February 2019 | Neotas

Part 2: Courage as the foundation of a value-focused culture

In PART 1 of the Courage, Culture and Conduct series, Patrick Butler shared his views on overcoming the fear factor to drive success.  >> READ HERE

PART 2: Courage as the foundation of a value-focused culture

Cognitive bias can cause fear of new ideas and new ways. We see examples of specific behavioural models (Confirmation bias, Framing, Anchoring etc), when decision makers…

  • rely on instincts and practices developed over years that result in downplaying or ignoring uncomfortable messages
    focus on what is easy to measure, or provides positive evidence for past decisions, rather than seeking out ways to measure the more important warning signs
  • deprioritise active learning, questioning behaviour to find new ways to measure, and so foster less tangible but fundamental behavioural drivers of success
  • ignore innovations that may give better insight to clients or staff and so be able to predict and better influence their likely future behaviours to benefit all stakeholders.

Instead, we need to foster courage at every level of the firm, from the board downwards, to:

  • challenge the status quo in both the firm’s and their own thinking to drive an open, aspirational culture – rather than one of over-control, blame and fear
  • show humanity and integrity (by which we mean authenticity) to set the example and inspire staff to do likewise
  • be open about failures in order to encourage lessons to be learned
  • speak up when something does not look right, or with fresh ideas that may enhance the firm’s ability to succeed in the long term, even if they may have a short-term cost.

This may be intuitive, but shareholders demand financial returns , not measures of collaboration. ‘Humility’ does not pay pensions that are due or provide expected investor returns. However, without the strong foundation of these qualities, you risk a Carillion, a Nokia, a Lehman, Bear Stearns, a Patisserie Valerie, Tesco, LIBOR, Interest Rate Swaps… etc. etc.

Thus, managers who have the courage to have open discussions with boards and shareholders to demonstrate the link between good conduct, good business practices and longer-term confidence in order to take better strategic decisions, will build trust, productivity and thus success for their firms – as well as themselves.

Forward-thinking leaders can become the catalysts for sustainable value for their firms and the rehabilitation of the finance industry, greater confidence and participation in the market, reducing volatility and driving growth. With finance as the lifeblood of the economy, I need hardly spell out what this will do for standards of living.

So, what can senior managers do – in practice?
• Can they, in fact, measure culture?
• How might they really build a better understanding of their colleagues’ motivations, to align personal goals with the values of a firm and interests of shareholders and customers alike, to ensure long-term success?

Instilling cultural and behavioural change from the ‘ground up’ can be challenging, but by aligning measured approaches and gathering insights that are honest and true, managers can foster better decision making that will benefit clients, colleagues and shareholders alike.

The key to this is finding reliable ways to measure the behavioural drivers…


In Part 3 of the Courage, Culture and Conduct series, we’ll take a look at the ways in which we can measure culture. CLICK HERE to follow us and receive live updates.

About this series:

The concepts in this series and some of the new tools available to manage culture will be discussed further at the UK Finance Culture eats Strategy for Breakfast event on 14 March for Board level executives. They will also be explored in more detail within the fourth cohort of the Conduct and Culture Academy beginning at the end of March.

About the author:

Patrick Butler is co-founder of the Conduct and Culture Academy at UK Finance and founder of Calitor Limited. A former Diplomat, Investment banker, Operating Officer, Head of Compliance, he now advises and coaches senior management and future leaders to enhance behavioural understanding underpinning practical solutions to meet the changing regulatory landscape and build competitive advantage.

Seaborne Freight: the deal fraught with red flags

At the end of 2018, a £13.8m contract was awarded to a ferry company, Seaborne Freight, in preparation for the potential consequences of a ‘no-deal’ Brexit. The company is expected to run ferry services between Ramsgate and Ostend from March onwards. However, in a very public outing, it was revealed that there was a string of potential risks in association with this company. We ask the question; how did this one slip through the net and would there have been any areas of concern or potential risks that our management due diligence would have flagged?

Initial searches into the company’s Directors show a clear potential risk indicator almost immediately. John Edmund Paul Sharp (also known as Ben Sharpe) was the director of Mercator International Ltd, Mercator Ship Chartering Ltd and Mercator Platforms Ltd. These companies were all subject to compulsory liquidation, and Mercator International Ltd showed debts of £1.46m at the time of dissolution in 2016.

The company’s website also displays other areas of concern, for instance the website’s ‘Portal Login’ is only an image and not interactive. This may have potentially indicated even higher risks associated with signing a large contract deal. The Terms and Conditions on the company website appeared to be copied directly from a food delivery website. This has since been amended, but cached versions of the web page can still be found that reference “placing a meal / order”. Another potential area of interest, entails the company’s Twitter page – it only includes weather forecasts from June to September 2018.

According to Chris Grayling, the Secretary of State for Transport, due diligence checks were carried out and searches were conducted on the Directors. These searches raised nothing of interest that would have prevented a contract from being signed or the deal being questioned at the due diligence stage.

Andy McDonald, the Shadow Transport Secretary, said: “Awarding a contract to a ferry company with no ships is yet another disgraceful misuse of public money by the transport secretary.”

For a sizeable deal of almost £14m, it is unsurprising that deeper due diligence checks (including management due diligence) were expected to be taken regarding the company and its Directors. The checks that were claimed to have been made had been considered satisfactory. And yet, in the fall-out, numerous issues have surfaced.

Conducting more rigorous checks for a new contract deal, on the company and its directors, provides an added layer of protection against fraud and reputational risk, better inform the decision-making process and ultimately safeguard any investments. The case of Seaborne Freight is just one example of the limitations of existing due diligence processes. It calls for management due diligence that delves deeper, especially for government contracts.

>>>

How well do you know the people and companies you invest in? 

By leveraging the latest technology and advanced analytical capabilities, Neotas is setting new standards in due diligence and reducing the number of investment deals gone wrong. Find out more about our Management Due Diligence >> click here

Is it time to PEP up your Due Diligence Process?

In 2017, Parliament passed the Money Laundering Regulations (MLRs) on the back of the EU’s Fourth Money Laundering Directive (4AMLD). With the aim of tackling terrorist financing and money laundering, the MLRs represented the government’s push to encourage businesses to undertake a substantially more rigorous risk-based approach to due diligence.

The revelation that a significant percentage of the IRA’s funding came through tax fraud thrust the relationship between fraud, money laundering and terrorist financing into the limelight. In the wake of 9/11, it was discovered that approximately 30% of al-Qaeda’s finances were the direct result of charity fraud, some of which was committed in the United States itself. As modern terrorist organisations move away from state sponsorship and towards financial crime as a source of income, it has become not just a government directive, but a corporate responsibility to undertake appropriate AML due diligence.

One such integral factor in AML due diligence is the treatment of Politically Exposed Persons or “PEPs”. The level of scrutiny afforded to PEPs is a result of their ability to abuse their position in public office for personal and financial gain. The power to manipulate the financial system provides the opportunity to launder any proceeds.

Steps in the right direction…

In the recently updated Financial Crime Guide, the FCA stated that best practice for institutions dealing with PEPs and high-risk customers entails “using, where available, local knowledge and open source internet checks to supplement commercially available databases when researching potential high risk customers including PEPs.”

Despite the clear message from the FCA, firms are still running afoul of regulatory bodies. Last month Khalid Mohammed Sharif, a partner and AML Officer at London firm Child & Child, was fined £45,000 for a lack of appropriate enhanced due diligence.  He failed to recognise his clients as PEPs when simple searches of open source information would have revealed their status.

Identifying PEPs is not always easy. Whilst some are obvious: Theresa May, Mark Carney and Jeremy Corbyn to name a few, many are not. Especially when we bear in mind the FCA’s requirement to consider not just an individual’s prominence, but both familial and business connections as indicators of PEP status. Unfortunately, there is no globally agreed upon list of PEPs. The EU’s Fifth Anti-Money Laundering Directive (5AMLD) requires member states to release a functional list of politically exposed positions, but this does not mean a list of PEPs themselves. These lists have limitations and discrepancies between them are common. Often a person’s PEP status is unclear or does not fall within a well-defined function. PEPs from outside the EU are not considered. This is where Open Source Intelligence becomes of paramount importance.

Interrogating open sources of information such as social media, company records and news articles is crucial in mapping out an individual’s network of significant connections. At Neotas we have uncovered potential indicators of PEP status through open sources for several of our subjects of research. All individuals that did not appear on any publicly available PEP lists.

The use of open sources forms a powerful part of enhanced due diligence. It provides firms with actionable intelligence to accurately determine the PEP status of their clients and subsequent level of risk. This means compliance with AML regulations that may not have been guaranteed otherwise; going beyond skin deep checks. Being equipped with deeper insights to help recognise a PEP is of the utmost importance to a compliant institution and open sources provide the perfect way to do it.

~ by Alex Penn, Higher Intelligence Analyst

Neotas go beyond traditional and structured database checks. We provide deeper insights on people risk by interrogating social media, the deep and the dark web. Request more info today -> info@neotas.com

Part 1: Fear as an Impediment to Success

The behavioural theories that underpin the regulators’ approach to mitigate misconduct, are also fundamental to driving success. If we focus on the behaviours that drive value in the long term, this will align interests of employees, managers, boards and shareholders with those of customers and simultaneously crowd out misconduct.

This long-term focus critically changes leaders’ priorities. It means that leaders need to articulate clearly what these long-term goals look like (rather than focus on short-term returns demanded by just one stakeholder – usually an activist shareholder, or the fund manager supposedly representing myriad silent small shareholder, such as pensioners, but often driven by personal targets. This requires the courage to define the fundamental values of a firm that will achieve those goals, and then challenge themselves to work out how to manage the drivers of those values.

These drivers are not backward-looking measures such as financial accounting measures, or HR defined metrics. They are behaviours that drive future outcomes and are the core levers by which leaders (at every level) may embed a Culture that will be both a safety net and an engine of success. At the UK Finance Conduct and Culture Academy (CCA) we explore the link between behaviours and financial value including how to build financial models that can be powerful tools for firms to deliver their strategy.

But what behaviours? Among others: collaboration, courage, self-awareness, active learning, conformity, accountability, temperance, a tendency to be outward looking, humility, innovation, and transparency (and their opposite pairings), not the simplistic outcomes (mis-selling, unauthorised trading) often at the core of Conduct Risk Frameworks. The FCA internal model of leadership characteristics includes these sorts of attributes with which it can assess leadership of the institutions it supervises, currently informally – and I imagine soon formally – under its Senior Managers & Certification regime.

Firms can rebuild frameworks, using a behavioural lens to articulate and reward these behaviours to stimulate the innovation and productivity that drives sustainable growth. Yet few firms make this core to their strategy, preferring to continue using or slightly tweak their existing frameworks, in some cases shoe-horning Conduct into a traditional Risk framework, rather than threading it through all activities. Why is this? Could it be fear of the different, or fear of accepting sunk cost as a loss? Yet the status quo has hardly been a paragon of success.

“Fear” was a key topic of discussion at the FCA CEO roundtable in November. Although some leaders are starting to view fear as a cultural impediment to business success, many still talk more about their own fear of failure by themselves or others, or of issues they cannot control, such as Brexit.

These responses reflect findings from recent research and surveys on behaviour and culture at board level. For example, the propensity for leaders to overestimate their abilities to measure and manage culture, even though they recognise it as key to success.

Fear of unfair blame or criticism (e.g. under SMCR) tends to suppress the right behaviour, even though behavioural research by the likes of Dan Ariely demonstrates that the ability to admit failures reduces the likelihood of recurrence.  Such honesty can only be in the best interests for all stakeholders of any industry, and society.

Yet this cognitive bias may cause managers to ignore the behavioural drivers that ultimately will cause their bank to trip up or lose them the opportunity to foster those that will drive sustainable success. The courage to recognise cognitive bias is the first step for leaders to manage it and so ensure sustainable value to the firm.

At the CCA, we explore the growing discussion on Culture in Banking amongst regulators. On the surface, it may be the only way the regulators can supervise and control a constantly changing, complex interdependent global industry that constantly seems to find new ways to demonstrate misconduct. But, if we switch to the other side of the coin, courage to learn how to manage Culture proactively can in fact drive sustainable value, rather than just prevent regulatory loss.

>>> END OF PART 1 >>>

Stay tuned for PART 2 of the Courage, Culture and Conduct series: “Countering Cognitive Bias” > live updates here

First published on www.neotas.com > helping organisations to harness digital intelligence, evidence compliance and mitigate people risk.

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About this Series:

The concepts in this series and some of the new tools available to manage culture will be discussed further at the UK Finance Culture eats Strategy for Breakfast event on 14 March for Board level executives. They will also be explored in more detail within the fourth cohort of the Conduct and Culture Academy beginning at the end of March.

About the Author:

Patrick Butler is co-founder of the Conduct and Culture Academy at UK Finance and founder of Calitor Limited. A former Diplomat, Investment banker, Operating Officer, Head of Compliance, he now advises and coaches senior management and future leaders to enhance behavioural understanding underpinning practical solutions to meet the changing regulatory landscape and build competitive advantage.

View the Free Webinar >> Managing Culture to Deliver Strategic Success: Converting the Regulatory Imperative into Business Success.