Kevin Stiroh: The impact of the pandemic on cultural capital in the
finance industry
Remarks by Mr Kevin Stiroh, Executive Vice President of the Financial Institution Supervision
Group of the Federal Reserve Bank of New York, at the Risk USA Conference (delivered via
videoconference), 16 November 2020.
* * *
Good morning and thank you for the opportunity to participate today, the first day of what looks to
be a very interesting four days featuring a range of important and timely discussion items for the
financial sector. As I looked through the agenda, I was impressed with the diversity of topics the
panels will be covering, including traditional banking risks, emerging risks like climate change,
and the industry's response to the pandemic.
Today, I want to focus my time on the importance of a firm's culture in determining business
outcomes and how that culture may be impacted by the Covid-19 pandemic. Through my
remarks today, I will address two core sets of questions. One, what is cultural capital, why does
it matter, and how does it evolve? Two, how is cultural capital impacted by the pandemic? I think
we'll hear more about how the pandemic is impacting financial firms in a wide variety of ways
throughout the conference.
Before proceeding, I will emphasize that I am speaking for myself and my views do not
necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve
System.
What Is Cultural Capital?
First, what is cultural capital?
My colleagues and I introduced the concept of cultural capital for financial firms in a white paper
in late 2017 as a type of intangible asset that impacts how a firm operates and ultimately
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performs. Cultural capital is an input into a firm's production process that determines its ability
to deliver the products and services that it offers. It is analogous to physical capital like the
equipment, buildings and property a firm uses; to human capital, which is the accumulated
knowledge and skills of its workers; and to reputational capital, which includes the franchise
value or brand recognition of a firm.
More broadly, culture can be defined as the shared set of norms within a group that influences
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decision-making and is evidenced through behavior. Cultural capital is a conceptual way to link
a firm's culture, including its values, assumptions and behavioral norms, to its business
outcomes. For financial firms, it is not loss-absorbing in a financial sense like equity capital, but it
can be loss-preventing by influencing decisions, behaviors, and outcomes over time. As an
intangible asset, we generally see the impact rather than the thing itself. But, its impact can be
measured, assessed, and ultimately influenced.
In an organization with a low level of cultural capital, for example, behavioral risk is high.
Behavioral risk refers to behaviors within an organization that could potentially lead to negative
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business outcomes. In such organizations, behavioral risk is not effectively mitigated or even
considered, and the stated values of the firm are not reflected in the actions and norms of the
organization's members. Group think is prevalent and employees do not speak freely, or are
ignored, when they have concerns about the way their group is doing business. The letter of the
law may be followed but not the spirit, with illegal activities only coming to light when discovered
by authorities. "Conduct" is viewed as something that is only the responsibility of the compliance
department through a set of rules and controls. The outcomes stemming from high behavioral
risk reduce cultural capital, damage the firm and the trustworthiness of the industry over time.
In an organization with a high level of cultural capital, on the other hand, behavioral risk is low.
Employees refrain from taking excessive risks and they are unafraid of - and rewarded for -
raising issues up the management chain. When they speak up, they believe the organization will
take them seriously with meaningful responses. The organization recognizes and rewards
employees who understand and internalize the expectations of laws and regulations, and do not
view compliance as a checklist. In organizations with a high level of cultural capital, an important
factor in advancing to senior leadership is role-modeling behavior consistent with a firm's values,
assumptions and behavioral norms. These actions all add to the firm's stock of cultural capital.
Like other forms of tangible and intangible capital, cultural capital grows and shrinks over time -
purposeful investments and managerial focus can add to it, while neglect or misconduct can
reduce it. Depletion of cultural capital can adversely impact the firm's productive capacity and
value. This reflects, for example, changes to employees' attitudes and practices ("how we do
things"), as well as their beliefs and values ("the way things should be done"). In the Whitepaper,
mthey need to recognize the importance of this critical asset, be able to measure it, and
understand the types of investment needed to sustain it and the forces that may cause it to
depreciate.
Since the New York Fed began to highlight the need for a focus on culture reform in financial
services, measurement has consistently been raised as a challenge. While measuring culture
may not be as straightforward as measurement approaches for more traditional assets and
risks, it is possible to gain valuable insights through a multi-layered and patient approach.
Through the use of surveys, interviews, focus groups, behavioral analytics, network analyses,
and board effectiveness assessments, firms can triangulate from multiple inputs and develop a
view of how high or low their cultural capital is, both in an absolute and relative sense.
At a 2017 conference, hosted by the New York Fed, representatives from across the industry
came together to discuss how boards of directors assess their firms' cultures, hold
management accountable, the benefits of data and benchmarking, and finally, the role of
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performance management and incentives. Since then, several firms have started to use big
data to perform network analysis to understand how culture is transmitted through an
organization. Others have further honed their ability to gather qualitative data and interpret it in
new ways.
There is a greater recognition that there are no simple and straightforward metrics to tell them
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where they stand vis-à-vis cultural capital. Rather, these firms are regularly experimenting with
new ways to identify patterns within complex systems that are continuously evolving. A number
of firms have recognized that the data they gather must be contextualized. Cultural capital is not
a single statistic; one part of a firm could have generous stores of it, while another department or
geography requires more focused investment and attention.
From the accumulation perspective, building cultural capital means investing in the way the
organization approaches everything it does, including defining its purpose, setting its business
strategy and risk appetite, training, communications, decision-making, prioritization,
compensation practices, and how employees are incented to interact with colleagues, clients,
and customers. A critical part of sustained investment is that business leaders and boards of
directors see it as their responsibility to set the tone from the top. Modelling the desired behaviors
sets a powerful example and serves as a form of behavioral risk mitigation. All of these actions
reflect choices that a firm makes, either implicitly or explicitly, that can build cultural capital.
On the other hand, cultural capital can also decline or deteriorate as a result of internal choices.
For example, overt incidences of misconduct such as a trading scandal or a legal issue,
deviations between employees' actual experiences and a firms' stated values, or observations of
inappropriate behavior that is tolerated or even rewarded can all contribute to the depreciation of
a firm's cultural capital. This decline can be self-reinforcing as certain behaviors are rewarded
and individuals advance in an organization, or the composition of the workforce changes as
employees choose to work at firms with higher cultural capital.
The Pandemic's Impact on Cultural Capital
While the discussion so far has focused on how internal choices that a firm or its employees
make can impact cultural capital, it is equally true that external factors have the potential to have
a similar impact. For example, changes to social norms around what constitutes acceptable
workplace practices can alter behavioral norms inside a firm. The nation-wide racial justice
movement is another example of an external factor that could impact the internal culture, based
on the choices a firm makes in its response.
The current COVID-19 pandemic will also surely impact cultural capital in unpredictable and
enduring ways. Since March, our world and the financial industry have changed before our eyes.
Our workplaces were transformed overnight from offices to our homes. Our office mates now
include our spouses, kids, and roommates. And, our colleagues became voices on the other
ends of our phones or faces on our screens.
What does all of this externally-driven change do to a firm's culture? In the early days of the
pandemic, the financial industry and the official sector responded quickly and forcefully to ensure
that the provision of critical financial services continued despite the tragic health crisis, significant
economic and financial uncertainty, and substantial operational challenges. Many were focused
on solving the immediate problems and figuring out how to work remotely. This proved
surprisingly effective, at least in the short run.
From the perspective of cultural capital, this sudden and dramatic shift in how we work raises
multiple questions. First, how does cultural capital influence outcomes in this new environment?
How are we drawing on, or depleting, the cultural capital that already existed? Does this
environment pose new challenges regarding behavioral risk? And finally, is it possible to identify
new opportunities to build cultural capital in a predominately remote environment?
As we look across the industry, hear the experiences of firms and read the emerging literature,
like the recent report by the UK FCA, one can identify factors that are likely to impact, and
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possibly erode, cultural capital. I'll outline several areas where these dynamics may be at play,
including loss of personal interactions, severed networks, uncertainty, and decreased monitoring
and oversight.
Lack of personal interaction. The first dynamic is lack of personal interaction, which is critical to
forming trusting relationships. As trust, a cornerstone of a good culture, is built through frequent
interactions and reliable behavior, the lack of personal interaction at the workplace has the
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potential to weaken trust between colleagues, within teams, and across organizations. Trust is
a complex human emotion that allows individuals to have faith in colleagues to do the right thing
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and not cause harm. Is it possible to sustain this 'trust' in colleagues as frequency of
interactions decrease and the format of interactions make personal bonding more challenging?
While it may still be too early to understand the long-term impact of a fully-remote staffing model
on trust, it is interesting to note that over the last few years, a number of large firms that had
favored a highly remote workforce, including Yahoo and IBM, had begun to reverse course,
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asking employees to return to the office to increase personal interaction and collaboration. We
can perhaps learn by comparing firms that intentionally transitioned to a virtual work environment
with limited personal interactions, to those that relied heavily on personal interactions and were
forced into a fully remote posture. Indeed, we will explore how proximity impacts trust as part of a
panel on trust and decision-making that I'm moderating on December 2 for the New York Fed.
Severed networks. The second dynamic is severed personal networks. Beyond formal networks
and hierarchy within an organization, the value of informal networks should not be
underestimated. As I mentioned, the financial sector has been quite effective in maintaining core
services and operations during the pandemic so far. One hypothesis is that this success
reflects, in part, the development of personal relationships, teams, and networks over years, and
possibly decades. As people came together during the initial months on the pandemic, it is likely
that they relied on their existing networks and leveraged the strength of existing relationships.
With the elimination of impromptu, spontaneous interactions over coffee, in elevators, and
unplanned encounters, organizations need to understand the impact on communication,
collaboration, innovation, and comradery. Will networks and relationships depreciate? Is there a
heightened risk of silos? Are there missed opportunities for creativity in problem solving? Are
there insights and knowledge being overlooked? And how do all these influence dialogue, debate
and ultimately outcomes in the organization?
Uncertainty. The third dynamic is uncertainty. As many industries and organizations face
unprecedented businesses challenges, we know that employees are also facing unique personal
challenges related to their health, well-being and job security, both for themselves and their
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families. While we understand that this level of uncertainty can be paralyzing for individuals, we
should also be asking how this level of persistent and profound uncertainty may impact a firm's
culture. One potential risk is the potential for "action bias." When feeling out of control due to the
uncertainty of the environment, people are more likely to act quickly. They do this to feel as
though they "did something about" an issue when in fact, more thought and analysis would result
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in a better business outcome. Even for organizations that are not as directly impacted by the
pandemic, thought should be given to how uncertainty about personal and professional
circumstances impacts decision making, relationships, and behaviors in the workplace.
Decreased monitoring/oversight. The final dynamic is monitoring and oversight. Both internal and
external monitoring and oversight play an important role in ensuring behavioral norms are
maintained, sound processes and procedures are being followed, and there is open
communications across reporting lines. Limited contact with managers and leaders within the
organization has the potential to leave employees lacking clear guidance, feeling isolated, and
willing to take on more risk. In large complex organizations, this is also likely to vary across
business lines, heightening the need for clear and consistent leadership and guidance from
multiple levels within the organization.
In response to these dynamics, we have seen financial firms take a number of steps over the
past few months focused on mitigating behavioral risk associated with the pandemic and working
remotely. For example, some firms have leveraged prominent instances of misconduct and
customer abuses of coronavirus relief programs to reiterate clear expectations and standards
around integrity and personal accountability for employee actions. Others have intentionally
placed cultural leaders over businesses in need of a stronger control environment. This indicates
that the pandemic may be leading to opportunities to grow cultural capital, or at least ensure
practices are in place to ensure it is not eroded.
Finally, perhaps the experience of shared uncertainty could have a positive impact on culture,
particularly with respect to fostering greater empathy. I've certainly seen examples within my own
organization of people stepping up when colleagues that are under greater personal pressure
need more time to manage their external commitments. There has been much greater openness
and vulnerability among work colleagues - and greater vulnerability tends to encourage higher
levels of trust. We should all be thinking about how to ensure that we seize the opportunity to
"bake in" these positive changes.
Conclusions
To conclude, as we look back on the past eight months and begin building the next normal, I think
that the idea of cultural capital will prove to be enduring. The ways in which firms might invest in
their culture will undoubtedly change in the new work environment and we'll learn more about the
long-term impact of the pandemic, but the basic ideas that culture influences business
outcomes, that firms can build their culture through purposeful investment, and that culture can
depreciate if left unattended will likely persist.
To better understand this evolution, we should begin by examining each of the factors that
determine a firm's culture, pre-pandemic and post-pandemic, and identify the likelihood of events
or practices that have the potential to build or erode their cultural capital.
Thank you for your attention.
1
Misconduct Risk, Culture, and Supervision," Stephanie Chaly, James Hennessy, Lev Menand, Kevin Stiroh, and
Joseph Tracy, Federal Reserve Bank of New York, December 2017.
2
Edgar H. Schein, Organizational Culture and Leadership (2004). For a context specifically related to supervision,
see "Supervision of Behaviour and Culture: Foundations, practices & future developments,"
DeNederlandscheBank, 2015
3
Mirea Raaijmakers, "INTERVIEW: ING's behavioural risk team seeks to uncover 'invisible drivers' of risky
behavior", Reuters Financial Regulatory Forum, Henry Engler, January 10, 2020.
4
Kevin J. Stiroh, "The Complexity of Culture Reform in Finance," Remarks at 4th Annual Culture and Conduct
Forum for the Financial Services Industry, October 4 2018.
5
New York Fed Workshop on Culture Measurement and Assessment, June 2017.
6
Conduct, culture and Covid-19" Cara Bloomfield, Peter Ewing, Olivia Fahy, Nafa Ben Haddej and Ted
MacDonald, FCA, June 2020. "Citi investment bank boss predicts resurgence of offices," Financial Times, May
2020.
7
How to Prepare Your Virtual Teams for the Long Haul," Mark Mortensen and Constance Noonan Hadley, Harvard
Business Review, May 2020.
8
Supervision of Behaviour and Culture: Foundations, practices & future developments," DeNederlandscheBank,
2015.
9
Why IBM Brought Remote Workers Back To The Office - And Why Your Company Might Be Next " Forbes,
October 2017.
10
Don't Let Uncertainty Paralyze You", Nathan Furr, Harvard Business Review, April 2020
11
"Lockdown and crisis: why now is THE time to look at behavioural risks" Samhoud, March 2020