FSA chief outlines how to regulate company culture

Unacceptable culture within firms was a major contributor to the financial crisis and so regulators should play a greater role in judging how culture drives firms’ behaviour, according to the chief executive of the Financial Services Authority (FSA).

In a speech at the Chartered Institute for Securities & Investment (CISI) conference in London, Hector Sants discussed his personal view that many of the causes of the financial crisis were deeply rooted in behavioural issues.

He commented that ‘even after all the supposed lessons learned exercises, we are still seeing some decisions by management in major firms that we would judge not to be prudent’ and, as a result, greater intervention is needed from regulators to ensure decisions made by firms deliver the outcomes society expects.

Sants, said: “Historically regulators have avoided judging culture and behaviour as it has been seen as too judgemental a role to play.

“However, given the issues we continue to see over time, I believe this one-dimensional approach has to be questioned. Every other aspect of the regulatory framework is under scrutiny and we should not shy away from debating the culture question.”

The FSA chief executive commented that the focus for regulators should not be to define one ‘acceptable culture’ because there are many different forms a positive culture can take. Rather, regulators should focus on what an unacceptable culture looks like and what outcomes that drives. He outlined the mechanisms by which regulators could intervene to ensure firms have the right cultures:

• ensuring firms hire managers who act with integrity, by judging competency but also ensuring they understand the need to act with integrity, deliver the right culture and are equipped to do so;

• ensuring firms have the right governance and behavioural framework to facilitate good judgement by their staff; and

• assessing the actions against society’s wider expectations not just shareholder value.

Sants continued: “I would strongly advocate intervention in the UK through changing the Companies Act framework for directors, for example. The current requirement for directors is to promote the success of the company. This is often interpreted in terms of shareholder value. Whilst this does include the need, for example, to ‘have regard to’ the impact on the community, I do not believe that is sufficient.

“There must be a stronger and more explicit obligation to wider society. There must be clear recognition of the need for institutions to contribute to the common good.

“Determining an ethical framework is for society as a whole, not an unelected regulatory agency. However, it is, I believe, our role to police behaviour and expect firms to have the right culture which facilitates the delivery of the outcomes we expect.”