Regulating accountability
In a recent podcast, Professor Elizabeth Sheedy discussed the findings of her research into banks' experiences in implementing the Banking Executive Accountability Regime (BEAR) and the positives and negatives to emerge out of that experience in the relatively short time since the scheme has been in operation.
The research is based on analysis of feedback provided by people working within the industry – either 'accountable persons' or, their direct reports – with a particular focus on those working in risk, compliance and internal audit roles.
You can find the full text of the report here.
Some key takeaways
Early signs are positive…
Bearing in mind that the scheme only came into effect for the largest banks in July 2018 and for smaller ADIs in July 2019, Professor Sheedy emphasised in the podcast discussion, that it's too early to draw firm conclusions on the effectiveness of the scheme.
Having said this, an early 'look under the hood' suggests that the BEAR is having a positive impact advancing executive accountability and risk culture in banks, with most participants in the study accepting the regime as justified.
The paper provides more detail around this stating,
'There was consensus that the introduction of the BEAR was justified when considered from an industry-wide perspective, with a clear majority of participants outlining a positive response in relation to their organisation’s implementation of the BEAR'.
Positive impacts
Greater clarity around individual accountability
Participants in the study reported that the development of individual accountability statements and accountability maps has been a worthwhile exercise in its own right, in that it prompted 'constructive discussion' about grey areas of responsibility and served to clarify individual accountability.
The study found that this additional clarity drove 'greater understanding of what accountability entails', especially in those organisations that took a thorough approach to implementing the scheme.
Executives were found to be 'more likely to be thoughtful and self-reflective about their actions', and more focused on exercising 'due care, skill and diligence' in the performance of their roles. For example, the study found that executives are more likely to consult widely/gather more information and to take a more hands-on approach to management (to be more rigorous in their approach to delegating responsibility, monitoring progress and intervening where necessary).
An empowering effect
Professor Sheedy said that a 'surprising' finding was that increased clarity around individual accountability had an 'empowering effect' on executives, enabling quicker and more streamlined decision making, as well as a sharper focus on effective management of direct reports/projects and on the prompt resolution of issues.
This finding was not mirrored in UK-based research into the Senior Managers and Certification Regime (SMCR) – the accountability regime on which the Australian BEAR was based.
The study found that increased clarity around accountability has also had a positive impact on risk culture within banks, creating opportunities to 'fix long standing issues'.
Positive impact on 'risk culture'
The report comments that one of the biggest risk culture challenges to date, has been the failure of line one roles to accord sufficient weight to concerns raised by those in line two or three roles.
The study found that the BEAR 'appears to be having a favourable impact on risk governance by bringing home Line 1 accountability'. Put another way, awareness on the part of accountable persons that they will be held individually accountable should a problem emerge, is proving effective in motivating them to take a more proactive approach to risk management and to respond more quickly to resolve historical issues as well as any new issues.
Lines two and three are being accorded more weight
From a risk/compliance perspective, study participants reported that the voices of risk/compliance functions are being accorded more weight in decision making, because accountable persons are more likely to consult with support functions before making a decision to ensure the decision can be justified.
Likewise, directors and assurance teams reported finding it easier to ascertain exactly who is accountable, when issues do arise.
The BEAR has also been positive from a resourcing perspective – the BEAR provides Chief Risk Officers and Chief Audit Executives with a 'clear frame of reference that no one can argue with'.
As such the report concludes that people in line 2 and 3 roles (as well as non-executive directors have 'undoubtedly benefited from BEAR' as it is now 'much easier to identify who is on the hook and this can help move towards resolution'.
Addressing underperformance
Some participants reported that their organisations were tougher in the way they address underperformance and poor behaviour, though others flagged performance management as 'still a work in progress' at their organisation.
Negative consequences?
Overall, the study found that 'the drawbacks of the BEAR have been less important in reality than was anticipated' prior to implementation (and overall, participants tended to view any negatives as justified).
- Increased administrative burden: The paper comments that 'the BEAR undoubtedly creates additional administrative burdens' and that this was the most commonly mentioned negative consequence. For example, several participants reported that notifying APRA of minor changes to accountabilities imposes a significant burden. However, almost all participants in the study viewed the increased burden as 'manageable and a price worth paying'.
- 'Squandered resources': Prior to the introduction of the BEAR, concerns were raised about the possibility of 'squandered resources' ie that executives might spend too much time documenting 'reasonable steps' to justify their actions/guard against possible future scrutiny. The study found that the majority of participants did not report this as an issue. Some participants felt that the additional documentation was not 'overdone' but instead helped the decision-making process, causing executives to be more self-reflective.
- Talent retention and recruitment: Prior to the introduction of BEAR, concerns were raised that the level of scrutiny would result in difficulty in attracting executives to senior roles. However, the study found that 'Interviewees overwhelmingly opined that accountability is appropriate for senior executives and people in such roles should be willing to accept scrutiny'. Overall, the authors conclude, 'We found no evidence that good people have been lost to other industries on account of the BEAR, or that there is a difficulty finding suitable people willing to take on AP roles'.
- Excessive 'unproductive' fear and heightened work stress:
- In two of the participating organisations some concerns were raised during interviews about 'unproductive fear' and the authors comment that 'while not presently a serious or pervasive issue, it seems that this is an issue that warrants monitoring'.
- On the issue of causing heightened work stress, the study found that accountable persons did not experience significantly higher levels of work stress than other executives.
Limitations on the effectiveness of the BEAR?
The paper identifies a number of factors that may be moderating the effectiveness of the BEAR. These include the following.
- A 'lacklustre approach to implementation': Organisations that took a more 'enthusiastic approach to implementing the BEAR' are more likely to experience the benefits than those who took a 'BEAR-lite' or minimal approach.
- Limited capability – The paper notes that a limitation of the BEAR (and similar accountability regimes) is their reliance on holding accountable persons individually to account for managing well. However, participants in the study observed that this approach will only be effective, if the executive in question has the capability to perform their role effectively – for example, that they can effectively delegate tasks, monitor progress and intervene where necessary to ensure the tasks are carried out correctly. The paper observes that 'capability in this area cannot be assumed; some financial institutions have not done enough to coach and train executives in these areas'.
- Memories fade: The BEAR was introduced 'during a tumultuous time' for financial institutions (Figure 1 at page one of the study is a graphic showing a timeline of the various 'scandals' occurring at the time) and the paper highlights an 'interaction effect' between BEAR and these events. The study found that participants were unable to easily differentiate between the 'BEAR effect' and the effect of these other events on keeping the focus within their organisations on enhancing risk governance. The paper suggests that once the memory of these events fades, the 'BEAR effect' may similarly diminish.
- The role of the board: The paper comments that 'under the BEAR, accountability is intended to come primarily from the board' ie it is up to the board to ensure that underperforming executives 'experience appropriate consequences'. The paper observes that in the past, 'boards have not always done well at this and variable remuneration has too often been considered an entitlement. Deferrals and malus clauses have not been used'. Having said this, the authors note that recent analysis of executive remuneration indicates that 'the tide has turned' on this issue.
[Sources: The human risk podcast, Professor Elizabeth Sheedy on how Accountability can reduce human risk; Full text paper: Sheedy, Elizabeth A. and Canestrari-Soh, Dominic, Regulating Accountability: An Early Look at the Banking Executive Accountability Regime (BEAR) (December 1, 2020).]