SEC Talks Culture, Kinda Misses Key Point

The Securities and Exchange Commission has been talking up the importance of corporate culture lately, including two speeches already this week that touch on the subject. Corporate compliance officers trying to glean insights about what to tell your own boards about culture may want to take a closer look — especially to understand a crucial point about culture not emphasized strongly enough.

SOX Compliance


Begin with SEC chairman Jay Clayton, who spoke Monday at a day-long symposium hosted by the New York Federal Reserve on corporate culture in the financial industry. His remarks touched on everything from the importance of understanding a company’s true culture, to the many actions and attitudes that collectively build a corporate culture, to what the SEC expects managers to do about culture.

Clayton opened with the importance of management truly knowing and understanding the corporate culture — which, honestly, strikes me as common sense. But why, specifically, must the C-suite and board understand corporate culture? Because negotiating your way out of a misconduct mess can get really sticky if you don’t:

Let’s take as given that both the firm’s management and the regulator want the firm to have “good” culture: one, for example, that is consistent with long term shareholder, employee, customer and societal interests as well as law and regulation… However, if there is a disconnect between what management thinks the firm’s culture is today and what the regulator thinks the firm’s culture is today, agreeing on measures to enhance the culture will be difficult — very difficult. Said starkly, if the regulator is convinced a firm has a cultural problem and the firm continues to fight that conclusion, tension is likely to be high and progress — which involves fostering mutual regulator -firm respect and trust — will be slow and costly all around.

Yet another practical point you can raise with your board or CEO if it seems disinterested in corporate culture.

Later, however, Clayton says that one key to preserving culture is to have a clearly defined mission. Take a look:

There are many familiar methods for communicating, monitoring and reinforcing cultural objectives — compliance programs, policies and procedures, training, personnel decisions (including evaluations and compensation), etc. I believe all of these methods are important and, in large financial organizations, essential. I also believe these methods are enhanced by, and in fact, to be effective over the long term, require, a clear, candid, easily understandable articulation of the organization’s core mission.

A fair point to raise, but perhaps too simplistic for the real world. For example, Clayton mentions the SEC itself and its core mission: “furthering the interests of our long-term retail investors.”

That phrase can mean different things to different people. Clayton could take (and has taken) that phrase to mean loosening oversight of small companies, so they can go public more easily and earlier in their corporate lives, and retail investors can reap the benefits.

On the other hand, recall the dot-com market crash in 2000. Long-term retail investors did not have their interests furthered back then, and the loose governance rules Clayton talks up today were exactly what caused that trouble.

So many people might hear the phrase furthering the interests of our long-term retail investors” and assume the speaker means stronger governance and compliance, such as what the SEC implemented with the Sarbanes-Oxley and Dodd-Frank acts. Yet that’s the opposite of what Clayton means when he talks about furthering the SEC’s mission.

Priorities Matter as Much as Mission

It’s an important point because this is how miscommunication happens in large organizations, and compliance officers deal with the consequences of that miscommunication all the time. Everyone in one part of the enterprise thinks the policy is clear, the meaning is clear, the objective is clear — and then we’re stunned to find that another part of the enterprise has reached a different conclusion and is behaving in a totally different way.

What are they thinking, we ask? How could they not understand what we just said?

They misunderstand because senior leaders spend too much time talking about mission and values, and not enough time working on priorities and incentives.

Employees (and third parties) spend much of their day asking themselves: What am I supposed to do? What am I being paid to do? Then they act on those answers as best as they understand them. So if senior leaders really want a strong, unified culture, they should be sure the company’s priorities are clear, and employee incentives (read: paychecks) are geared to achieving them.

I had a recent post on Navex Global about the difference between values and priorities if you want to dive deeper into the issue. Another excellent treatment of the point came from William Dudley, former president of the New York Fed. He gave a superb talk last year on the importance of defining a firm’s mission and building incentives around it — complete with a swipe at financial firms for bungling that process way too often.

That’s not to say thinking about mission and core values is a waste of time. On the contrary, senior executives should think deeply about core ethical values for the organization, as well as mission — which is just fancy-speak for “what the company tries to do.”

But those are the first steps, and let’s be honest: every company says it wants to be ethical, and inclusive, and respectful, and honest. I’ve never heard of an organization that didn’t profess to want those things. Even the Trump Administration says them.

Unto themselves, however, they are just keywords in a vacuum. Then comes the harder work of emphasizing which objectives matter more than others (that’s priorities) and how to drive employees to focus on those objectives (that’s compensation). That’s what leaders need to consider as they try to keep a corporate culture together.

Leave a Comment

You must be logged in to post a comment.