the benefit of nearby team members as they got on with the job. Both were deeply isolated and one year later continue to be or are tentatively emerging into another new environment.

Looking ahead, organisations are considering how best to create permanent hybrid work environments, but location is just one dimension.

Others include the evolving skills and behaviours that will be needed to maintain standards of conduct but also health and wellbeing. This leads to thinking about technical competencies as one aspect and character, values and habitual behaviours as another.

To progress conduct supervision of wholesale firms we introduced 5 Conduct Questions, we have since used these questions within our own Transformation to address from the outset the culture and behaviours we seek as outcomes as we transform the organisation.

The 5 Conduct Questions - Capsule History and Impact

The FCA was formed in 2013, a point in time when the financial services industry was deeply mired in condemnation and distrust.

There was a lack of familiarity with the conduct and behaviour landscape remembering that the terms ‘conduct’ and ‘behaviour’ were not as familiar in financial services as they are today. Within our published supervisory framework, we set out business model and culture drivers to assess the harm to our statutory objectives.

Within our retail firms and the treating customers fairly work the discussion on conduct and culture had progressed. The 5 Conduct Questions served to provide focus and some consistency of approach as we

embedded our focus on conduct within our wholesale firms. The first question was about identifying conduct risk. This was the obvious starting point on the basis that you cannot manage a risk if you have not identified it in the first place. A truncated version of the 5 Conduct Questions could look like this:

How do you identify conduct risks throughout the organisation?
How do you get staff to buy-in to your conduct goals and initiatives?
How do you support staff when they do buy in and want to respond?
What management information supports feedback and development?
What might undermine your efforts or be the next adverse surprise?

Board Chairs, CEOs, Global Business and Support Unit Heads all saw merit in the approach and especially as a regulatory initiative. Some firms requested that a specific definition of conduct risk be provided as part of part of the regulatory rules. However, they came to agree that it is an essential effort for firms to figure out for themselves how conduct risks emerge from their business models, staff behaviour and elsewhere and how those risks might be addressed. Every firm was different and could reap a benefit from its own exploratory efforts.

Meeting annually, firms updated us on their conduct initiatives, whether successful or not. Our resulting annual reports were immediately useful as a benchmark for innovation and progress and included a range of practical observations and insights including:

the importance of the CEO and business heads in leading the drive for conduct and culture change rather than a Risk or Compliance Department,

Shifting attention to assessment of the full lifecycle of products,
the importance of front-to-back coverage where initial efforts had concentrated almost entirely on direct, customer facing staff activity,
the introduction of ‘Behaviour at Risk’ as a concept to draw attention to the dynamic nature of conduct risks which can emerge suddenly (or even subside),
the introduction of ‘Tone from Within’ to signal the importance of developing one’s own moral compass rather than just guessing what someone you admire might do in a difficult situation. Tone from the Top continues to remain essential.

The 5 Conduct Questions package has since evolved into a business-as-usual activity in many wholesale organisations when reviewing risks. These questions now form an integral input into the assessment model used by the FCA in its supervision work. The package is a powerful toolkit that could be adapted for a wide variety of topics.

For example, replace the term ‘conduct’ with ‘cyber security’ as the context for each question. That particular adaptation served us well in our supervisory engagement activity on that topic.

Long before COVID-19 appeared the FCA had been pushing D&I initiatives within financial services firms as an essential element in driving improved outcomes, whether we were talking about reducing harm to customers or staff well-being.

Management attention has certainly become more focused on ensuring health and well-being and taken note of the impact the changed work environment can have on behaviour. Ensuring psychological safety and inclusiveness, where you make the best use of diversity in all its forms, has ascended the priority list.

The FCA’s new CEO Nikhil Rathi recently emphasised this growing importance, not only for organisations in general, but also on the regulatory agenda. In his blunt assessment of the need to improve and the regulator’s role in helping to drive this change, he posed a question for all firms to consider, whether your management team is diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?

When considering conduct within your firm, the potential for benefit and harm to consumer or market outcomes, diversity of thinking is key. Diversity of thinking requires both diverse representation and an inclusive environment that can tackle the risk of group think and encourage innovation. You need to ensure diversity of thinking on the topic by effectively engaging a wide range of contributors? Furthermore, is there an adequate state of psychological safety such that participants freely and fully respond and contribute?

Inclusiveness results from the evident degree of safety as an output rather than just having a range of participants present or invited. Focusing sharply, inclusiveness enables diversity and the benefits therefrom to flourish. Without such efforts to seek input and listen, progress will surely be tentative and in need of ongoing refinement.

FCA Transformation Programme

With an eye on the future, the FCA has embarked on a major Transformation Programme of its own. It seeks to address strategic drivers for change as well as the key risks it faces as an organisation in service of delivery on its public commitments. It is moving quickly to build the plan and high-level design, balancing the time required to get change of significant size and complexity right.

Attention to culture is often a component of large projects and culture change cannot be achieved by decree. It occurs over a period measured more in years than weeks or

months. Significant change occurs as a result of focused and concerted effort by senior leadership and those within the firm who have a disposition to lead even though they do not hold a notable position. Much more attention needs to be paid in advance to the potential impact on an organisation’s culture when introducing significant change.

The Transformation Programme involves multiple workstreams, a typical approach for large projects and change management. It is recognised that the achievement of culture change is the responsibility of each workstream, rather than a separate initiative of a ‘Culture Workstream’ or, say, the Human Resources Department.

Culture change needs to be forged by the workstreams together with staff. It is an output of delivering change in a particularly effective way not a product that will be introduced along with a software upgrade.

In order to raise the profile and importance of culturally important elements of its change programme, the FCA has applied 5 Culture Questions. It has then encouraged each workstream to work through the questions as a tool for addressing their challenges in an orderly way.

A small team seeks to coordinate the consistency of application of the questions by the workstream leaders and to keep the groups appraised of what is emerging, common or divergent, across the project as a whole. Being mindful of the importance of Diversity and Inclusion, the team includes a dedicated individual with Diversity and Inclusion as a specific focus who operates as a linchpin to other internal expertise and interest groups.

Here is our adaptation presented as the 5 Culture Questions:

What proactive steps are being taken at the design and planning stage to identify culturally relevant steps that will improve the achievement of FCA objectives?
How would you enable colleagues to understand, engage and buy in to the change needed to achieve intended outcomes?
How would you support colleagues in their efforts to develop and evolve, accessing existing and newly designed resources?
What management information would show direction, track outcomes and support effective feedback loops that contribute to continuing improvements?
How will you remain alert and respond to opportunities, threats, strengths and weaknesses related to your workstream?

Through this effort, the FCA seeks to identify at an early stage what the cultural impact might be from a potential change or how it is introduced or subsequently supported. The re-framed questions demonstrate once again how adaptable the 5 Questions toolkit can be. The approach entails an iterative process throughout the life of the project and beyond to ensure desired outcomes are supported. If organisations operated like this in the past, then we salute them. As we move into the future, such approaches will need to be more commonplace.

The 5 Questions is a classic coaching tool and such collaborative engagement sits tactically alongside our supervisory and enforcement work. Using this toolkit on ourselves to better manage internal development efforts reflects our determination and results in part from the industry demonstrating to us that it works.