‘Regulators have to learn to humbly accept their failures and limitations…’

A brief AretéThoughts Q&A with Srikanth Mangalam

What is the most important contribution risk management can make to the lives of people in organisations?

Practicing risk management has taught me to look at the big picture, understand the role of yours and others’ actions in that broader context, and the consequences they lead to.

It allows you to break silos, introduces a sense of discipline, proportionality and equity required to solve problems. If practiced correctly, it compels you to focus on identifying and addressing what may seem like competing or conflicting objectives or risks (e.g., public health protection versus economic revitalisation) and requires collaboration, trust, rational thinking and empathy.

Clearly, we have seen the need for all these attributes to be at play since the advent of the pandemic and our success will depend on how we apply them in a cohesive, integrated manner moving forward.

What is your current favourite book or podcast and why?

As a risk management professional, I was taught to always look at approaching and addressing problems or risks through the lens of causative reasoning.

Understanding cause and effect has been my mantra of practice and which I have always felt as being neglected by even the most knowledgeable especially in my line of work. Reading The Book of Why’ by Judea Pearl provided an extreme sense of validation and reassurance. In a world exposed by the potential threat of irresponsible data scientists, he has described the dangers of ignoring causality in the proliferation of AI and other intrusive technologies.

“Correlation is not causation” is something that is taught early in all our educational lives but continues to be indiscriminately practiced especially in domains affecting peoples’ lives.

I have been advocating people in all decision making spheres to read this book as it provides a layman description of the importance of understanding and applying causal reasoning.

What action could a company take that would make a difference to successful recovery from the pandemic?

I will speak from the perspective of regulators who have a responsibility of protecting and ensuring peoples’ lives and livelihoods. I strongly believe that one of the causal factors for the advent and the consequences of the pandemic is a global regulatory failure to collaborate.

What Covid-19 has illustrated very clearly is the presence and manifestation of interconnected risks. Regulations are developed and administered to address these risks but rarely in a coordinated manner. Regulators establish these artificial barriers that may be jurisdictional or sectoral in a nature because they assume there is a starting and ending point for the regulations they administer.

However, risks don’t respect such barriers, are not linear and extremely complex. Unless there is a coordinated and a global effort to break the silos and address the interconnectedness of such risks, we are likely to see several such occurrences in the future.

Regulators have to learn to humbly accept their failures and limitations, prepare to compromise on their authority and work collaboratively, and focus on broader social outcomes (and not strictly on their artificially drawn mandates) even if they appear to be competing or conflicting in nature. Take the example of vaccine approvals. It makes no sense to me as to why we couldn’t have had a global approach to the regulatory review and approval process.

Srikanth Mangalam is Founder and President of the Risk Management (PRISM) Institute.

‘…what 99% of people intuitively want from their workplace’

A brief AretéThoughts Q&A with Dr Roger Miles:

What is the most important contribution culture can make to the lives of people in organisations?

To affirm a collective, pro-social purpose. This may partly be found within “what shareholders think their money represents” but increasingly it’s so much more than that: a sense that as an organisation moves along, it leaves a trace of something greater than itself, rather than (literally or metaphorically) gouging a trench across the landscape as it passes by.

What’s odd to me is that we even have to spell this out, as actually it’s just what 99% of people intuitively want from their workplace. That basic human tendency to goodness may be why the infamous “1%” are so often to be found in charge. After the 2008 financial crisis we saw a kind of preview of a social reckoning – vox pop risk – that we’re seeing again during the mad global behavioural experiment that is Covid-19 response. With my political science hat on for a second, there’s talk of an “Attlee moment” akin to when in 1945 Churchill, having just won a war, found himself abruptly dumped by the voters. We might see this happen to governments around the world. I love how modern behavioural science is helping us to make better and better predictive lenses, by the way. Though I may be proved wrong on this call.

Regrettably, that simple, happy popular pull towards the satisfaction of “doing something worthwhile” gets knocked off course by how a lot of organisations operate. On my travels, in business and in the public sector, I see so many systems that are blind to the human factor. What the science calls “the informal organisation”, I prefer simply to call “What Actually Happens”. Badly designed systems of reward sit alongside control instructions that mostly seem to have been conceived by people with no empathy or even sightline towards what front-line staff actually do, with the controls then applied in such a clumsy way that they demotivate every person they touch.

For example, I was in a big bank last month where they proudly showed me their ‘Conduct Policy’, which consisted of more than 95 prohibitions (“don’t…”) versus just five motivators (“do…”). And they wondered why they weren’t winning any staff hearts and minds for their ‘Good Conduct’ initiative. It’s all very well Conduct regulators throwing around phrases like “psychological safety”, “speak-up culture” and “anti-bystanding” but you don’t overcome an organisation’s culture of fear just by preaching at people. Having Chief Executives who deny the existence of bias effects doesn’t help much, either. I actually thought that the science had won that debate, but apparently there are professional firms’ boardrooms still in full denial. Never mind, all the more work for me, or someone or other behavioural!

In certain sectors – again, finance, for example – it doesn’t help that there’s quite a history of suppressing ‘fail-learn’ signals, and promoting delusional and sociopathic risk-takers. And then they wonder why they’re so short of metacognitive skills.

What is your current favourite book or podcast and why?

I’m going to cheat slightly by choosing three if I may.

The Human Risk podcast by Christian Hunt has great new science insights and is consistently thought-provoking but also fun. It hosts an ever-expanding cast of applied behavioural science visionaries, usually with amazing anecdotes from their front line work. It understands that the best behavioural science is about closely studying “what actually happens”, not just building elegant theoretical models. My favourite people to work with, like Christian, are all driven by curiosity to understand why the human animal behaves as it does. Not coincidentally, they’re often also polymaths and second-career ‘outsiders’, bringing a fresh eye for the telling human detail.

I can’t go straight to a “best book”, partly because I always have at least a couple of science books on the go as well as something literary. The three (loosely) behavioural science books I’ve most enjoyed in the past year are:

David Omand’s How Spies Think: looking at bias, trustworthiness and situational awareness; it reminds me of a more Civil Service version of Gavin de Becker’s classic The Gift of Fear, possibly the best account ever of how to rebalance rationality against intuition.

Simon Baron-Cohen’s The Pattern-Seekers: delving into alternative cognitive states. It suggests that, for example, people with autism bring – have already brought – huge contributions to human civilisation and that far more can be achieved if only we would let more ‘non-neurotypical’ people join us at the table.

Which brings me to: My shortlisted science book would have to be Matthew Syed’s Rebel Ideas. Syed is reliably brilliant; one of the very best popular science writers as he’s both a great finder of evidence and a great storyteller, just straightforwardly excellent at the craft of writing. In this book he tackles cognitive diversity, a factor that’s vital to a healthy culture for any institution, yet can be really tricky to assess. Organisations of all kinds have been fooling themselves for ages by fixating on ‘conventional’ diversity markers (gender, ethnicity, and so on).

Cognitive diversity is way more powerful than any of these as a driver of business value, reflexivity and healthy culture change. But because of course it’s much harder to report on than those surface diversity indicators, few firms appreciate its huge, untapped value.

On the pure literary side I’m into John Mullan’s The Artful Dickens. It’s a bravura show of discovering how a great writer thinks, using some stupendously clever language analysis. Most of what we might call “literary psychoanalysis” is dodgy and opinionated, but this is the real deal.

Maybe I like it because it also draws on something that’s going among the language-analytic geek community (confessing I’m one) in ‘reg tech’ right now. We’re seeing in financial sector Conduct analytics, for example, with ultra-smart metalinguistic tools like Digital Reasoning starting to unlock the secrets of what language AI people call “unstructured data” but everyone else would call “casual workplace conversations”.

Do you think ESG investing will become mainstream and if so, how long do you think it will take?

Yes. Once the institutional investors’ AIs realise that ESG (Environmental, Social and corporate Governance) really does deliver durable value.

Or, for the same reason, possibly no. We’ve already seen an alarming tendency for AI (artificial intelligence) systems designers to ‘bake in biases’ – that is, for the systems they produce to simply replicate and amplify the programmers’ own perceptual foibles. If the people who programme trading algorithms persist in chasing maximum short-term returns – the flash-trading tendency – then we’ll probably succeed in incinerating the planet before the full resilience benefits of ESG have time to assert themselves. Which would be a pity, not to mention a waste of a little blue planet.

Roger Miles is a behavioural researcher and lecturer specialising in the fields of risk cognition and financial regulatory design. He is co-Founder and Faculty Lead at UK Finance’s Conduct and Culture Academy. His published work includes serial Culture commentaries for Thomson Reuters, and the books Culture Audit in Financial Services and Conduct Risk Management: A behavioural approach.

Nordic Business Ethics Day 2021: From words to a culture of integrity

This just in from our friends at Nordic Business Ethics:

Expressing a commitment to ethical business practices is becoming the norm for most companies.

Drafting a policy and implementing an e-learning can be done fairly easily. A CEO can express that ethical business practices is part of the company DNA and has a zero tolerance against misconduct in ten seconds.

The ultimate purpose of business ethics is however not the words and ambition, but to influence behaviors and the impact. How do we ensure that our work has a true impact, on the company culture and beyond? 

What do you reply to a board member or CEO who questions the investments needed into ethics & compliance with the statement that ”we have a great culture”, ”we don’t have the same issues as company X”, ”it is just common sense, everyone should know that we only do what is right”…?

How do we ensure that the work we do is not dependent on us as individuals, but become institutionalized?

How do you respond to a regulatory who asks about proof of a ‘culture of integrity’?

Nordic Business Ethics have invited exceptional experts to guide us through these topics, from Brazil, the US and our own backyard. It is the annual Business Ethics Day on April 29. 

P.S. Use the nbe21earlybird code to get 25% off your ticket.

P.P.S. Talking of Brazil, in case you didn’t see this already: The Future of Regulation is Culture

“If trust were a colour, it would be grey”

The crisis of confidence in legislation – a brief review

By Maria De Benedetto, Nicola Lupo and Nicoletta Rangone (eds) Nomos Hart 2020

The Rome Conference that gave birth to this excellent book took place before the start of the Pandemic. The topic would turn out to be even more prescient and important than the various expert authors could have predicted at the time. This is an important work that should be widely read by anyone involved and/or interested in law-making and regulation at any level. I would also recommend it to anyone trying to make sense of the rise of populism and pondering the future of democracy. It makes sobering reading indeed.

Trust is the main component of social capital

As De Benedetto points out in her introduction, trust is the main component of social capital and operates at every level of social life affecting human relations. She reminds us that trust always presupposes incomplete information. Hence the title of this blog, which is a direct quote. The “white” condition means complete information and “black” no information at all. Trust is needed to fill the knowledge gap in the “grey” condition. Trust is what is needed to overcome fear and to make taking the risk involved acceptable. Given that our world has become so complex, and despite our increasing knowledge, often unknowable, trust plays a key role in society. So, what are the consequences of the decline in trust in institutions documented by the annual Edelman Trust Barometer and illustrated by the rise of populism?

A more specific question that has been playing on my mind for the past year: how has trust in government or the lack of it influenced compliance with social distancing, mask wearing and other pandemic related regulations? Also, what other factors relating to regulation have influenced how people behave? Although the Pandemic is not the focus of the book (it is mentioned as the editorial process was ongoing when it began) there are plenty of answers to these questions in this volume.

Institutions need public trust in order to function properly. Addressing various aspects of the decline in trust in public institutions, it asks important questions. Can better legislation and regulation help to reverse this decline? What role has legislation and regulation played in that decline? Have the numerous better regulation initiatives undertaken by the EU and some national governments improved the situation? Does transparency increase or decrease trust?

Many of the chapters focus on the European Union and make interesting reading in the wake of Brexit. In addition to analysing various aspects of the problem, some of the chapters pose and debate various solutions. Specifically, Helen Xanthaki discusses how the EU could use its legislation to speak directly to EU citizens and how to go about it. One only wishes that her ideas had been taken up years earlier to avoid the sad saga of Britain leaving the EU.

A roadmap

Xanthaki sets out a roadmap to “loyalty and trust” which begins by identifying the different categories of users of EU legislation (EU citizen lay people, sophisticated non-lawyers who use EU legislation in their work and finally lawyers, judges and senior law librarians. These groups each have different capacities to understand, different questions and different usages or purposes for reading legislation. Step 2 involves restructuring legislation and pitching different sections at these different user groups in a language they can understand. Reading her suggestion (as a former lawyer who believes in plain language) I ask myself why all legislation hasn’t been written this way already. It is worth setting out here as I take it from the book::

Part 1 would speak to lay people, giving the main regulatory messages and conveying the essence of the legislation. For example, what is the reason for legislating on this topic; how does the legislation benefit citizens and enterprises and what are the rights and obligations given under this law. Perhaps if people were better able to understand the benefits of EU legislation before losing them, we wouldn’t be where we are today in the UK.

Part 2 would give further details in balanced language as well as list duties of Member States and

Part 3 would deal with issues of legislative interpretation, procedure, application of particular relevance to legal professionals.

Re-establish lost channels of communication

The benefits of this approach as described by Xanthaki would be to re-establish lost channels of communication and make citizens participants in the process. This would enhance the legitimacy of EU institutions and reinvigorate democracy, for the long-term benefit of the EU and its citizens. Significant improvements have been made in the EU’s regulatory process, as explained in detail in other chapters of the book, however I feel this point about a lack of direct communication between the EU and its’ citizens is particularly important.

The amount and complexity of laws and regulation has increased significantly and this increase has created more distance between citizens and the state as they feel burdened without understanding the benefits. Clearly the number and complexity of regulations must be rationalised at all levels of government. The impulse to add more regulation as the answer to every problem that arises must be resisted. Paradoxically, it is precisely this resort to formalistic rules to fill the trust gap that has contributed to widening the trust gap.

As Florentin Blanc points out in his chapter, we are in a cycle of distrust. His research shows that outcomes are influenced by different regulatory delivery systems. Systems that emphasize support for voluntary compliance, that use diverse and complementary tools and that are based upon risk proportionality perform better in terms of delivering desired outcomes. He cites my co-author Professor Chris Hodges OBE for evidence that deterrence is an insufficient tool to address serious non-compliance due, for example to toxic corporate cultures. And Blanc describes how one of the purported solutions to the problem of corruption in public officials, which is to remove their discretion and require them to report and enforce against all violations is part of the problem, rather than a solution. How can you increase trust between a regulator and a business that is trying to do the right thing and may need help when any non-compliance that is noticed by the regulator MUST result in a fine or other penalty? The assumption that all non-compliances are intentional is incorrect and dangerous. As pointed out earlier given the complexity and amount of regulation, often applying to the same activity, much of the non-compliance that results is the result of lack of understanding, skills and/or resources to comply. Also in the past twenty years behavioural science research has improved our understanding of why good people do bad things.

A sobering point

There is so much more in this book that warrants attention. I would like to end with a very sobering point made in the conclusion by Coglianese. His theme is the law as scapegoat. He points out that it is easy to blame the law for every negative social condition people are experiencing. Most populists do this, paradoxically in order to gain power. Scapegoating is easier than building coalitions to tackle complex problems and take unpopular decisions he rightly says. Coglianese also explains that law shares many features with migrants: it is foreign to most people, they are both relatively powerless to defend themselves and denigrating them gives people a sense of superiority. However, scapegoating the law and its institutions further decreases trust even further, and ultimately clears the way for the rise of authoritarianism. Yes, nothing less than this.

Many people have raised the alarm over the denigration of US institutions that has accelerated over the past four years, and drawn parallels with the rise of National Socialism in the 1930s. If we do not heed the lucid and profound analysis of the causes and manifestations of the crisis of confidence in legislation outlined in this book; and take steps to address them, many of which are outlined here, we may find that our democratic institutions are damaged beyond recognition. At no time in history has humanity needed solutions that rely on cooperation across the entire planet as we do now. Those solutions can only be built on trust in the public institutions that will have a major role in delivering them. So, if this book appears to be only an academic exercise, think again.


About The Crisis of Confidence in Legislation

The Authors
  • Maria De Benedetto is Professor of Administrative Law at Roma Tre University.
  • Nicola Lupo is Professor of Public Law at LUISS Guido Carli University, Rome.
  • Nicoletta Rangone is Professor of Economic Law at LUMSA University Maria SS. Assumption of Rome.
The publisher’s summary

This book contains the discussions that took place at a conference that gathered together experts in the field. The book is made up of 4 sections: Confidence in Legislation as a Regulatory (and Administrative) Problem; Improving Confidence in Legislation Via Better Regulation Tools; Responsibility of Parliaments in Improving Confidence in Legislation; and Confidence in Legislation and Enforcement.

2021 OECD Global Anti-Corruption & Integrity Forum

Leading through the Crisis: Integrity and Anti-Corruption for a Resilient Recovery

Registration is open: The virtual 2021 OECD Global Anti-Corruption & Integrity Forum will take place on 23-25 March 2021. Register today to join discussions on new public integrity indicators, illicit financial flows, state involvement in the business sector, and many other issues.

The Forum will explore the new integrity risks, challenges and opportunities that have arisen in the COVID-19 context, as well as identify innovative solutions required to govern and conduct business with integrity, including with respect to responsible business conduct (RBC) standards, and tackle corruption in times of crisis. The Forum invites governments, business leaders, policy makers, anti-corruption experts and practitioners, civil society representatives and academics to focus on restoring trust and integrity in and beyond the current crisis, in building a more resilient and more ethical future.

Register now: oecd-events.org/gacif2021

And in case you missed them: 2020 Knowledge Partner talks

‘We talk about corruption as a concept, but in practice, it’s driven by human behaviour.’

A brief AretéThoughts Q&A with Christian Hunt

What one thing would you change about anti-corruption regulation or enforcement?

We talk about corruption as a concept, but in practice, it’s driven by human behaviour. I’d like to see solutions that reflect this. We often think of “bad” people who intentionally set out to do “bad” things, but there’s far more complexity to this.

Of course, there are intentional wrongdoers, but there are also people who, for understandable reasons, get swept up in corrupt practices that are going on around them.

There’s a world of difference between a criminal mastermind and someone who accepts a bribe to be able to feed their family. I don’t have specific answers, but I think we need to move beyond enforcement to deal with some of the root causes of corruption – there are very real issues that drive otherwise “good” people to do “bad” things. We shouldn’t be surprised that in a world of huge inequality, that we see corruption.

On that note, my second wish is that we’d address kleptocratic practices. Cities like London, that ostensibly promote order and the rule of law, effectively allow corruption to flourish elsewhere. We need to address that as a matter of urgency.

What is your current favourite book or podcast, and why?

I’ll avoid promoting the Human Risk podcast (available wherever you get your quality audio content) and instead highlight Spectacular Failures – a show that explores things that have gone spectacularly wrong. That might be companies with questionable business models or just one-off examples of really poor decision-making that had major consequences. The key focus is on things that have gone badly wrong and what we can learn from it. Host Lauren Ober approaches her subject with a sense of fun and curiosity that is infectious and engaging.

Book-wise, as well as Tom Burgis’ Kleptopia (that deals with the corruption issues I highlighted in my earlier answer), I loved John Cleese’s recent book on Creativity. It’s a quick read that highlights some of the things he uses when he’s creative. Lots of practical tips, fun stories and, for anyone whose job involves creativity (so that’s anyone except those in safety-critical industries), it highlights some excellent practical ideas.

What action could a company take that would make a difference to successful recovery from the pandemic?

I think the pandemic offers the perfect opportunity for companies to think about what they are doing and whether their business model still makes sense. Of course, some business models didn’t actually make sense pre-pandemic!

So it’s the perfect opportunity to reflect on what a company is there to do – its purpose – and how it goes about doing it. What COVID has exposed are inefficiencies, flawed presumptions and perceived wisdom that actually wasn’t so wise. I think we can learn from this experience and challenge orthodox thinking – if you’re having to make changes because of COVID, then you’ve got the opportunity to think about what other changes you could make.

Equally, I think it’s a good time to “read the room” and recognise social, environmental and ethical dynamics. Many business practices might be legal, but that doesn’t make them right. Thinking about how you run your business is important. Companies can no longer operate in a vacuum – transparency and stakeholder activism are powerful forces that will drive change. Much better to embrace this than try to pursue legacy strategies.

Follow Christian on Twitter, connect with him on LinkedIn – and subscribe to his podcast on Spotify (or wherever you get your audio).

Kalifa FinTech Report: Ethics mentioned in passing, and only once…

The Independent report on the UK Fintech sector by Ron Kalifa OBE has just been released by HM Treasury. My quick take in the context of Ethical Business Regulation:

The call for close working between the regulator and the regulated makes sense – as they suggest through ‘enhancing the Regulatory Sandbox, making permanent the digital sandbox pilot, introducing measures to support partnering between incumbents and fintech and regtech firms, and providing additional support for regulated firms in the
growth phase
.’

The comprehensive call for skills development is also welcome – 86 mentions no less across the report. And timely beyond FinTech of course (e.g. the World Economic Forum call for building a common language for skills).

Sobering is the fact that ethics is mentioned in passing, and only once. WireCard won’t be the last… There’s real and significant work to do here. Here’s a primer on Ethical Business Practice and Ethical Business Regulation for the taking.

Last but not least, the call for a Centre for Finance, Innovation and Technology is interesting. Does it risk duplicating efforts from the Centre for Financial Technology & Innovation at Leeds, the Centre for Alternative Finance at Cambridge etc. etc. I do hope they’ll coordinate with UK Research & Innovation.

Find the full report for your own reading here:
gov.uk/government/publications/the-kalifa-review-of-uk-fintech

2021 World Values Day

Just in from our friends at World Values Day:

Our theme this year is Reconnecting.  We are all living through a time of enormous uncertainty and disruption. This has been very hard for all of us. A time of upheaval is also an opportunity to deepen our understanding of values and how they connect us with our sense of self, with others, and with the wider world.

So this World Values Day let’s use our values to reconnect with one another and with what matters most in our lives.

Join the conversation at #WorldValuesDay – and learn more at worldvaluesday.com/

COVID-19: Crisis or Opportunity for Corporate Culture?

Implications for Why and How Ethics and Compliance Should Thrive in This Evolving World


• Assess culture and use the information to build new paradigms
• Shift role of functions, including ethics & compliance, to more collaborative work focused on corporate purpose
• Help leaders better communicate in a time when new working practices demand quality leadership

Level

Intermediate

Moderator – Sally March – Director, Drummond March Ltd.

Sally March

Sally March is an international lawyer and Certified Compliance & Ethics Professional based in London. Sally is adjunct professor at IE School of Law in Madrid where she teaches Compliance and Internal Controls. She conducts compliance program reviews and advises FTSE 100 companies on international ethics and compliance programs

Panel – Jane Mitchell | Robert W Smith | Ruth Steinholz

Jane Mitchell

Jane Mitchell, Founder, JL & M

Jane’s passion is to challenge leaders to be courageous enough to hear, listen and act in ways that drive values-based cultures and to encourage people to understand that you need more than just words, process and controls to sustain success. Jane has worked with a number of FTSE 100 global companies, which include: Rolls-Royce plc, BAE Systems, BP, Tesco, Serco and Airbus, Cooperative Bank and BT. Jane is also a Director of leading engagement agency Karian and Box, and is the current World Conference Chair for the International Association of Business Communicators (IABC).

Robert Smith


Robert W. Smith, Director Business Compliance and Ethics, Serco Group plc

Robert is a Chartered Director and Lifetime Fellow of the Institute of Directors where he sits on the Accreditation and Standards Committee and a Lay Trustee on the Board of the Royal College of Pathologists. Current responsibilities cover ethics and elements of ethical compliance covering business conduct and standards of behaviour, anti-corruption and competitive behaviour and human rights, and corporate responsibility.

…and yours truly. I hope to see you there. View the conference brochure – and stay tuned using #SCCE & #SCCEecei – and help spread the word.