Group of Thirty suggests penalizing good conduct breaches with regular compensation adjustments
The Group of Thirty, an advisory body headed by former European Central Bank president Jean-Claude Trichet, has called for links between executive compensation in the financial industry and the ‘cultural standards’ of banks.
The group, which includes US economist Paul Krugman and former US Treasury secretary Larry Summers, says numerous financial penalties, investigations and regulatory actions against banks since the 2008 financial crisis indicate that financial firms are still failing to address serious cultural issues at the top of their organization.
‘Events that precipitated the global financial crisis and the subsequent issues that have emerged have revealed a multitude of cultural failures,’ the group writes in a report called ‘Banking conduct and culture: a call for sustained and comprehensive reform’. ‘A lot of work has begun in banks to deal with issues of conduct and behavior, but there are important gaps in implementation, and there is a need to sustain and reinforce these efforts to achieve lasting results.’
The Group of Thirty also calls on banks to ensure they are not rewarding executives who ‘do not meet a threshold of acceptable behavior in alignment with firm values and conduct expectations.’ It also suggests that regular compensation adjustments, with clawbacks and cuts to bonuses, are used to punish breaches and that banks ensure all executives are aware that misconduct will be punished.
The group further recommends the development of a set of indicators to measure whether a team or an individual is adhering to acceptable conduct practices. These include an appreciation for external factors such as press mentions, client surveys, client complaint data, ombudsman data and regulatory reviews. Internal indicators, it says, should include staff surveys, 360-degree assessments, compliance and risk management breaches, staff behavior and other factors.
Boards of banks should also set up separate committees to monitor compliance with corporate cultural standards, take measures to ensure potential whistleblowers know they will not be punished for calling attention to executive misbehavior, and create ‘dashboards’ to monitor progress toward improvement in their bank’s culture, the group suggests.
