Pub. 5 2015 Issue 4

appetite statement)? Are people being promoted who represent the highest eth- ical standards that we seek to achieve? Metrics for the board to watch might include employee surveys, turnover in individual departments and other human resource problems, says Wat- son. Other metrics include complaints, overdue audit findings that haven’t been solved in the proper time period and compliance failures. Susan Ochs, a senior fellow at the New America Foundation, is developing an assessment tool that will allow banks to evaluate their individual cultures as well as benchmark their performance against peers and track performance over time. As part of a previous study of banking industry culture, “Inside the Banker’s Brain,” she says she found a problem with people not feeling com- fortable enough to speak out when they saw problems. “It starts to distort behavior,’’ she says. “[Employees] feel it’s better to stay quiet rather than speak up and be wrong about what they see.” She found five dominant mental models in the financial industry: a bias toward complexity, a desire for financial success and recognition of intelligence, a high level of self-interest and a short-term outlook, where people are expected to maximize revenue in every transaction and reap the fruits of their labor quickly. She thinks it’s not only big banks that have problems. She points out that it was common a few years ago to reorder overdrafts so the largest item hit the account first, which created a public perception problem for banks and a subsequent regulatory crackdown on overdraft policies. “The $35 [overdraft fee] eight times per day became the in- dustry norm,’’ she says. “I think culture is a concern for every institution.” As a result, many banks have begun to address reputation problems and focus on how they treat their custom- ers. Banks have developed risk appetite statements, and the largest banks have “qualitative statements,” which include values statements such as: We won’t sell NOT ONLY ARE BIG BANKS GETTING A NONSTOP BLACK EYE IN THE PRESS BUT REGULATORS ARE QUESTIONING THE ONSLAUGHT OF BAD ACTORS IN THE INDUSTRY. products we don’t fully understand. Those statements are brought into meet- ings whenever a decision is made about entering a new geography or introduc- ing a new product, says Scherf. JPMorgan issued a more than 100- page report last December following a series of scandals, including the London whale trading debacle. The report high- lighted efforts the company was making to rearticulate and re-emphasize its cultural values and corporate standards “with the aim of ensuring that em- ployees internalize these standards and live by them every day.” As JPMorgan CEO Jamie Dimon says in the report, it’s not enough to have well-articulated standards. “They must be embedded in the values of each and every em- ployee through continued training and reinforcement, and must guide and be evident in our actions.” At JPMorgan, changes include paying operating committee-level executives over a multi-year horizon, while making sure performance evaluations include a review of the “risk and control focus” of the executive. Anyone identified as a “material risk taker” for the organiza- tion, as well as operating committee members, get deferred stock awards subject to forfeiture years down the road if performance thresholds aren’t met. Such efforts are trickling down to smaller banks as well. Zions Bancorp., a $58 billion asset institution based in Salt Lake City, Utah, has been making changes for years to its compensation plans. More than 10 years ago, executives could earn as much as 400 percent of their target bonus if they exceeded perfor- mance metrics, but that has gone down to a maximum of about 120 percent of target, partly because regulators no longer accept such a high upside award. The 2014 stock awards for the CEO and CFO vest on a four-year schedule, but only if the company meets certain targets related to regulatory issues and stress testing. Zions failed its stress tests in 2014 but passed this year after deciding to sell a portfolio of collateral- ized debt obligation securities, among other changes. Also, the compensation committee introduced risk management effectiveness scores to help determine annual cash incentives for top execu- tives. The company’s claw back policy states that any employee’s bonus can be reclaimed, not just because it was based on inaccurate financial statements, but for “wrong doing” that impacts the bank, including reputational harm. Banks above $50 billion in assets have spent a tremendous amount of time and energy on governance over- sight and redesigning incentive plans, says Scott Law, a Zions executive vice president and director of compensation. “It’s really changed. There is far more emphasis on how the plans achieve risk balance.” He thinks a lot of the changes were necessary because the banking industry previously awarded incentives to employees with almost no downside if they put the long-term viability of the company at risk. On the other hand, the sheer size of regulatory reports can be overwhelming. He recently submitted a n Culture — continued on page 16 15 FALL 2015