Scorching Report on FDIC’s Flawed Culture

The Federal Deposit Insurance Corp., one of the primary banking regulators in the United States, has released a blistering report about the agency’s own failure to uphold a culture of compliance, workplace respect, and accountability. Ethics and compliance professionals have so much to digest here we’ll need to explore it all over the course of several posts. 

The report itself is no surprise. The FDIC has been under scrutiny for months, ever since a Wall Street Journal article last fall documented years of sexual harassment, racism, whistleblower retaliation, and all the other dysfunctions of an insular, toxic workplace culture. The FDIC immediately promised an independent investigation. 

The 234-page report released Tuesday is the result of that investigation — and yikes, it is ugly stuff. The gist of the findings are captured in this paragraph from the executive summary: 

[F]or far too many employees and for far too long, the FDIC has failed to provide a workplace safe from sexual harassment, discrimination, and other interpersonal misconduct. We also find that a patriarchal, insular, and risk-averse culture has contributed to the conditions that allowed for this workplace misconduct to occur and persist, and that a widespread fear of retaliation, as well as a lack of clarity and credibility around internal reporting channels, has led to an underreporting of workplace misconduct over the years.

Now in the crosshairs is Martin Gruenberg, chairman of the FDIC and a leader at the agency for nearly 20 years. FDIC employees told investigators that Gruenberg could be “extremely difficult and volatile,” especially when confronted with bad news or views he didn’t like. On Tuesday Gruenberg did apologize to FDIC for any abuse they suffered on the job and “for any shortcomings on my part” — but this is pretty damning stuff, and Republicans on Capitol Hill have already been calling for him to resign. As soon as prominent Democrats do too, you can put a fork in his career there.

Anyway, that’s the breaking news part of this scandal. Now let’s study some of the issues uncovered by the report at a deeper level. 

FDIC Culture, Accountability, and Structure

The root of the problem seems to be the tangled up mess of the FDIC’s organizational structure, its corporate culture, and ham-fisted or nonexistent attempts to hold wrongdoers accountable. Deciphering how much each of those three factors contributed to the agency’s overall dysfunction is no easy task. 

For example, consider the FDIC’s purpose and structure. The agency’s purpose is to oversee the financial stability of banks throughout the United States, and to take over insolvent banks for brief periods until those insolvent institutions can be merged with larger, more stable ones. To fulfill that mission, the FDIC has its headquarters in Washington, D.C., eight regional offices, and even more field offices. It currently employs about 6,000 people.

To manage those solvency risks, the FDIC employs “commissioned” bank examiners, who in turn supervise teams of more junior officers. Typically a junior employee needs four years of field training before he or she could be promoted to commissioned status. The junior examiners work on teams run by commissioned examiners, and those more senior commissioned examiners control the junior examiners’ daily work lives and paths to promotion.

You can see where this is going, right? We have a sprawling organizational structure, where local offices are run by senior, long-term managers who have enormous influence over junior employees. The power imbalance implicit within such a structure didn’t evolve spontaneously; it was deliberately built, decades ago. 

The FDIC’s mission also involves lots of field work. Sometimes teams work through the weekend, seizing an insolvent bank and packaging it for merger with a healthier bank the following Monday. Or teams can spend their days visiting banks for routine inspections — which means more time on the road, working in close collaboration with colleagues and supervisors. 

Again, we all see where this is going, right? Before we even get to the bad leadership, poor accountability, flawed reporting processes, and all the other details that compliance professionals dwell on so much, we should step back and see that the FDIC had an organizational structure flawed in its design. That structure, left unattended, would inevitably default to imperious, larger-than-life managers who could thwart accountability and engage in misconduct themselves. 

Why Does That Matter?

It’s important to dwell on this point because when we talk about assessing culture risk, that is where you need to start: at the very structure and mission of the organization. You need to look at those fundamentals and then ask questions such as: 

• How much would people operating under this structure eventually veer toward abusive behaviors? 
• How much would the culture veer towards something insular, rather than open? 
• How much would management bend toward self-preservation rather than accountability? 

Fiefdoms, sub-cultures, silos, insularity; do those things persist despite your structure and mission, or because of it? That’s the real issue here.

Compliance officers, boards, and senior managers need clear, honest answers to all those questions, because otherwise you won’t know how much senior leaders need to focus on the culture. You won’t know how vigorously to monitor culture. You won’t be able to predict likely pressures for misconduct and how to build ethics and compliance strategies to address those pressures.

This strikes me as a fundamental issue for ethics and compliance officers when we talk about cultivating a “culture of compliance.” You won’t know how strongly to hammer that nail if you don’t understand how your organization’s mission and structure work against that culture. Once you do understand those pressures, then senior executives can think more effectively about the specific levers to pull — compensation schemes, personnel structure, team leaders, workplace policies, and so forth — to avoid a culture of misconduct.

Indeed, put the FDIC aside for a moment. Another example of this point comes from Wells Fargo and its fake-accounts scandal of the 2010s. Several years ago I had a post tracing the origins of that crisis all the way back to 1998, when Washington deregulated the banking industry. That deregulation led Wells Fargo to invent a new metric for employee success, the cross-sell metric — and once that metric was invented, gaming that metric became one of the bank’s primary fraud risks. 

Except, senior leaders at Wells Fargo then never took the necessary steps to prevent employees from gaming the cross-sell metric. A culture of complacency and disconnection took root, and the rest is history.

The risks for Wells Fargo and the FDIC were radically different (consumer fraud for Wells, harassment for the FDIC), but fundamentally both were plagued by the same problem. Management couldn’t successfully address the culture risks that arose from each one’s structure and mission.

That’s enough for today, but clearly we have many more FDIC threads to pull.