Regulatory News

The Importance of Diversity in Financial Services – Deputy Governor, Prudential Regulation, Ed Sibley

13 Feb 2018 Speech

RetailRemarks prepared for address to FuSIoN (the Financial Services Inclusion Network)

I am delighted to be here this evening
and to have the opportunity to speak about diversity and inclusion in financial
services at the first FuSIoN event of 2018. I would like to thank Francesca
McDonagh for the invitation.1 2

I strongly
believe that diversity in all its forms is important, and that there remains a
serious deficit in diversity of background, experience, and, critically,
thinking at senior levels in financial services in Ireland.  This needs to change.  In my remarks this evening, I will cover:
some background on the roots of my interest in diversity; the business case for
improving diversity and inclusion, the Central Bank’s approach to diversity and
inclusion (from both an internal and external perspective); and outline how we are seeking to drive improvements in
diversity across regulated firms.   It is important to note that the opportunities
and benefits that can accrue from increasing diversity in the workplace are
dependent on creating an inclusive workplace, where different views, background,
experiences, cultures, etc., are valued and nurtured.

I will conclude that meaningful and
sustained improvements in diversity and inclusion can help to improve the
safety and soundness of financial services firms and contribute to the restoration
of trust in the financial system in Ireland.

My Background

I have been working in financial
regulation and supervision since the onset of the financial crisis, firstly, in
the UK, and now in Ireland. As Deputy Governor, Prudential Regulation at the
Central Bank, my role spans the entire Irish financial services system.  It is also a very international role.  I am a member of the Supervisory Board of the
Single Supervisory Mechanism (SSM), the pan European banking supervisor.  I am on the Board of Supervisors for both the
European Banking Authority (EBA) and the European Insurance and Occupational
Pensions Authority (EIOPA) and the General Board of the European Systemic Risk
Board (ESRB).   

In other words, I occupy an extremely
privileged position of being able to see across the financial services system
both here in Ireland, and across Europe. 
 I also have the privilege of
engaging with, debating with and disagreeing with international colleagues with
diverse opinions, backgrounds, incentives and views.

I am also privileged in many other
ways.  In fact, you might wonder why a
middle-aged, white, able-bodied, English, male, member of the establishment (by
role at least) cares about diversity and inclusion.  Well, I would argue that my good fortune by
birth and upbringing does not preclude my desire for change – and, indeed, my
strong belief that change is necessary.  

But I would accept that it is, perhaps,
the diversity of my family background, my career, my experiences and my
interests beyond work that increase the resonance with me of the evidence that
I see.  It is for this reason that,
within the Central Bank, I am Chair of the Diversity & Inclusion Steering
Group and why, with the support and drive of many others, I am seeking to
improve our approach to diversity and inclusion within the Bank and drive
meaningful change across the financial services system.

Diversity and Inclusion in the Central
Bank

 I will start with an example. In July
last year, the second event of the Central Bank’s Rainbow Network was held.
BeLonG To, an organisation, which no doubt is familiar to many of you, and
which does fantastic work with young people who identify as LGBTQ, came to talk
about their work.  I hosted a panel
discussion with incredibly inspiring young people who spoke about their journey
in coming out.  I was really proud to
have had a role in making this event happen in the Central Bank, and in sending
a very clear message to my colleagues, that our organisation was supportive of
diversity, and wanted to be an inclusive employer. 

This is important. Research3 shows that many LGBTQ
people to not feel fully comfortable about disclosing their sexuality at
work.  There is no obligation for anyone
to do so.  But employers should provide
supportive environments to show that all employees are treated equally and
fairly and can bring their whole selves to work.  In the Central Bank we are ensuring that we
have such a supportive environment that helps all of our people to grow and
develop and reach their potential. 

This was one event of many, and through
these events, the creation of other D&I networks, and senior sponsorship to
harness and support the energy of employee led initiatives, we have
demonstrated our commitment to meaningful change and improvement.   I strongly credit our Women’s Network, which
has been in existence for a few years, in being a real driver of awareness and
the case for change, recognising that diversity goes far beyond gender,
important as that is.

And I am proud of where we are.   From a gender perspective, we strongly outperform
both the financial services sector, the public sector and European peers, in
terms of seniority and pay, from the Board (our Commission) down through our
executive and senior leadership levels, there is a very healthy balance.  More than one third of our board are women, as are 40% of our executive
committee, and 43% of our leadership team (Head of Function and above).4

Our ambition is to go further, and there is much more work to be done in the Central
Bank.  We have
dedicated resources to improve our approach to D&I across the Bank, and
have established Parents and Carers, Bankability and the Rainbow Networks
running alongside the Women’s Network. 

Why?

 There is a plethora of research that a more diverse
and inclusive workplace can better enable the Central Bank to fulfil its
mission and vision of ‘safeguarding stability, protecting consumers’ and
of being ‘trusted by the public, respected by our peers, and a fulfilling
workplace for our people
’.

As stated by Governor Philip Lane during a speech at
the European Financial Forum two weeks ago, “We see diversity and inclusion
as vital to ensuring we have the right mix of people to deliver our complex and
diverse mandate and that all our people have the chance to reach their
potential
.5

The research has shown that having diverse teams can
improve the quality of decision-making6 at all organisational levels, reduce groupthink7 and allow assumptions to be challenged more
effectively8. Heterogeneous teams are, on average, better than
homogeneous teams on creative and complex problems9. They increase the number of perspectives, provide
better understanding of customer needs and flex management approaches. In a
diverse and inclusive workplace, there is greater potential for internal crowd
sourcing of ideas, innovation, challenging of ideas, and refining ideas in real
time10.

Research based on mathematical models and social
experiments, demonstrates how diversity can trump ability in group
decision-making processes11.Diversity has been found to reduce the average error
in decisions12. It has been found, that the more variation in the
pool, the better the selective process13, which is key to reducing groupthink. The more
diverse a team, the more likely its predictive capability in the face of
uncertainty14.

The 2016 Empowering Productivity Report, which was
sponsored by the UK Treasury and the Bank of England concludes that, “Diverse
groups tend to have a well-rounded view on business issues and risks. It is
widely believed that greater diversity of thought results in better decision
making and improved corporate governance and risk management, thus avoiding the
perils of ‘groupthink’
.”

All of this research is very relevant to us in our
role as regulator, both from an internal and external perspective.

We also recognise that if the Central Bank is not seen
to be a diverse workplace, it will lose out on the pool of talent. McKinsey’s
‘War for Talent’ Report15 and other more recent research16 positions increasing competition among organisations for talent as a key driver
of organisational success or failure. The
reality is that many graduates will actively seek ‘diverse’ organisations
because they associate them with creativity, innovation and stimulation17.

Once we attract the right people, we recognise that it
is equally important to ensure that they feel included so that they stay in the
Bank for the long term. Research indicates that the lack of focus on diversity
and inclusion is likely to be a contributing factor to higher attrition levels18.  In order to operate
optimally, we recognise that as well as attracting and retain the best talent,
the Central Bank needs everyone working to his or her individual optimum. Research
shows that if organisations become both more diverse and more inclusive, employees
will perform better, as they can be themselves and the resultant discretionary
effort can be harnessed19.

I am also aware that, particularly as a public sector
organisation, the Central Bank has a moral imperative to reach out and include
diverse talent that is reflective of Irish society and not to discriminate or
create barriers, either real or perceived, against minority groups.

Diversity in financial services

When Governor Lane spoke at the European
Financial Services Forum, he emphasised the focus on diversity in financial
services by the Central Bank and said that “The inclusion of this issue as part
of this year’s European Financial Forum is indicative of the welcome and
necessary recognition of the importance of improving diversity across the
financial services industry
“. 20

I have given a number of speeches over
the past year, as have other colleagues from the Central Bank, in which we have
spoken about the importance of diversity in financial services.

For many of the same reasons that the
Central Bank has prioritised diversity and inclusion within our own
organisation, we are also focused on diversity in the financial services we
regulate. As I have touched on, there is strong evidence to show that diversity
at senior levels of regulated entities can help to reduce the likelihood of
groupthink, increase the level of challenge and improve decision making and
risk management. There is also a clear connection between the diversity in an
organisation and its culture.

These are all attributes that as a
regulator we should and do care about. Groupthink, in particular, was
identified in the Nyberg Report as a contributing factor to the financial
crisis in Ireland.  In my own experience, a lack of
diversity at senior management and board level in organisations is a leading
indicator of elevated behaviour and culture risks, and consequently prudential
and conduct risks.

If we look at the causes of the
financial crisis, we can see clear linkages to behaviour, culture and
diversity. It is clear that there were multiple failures and multiple
individual and collective decisions leading up to the financial crisis.  For
example, collective groupthink, business model and strategy failures,
governance and control issues, financial misconduct, excessive optimism,
regulatory failures, political interference and so on.  There are behavioural and cultural linkages
across all of these failures. 

The behaviours and underlying cultures
within financial services firms were wholly inappropriate. Short termism
was incentivised, particularly with respect to shareholder returns. 
Effective internal challenge of the prevailing views was not. While many
improvements have been made, not enough progress has been made with respect to
underlying behaviours, cultures and incentives.

The culture in the retail banks has led to
catastrophic failings in the treatment of customers affected by the tracker
mortgage scandal, which has done further lasting damage to the reputation of
the Irish banking sector. Globally, there is evidence of cultural failings
across the financial services sector, be it Wells Fargo, the LIBOR scandal,
RBS, PPI and so on.  Moreover, at an
individual firm level, I have seen too many examples where regulated firms are
having to be pushed too hard by the regulator to address failings and remediate
issues, where the focus is on the letter of the law and not the desirable
outcome.  In some cases this has led,
ultimately, to the failure of the firm when earlier acceptance and change would
have, perhaps, preserved it. 

I spoke at an
event last year21, during which I highlighted that the consequential breakdown in public
trust and confidence in financial services, and the need for meaningful
cultural change to repair and restore trust.  
As the reputation of financial services firms has been damaged there is
a tendency for a greater degree of commoditisation of services, products and
product providers.  If consumers do not
trust providers or their products, they are understandably going to be more
driven by price, when other factors may also be important in terms of
suitability.  Concerns are so deep rooted
that there is a lack of trust regarding pricing (e.g. car insurance, mortgage
pricing), and customer treatment (e.g. re mortgage and SME borrowers in
distress). Ultimately, I do not think this is positive from either a financial stability or a
consumer protection perspective.

Diversity and inclusion have roles to play in
mitigating some of these risks. McKinsey22 research in this area suggests that
companies in the top quartile for gender or racial and ethnic diversity are
more likely to have financial returns above their national industry medians.
Companies in the bottom quartile in these dimensions are statistically less
likely to achieve above-average returns.

In other
words, diversity is directly relevant to the key outcomes that we are seeking
to achieve for regulated firms and the system as a whole – specifically, that
regulated firms are well governed, with appropriate cultures (including
relating to challenge) and risk management arrangements in place; and that they
have business models that generate profits over the long term in a sustainable
way. 

Current levels of diversity in financial
firms

Given the positive impact that diversity
can have on behaviour and culture in financial firms, it is concerning that a
significant imbalance in gender and other diversity aspects remains at senior
levels of most regulated firms in Ireland.

In September 2008, before the bank
guarantee, the main retail banks operating in Ireland had no female executives
at Board level; the 18% of female Board members were non-executives. 

Worryingly, the situation is not
improving. Approximately 80% of the most senior and influential appointments in
regulated firms in Ireland between 2012 and 2016 were male23. Comparisons
are almost certainly worse for any other measure of diversity. 

Strikingly, underneath the headline
numbers, there is an even greater gender imbalance for roles that are revenue
generating. At the board level, women comprised 12% of nominations for
Chief Executive roles, 12% of nominations for Chairman of the Board roles, 15%
of nominations for executive director roles and 18% of nominations for
non-executive director roles.

It is also interesting to look at the split
across roles – women are more prominent in risk, compliance and audit
functions, men even more so in front line / revenue generating roles.

This is not to suggest that diversity is
all about gender. There are no studies that I have seen for the EU or
Ireland on racial and ethnic or sexual orientation diversity in business, but I
have no reason to believe that it is any better than the UK – where 78% of UK
companies have senior-leadership teams that fail to reflect the demographic
composition of the country’s labour force and population – or indeed the US,
where the figure is 91%.

So the current situation, in Ireland at
least, is concerning.  Last year, we reviewed a sample of diversity
policies in regulated firms, which many financial services firms are now
required to have (under the CRD, Solvency II and the Central Bank’s Corporate
Governance Codes). These are not going to turn the dial.

In the main, they were striking for
their lack of ambition. In many cases internal targets that are already being
met have been set, many lack accountability, and there is little evidence that
progress against them is being monitored. Remarkably, for two large financial
services firms, their diversity policies were exactly the same, word for word,
with the exception of the names of the firms and some of the targets they had.

Notwithstanding these issues, there are
financial services firms that have a healthy gender balance, with nominations
among certain banks and insurance companies at 44% and 45% female applicants
over the past five years. There are financial services firms that have
diversity policies and programmes that demonstrate that diversity is a
priority. There are also sector wide initiatives, such as the 30% Club, and
the work of FuSIoN itself, which are focusing on addressing these issues, which
the Central Bank is actively participating in.

But more needs to be done.

What actions are we taking

As
stated by Governor Lane during his address to the European Financial Forum, “The financial services industry can certainly expect to see a
continued increase in the intensity and intrusiveness of our engagement on
diversity
.24

Diversity is supervisable. We can
legitimately expect regulated firms to meaningfully address diversity and
inclusion in the boardroom, at the executive level and the pipeline of talent
needed to run the organisation in the long-term.  Our supervisory work is, therefore, being
enhanced as follows:

  • We can assess whether boards and the executive are taking responsibility for actively promoting diversity and inclusion at all levels of the firm, to improve decision-making and how this, in turn is impacting on behaviour and culture.
  • We will review the policies that are put in place to deliver this outcome. We will analyse data showing the outcomes from a firm and a sector perspective on an annual basis. We expect to publish data in this regard this coming March.
  • We are including aspects of diversity in the upcoming Behaviour and Culture Review of the retail banks.  This is a major step forward in our approach, which we will apply in other reviews in different sectors. It puts the Central Bank at the forefront, internationally, of the regulatory work on diversity.
  • We are reviewing our governance codes and requirements to be more explicit in terms of expectations regarding diversity policies.  
  • We will also be considering whether our own actions are inhibiting change.  For example, in our consideration of fitness and probity applications, are we considering exclusively on an individual basis or a more rounded consideration of the construct and diversity of the board, executive and so on?  That is not to say that we should lower our standards, but that we will be enhancing how we consider the effectiveness of the board and the executive as a whole.

Risks and Barriers

I would
accept that change is not without risk or challenge. There are deeply
entrenched issues that need to be overcome – many of which are societal.    Recent studies of the gender pay gap
affecting Uber drivers25
are interesting in highlighting deep rooted issues and behaviours that go
beyond an individual firm’s, no matter how large, ability to change.   

There is also
more controversial research which shows correlation (and argues causation)
between higher levels of diversity and higher levels of societal mistrust26.  Whatever the drivers for this mistrust, it is
clear that an organisational level and a more macro level, a focus on inclusion
is critically important too.

But these
risks and barriers are relatively small compared to the potential benefits at
both a system wide level and an individual firm level if they can be overcome.

Conclusion

 In my role I am focused on ensuring that
the Central Bank is safeguarding stability and protecting consumers, and
delivering a vision whereby the financial services system in Ireland delivers
for both the economy and its customers in a sustainable way over the long
term.   There is clearly more to be done
to have confidence in the achievement of this vision for the Irish financial
services system.

Diversity and inclusion has a role to
play in achieving this vision. This includes through ensuring that regulated
firms have appropriate and effective governance, risk management and control
frameworks in place, that their actual cultures are consistent with their
stated aspirations, and that their business models are sustainable over the
longer term. 

In other words, meaningful and sustained
improvements in diversity and inclusion can help to improve the safety and
soundness of financial services firms and contribute to the restoration of
trust in the financial system in Ireland. Diversity and inclusion are therefore
critically important to the Central Bank’s mandate of safeguarding stability
and protecting consumers, and will continue to be high on my list of priorities
both internally within the Central Bank, and externally as a regulator and
supervisor of the financial services sector.

I am also
committed to continuing to enhance the Central Bank as a place to work, where
all our people can bring their whole serves to work, and achieve their full
potential.  Our diversity and inclusion
work will continue to have a strong part to play in achievement of this vision
too.

Thank you for your attention.


1 With thanks to Siobhán Kirrane for assistance in preparing my remarks

2 Speaking at the Importance
of Diversity in Financial Services
event of the FuSIoN Network, 13 February 2018

4 Central Bank of Ireland data

Hoogendoorn, S., Oosterbeek, H. and van
Praag, M. (2013) The impact of gender diversity on the performance of business teams:
evidence from a field experiment.
Management Science, 59, pp. 1514–1528.

7 Zelechowski, D. and Bilimoria, D. (2004) Characteristics of women and men
corporate inside directors in the US.
Corporate Governance: An International
Review, 12(3), pp. 337–42.; Maznevski,
M. L. (1994) Understanding our differences: Performance in decision-making groups
with diverse members.
Human Relations, 47(5), pp. 531–552.

9 Fons Trompenaars and Charles Hampden Turner, Riding
the Waves of Innovation (McGraw Hill, 2012).

10 Robinson,
G. and Dechant, K. (1997) Building a business case for diversity. Academy
of Management Executive, 11, pp. 164–177.; Brown, D., Brown, D. and
Anastasopoulos, V. (2002) Women on boards: Not just the right thing . . .
But the
brightthing. Report, 341-02: The Conference Board of Canada,
Ottawa.; See Procter & Gamble’s ‘Connect and develop’ tool
which increased Research and Development productivity by 60 per cent.

11 12 13 Scott Page, The
Difference (Princeton University Press, 2004).

14 James Surowiecki,
The Wisdom of Crowds: Why the many are smarter than the few and how collective
wisdom shapes business, economies, societies and nations (Knopf Doubleday,
2004).

15 Elizabeth G. Chambers, Mark Fouldon,
Helen Handfield-Jones, Steven M. Hankin, Edward G. Michaels III 1998, The War for Talent, McKinsey Quarterly; Elizabeth L.
Axelrod, Helen Handfield-Jones, and Timothy A. Welsh 2001, The War for Talent, Part Two, McKinsey Quarterly .

16 Ed Michaels, Helen
Handfield-Jones, Beth
Axelrod, The War for
Talent, Harvard
Business School Press Boston, Massachusetts, Copyright
2001 McKinsey & Company, Inc; Edward E. Lawler III 2008, Talent: Making People
Your Competitive Advantage, Jossey-Bass, A Wiley Imprint; Growth reimagined. The talent race is back on, 14th Annual
Global CEO Survey, PwC.

17 and 19 Stephen Frost, The inclusion imperative: How real inclusion creates
better business and builds better societies, 2014.



Original Article Here

Leave a Reply

Your email address will not be published. Required fields are marked *