Weekend Reading: More of the Same, but Different
By: Stephen J. Scott , Founder & CEO of Starling
This piece first appeared in Starling Insights' newsletter on May 11, 2024. If you are interested in receiving our thrice-weekly newsletter, among many other benefits, please consider signing up as a Member of Starling Insights.
I usually enjoy affording myself some quiet time to draft these Weekend Readings. It’s nice to have the space of time and mind to give deeper thought to topics of interest and import.?But there is no pleasure in drafting this continuation of last week’s musings, which now seem sadly prescient.
That post questioned the true purpose of the corporate internal investigations conducted by law firms in the wake of corporate scandals, asking whether these supposedly independent inquiries are aimed “at helping to establish ground truths, or at hurriedly masking them.”??
I posed that question in connection with an ongoing inquiry into allegations of pervasive misconduct at the US Federal Deposit Insurance Corporation (FDIC) . Last week saw the release of a report prepared by Cleary Gottlieb, the law firm hired by the board of the FDIC to investigate these allegations. The Cleary Gottlieb report offers readers the usual catalog of sins that follow such inquiries, and it makes for appropriately depressing reading.?
A high-level conclusion:?
[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.
[A] patriarchal, insular, and risk-averse culture has contributed to the conditions that allowed for this workplace misconduct to occur and persist, and [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.
Depressing enough, and the report offers all the grim details. But far more depressing still is Cleary Gottliebs’s uninspiring and uninspired Enron-era list of remedial recommendations.
In recent years, in jurisdictions worldwide, banking sector regulators have emphasized the importance of culture in driving risk at the firms they oversee, and an increasing number of them have recognized that an appreciation of behavioral science is useful to both the governance and supervision of cultural challenges and the conduct risks they may pose.?
Yet Clearly Gottlieb?makes but one reference to behavioral science in its report: and there, only to observe that no one at the FDIC seems to have had the behavioral science training needed to permit its management "to understand expected reactions to being a victim of harassment.”? And while industry leaders in many sectors are deploying predictive analytics to “predict & prevent” misconduct challenges, Clearly Gottlieb advises the FDIC to double down on the very “detect and correct” mindset that led directly to its current disgrace.?
In short, and perhaps unsurprisingly, Cleary Gottlieb?has offered up a report by lawyers that reads like a work-order for more lawyers.?I’m not sure the employees at the FDIC will take much comfort in that, and I hope Chairman Gruenberg will have something more thoughtful to put before Congress when he appears before the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs this coming week.
A sexualized boy’s club
Last November, headlines were filled with lewd tales of a toxic workplace culture at the US agency. "Female examiners left the FDIC because of what they say was a sexualized, boys' club environment." A Special Committee of the FDIC board appointed Cleary Gottlieb to conduct an investigation, culminating in last week’s report, wherein, we learn that, of the 510 hotline reports related to subjects that fell within the scope of the lawyers review:
While it is perhaps unsurprising, it is also wholly justified that House Financial Services Committee Chairman Patrick McHenry has called for FDIC Chair Gruenberg’s resignation.?“The FDIC must be held to the same standards of conduct it imposes on the entities it regulates,” the Republican Congressman rightly insists.?
Equally unsurprising, yet perhaps far less justified, are the more muted reactions coming from the other side of the political aisle.?When even the liberal-leaning NPR reports that “Toxic Culture is the Norm at the FDIC,” the conservative-leaning editors of the Wall Street Journal are dead right to ask “Where is the Outrage Over the FDIC?”?
So allow me to offer a little outrage of my own.
More of the same, but different
“Hundreds of our colleagues reported painful experiences of mistreatment and feelings of fear, anger, and sadness,” Gruenberg acknowledged when the Cleary Gottlieb report was released, bravely adding that “As Chairman, I am ultimately responsible for everything that happens at our agency, including our workplace culture.”?
I applaud that, and it is surely commendable that Mr. Gruenberg went on to pledge that he would work to implement all of the remedial recommendations contained in the report.?So let’s have a look at those.?We’ve listed them below, alongside a list of the relevant current and past practices that the report also outlines.?
To summarize, at the recommendation of counsel, Mr. Gruenberg has pledged to do much more of the same, only better this time. The FDIC will also endeavor to protect victims of harassment, after their victimization. And it will seek to transform its culture, by appointing a 3rd party “monitor” (presumably a lawyer) to oversee that otherwise unspecified effort.
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“Management’s responses to allegations of misconduct, as well as the culture and conditions that gave rise to them, have been insufficient and ineffective,” the Cleary Gottlieb inquiry into the misconduct at the FDIC concludes. “To fully and effectively address this conduct and these conditions, we believe cultural and structural change is necessary.”? Indeed.
But the recommendations put forward by Clearly Gottlieb will not go far in that direction, and this should incite at least a little productive outrage in anyone genuinely concerned for the wellbeing of our federal employees and the effectiveness of the agencies they serve.??
Moreover, it can only be expected to infuriate the victims of abuse within those agencies who are now asked to believe that more of the same (but better!) will somehow produce different outcomes than those to which they have sadly grown accustomed.
Do as I say, not as I do (revisited)
In an effort to shape their own culture and conduct predispositions in directions desired by both management and supervisors alike, banks devote enormous budgetary resources to HR-oriented employee surveys, 360-reviews, ethics training, anonymous hotlines, town hall meetings, ‘listen-up’ workshops, etc.?
Far more goes to the small army of lawyers responsible for crafting the associated policies and procedures, and for running the systems of record necessary to track the inevitable breaches of such. And then there are the costs associated with maintaining staff responsible for overseeing this array of what is widely disregarded as “administrivia,” in the widely-used industry vernacular.??
Despite this investment, well-intentioned and sincere bank managements remain frustrated by continued failures in their culture and conduct risk governance, and the punitive fines regularly assessed by regulators, which have added up to several hundreds of billions of dollars in further cost (in the global aggregate) in the 15-years since the financial crisis.
Regulators are similarly frustrated by the industry’s poor progress in better managing its culture challenges, and they are now asserting a readiness to hold board members and senior leadership personally accountable for achieving better outcomes.?
We see this in the FDIC’s October 2023 Proposed Guidelines “Establishing Standards for Corporate Governance and Risk Management for Covered Institutions With Total Consolidated Assets of $10 Billion or More.”
“The ‘tone at the top’ is integral to promoting a culture and environment of responsible and ethical behavior,” the FDIC insists therein.? “The qualitative components” of such should set forth the conditions that would promote “a safe and sound risk culture” and identify how the covered institutions will assess cultural risks, “including those that are difficult to quantify.”
Outlining relevant Duties of the Board, the FDIC argues, “The board should establish a corporate culture and work environment that promotes responsible, ethical behavior,” adding that this culture and environment should not condone “unethical behavior, or violations of law, regulation, or policy” and insisting that “the board should hold directors, officers, and employees accountable for such conduct.”
There is little in the remedial plan put forward by Cleary Gottlieb, or in the culture change efforts pledged by Chairman Gruenberg, to suggest that the FDIC would successfully satisfy the demands it asserts here vis-à-vis the institutions it oversees.??
What got you here won’t get you there
To be clear, I believe the FDIC Special Committee had the best of intentions in hiring Cleary Gottlieb to conduct an independent internal review, and I believe that this was a responsible and necessary initial step.? I further believe that Clearly Gottlieb brought admirable talent and professionalism to its task, and that it produced an excellent and thorough accounting of the events and circumstances within the FDIC that now require thoughtful remedy.
My frustration is with the remedial planning thus far outlined.?
In my Weekend Reading post last Friday, I suggested that the litmus test question to be answered in circumstances such as those currently faced by the FDIC is this: what will help us to evidence our trustworthiness most sustainably? The FDIC has yet to put forward a compelling answer to that question, and the Clearly Gottlieb report offers little help.
Those interested in a thoughtful discussion of what might be helpful would do well to visit Starling Insights, watching for the release of our 7th annual Compendium — an inquiry into “Culture & Conduct Risk in the Banking Sector — Why it matters and what the industry is doing to address it” — and by hearing from the leading industry figures who will participate in a series of relevant discussions during our June 11th online launch event.
And please note that anyone working with the FDIC is very welcome to join the day-long event at no cost —just reach out to us at [email protected]. Don't miss hearing from:
Amy Edmondson , Professor at Harvard Business School & Author of The Fearless Organization
Elizabeth Broderick , past-Australian Sex Discrimination Commissioner & Author of the "Report into Workplace Culture at Rio Tinto"