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Directors Governance Center

April 18, 2017

William Dudley Addresses the Importance of Corporate Culture

In a post-financial crisis era of heightened regulation, increased regulatory enforcement, and renewed emphasis on corporate accountability, a recurring corporate governance theme has been the importance of corporate culture. As institutional investors continue to focus on long-term value creation, the impact of culture on the sustainable success of an organization is readily apparent. Corporations that neglect to build and maintain an ethical corporate culture that emphasizes compliance and transparency face greater risks than ever before.

William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, recently addressed the importance of corporate culture as it impacts corporate performance in remarks delivered to the global banking community at the Banking Standards Board in London, United Kingdom. While Mr. Dudleys remarks were intended for the financial services industry, they are nonetheless relevant to directors and organizations across industries and sectors.

Mr. Dudley began by asking that participants in the financial services industry engage in introspection. Specifically, Mr. Dudley asked that companies consider the question What are you for? in defining their core values and organizational mission: If you cannot answer the question what are you for, or if your answers do not make sense in light of your business, then it is time to re-examine your purpose.

After emphasizing the integrated role that banks play in our economic system, Mr. Dudley noted the importance of measurement when it comes to tracking an organizations progress toward a given objective. Further to the subject of measurement, Mr. Dudley discussed results from the Banking Standards Boards industry-wide benchmarking survey on corporate culture, which drew approximately 28,000 responses from workers in the financial services industry. In the survey, respondents were asked to agree or disagree with a number of statements that were emblematic of cultural issues in banking.

Mr. Dudley stated Nearly 30 percent answered that they would be worried about negative consequences if they raised concerns at work. That shows, perhaps more than any other finding, that there is still a long way to go in creating a culture for long-term success in banking. In addition, approximately one quarter of employees did not affirmatively agree that their organization puts customers at the center of business decisions. That is also of concern if we want an industry that is sustainable over the long term.

According to Mr. Dudley, the financial services industrys response to these findings is up to themthe obligation to create and preserve a culture where all employees and managers buy in to the theory that an organization should serve its stakeholders, beyond merely a focus on short-term profits. Critics have noted the risks of maligned compensation incentives that have served as a key driver of corporate misconduct in the financial services industry over the last decade. Mr. Dudley articulated the relationship between incentives, behavior, and culture as follows:
Incentives shape behavior, and behavior drives culture. If you want a culture that will support your long-term business strategy, you need to align incentives with the behaviors that will sustain your business over the long haul.

Finally, Mr. Dudley closed his remarks by providing a few concrete examples of why strong corporate culture flows directly to a firms bottom line and is not merely a social issue:*

*Good culture means that employees speak up so that problems get early attention and tend to stay small. Smaller problems lead to less reputational harm and damage to franchise value. And, habits of speaking up lead to better exchanges of ideasa hallmark of successful organizations.

*Good culture means greater credibility with prosecutors and regulatorsand fewer and lower fines.

*Good culture helps to attract and retain good talent. This creates a virtuous circle of higher performance and greater innovation, and less pressure to cut ethical corners to generate the returns necessary to stay in business.

*Good culture builds a strong organizational story that is a source of pride and that can be passed along through generations of employees. It is also attractive to clients.

*Good culture helps to rebuild public trust in finance, which could, in turn, lead to a lower burden imposed by regulation over time. Regulation and compliance are expensive substitutes for good stewardship.  

A transcript of Mr. Dudleys remarks are available here.