Community Banking Connections

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Understanding How Culture Drives a Bank's Mission
by Robert L. Triplett III, Senior Vice President, Banking Supervision, Federal Reserve Bank of Dallas

As the officer in charge of banking supervision for the Federal Reserve Bank of Dallas, I need to be aware of banking conditions and challenges facing community banks in the Eleventh Federal Reserve District. I spend a considerable portion of my time reaching out to community bankers, and they routinely talk about a variety of topics that are also at the top of my mind, including pressure on margins and earnings, regulatory burden, fintech’s potential impact, succession management, and a host of other issues. One topic that is not regularly mentioned — at least overtly — is corporate culture.

Although corporate culture may not come up directly in my discussions with bankers, it is nonetheless a critical component of a bank’s operations that influences decisions and actions taken in response to the challenges and opportunities a bank faces. Recent enforcement actions, such as the penalties levied against Wells Fargo for its sales practices and the Environmental Protection Agency’s consent decrees with Volkswagen for emissions testing violations, highlight the importance of culture in an organization. In both cases, evidence points to fundamental cultural issues that drove underlying behavior, resulting in undesired outcomes. Maintaining a strong, positive culture aligned with the organization’s mission is critical for achieving long-term success and for avoiding missteps that can damage an organization’s reputation or result in financial loss. As a bank supervisor, it is my view that aligning culture with mission is one of the most important areas of focus for a community bank.

What Is Culture?

A review of academic and business literature reveals no shortage of definitions of culture. The definitions vary and emphasize different aspects of culture, but a common theme across the definitions is the importance of an organization’s values. An organization’s values are often formed over time as its members encounter and resolve problems that arise from member interactions as well as operating in the business environment. The manner in which leadership responds to conflict often becomes the expected norm, and these norms are typically passed on to new members through immersion and teaching. Values are simply what is most important to the organization, and they define expectations for internal conduct and for interactions with customers and others outside the organization. Therefore, at its core, an organization’s culture evolves from the set of values that guide decision-making and behavior.

Decisions and the resulting actions often reflect a bank’s culture. The prevailing culture in an organization may result from intentional thought and reinforcement, or it may simply reflect the aggregation of decisions and actions taken over time. Regardless, every organization will possess a distinct culture. Observed over time, the decisions made by an organization’s leaders and the actions of its employees reveal its underlying values, which define the culture.

Why Is Culture Important?

Do not underestimate the importance of culture to a company’s day-to-day functions. Employees are constantly evaluating how decisions are made, what is important to the leaders, and how they should respond and behave. Essentially, employees look to management to set the tone for how the company will operate. Do your employees understand how they should interact with customers? Have you clearly articulated the ethics and principles by which your bank will operate? Does the bank’s senior management set the tone by demonstrating the strong, positive values that should be emulated by the bank’s employees? Some of these questions will be answered explicitly through the bank’s mission statement or other corporate declarations; however, follow-through by senior leadership is necessary for continued success. Because culture drives behavior, culture has significant implications for all critical aspects of a community bank’s operations, including the way the bank will lend, how it will treat its customers, and the bank’s role in the communities that it serves.

Culture will evolve, especially as a bank faces new challenges. It is important that the bank’s leaders often communicate the desired values and behaviors, such that the culture does not devolve into a conflicting set of norms or reflect an entirely different set of values. If guided by well-established values, decisions and actions that align with and reinforce established values will sustain the culture.

How Does a Bank Instill Culture?

To help ensure that a bank’s culture aligns with its mission, core values should be thoughtfully considered and support the business objectives that allow the bank to fulfill its mission. Once established, the bank’s core values should be communicated throughout the organization. A bank’s culture should be instilled, rather than imposed. Simple platitudes cannot produce a desired culture, especially if actions are inconsistent with the expressed cultural values. Instead, values should be consistently reinforced and demonstrated through senior leaders’ actions.

Having regular dialogue within the bank about culture is important for establishing the bank’s current core values and shaping future values. Most community bankers who I have met would broadly describe their bank’s mission as fairly and profitably meeting the financial service needs of the communities that they serve. To help achieve its mission, a bank may list providing superior customer service as one of its core values. However, front-line employees’ experiences may reveal that the culture instead is driven by the value of speed — handling the highest volume of transactions in the least amount of time — or in a way that generates the greatest profit. Thus, instead of consistently delivering superior customer service, employees may often do what is expedient during peak business hours, which could mean employees may not follow established procedures but take shortcuts instead.

Certainly, taking shortcuts can be a detriment to providing superior customer service. Depending on the nature of the transaction, failure to follow established procedures could expose the bank to financial loss. Further, at the extreme, this could result in mistreatment of customers and violations of consumer protection laws and regulations. For example, certain required disclosures might not be provided to consumers or, in the absence of following established procedures designed to promote equitable treatment, employee biases — overt or not — could drive less favorable treatment of customers on a prohibited basis.

In this instance, employee behavior would not be consistent with the bank’s articulated core values. This example is not meant to suggest that superior customer service and efficiency are at odds; what it does mean is that it is insufficient to simply espouse a value and expect it to stick. Rather, a bank’s core values must be supported by strong policies, procedures, training, and an incentive structure that is aligned with and reinforces those values. In my example, expectations for what constitutes superior customer service in the context of any particular job should be defined. Decisions about transaction volume goals and staffing during peak business hours should be realistic and established consistently with the customer service value in mind. Only then will the values, culture, and mission align.

How Is Culture Maintained?

Even if values have been effectively communicated and embedded in the bank’s operations, the culture supported by these values must be reinforced. As I mentioned earlier, while values will drive behavior, culture ultimately is a reflection of actual behaviors, not desired behaviors.

It is necessary for senior bank leaders to clearly articulate and reinforce in their communications to employees the bank’s core values, but doing this alone is insufficient to maintain a culture. If behaviors at odds with core values are allowed to persist, such communications will not matter. Senior leaders in the organization must consistently exhibit behavior consistent with the bank’s core values. In other words, they must “walk the talk.” Additionally, behaviors throughout the organization that do not align with the culture must be identified and corrected. Often, such behaviors can be identified through established processes for evaluating management and employee performance. Correction may take the form of revising procedures that promote misaligned behavior, providing additional training to an employee, or, at the extreme, taking proportionate disciplinary action.

Open dialogue can be a powerful means for management and staff to speak about the bank’s culture and how it contributes to meeting the bank’s mission. Such dialogue can also be a means to identify barriers to values-driven behaviors or examples of values-inconsistent behaviors. In some cases, it may be difficult for an employee to openly discuss concerns about behaviors he or she witnesses, especially if such behaviors cross ethical or legal boundaries. For that reason, banks should strongly consider making available to employees a means to voice such concerns anonymously, such as a hotline. In the end, organizations, including community banks, need multiple avenues to collect and identify information to aid in maintaining and improving corporate culture.

Conclusion

I would like to close with a message specifically to community bank chief executive officers (CEOs). Someone once told me, “Leaders cast long shadows.” This person meant that employees look to their leaders for inspiration and direction, particularly when a potentially controversial or ethical decision must be made. Bank employees will observe how decisions or actions are handled by management and whether matters are handled in a way that is consistent with cultural norms. Deviating from well-established norms or making decisions that erode the culture will chip away at a CEO’s credibility as an individual and a leader. Much like the referees in a football game, employees are keeping a watchful eye on the CEO’s performance. Employees may not literally throw a flag, but once the CEO commits a culture infraction, he or she can expect to be penalized, and it is tough to earn back the employees’ respect and trust. To ensure the success of the team and fulfill the bank’s mission, as its leader, a CEO must champion a strong, positive culture by showing up every day with a focus on demonstrating and reinforcing the bank’s core values. I believe that the deep, values-based connections formed among bank leaders, employees, and their customers are essential for the continued success of community banking.