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Better conduct and better value from cognitive diversity

At a recent Culture Management workshop at the UK office of a global banking client, there was unsurprisingly vigorous discussion about the need for diversity, on a number of fronts, linked to the strong perceived cultural influence felt from head office (based outside the UK). At the end of the session, a recent arrival to the office, who had been relatively quiet during the session, took me aside to comment on one group’s discussion about diversity, in particular that:

  • Gender and racial rebalancing damage true equality, which should be based on merit.

  • Targets for diversity are not helpful, because they do not focus on value that diverse backgrounds bring, just numbers.

  • Traditional mind-sets reinforce cultures in which managers expect a specific way of thinking in the organisation. Thus managers can feel that new ideas do not confirm their own assumptions and open, honest dialogue may threaten their sense of authority.

  • This is exacerbated by a tendency for management to remain physically isolated from what happens daily on the floor of their organisations. This weakens communication, openness and trust needed for effective identification and management of problems.

Her comments highlighted two points:

  1. Newcomers in the firm did not feel comfortable challenging what appeared to be orthodox views, even in a workshop on Culture enhancement at a firm that was open-minded enough to implement such a programme.

  2. The difficulty with Diversity targets is that they focus on the superficial, outward indicators. ‘Good’ diversity metrics in a firm may be part of a Conduct framework, but they do not go far enough in giving a firm access to the skills and value creation available to it in large swathes of the population.

Over 20 years ago David A. Thomas and Robin J. Ely made this point in A New Paradigm for Managing Diversity. Diversity laws and programmes are often designed for fairness, which, like many Conduct frameworks, focusses on achieving an absence of bad symptoms. However, they miss the positive value that cognitive diversity (as opposed to Diversity per se) brings to organisations – particularly in decision making.

Decisions are based on two sources of information: mental models based on past experience and the information we have available. Both are flawed because both are incomplete, or limited. More information based on greater breadth of expertise leads to better decisions. A firm that encourages the articulation of diverse perspectives (offered by not only gender and racial diversity, but also educational, geographical and experiential diversity) will therefore be better equipped to challenge traditional assumptions and orthodoxies and so avoid threats imposed by Conduct Risks and market evolution alike.

What threatens cognitive diversity, even in a supposedly diverse and enlightened organisation?

One perspective is that well-known behavioural models are at play: confirmation bias and lack of awareness (cognitive dissonance) can cause a different, even opposite message to be heard than that which is officially or overtly communicated.

Consider this scenario:

  • Managers are under pressure to deliver targets, so fall back on heuristics and seek self-confirmation as they struggle to manage highly active teams. The balance between consensus and conflict is very difficult to strike.

  • Instinctively, to make life easier, managers tend to avoid challenge and therefore hire in their own image. They also create a culture in which similar types of behaviour are rewarded, as this can seem to be the most efficient route to achieve clear financial performance targets.

  • This becomes an imbued culture that can deter individuals with different ideas from challenging the status quo.

  • Firms must beware the subtle effect of a top-down culture that can inadvertently suppress the valuable alternative perspectives from cognitively diverse individuals and so perpetuate a type of groupthink – as appeared to be the effect on my interlocutor at the start of this piece

How can we counter this effect?

Even though cognitive diversity creates value in business, few firms have embraced it. This surely asks if we are rewarding the right behaviour? Do we want full engagement, or just a blinkered focus on short term targets?

Many firms propagate old practices, for fear of highlighting past flawed decisions or models. This does nothing to remotivate staff and misses out on the potential contribution from a huge swathe of the workforce. Many large firms refer to this valuable, but demotivated core (junior to middle managers) as the permafrost, but they are the critical front-line resource for managing effective Conduct and ensuring a robust Culture as expected by the regulators in the new environment

Firms could usefully reassess their incentive structures and what behaviour they really reward, how they value the capabilities to support a productive environment and recognise the contributions of both existing and potential future colleagues.

So, to recap:

It is not the ticking of a Diversity box that will help a firm meet the challenges set by the future, but a culture that rewards diverse ways of thinking.

Opening the door to the full potential of your colleagues can release the ethical and moral sense that will ensure everyone is able to do the right thing and thus exceed regulatory expectations, such as Conduct of Business standards and support strategic goals – where these are clear.

A creative, innovative approach to incentive programmes in banking can therefore both mitigate risk and create value in the long-term. Doing nothing is therefore value-destructive.

The aim of the UK Finance Conduct Risk and Culture Academy is to offer the environment that helps our members make a real difference. It creates a rare opportunity for members to come together with expert practitioners, academics and – most importantly - each other, to learn from successes and mistakes, leverage new thinking and build fresh approaches to designing and embedding Conduct and Culture programmes.

This relies on open discourse, challenging thinking and best practice transfer all geared to rebuilding Trust in banking, to support economic growth, good customer outcomes and market integrity – goals that are aligned with society, shareholders, customers and regulators alike.

For more information on the Academy click here


 

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