Clutch President Brandon Daniels Quoted on Front Page of Wall Street Journal

February 2nd, 2015

Clutch’s Brandon Daniels was quoted in a front page article of The Wall Street Journal this morning. The article looks into how big banks are monitoring company culture and dealing with increased scrutiny from regulators. Read the full article at WSJ.com or read the full text below. ​​

Big Banks Try to Monitor Employee Attitudes to Avoid Future Problems

“Culture” is the buzzword of the moment at banks—and a puzzle that regulators and Wall Street firms are wrestling to solve.

As they emerge from years of bruising fines, layoffs and losses, big banks are trying more than ever to monitor employee attitudes and values to avoid future problems.

But they also have little choice: Senior officials with the Federal Reserve and other agencies in recent weeks have made it clear that they believe bad behavior at banks goes deeper than a few bad apples and are advising firms to track warning signs of excessive risk taking and other cultural breakdowns. Still, even regulators acknowledge culture is a difficult thing to measure.

“I confess that proof is hard to come by,” said Thomas Baxter, general counsel of the Federal Reserve Bank of New York, in a speech last month. “Yet I am not alone in the fundamental belief that a strong ethical culture will lead to better behavior.”

In October, New York Fed President William Dudley warned bank executives that regulators would consider breaking apart the big banks if executives didn’t do enough to root out wrongdoing. Mr. Dudley mentioned the word “culture” 44 times in the speech. “Risk takers are drawn to finance like they are drawn to Formula One racing,” Mr. Dudley said then.

The issue is taking on added urgency as U.S. banks await feedback expected around March from the Fed’s annual “stress tests” to ensure large banks can handle a deep slump like the 2008 financial crisis and continue lending without needing a government rescue.

Industry experts say qualitative components, such as how banks monitor and measure risks, appear to be a greater focus this year in addition to the number-crunching aspects of the tests.

The result is a rush at firms including J.P. Morgan Chase & Co. and Wells Fargo & Co. to crunch the numbers on things like how often employees go to happy hour to how they score on a happy-to-grumpy ratio. One consulting firm hired by a major bank determined it was a red flag when employees used the word “workaround” in internal communications, indicating a willingness to bypass set rules or policies.

Privately, bankers and their advisers worry that regulators will use “culture” as a blunt instrument to find fault with banks on a range of matters, since the subject is by nature qualitative. BB&T Corp. Chief Executive Kelly King recently called culture “the new rabbit” Washington is chasing.

Bank culture, especially at large institutions, can range from how a teller interacts with customers to how highly paid traders make decisions and weigh obligations to their clients against the bank’s. That can make it different than other industries.

Wall Street more than other industries provides a mechanism that feeds the risk taking. Traders in particular are often incentivized to be confident and aggressive, and it is often those employees who rise to the top at the banks.

As a result, all the largest U.S. banks are grappling with how they might measure culture.

“The industry is sort of having a culture moment,” said Susan Ochs, founder of the Better Banking Project at the nonpartisan think tank New America Foundation. Ms. Ochs said she is discussing with bankers, consultants and regulators assessment tools that could be used across the industry based on her research.

Her group is part of a cottage industry of consultants and other experts that has developed around this issue. According to people familiar with the matter, banks are collectively spending tens of millions of dollars on such consultants.

Among other things, the Better Banking Project is developing an analytical survey for banks to give to employees to tease out ways of thinking that could turn into potential problems. For example, it is looking to identify cultural trends in a bank where employees believe selling complex products makes them seem smarter, or that pay is the best measure of success.

Promontory Financial Group, which is separately working with several global financial institutions, is measuring the response time by management to audit challenges, which could represent tension among departments. The firm is also helping clients craft action plans to put into place if a regulator reports weakness in the institution—even informally—and then tracking them internally to ensure they reach senior officials, said Elizabeth McCaul, a former New York superintendent of banks who now leads Promontory’s New York office.

Academics have examined and tried to measure corporate cultures for decades, but “nobody has cracked the code in the way the banks are trying to do now,” said Sydney Finkelstein, a management professor at Dartmouth College’s Tuck School of Business. He added that getting valid data on this issue is “really, really very difficult.”

U.S. Comptroller of the Currency Thomas Curry said in an interview that culture is a “critical component of a sound management team” and could significantly affect his agency’s rating of a bank’s strength, known by the acronym Camels, for capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. “There is teeth to this” new emphasis, he said.

Ideas floated by regulators and industry experts include putting banks on a driver’s-license-like “point system” where their licenses to do business could be pulled for bad performance. Other ideas such as fining bank chief executives, banning bad traders from the business or factoring compliance breaches into compensation aim to build a more personal sense of responsibility.

The Clutch Group, which is consulting for two banks it wouldn’t name, found that informal happy hours led more often to harassment issues than those planned as corporate events, said Brandon Daniels, Clutch president. It also found that there was a 75% greater chance of employees going around internal controls when the word “workaround” was used in their communications.

J.P. Morgan in late December issued a report in response to a shareholder request that emphasized culture across the bank and detailed a focus on benchmarking employee survey results to spot weaknesses.

The report said the bank is tracking issues raised by employees or reported through its code of conduct hot line and measuring culture progress by a reduction in “adverse regulatory events.”

In the last two years, Wells Fargo has added questions to its annual employee survey to understand whether employees refer the bank’s products to friends and family, trying to decipher their confidence in the firm, said Pat Callahan, the bank’s chief administrative officer.

The bank also measures employee satisfaction through what CEO John Stumpf calls a “happy to grumpy ratio.” The idea, executives say, is that happy employees, defined as ones who say they are satisfied, are more likely to act ethically. Wells Fargo says the ratio clocked in at 8:1 in 2014, versus 7:1 in 2013 and 3.8:1 in 2010.