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The Asch Experiment

Supervisory framework for assessing conduct and culture in the financial sector Femke de Vries De Nederlandsche Bank June 17th, 2014. The Asch Experiment . Pre-crisis supervision. Post-crisis supervision . Why supervision on culture & behaviour ? .

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The Asch Experiment

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  1. Supervisory framework for assessing conduct and culture in the financial sectorFemke de VriesDe Nederlandsche BankJune 17th, 2014

  2. The Asch Experiment

  3. Pre-crisis supervision

  4. Post-crisis supervision

  5. Why supervision on culture & behaviour? • 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: • Behaviourhas predictive value with respect to future financial performance • Early intervention may prevent future problems • More rules alone will not prevent the next crisis

  6. Methodology

  7. Conduct and culture is one of the pieces of the puzzle

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

  9. 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. Methodology Reports Discussion of findings First intervention Start of second intervention = tracking follow up

  11. What is your opinion? • Culture cannotbetranslatedinto audit standards • Assessment of culture andbehaviourshouldbe part of any SAI risk analysis • SAIscanplayan important role in stimulatingneccessary culture changes in public sector organisations

  12. Results

  13. Case-Findings

  14. 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. Keyareas Culture change requires permanent attention of directors and auditors

  16. General impact of supervision on culture & behaviour • 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. Finalcomments • 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. What is yourexperience? • Our SAI is committedtoanethical culture andbehaviourwithinourownorganisation • Our SAI has invested in facilitativeleadership • Our SAI systematicallyorganisesinternalandexternalchallenge, dialogueanddebate • OurSAIsdecision making process is frequentlyevaluated

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