Supervising culture and behaviour at financial institutions: The experience of De Nederlandsche Bank

Jakob de Haan, Wijnand Nuijts, Mirea Raaijmakers

06 November 2015



The Global Crisis revealed serious deficiencies in the financial system’s regulatory and supervisory frameworks. Supervision of financial institutions traditionally focused mainly on solvency and liquidity. However, the Crisis has shown that safeguarding the stability of the financial system and the health of institutions requires more. An important lesson was that supervisors should ask questions about institutions’ culture and behaviour, as today’s undesirable behaviour in financial institutions is at the root of tomorrow’s solvency and liquidity problems. This lesson also emerges from academic research, showing that culture and behaviour are potential driving factors for firms’ financial performance (Lo 2015, de Haan and Jansen 2011).

A third key reason for increasing the supervision of institutional culture is the widely supported belief that responsible behaviour cannot simply be enforced (DNB 2015); more needs to be done. For supervised institutions to be able to identify the negative consequences of behavioural patterns – and to realise that breaking these patterns is essential – they must first be aware of irresponsible or unethical behaviour. This has become all the more urgent in light of the declining public confidence in the financial sector following the Crisis (van der Cruijsen et al 2015).

Naturally, supervised institutions themselves bear primary responsibility for integrating this approach into their organisations. It is, however, up to supervisory authorities to monitor how this is done, which requires them to dig deeper. Even if an institution’s financial figures suggest that its continuity is not compromised, the firm’s corporate culture and behaviour may still pose risks to its continuity. This also requires a new approach to supervision.

The significance of supervising culture and behaviour at financial institutions is evident from the attention paid to it in international rules and regulations. For instance, new supervisory frameworks for banks, including Basel III and the most recent version of the Basel Committee on Banking Supervision (BCBS) Corporate Governance Principles for banks, explicitly zoom in on the culture in banks’ risk management departments.

New approach to supervision

De Nederlandsche Bank (DNB) is the first supervisory authority in the world to target culture and behaviour as risk factors, thereby assuming the responsibility of incorporating this aspect into its supervision. The aim is to identify risks that may arise from culture and behaviour at a sufficiently early stage and take appropriate countermeasures (DNB 2015). Various corporate scandals have demonstrated that human action and the drivers behind it can have disastrous consequences for an institution. Behaviour and group dynamic processes can affect institutions’ financial performance, integrity and reputation, and thus general confidence in the financial sector. Inadequate attention to these factors causes risky behaviour to persist. Examples include executives dominating the decision-making process, two opposing camps within a board acting solely in their own particular interests, and top managers not voicing their opinions at board meetings because they feel insecure (DNB 2015). It is an established fact that the negative impact of this type of behaviour takes quite some time to materialise. By looking ahead, DNB is able to respond to signals at an earlier stage and gain valuable time (Nuijts 2013).

Since 2010, DNB has carried out 52 thematic examinations on behaviour and culture, involving 20 banks, 16 insurance companies, 10 pension funds and 6 trust offices. The examinations focused on leadership, decision-making, and communication; and also addressed the group dynamics, behavioural patterns, and mind-sets of executive and pension fund boards. Each of the examinations resulted in institution-specific findings. These are and will remain confidential, but general findings may be published (DNB 2015).

DNB's supervision of behaviour and culture is based on the following principles (DNB 2015):

  • First, supervisory authorities are able to identify, assess and mitigate risks relating to behaviour and culture. As analysing cultural and behavioural risks requires different knowledge and skills than ‘traditional’ supervision does, DNB has added organisational psychologists and change management experts to its staff.
  • Second, financial institutions bear ultimate responsibility for their behaviour and culture. Although supervisory authorities play a key role by holding up a mirror to institutions and drawing their executives’ attention to potential risks arising from behaviour and culture, the institutions themselves are ultimately responsible. DNB is not stepping into their shoes. The aim of supervision is to identify behavioural and cultural factors that can have an adverse effect on the operational management and, therefore, the performance of financial institutions. By explicating these issues, insisting on measures, and monitoring their implementation, DNB seeks to bring about changes in institutions (DNB 2015).
  • Third, behaviour and culture form an integral part of an institution’s operational management and therefore its supervision should match the supervision of the institution’s strategic objectives, business model, and governance. DNB believes that institutions can be managed effectively only if attention to structure and behaviour go hand in hand.
  • Fourth, supervision of behaviour and culture has the highest degree of effectiveness when supervisory authorities can go beyond the standard blueprint. DNB does not automatically impose a predefined, desired culture on all institutions alike. Each institution operates within its own context, developing its own frame of reference with related patterns of behaviour and customs. DNB nevertheless asks board members in the financial sector to reflect on and learn from their own conduct. Management board and supervisory board members should therefore take ample time to consider their own behaviour as well as the dynamics in the group. DNB also requires prudence in opinion-forming and decision-making processes, expecting institutions to take specific measures aimed at encouraging opposition. DNB believes that chairpersons should be capable of flexibly applying several leadership styles, depending on the situation (DNB 2015).
  • Fifth, supervision has so far mainly focused on behaviour and culture at the top – that is, management and supervisory boards, and pension fund boards.

Model and instruments

In contrast to ‘traditional’ supervision focusing on financial data, behaviour and culture are more difficult to supervise because they are less easy to observe and are less tangible.

An institution’s corporate culture can be defined as the shared values and standards underlying the behaviour and attitude of the people in its employ (de Haan and Jansen 2011). Culture and behaviour can be compared with an iceberg, where all you can see is the tip and where most of the ice is under water. Seeing only the tip of the iceberg gives you no idea of what is underneath. DNB distinguishes between three layers in an organisation’s culture: behaviour, group dynamics and behavioural patterns, and mind-set (DNB 2015). The deepest level of culture in this model is mind-set, referring to deep-rooted convictions and values that often determine the direction of group dynamics and conduct. An individual’s mind-set determines how they view the world, who is reliable and who is not, and what has priority or importance. Group dynamics refers to the underlying relationships between and among executives. Is the atmosphere conducive to board members calling each other to account for adverse behaviour? Is it one of collaboration or competition? Groups usually devise solutions for dealing with all sorts of situations they come up against. And the solutions that are frequently called on create behavioural patterns – actions performed regularly (mostly unconsciously, automatically); ingrained habits that are no longer recognised because they seem so natural. Conduct is the most visible element of culture. DNB pays particular attention to behaviour in terms of decision-making, leadership, and communication. The key question is whether these contribute to an institution’s sound and ethical business operations and reduce its risk profile (to the extent that it may serve to improve its performance).

In its supervision of behaviour and culture, DNB has a range of instruments at its disposal. For instance, it holds surveys among staff from all organisational levels, obtaining responses that should shed light on the institutions. Information is also collected by means of desk research, with an emphasis on obtaining objective information about the structure and design of the organisation and its decision-making processes. In addition, periodic interviews are held with members of the executive board, supervisory board, and other tiers of management. These interviews focus on the interviewees’ own behaviour and their perception of the dynamics within the executive or supervisory board, specifically addressing the individuals’ role in the decision-making processes as well as their personal motivation and beliefs. The term ‘interview’ is applied loosely here – most involve an executive or supervisory director independently completing a self-assessment. Lastly, board meetings are attended on a regular basis to gain insight into the board’s dynamics and behavioural patterns.

There is a reason for using this variety of tools – DNB accepts conclusions from its examinations only where the observations made using several tools are mutually supportive.

Examples of examination outcomes

One of the ways in which DNB supervises culture and behaviour is by conducting thematic examinations (DNB 2015). Topics include decision-making (in 2011), board effectiveness (2011-2012), behaviour and culture (2012-2013), capacity for change (2014), behavioural root cause analysis of persistent supervisory issues (2015), and risk culture (2015). Although these examinations each have their own focus, they all address leadership, group dynamics, decision-making, and communication.

The 2011 examination into decision-making, for instance, looked at balance and consistency in decision-making (Nuijts 2013). These characteristics were studied by zooming in on particular instances of decision-making. A major conclusion from the examination was that decision-making processes are not always balanced. Dominant leadership was observed at many of the supervised institutions. In this leadership style, the leader usually uses his or her formal position or knowledge edge to force through preferred proposals in decision-making, ignoring the input of others – if at all solicited or volunteered (Nuijts and de Haan 2013). This jeopardises the quality of decision-making. Another risk associated with dominant leaders is that they tend to surround themselves with managers and staff that conform to their own image. This is liable to reinforce unanimity regarding the direction of the company. Although this may be beneficial insofar as it supports decisive and concerted action in the short term, it can – under certain circumstances – also foster ‘groupthink’. The phenomenon of groupthink – in which the desire for consensus paves the way to premature solutions – also causes key information or risks to be overlooked. This is why dominant leadership requires opposition. Leaders who do not seek or receive feedback and who are not open to feedback will ultimately go off the rails. It is therefore important that organisations have formal systems in place for providing feedback, but often they do not.

Furthermore, several thematic examinations revealed that not all decisions were consistent with predefined strategic goals. Such inconsistency introduces the risk that the strategy ceases to determine how the institution and its staff act, or that decisions are taken that are not in the institution’s interest. In some cases, a clearly-defined strategy was absent altogether, potentially rendering the organisation rudderless. Properly defined goals serve to guide the day-to-day activities of all staff within the organisation. Similar problems are likely to arise if the institution has a clear strategy but fails to communicate it effectively to its staff. The examination highlighted several instances of this phenomenon. A further risk associated with poor communication is that a gap develops between the institution’s senior managers and its other staff; the rank and file do not understand where the people at the top are leading them. This can impair the institution’s ability to respond promptly to changing circumstances, as staff do not understand what is expected of them or do not feel a sense of urgency to act. An institution’s senior management puts its credibility at risk if it does not (consistently) take decisions that reflect its predefined strategic goals.

Moreover, several institutions turned out to have an (excessively) informal organisational culture. Formal decision-making often depends on informal agreement, and there is nothing inherently wrong with that. However, informal decision-making becomes problematic when it interferes with formal decision-making processes. It compromises the established allocation of duties and responsibilities, and negates the formal processes of consultation, by divorcing them from the actual decision-making. Interference by informal consultation bodies can also diminish the transparency of decision-making. Incidentally, transparency can also suffer if, in the context of formal consultations, insufficient consideration is given to the risks associated with a decision, or to the interests of the various stakeholders. Under such circumstances, risks tend not to be considered adequately or in appropriate depth and the negative potential implications of a decision tend not to be taken fully into account.

Lastly, the thematic examinations showed that in many cases one of the root causes of failing leadership or poor group dynamics was inadequate communication. Aggressive or, on the contrary, defensive communication styles, and emotional, blunt, or downright rude communications undermine confidence between discussion partners, hampering an open and in-depth exchange of ideas. Under such circumstances, debates are likely to deteriorate into an overt conflict, rendering any further effective decision-making impossible.

Good practices

The examinations also yielded many examples of good practices. Examining officers came across chairs who involved as many key officers as possible in the opinion-forming and decision-making process. By fostering a safe climate and encouraging others to provide substantive input, these individuals were able to get a variety of perspectives and alternatives on the table, which proved conducive to the quality of the decision-making process. Other chairs made time for self and group reflection or encouraged colleagues to hold each other accountable for their behaviour.

Other examples of good practices were observed in the creation of vehicles for the expression of alternative views. Establishing a discussion body (comprising all of the institution’s key officers in both business and control positions) or subdividing the decision-making process into separate perception, opinion-forming and decision-making steps created time and space to look at a decision from several angles (Nuijts 2013). An in-depth look at facts, interests, risks, and possible perspective allowed the institutions in question to investigate multiple scenarios and alternatives, enabling them to take prudent decisions. In addition, this so-termed inclusive approach broadened the level of internal support for decisions taken (DNB 2015).

Scientific research

DNB’s supervisory examinations may present opportunities for internal scientific research. This occurred, for instance, in response to an important conclusion from supervisory examinations into group dynamics relating to pension fund boards not consistently operating as a collective, with board members divided along employer-employee lines. As a result, these boards were not independent bodies of individuals jointly representing the collective interests of all stakeholders in the relevant pension fund, but rather a collection of ‘camps’, each representing only the interests of its own supporters. This conclusion was the reason for comprehensive scientific research among 318 Dutch pension funds (Veltrop et al. 2015).

Pension fund boards generally consist of representatives of a particular group of individuals, for instance employers and employees. As these different groups have partially conflicting interests, they may be seen as factions with the board. The research conducted by Veltrop et al. (2015) has shown that the demographic composition of these factions in terms of age and gender affects the pension fund board’s functioning. The greater the differences between the factions, the stronger the perception of subgrouping, and the lower the pension fund board’s own perceived effectiveness. Imagine a faction of members’ representatives mainly consisting of women aged around 30 alongside a faction of employers’ representatives mainly consisting of men aged around 50. Pension fund boards can remove the strong sense of subgrouping and the negative impact on their functioning by reflecting on this functioning. This makes self-evaluation an excellent instrument to remove the perceived existence of subgroups – arising from demographic differences between factions – within pension fund boards. This outcome is consistent with DNB’s emphasis in its supervision of behaviour and culture.


The financial sector is witnessing major changes. These changes are essential for a stable financial sector to provide sound financial services to its customers. Public confidence in financial institutions fell sharply in response to the crisis and the financial sector continues to have a difficult social position.

Organisational culture is one of the areas requiring change, and this has been a key monitoring theme for DNB since 2011. This discussion of the main general findings from DNB examinations into culture and behaviour provides greater insight into the nature of supervision and associated risks.

However, cultural change requires time and patience. It starts with making executives aware of potential problems, followed by creating willingness to take action, and starting up what may prove to be a prolonged trajectory of cultural change at their own organisation. This makes demands on the stamina of institutions as well as the supervisory authority.

A final issue is whether institutions are prepared to change. The Netherlands Authority for the Financial Markets (AFM) and DNB have investigated the capacity for change at five large banks and insurance companies. In this context, an institution’s capacity for change was defined as the degree of willingness and ability among groups of individuals within the organisation to embrace and realise ambitions and intentions. This includes the ability to change course if the chosen approach seems unsuccessful, or in the event of a major change of circumstances. The research shows that the institutions examined display a genuine willingness to change and a sense of urgency. At the same time, the following issues emerged with regard to the change processes:

  • Priorities are not always clearly set;
  • Embedding the changes in the longer term can be quite a challenge;
  • In some cases, more space and time for reflection on the changes might be needed; and
  • Leadership also plays an important role.

The research findings are nevertheless encouraging – institutions are working on cultural change and they are making headway.


DNB (2015), “Supervision of behaviour and culture: Foundations, practice and future developments”, DNB, Amsterdam.

de Haan, J and D Jansen (2011), “Corporate culture and behaviour: A survey”, DNB Working Paper No 334.

Group of 30 (2015), Banking conduct and culture: A call for sustained and comprehensive reform, Washington, DC.

Lo, A W (2015), “The Gordon Gekko effect: The role of culture in the financial industry”, NBER Working Paper, No. 21267.

Nuijts, W and J de Haan (2013), “DNB supervision of conduct and culture”, in J Kellermann, F de Vries and J de Haan (eds), Financial supervision in the 21st century, Heidelberg: Springer.

Nuijts, W (2013), “Supervision of behaviour and culture: An effective response to governance and risk management problems within financial institutions”, European Journal of Business Compliance, 5-21.

van der Cruijsen, C, J de Haan and D Jansen (2015), “Trust and financial crisis experiences”, Social Indicators Research, forthcoming.

Veltrop, D, N Hermes, T Postma and J de Haan (2015), “A tale of two factions: Why and when factional demographic fault lines hurt board performance”, Corporate Governance: An International Review, 23(2): 145-160.



Topics:  Financial regulation and banking

Tags:  De Nederlandsche Bank, banking, regulation, banking regulation, Central Banks, supervision, Culture, financial institutions, behaviour, financial crisis, central banking

Head of Research, De Nederlandsche Bank (DNB); Professor of Political Economy, University of Groningen

Head of Department, Expert Centre Governance, Behaviour and Culture, De Nederlandsche Bank (DNB)

Supervisory Officer in behaviour & culture supervision, De Nederlandsche Bank