The Post-Pandemic Priorities for Audit and Risk Committees

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Even as the Covid-19 pandemic continues to reshape the banking and financial services industries, forward-looking organizations are focusing on how they can adapt to a post-pandemic world. With many business processes and controls forever changed, boards of directors — including their audit and risk committees — acknowledge that their views on fundamental risk issues must change as well.

New Workplaces, New Risks
One of the pandemic’s most disruptive effects was the upheaval of the centralized workforce. For decades, employees gathered together in a central location to work. Businesses took great pride in these workplaces, even putting their names atop the buildings in which they were located.

However, the pandemic shattered that model — possibly permanently — along with the concept of regular office hours and the expectations that personal devices should not be used for company business. During the pandemic, employees worked from their kitchens and dining rooms, improvising as they adapted to new ways of operating that would have been impossible 20 years ago. Beyond the obvious physical, security and technical risks associated with this dispersal, board members should understand some of the less visible risks.

For example, corporate culture often is shaped from the ground up through casual workplace interactions, which can be lacking in a remote work arrangement. Similarly, if people cannot gather together physically to brainstorm ideas, innovation and creativity can suffer. Many executives also lament their inability to read body language, tone of voice and other nuances in employees’ behavior to spot potential problems.

These types of risks are inherently difficult to quantify. Nevertheless, risk committees should be aware of them and ascertain whether management is addressing them.

Of even more pressing concern, however, are the effects that a decentralized workforce has on a bank’s business processes and control environment. While the immediate responsibility for overseeing management’s response to these risks might be assigned to the audit and risk committees, ultimately all board members have oversight responsibility and should make a committed effort to understand these risks.

Audit and risk committee priorities
Previously, when audit committees addressed risks associated with business processes and controls, they had the advantage of operating in something like a laboratory. The bank controlled most of the variables such as access controls, approvals and validations. In the post-pandemic world, however, risk monitoring and mitigation efforts must address new variables outside the bank’s control.

One specific audit committee priority is the need to evaluate how a dispersed workforce affects the control environment. Controlling access to systems is an area of major risk; remote reconciliations, remote approvals and digital signatures also are important concerns.

While a virtual private network generally would be the preferred method of providing remote employee access, that capability often was unavailable during the pandemic. Other options became necessary. In addition, many controls had to be redesigned quickly, with little time for testing the adequacy of their design or the effectiveness of the implementation.

Now is the time for many audit committees to take a step back and look holistically at their banks’ control environments. In addition to system access, this overview should include controls governing the retention of sensitive data, timely execution of controls, coordination to resolve deficiencies and validation of secondary reviews.

In assessing such controls, committee members might be constrained by their limited understanding of the technology. Given the novel nature of today’s situation, audit committees should consider getting qualified technical assistance, independent of management, to evaluate the steps taken to accommodate the new work environment.

Strategic issues and board concerns
Both the risk committee and the full board should consider broader questions as well. At a strategic level, boards should explore whether management’s response to the pandemic is sustainable. In other words, should the new practices the bank established — including remote work arrangements — become permanent?

Bank management teams have issued many press releases recounting how successfully they responded to the crisis. As banks move into the post-pandemic world, board members should review these responses and ask whether the new practices will allow for growth and innovation so that their banks can thrive in the future while still maintaining a well-controlled work environment.

As they revisit documented policies, controls and procedures — and remeasure the associated risks — boards and management teams ultimately must decide whether the new control environment is consistent with the strategy of the bank and capable of sustaining its desired organizational culture.

2021 Compensation Survey Results: Fighting for Talent

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Did Covid-19 create an even more competitive landscape for financial talent?

Most banks increased pay and expanded benefits during the pandemic, according to Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors. The results provide a detailed exploration of employee benefits, in addition to talent and culture trends, CEO performance and pay, and director compensation. 

Eighty-two percent of respondents say their bank expanded or introduced remote work options in response to Covid-19. Flexible scheduling was also broadly expanded or introduced, and more than half say their bank offers caregiver leave. In addition, most offered bonuses to front-line workers, and 62% say their bank awarded bonuses tied to Paycheck Protection Program loans, primarily to lenders and loan production staff.     

And in a year that witnessed massive unemployment, most banks kept employees on the payroll.

Just a quarter of the CEOs, human resources officers, board members and other executives who completed the survey say their bank decreased staff on net last year, primarily branch employees. More than 40% increased the number employed overall in their organization, with respondents identifying commercial and mortgage lending as key growth areas, followed by technology.

The 2021 Compensation Survey was conducted in March and April of 2021. Looking at the same months compared to 2020, the total number of employees remained relatively steady year over year for financial institutions, according to the U.S. Bureau of Labor and Statistics.

Talent forms the foundation of any organization’s success. Banks are no exception, and they proved to be stable employers during trying, unprecedented times.

But given the industry’s low unemployment rate, will financial institutions — particularly smaller banks that don’t offer robust benefit packages like their larger peers — be able to attract and retain the employees they need? The majority — 79% — believe their institution can effectively compete for talent against technology companies and other financial services companies. However, the smallest banks express less confidence, indicating a growing chasm between those that can attract the talent they need to grow, and those forced to make do with dwindling resources. 

Key Findings

Perennial Challenges
Tying compensation to performance (43%) and managing compensation and benefit costs (37%) remain the top two compensation challenges reported by respondents. Just 27% say that adjusting to a post-pandemic work environment is a top concern.

Cultural Shifts
Thirty-nine percent believe that remote work hasn’t changed their institution’s culture, and 38% believe the practice has had a positive effect. However, one-quarter believe remote work has negatively affected their bank’s culture.

M&A Plans
As the industry witnesses a resurgence of bank M&A, more than half have a change-in-control agreement in place for their CEO; 10% put one in place in the last year.

Commercial Loan Demand
More than one-quarter of respondents say their bank has adjusted incentive plan goals for commercial lenders, anticipating more demand. Ten percent expect reduced demand; 60% haven’t adjusted their goals for 2021.

CEO Performance
Following a chaotic and uncertain 2020, a quarter say their board exercised more discretion and/or relied more heavily on qualitative factors in examining CEO performance. More than three-quarters tie performance metrics to CEO pay, including income growth (56%), return on assets (53%) and asset quality (46%). Qualitative factors are less favored, and include strategic goals (56%) and community involvement (29%).

CEO Pay
Median CEO compensation exceeded $600,000 for fiscal year 2020. CEOs of banks over $10 billion in assets earned a median $3.5 million, including salary, incentives, equity compensation, and benefits and perks. 

Director Compensation
More than half of directors believe they’re fairly compensated for their contributions to the bank. Three-quarters indicate that independent directors earn a board meeting fee, at a median of $1,000 per meeting. Sixty-two percent say their board awards an annual cash retainer, at a median of $21,600. 

To view the full results of the survey, click here.

Governance, Fraud and Corporate Culture: Sorting Through a Complicated Relationship

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At first glance, the relationship between an organization’s or financial institution’s fraud risk and its corporate culture might seem obvious. Even a casual observer is likely to assume that a high-pressure, results-driven organization — with a culture that tolerates or even encourages people to cut corners or find loopholes and succeed at any cost — is bound to be at greater risk of financial reporting fraud and other risks. A root cause of many major scandals or frauds is dysfunction in the organization’s culture, with recent history offering numerous examples.

However, in many cases, the links between an organization’s corporate culture and fraudulent activity are not straightforward or clear-cut. The role that an organization’s underlying culture plays in contributing to fraud risk is often subtle and difficult to quantify, just as the culture itself can be challenging to define with specificity.

The critical question is how to develop a culture that reduces the risk of fraudulent activities and encourages ethical behaviors. The first step toward addressing that question is to develop a general understanding of what corporate culture is, what factors contribute to it and the role it plays in effective risk management.

It is essential that bank executives understand the relationship between culture and leadership, along with the reasons why it needs to be managed.

Organizational Culture and Why It Matters
Today’s definitions of “organizational culture” or “corporate culture” vary widely, from simple expressions such as “the way we do things here” to more complex and technical explanations.

All variations, distinctions and definitions of “corporate culture” or “organizational culture” have one thing in common: They describe characteristics that are primarily intangible and broadly dependent on individuals’ perceptions and interpretations of events and corporate priorities. This makes it inherently difficult to measure critical aspects of the culture and even more challenging to quantify the culture’s impact on an organization’s risk profile.

Virtually all of today’s widely recognized risk management systems or frameworks recognize the implied link between organizational culture and fraud risk. Specifically, the Committee of Sponsoring Organizations of the Treadway Commission framework defines an effective control environment as one in which personnel at all levels “demonstrate a commitment to integrity and ethical values.”

Shaping Culture: Start With a Diagnosis
As tricky as defining and measuring corporate culture are, it is even harder to shape and develop it. Many would argue that an organization’s culture is not something that can be created or built. To paraphrase from an interview with MIT Sloan School of Management Professor Edgar Henry Schein, an organization’s culture is something that is learned, not created.

One measurement option is to begin with a survey of employees. In addition to blatant examples of management’s arrogance, pressure, noncompliance or lax controls, surveyors should also be alert to subtle signs that certain risky behaviors might be tolerated or overlooked, even if they are not encouraged overtly.

Developing a Positive Culture: A Balanced Approach
Whether the risks are obvious or subtle, there are many positive steps boards and executive teams can take to shape both the control environment and the organization’s broader overall culture.

The 2020 World Economic Forum paper proposes six initiatives designed to provide what it describes as “a holistic approach to organizational ethics.”

  1. Build a new vision for boards
  2. Improve organizational oversight
  3. Review mission, strategy, and purpose
  4. Identify and encourage ethical leadership
  5. Increase organizational diversity and inclusion
  6. Measure stakeholder trust

This approach is but one example of the dozens of models, methods, and frameworks available to help organizations shape and adapt their corporate cultures. Virtually all such approaches share some common themes, such as the importance of senior-level commitment to ethical behaviors and the essential value of audits and other conventional risk management tools.

Above all, any effort to mitigate the fraud risks associated with organizational culture must work proactively to engage employees — ideally through a combination of ethics and compliance training programs along with less-overt cultural outreach efforts. Ultimately, as the World Economic Forum paper notes, “creating and sustaining a strong ethical culture is the key to creating an organization that makes behaving ethically as easy as possible.”

Visit bakertilly.com for a more comprehensive discussion of the topic.

Exploring Banking’s What Ifs

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What if the ball didn’t sneak through Bill Buckner’s legs in 1986?

What if you answered the call to deliver two pizzas for 10,000 bitcoins in 2010?

What if Hillary Clinton lost the popular vote but won the electoral college in 2016?

Thought exercises like these can take you down the rabbit holes that many opt to avoid. But how about asking “what if” type questions as a way to embrace change or welcome a challenge?

Mentally strong leaders do this every day.

In past years, such forward-facing deliberations took place throughout Bank Director’s annual Acquire or Be Acquired conference. This year, hosting an incredibly influential audience in Phoenix simply wasn’t in the cards.

So, we posed our own “what ifs” in order to keep sharing timely and relevant ideas.

To start, we acknowledged our collective virtual conference fatigue. We debated how to communicate key concepts, to key decision makers, at a key moment in time. Ultimately, we borrowed from the best, following Steve Jobs’ design principle by working backward from our user’s experience.

This mindset resulted in the development of a new BankDirector.com platform, which we designed to best respect our community’s time and interests.

Now, as we prepare to roll out this novel, board-level business intelligence package called Inspired By Acquire or Be Acquired, here’s an early look at what to expect.

This new offering consists of short-form videos, original content and peer-inspired research — all to provide insight from exceptionally experienced investment bankers, attorneys, consultants, accountants, fintech executives and bank CEOs. Within this new intelligence package, we spotlight leadership issues that are strategic in nature, involve real risk and bring a potential expense that attracts the board’s attention. For instance, we asked:

WHAT IF… WE MODERNIZE OUR ENTERPRISE

The largest U.S. banks continue to pour billions of dollars into technology. In addition, newer, digital-only banks boast low fees, sleek and easy-to-use digital interfaces and attractive loan and deposit rates. So I talked with Greg Carmichael, the chairman and CEO of Cincinnati-based Fifth Third Bancorp, about staying relevant and competitive in a rapidly evolving business environment. With our industry undergoing significant technological transformation, I found his views on legacy system modernization particularly compelling.

 

WHAT IF… WE TRANSFORM OUR DELIVERY EXPECTATIONS

Bank M&A was understandably slow in 2020. Many, however, anticipate merger activity to return in a meaningful way this year. For those considering acquisitions to advance their digital strategies, listen to Rodger Levenson, the chairman and CEO of Wilmington, Delaware-based WSFS Financial Corp. We talked about prioritizing digital and technology investments, the role of fintech partnerships and how branches buoy their delivery strategy. What WSFS does is in the name of delivering products and services to customers in creative ways.

 

WHAT IF… WE DELIGHT IN OTHER’S SUCCESSES

The former chairman and CEO of U.S. Bancorp now leads the Make-A-Wish Foundation of America. From our home offices, I spent time with Richard Davis to explore leading with purpose. As we talked about culture and values, Richard provided valuable insight into sharing your intelligence to build others up. He also explained how to position your successor for immediate and sustained success.

These are just three examples — and digital excerpts — from a number of the conversations filmed over the past few weeks. The full length, fifteen to twenty minute, video conversations anchor the Inspired By Acquire or Be Acquired.

Starting February 4, insight like this lives exclusively on BankDirector.com through February 19.  Accordingly, I invite you to learn more about Inspired By Acquire or Be Acquired by clicking here or downloading the online content package.

Developing a Digital-First Approach to Risk Management

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The world has leaned further and further into the digital realm, largely thanks to a younger, more tech-dependent generation.

The Covid-19 pandemic accelerated a years-long push toward online and mobile banking use. Does your institution have a true digital banking strategy to deliver simple and secure digital banking services to your customers? As the primary channel through which customers conduct nearly all their banking activities, digital is your bank now.

But as more consumers turn to digital channels, cybercriminals are following suit — as demonstrated by increasing incidents of fraud and unauthorized account access. To mitigate cybersecurity threats and protect your customers, your bank’s risk management strategy now requires a digital-first approach.

Risk Management in Digital Banking
Even though customers demand digital transformation, delivering frictionless experiences comes with certain inherent challenges and risks. Once you identify these hurdles, you can mitigate them so that your institution can move forward.

The most pressing digital banking risk management issues fall into two categories: overcoming organizational challenges and mitigating regulatory risks. Each of them has several considerations and variables your institution should consider.

Overcoming Organizational Challenges

Outdated corporate culture: Entrenched processes and perspectives can stall your digital transformation. Promoting a more forward-thinking culture must start at the top and flow down in order for the entire institution to embrace change. Confirm your bank’s risk management personnel are onboard, and involve them from the beginning to ensure a secure and safe transformation.

Refocusing of key positions: Some of your bank’s key positions may change in response to digital transformation. Digitization may shift the focus of some, but these positions are still critical to the institution’s success. For example, instead of manually performing tasks, employees working in an operations department may begin focusing on automating processes for the institution.

Resistance to change: Many institutions have executives that will champion progress, while others are resistant to the changes required to adopt a digital-first approach. Identify the champions at your institution and empower them to lead your digital transformation.

Lack of innovative thought leadership: It will take true out-of-the-box thinking to digitally compete with the big banks and emerging fintech companies. Encourage that kind of modern thinking within your institution.

Misguided beliefs: Quash any notions that a mobile banking app is the only component of a digital strategy, or that a digital-first approach means that personalization is no longer needed. Back-end operations and internal processes must fully support a digital environment that effectively identifies and fulfills individual customer needs based on their actions and behaviors — without adding friction to the customer experience.

Mitigating Regulatory Risks

Digital compliance and cybersecurity: Banks operating in a digital environment must still comply with all applicable laws and regulations. This includes paying attention to uniquely digital processes that are covered under specific rules, such as electronically signing documents per the E-Sign Act. To mitigate risk, institutions should invest in technology designed to ensure compliance and strengthen cybersecurity.

Third-party risk management: Many banks are outsourcing all or part of their digital strategy to fintechs and other third-party vendors out of necessity. But institutions are still ultimately responsible for all functions, whether they are performed internally or externally. A robust vendor management program is key to avoiding unqualified third-party providers. A provider must understand applicable regulatory requirements, be able to adhere to them and guarantee compliance.

Fraud and identity theft: The increase in banking without face-to-face interaction can increase the risk of synthetic identity fraud, traditional identity theft and account takeovers. Your bank should meet these challenges by reviewing and strengthening your Bank Secrecy Act/anti-money laundering (BSA/AML), know your customer (KYC), customer due diligence (CDD), cybersecurity and other relevant compliance programs. Digitizing internal processes will result in more available data as well as the ability to use AI to monitor customer behaviors and efficiently identify potential fraud.

While digitization can increase certain risks for banks that undertake such a transformation, enabling enhanced digital banking risk management to secure digital channels, mitigate risk and deliver a frictionless customer experience is worth the effort.

How One Woman Inspires Others

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Women are still underrepresented in the senior management ranks of many U.S. banks, and other women are quick to notice — and celebrate — when one of their own is elevated to a top position.

A perfect example of this dynamic is Maria Tedesco, the president of $19.9 billion Atlantic Union Bankshares in Richmond, Virginia. Tedesco joined the bank in September 2018 from BMO Harris Bank in Chicago, where she had been chief operating officer of its retail operation. Tedesco, who I interviewed via Zoom in October, says she came to Atlantic Union in part to work with CEO John Asbury, but also because she saw a customer-first culture that is missing at most large banks.

“What I found here at [Atlantic] Union is that the culture of [the] customer is woven into the fabric of the company, and that really attracted me,” says Tedesco. “I’ve had wonderful experiences at other banks, but I think the larger the bank the [more] they get away from the customer. And I missed being closer to the customer.”

When Atlantic Union Bank adopted its current name in May 2019 and launched a branding campaign (it had been named Union Bank & Trust previously), Tedesco and Asbury did a television ad together to promote the new name. After that, Tedesco says, “I was stopped all the time in stores to the point that I had to start getting dressed up just to go to the CVS [drug store] because people would stop me and say, ‘Oh, you’re my president.’ And I’d say, ‘What? No, I don’t think I’m president yet. You might have me mixed up with somebody else.’ But they’d say, ‘No, I’m a customer of Atlantic Union, and I love you.’ When did you ever hear anybody say they love their bank?”

Asbury, who took over as CEO at Atlantic Union in October 2016, initially decided not to hire a president when the board of directors first raised the issue, preferring to immerse himself in the bank’s operations. But not long after Atlantic Union acquired Richmond-based Xenith Bankshares in May 2017, which took the bank just past the $10 billion regulatory threshold where oversight becomes more rigorous and caps are placed on banks’ debit card interchange fees, Asbury decided he needed a strong No. 2 executive to help manage the bank.

Asbury first hired the late John Stallings Jr., previously the division president and CEO for SunTrust Banks in Virginia, but an illness soon forced him to step down. (Sadly, Stallings passed away in early November.) Convinced he now needed someone in the president’s role, Asbury says he pressed Stallings if he knew someone who could replace him. “I said to John, ‘Do you have any ideas?’ And he said, ‘I know of a fabulous leader, I’ve known her for 20 years, she’s in Chicago. I doubt she would do it, but we’ve got to talk to her. Her name is Maria Tedesco.’ I said, Maria — I’ve known her for a decade.”

Tedesco and Asbury had gotten to know each other a little through their involvement in the Consumer Bankers Association, and their careers had been on similar tracks, but they had never worked with each other. It took a while to convince her to leave Chicago for Richmond. Tedesco had spent the better part of her career working at big banks — before BMO Harris she held senior retail and business banking positions at Santander Bank and Citizens Financial Group — and this experience was important to Asbury as he pursues a strategy of growing Atlantic Union into a dominant regional bank.

Tedesco is responsible for overseeing all of Atlantic Union’s major business lines, as well as various enterprise-wide functions like marketing. Approximately 75% of the company’s employees report up through her.

Asbury says Tedesco has already made a significant impact on Atlantic Union.

“Maria is one of the best leaders I have ever worked with, and she is a force,” he says. “She’s very genuine. She’s very sincere. She has a tremendous breadth of experience. And she has been able to make an impact on this company that none of us could have made in a much larger organization. I’m so grateful that she’s here.”

Tedesco agrees that her position within the company is important to other women at Atlantic Union. “Absolutely,” she says. “Women have made so many advances in this industry, but it’s not good enough.” But I also sensed a certain ambivalence in Tedesco’s perspective that may be common to senior female executives generally: Is their elevated position viewed as having been earned on merit, or is there a perception that they were promoted specifically because they are a woman?

“I didn’t realize how important it was, but I heard from a number of our women in the company who said to me, ‘I’m so proud we have a woman as president,’” Tedesco says. “At first that struck me as odd. I said, ‘Well, what’s the difference? It doesn’t matter that I’m a woman. It’s about my capabilities.’”

During the interview process prior to joining the company, Tedesco says she was asked to talk about what it’s like to work in the banking industry as a woman. “It was frustrating, but I have come to realize that I have that responsibility, and it is one of my passions,” she says. Tedesco says she has begun an initiative within Atlantic Union called the “Women’s Inclusion Network” which creates opportunities for employees to leverage each other to grow personally and professionally, and is aligned with a broader diversity, equity and inclusion effort within the company. “I think I have advice and guidance and mentorship that I can provide other women inside and outside the company,” she says.

Tedesco credits Asbury with being a strong advocate for DEI efforts in the bank. “It’s who he is,” she says. “It’s an organic part of John. His support was incredibly important to me. He empowered me, and I went off running. That has helped other women.”

Asbury says that while Tedesco was not hired because of her gender, he didn’t expect her gender to invoke the reaction that it did. “When you know Maria, you know she’s here because she’s Maria, not because she’s a woman,” he says. “I can honestly say that the most skilled, most qualified person for the job was Maria, who happens to be a woman. But at the same time, I underestimated the impact that a female president would have.”

Five of Atlantic Union’s 14-member senior management team today are women. “That’s very different from when I got here,” he says. And that representation — particularly with a woman as the bank’s second most powerful executive — makes it easier to recruit other women to the bank.

“Don’t underestimate the multiplier effect that will happen if you can get women executives at the top of the house,” Asbury says. “That more than anything else is going to accelerate your ability to attract others. It really has a powerful effect.”

Asbury says that having a significant number of women in senior executive positions is “not just a perception issue. I get a lot of feedback that we’re a very contemporary or progressive leadership team. I think we are. Not just because we have so many women, but because I think we’re a ‘modern’ leadership team. That’s probably the best word to describe it.”

Driving Innovation Through Cultural Clarity

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New York-based Quontic Bank bills itself as an adaptive digital bank; it’s also a $1 billion community development financial institution (CDFI), lending to immigrants, low-income populations, gig-economy workers and borrowers who struggle to get a traditional mortgage. That mission means that the bank’s executives — including chief innovation officer Patrick Sells — tend to think about banking a little differently.

Its culture is a true competitive advantage of the bank — and that goes beyond having good, talented people on staff who get along with one another. It requires a mission, he says, and “strategic anchors” that can guide decision-making and empower employees.

Banks were already facing an “existential crisis” around digital and technology, Sells continues. “The pandemic that we found ourselves in has only exacerbated that tension,” he says. “[W]hen there is anxiety, we tend to act irrationally, we can tend to act scattered, we go back and forth. And what’s really critical is a steady hand as to who we are and what we need to do, and how we navigate through this, so we don’t get sucked into all of that. The culture, the clarity that we have, has definitely helped us navigate this storm.” Quontic has hired almost 90 new employees during the pandemic, he adds.

Sells discusses this further in this interview with Emily McCormick, Bank Director’s vice president of research. It has been edited for brevity, clarity and flow.

BD: It’s very easy to think about innovation, and focus on the nuts and bolts of the technology, but the culture and the mindset are so critical. How do you think through culture as it applies to innovation?
PS: There’s a tragedy in that innovation is often synonymous with technology, especially in this industry, and it really shouldn’t be. Innovation as much more than that. The thing that perhaps needed the most innovation, and would yield the greatest results, was culture that I think many banks don’t have. I think culture is an area where they’ve struggled. When you compare it to what’s gone on in the world around us — there’s so many things happening, and banks haven’t kept up with that.

These issues all interplay with each other. I think the greatest existential threat to the industry of community banking is culture. We have lost the war on talent. As the first digitally-native generation grew up and came out of college, they didn’t want to go work at a community bank. So today, we’re so behind from a technology standpoint, and we’re frantically, as an industry, trying to say, “We need this, we need that.” And that’s really a Band-Aid.

If we don’t figure out how to change this and lose the next decade of talent, we don’t stand a chance. The technology that’s new and cool today, we know the pace it’s accelerating at will be nothing compared to two, three years from now. … We also know in the data that’s coming out around millennials and the generations that follow, is that the sense of purpose matters immensely. And so for us, where we really focused on innovating, or what to do differently, is all in and around culture: How do we do that, and how do we bring that to life at Quontic? That will drive us into the future and where we want to go.

BD: You’re active on Twitter; one of your recent tweets focused on the fact that culture doesn’t end at the bank, it extends to the customer. Could you expand on that concept and how that informs how Quontic meets customer needs?
PS: There’s three components to Quontic’s culture: the mission, the de-centralized decision [making], and the shared language. Core values became that shared language, but one of our core values is try it on. For example, we want to be quick to try something new, even if we don’t know if it’s the right thing or not.

The other one is saying, “Cheese.” The next time someone asks to take a picture of you and they say, “Cheese,” what happens? Both of you smile, and usually the photographer is also smiling. How do we create that interaction? I think most customers expect, when you call your bank, you’re going to get very black-and-white answers as to what can and can’t be done. And there isn’t so much a focus on making it a pleasant experience.

An example of that, when Covid[-19] first happened at the end of March or early April, as an online bank, we picked up a lot of CD customers. For the consumer, one of the great things about CDs is you commit to putting your money in for a period of time, and you typically get the highest interest rate. If you break the CD, you lose all that interest. We knew a lot of customers would be nervous about what that meant for their financials, so we quickly reached out to say, “If you need to break your CD, you can do that penalty free.”

The majority of people said, “Thank you for offering this. As of now, I don’t want to do that.” But there was another group of people who said, “Yes, I want to do that.” Those same people called us back later and said, “I ended up being OK. I want to re-establish my account with you, and I’m going to tell everyone I know about what you’ve done for me, because it was so above and beyond.”

We want to be a spot, even though there’s a lot of anxiety going on, where we can bring smiles to people’s faces. I don’t know the data, but I doubt many banks emailed their CD customers to say, “You can break penalty-free if you need to.” We’re trying something on, and what happened from it? It deepened relationships and brought new relationships because it resonates the culture of who we are with the customer that we serve.

BD: We know that small businesses continue to be devastated by this pandemic. How is Quontic thinking through meeting the needs of small businesses, as this crisis continues and past it?
PS: This gives us the opportunity, in any crisis, to reframe, which is something I talk about in terms of innovation. What is innovation? Can you reframe what’s going on? Can we become aware of these underlying assumptions that haven’t changed in a while? If we change nothing but that, everything changes — that’s where you can find your most effective innovation.

For example, there’s a lot of small business owners who are behind the ball in terms of e-commerce. There [are] two ladies that own a [boutique] that I’ve gotten to know, and they wanted to open up a Shopify account to sell products online. I helped them do that. In one lens, helping [our small business customers] establish Shopify and e-commerce doesn’t result in any new revenue for the bank; but it strengthens the relationship and the [role] that banks historically played as a resource for small business owners.

There’s an opportunity to rethink branches. … While there’s great technology out there, like Shopify and Square, they don’t have people who can help you. What if the branch became a place where small business owners could get help [digitalizing themselves?] Now you’re utilizing the space that so many banks already have, and you’re beginning to play that meaningful role again in society. I think there’s a tremendous opportunity for banks to think differently, and say, “How do we help our customers also embrace technology that will ultimately help their businesses thrive?” That’s an example of a way banks can reframe what those relationships look like and deepen those relationships that’s outside of the norm as to what we think banks should be doing.

BD: So essentially, it’s about having that talent and expertise within the branch that can help the customer, and empowering employees to do that.
PS: This goes back to the mission [of] financial empowerment. It’s both that the products banks offer [are] one size fits all, and that the culture or the skills are largely the same. What if banks said, “We’re going to hire kids out of college who understand social media and e-commerce natively to help our small business customers.” Now you have talent that can help your bank figure out how to evolve. You solve two problems with one stone, and begin to change the reputation and everything. Not only does that have an impact for today, [but] my suspicion is the ROI on that over a decade is tremendous.

But you have to be willing to do something different. That’s where banks struggle, understandably; we’re taught to mitigate risk and to think about risk in everything. That can stand in the way of trying things that aren’t all that risky … it’s not that risky to add another digital bell and whistle that our core provides. It may be new for the bank, but it’s not really risky or innovative. We actually have to challenge ourselves to be bold and do something differently.

Strengthening Corporate Culture During Covid-19

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Before Covid-19, watercooler talk was an integral part of office culture. Groups of workers would gather in the breakroom for coffee and chat about their day, or the latest Netflix binge, or what they planned to do over the weekend. But today, with so many now working remotely and the rest encouraged to socially distance themselves from their coworkers, office culture has temporarily — and perhaps permanently — changed. For many, the big looming question is whether we return to that environment at all, given the potential for cost savings and the possibility of a second and third wave of the coronavirus later in the year.

But employees still need to interact with one another to foster relationships and collaborate. They also need to connect with managers, and create and maintain bonds with mentors.

The technology to enable this existed before the coronavirus struck the U.S., but many companies are only now shifting their practices to take advantage of it. These tools include video conferencing, and scheduling and productivity applications offered by providers like Microsoft Corp., Slack Technologies, Zoom Video Communications and Alphabet, the holding company for Google.

The savviest companies are finding ways to be more effective in the transition. One of these is State Street Corp. Christy Strawbridge, senior vice president and transformation director, shares the Boston-based bank’s experience in a discussion that took place as part of Microsoft’s Envision Virtual Forum for Financial Services.

Most of State Street’s employees are working from home and returning to the office isn’t a top priority, says Strawbridge. “We are not going to be rushing people back into the office; we’re going to help [them] work from home effectively,” she says.

It’s a stressful time, so the company is keeping communication lines open.

“Senior leaders are communicating formally and informally on a regular basis,” Strawbridge says. Employees can dial in to live, virtual forums hosted by senior executives — even CEO Ronald O’Hanley — to get answers on everything from technology needs to mental burnout. “It keeps us all connected,” she says. “It keeps us up to date on what’s going on.”

A number of companies now host virtual employee happy hours and other events using video communications technology. These intentional social interactions are vital to maintaining corporate culture, says Strawbridge. “We’re not running into each other in the elevator, so we need to be more deliberate on those social interactions,” she says, “because they’re not happening ad hoc.”

“It’s really important, now more than ever, that we stay connected,” she adds.

Employees are also encouraged to take time off. Maybe they can’t take the cruise they planned or visit Disney World with their family but taking time to do simple things — a day off for a hike, for example — can help prevent burnout.

Agility has grown increasingly important as the banking industry responds to the shifts and changes the coronavirus crisis has brought to bear on the U.S. economy. Financial institutions are rapidly deploying new technologies and practices to better serve customers and enable employees to work safely. Strawbridge points out that for State Street, their strategic goals remain the same but the path to achieve those aims is being adjusted.

“[Some] priorities have shifted in this environment, so we need to pivot work to other people on the team who might be more freed up,” says Strawbridge. “We have really uncovered the art of the possible here. We are realizing that there were things that we thought maybe we couldn’t do, or would be hugely challenging, or would take us three years to do — and we’ve done them in two months.” She credits more effective communication and collaboration — along with employee initiative — with these achievements. “We have a laser focus on prioritization in this environment that we can’t lose when we go back.” 

The company is empowering and engaging employees to solve problems — something Strawbridge believes will help State Street weather, and emerge stronger, from the crisis.

The foundation for a strong culture was built before the pandemic, but smart companies will foster and strengthen it during this crisis.

A Bank’s Most Valuable — and Riskiest — Asset

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“Culture should be viewed as an asset, similar to an organization’s human, physical, intellectual, technological, and other assets. … Oversight of corporate culture should be among the top governance imperatives for every board, regardless of its size or sector.” — National Association of Corporate Directors’ Blue Ribbon Commission

A strong, clear culture that aligns performance to shared goals is the hallmark of a thriving and sustainable organization. Such a culture boosts performance and long-term value creation. It’s a non-replicable competitive advantage.

Culture is a substantial asset. Like all other assets — loans, cash, investments or fixed assets — banks should have a proper valuation of their culture asset and know what their return on that asset is. It is incumbent on them to proactively identify strategic cultural risks and opportunities to optimize asset performance.

The chief executive officer is responsible for shaping and managing the bank’s culture, but the board ensures that they do so effectively. The ultimate responsibility for a thriving and sustainable culture sits squarely with the bank’s board.

A board should never be surprised by culture-related issues — yet these often only reach the boardroom when there are problems. Recent scandals have brought culture to the forefront for companies, and many boards and executive teams want to know exactly how — or, alarmingly, what — their culture is doing.

An Incomplete View of Culture
It can be difficult for bank boards to assess a seemingly “soft” issue like culture. They typically rely on disparate and indirect metrics such as employee engagement surveys and comments, hiring, promotion and turnover data, net promoter scores, and leaderships’ opinions to form some notion of cultural health. Many banks have done some form of “culture work” as well. In Gallup’s experience, these efforts tend to be episodic and narrowly focused on a desired aspirational state, such as being “agile,” “innovative,” “customer-centric” or “inclusive.”

The results are drastically — and worryingly — incomplete. Directors are becoming increasingly aware that their efforts to assess their culture asset lack a meaningful perspective on the risks, performance or asset value of the culture overall.

Culture Asset Management
Gallup’s experience is that most organizations struggle to define their culture — much less understand and harness effective levers for shaping it. Most banks and boards manage culture by default rather than by design.

We regularly observe high levels of angst and frustration from board members and executives who know there should be predictive signals, but don’t know where or what to look for.

Bank boards need an objective and reliable approach to managing culture risk and maximizing the return on their greatest — and riskiest — asset to effectively govern and guide corporate strategy.

In partnership with bank executives and boards, and leveraging tens of millions of data points, Gallup has developed a solution called Culture Asset Management to help boards measure and strengthen their cultures. We’ve found the 10 most influential factors of a healthy culture that are predictive of positive business outcomes:

  • Ethics and compliance
  • Diversity and inclusion
  • Leadership trust
  • Leadership inspiration
  • Disruption
  • Employee engagement
  • Performance management
  • Well-being
  • Sustainability
  • Mission and purpose

These 10 dimensions serve as a framework for determining the real value of culture as an asset and for diagnosing the performance and risk factors in managing that asset.

Bank boards are ultimately responsible for the culture of the organization; they must elevate the way they manage culture to fulfill their duty to steward and guide the long-term sustainability of the organization. Culture is a bank’s most valuable and riskiest asset, and should be treated as such. Yet, boards lack reliable, valid and comprehensive tools to understand the risks and strategic opportunities of their culture, which often leads to surprises.

Bank boards should never be surprised. They need a predictive, clear and holistic view of their bank’s culture to understand what the actual value of the culture asset is — just like every other critical asset.

Jennifer Robison contributed to this article.

Banks Ignore Credit Administration at Their Peril

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Not long ago, I asked the CEO of a mid-sized bank how he makes funding decisions when looking to add new technology or software systems. He told me that when it comes to spending money on software, he only listens to two people: the CEOs of other banks, and “Whatever my chief lending officer says.”

The question that immediately popped into my head was, “Why doesn’t the chief credit officer have a say?”

This situation is not unique. For a long time, credit administration has taken somewhat of a back seat when it comes to resource prioritization within banks. But this mindset can be dangerous for banks; if executives don’t give credit administrators the budget they need, it can come back to bite their institutions in several ways. Bankers would be wise to take a second look at how they allocate resources and consider three reasons why credit administration should be a bigger priority.

The resource disparity
It’s not hard to understand why credit administration can sometimes get overlooked. The lending side of the house gets the most investment because it brings in the revenue. When push comes to shove, the money makers are the ones who will receive the most attention from management.

It’s not as if credit administrators have been completely forgotten: Bank CEOs usually understand the importance of managing the loan portfolio. But the group often doesn’t receive funding priority, while it often feels like the lending team has a blank check. Credit administration is just as important as loan production; closing the resource gap can decrease risk and increase efficiency for your bank.

Limiting credit risk
The biggest reason banks should invest more in their credit administration department is risk mitigation. When credit administration systems are ignored, spreadsheets can run rampant. This opens the door to numerous risks and errors, including criticism from auditors and examiners.

Outdated systems can open your bank up to risk because administrators are unable to gather and analyze data in a coherent way. They are left using multiple systems and spreadsheets to create a complete view of a loan — a fragmented process that makes it easy to miss important risk indicators. Credit administrators require powerful tools that increase a loan’s visibility, not limit it. To mitigate risk, banks should invest in systems that make it easier for credit administrators to see the complete picture in one place.

Increasing operational efficiency
Investing in credit administration also improves operational efficiency for your bank’s employees. Clunky, outdated systems impede credit administrators from accessing important information in succinct ways. Fumbling through multiple systems and screens to find key data points increases the time it takes to perform even the most routine tasks. Performing a simple data extraction will often involve IT, wasting multiple employees’ time. What could be a simple and straightforward loan review process has turned to a slow, cumbersome and ultimately expensive process.

Outdated software can also negatively impact your team’s overall job satisfaction. Poorly designed systems can be frustrating to use; upgrading other departments’ systems could create a perception that credit administrators aren’t valued by the organization. This could hurt your company culture and lead to costly turnover down the road. Investing in new software and giving credit administrators tools that make their jobs faster and easier is a way that banks can demonstrate their support, keep employees happy and improve the efficiency of their work — potentially improving overall profitability.

Credit administration and loan production are two sides of the same coin, but resources have been weighted significantly toward the lenders for too long. It’s time for a change. Reassessing how your bank can support its credit administration team can mitigate risk, improve operations and ultimately save your bank money.