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NR 2005-45
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Acting Comptroller Williams Discusses Management and Supervision of Reputation Risk In Large Banking Organizations

Chicago, IL – Acting Comptroller of the Currency Julie L. Williams said today there may be no more elusive, difficult to manage, and feared risk than reputation risk for large banking organizations. Her remarks underscored the importance of effective structural governance and checks and balances, and stressed that the most vital component of an organization’s defense against reputation risk is ensuring that the organization is grounded in a sound corporate culture and value system.

“In a way, the prominence of reputation risk as a concern also is a product of large banks’ successes in managing other types of risks,” Ms. Williams said in a speech before the Conference on Bank Structure and Competition hosted by the Federal Reserve Bank of Chicago. “These successes make ethical and compliance embarrassments even more conspicuous and damaging to an organization’s franchise.”

Ms. Williams noted while the OCC can’t “regulate” corporate ethics, the agency will notice and comment on whether a banking organization has a corporate organizational framework, and policies or practices that support—or undermine—sound corporate values and an ethical climate within an organization. In addition, OCC supervision experience has demonstrated that if such values and the ethos of the organization are not strong, institutional soundness and a bank’s good name and reputation can suffer in unpredictable ways.

Ms. Williams stressed that the OCC doesn’t look at reputation risk in isolation, and will look to see whether a bank has an environment for sound decision-making that includes effective structural governance and a system of checks and balances to identify, monitor and control the risks to which the organization is subject. This evaluation will include whether the organization’s incentives recognize and reward the corporate values and culture that the company wants to promote.

“All these functions—business line risk management, enterprise risk management, compliance management, and internal and external audit, supported by effective internal information flow and communication—are vital components of a banking organization’s “defensive line” against reputation risk,” Ms. Williams said. “But that defensive line of corporate functions will be fundamentally incomplete if the organization is not grounded in a sound corporate culture and value system understood by all its employees.”

Ms. Williams said that compensation must be keyed to the interests of the company—to its safety and soundness, broadly defined—rather than to its short-term profitability or growth. If conflicts arise, it’s crucial for senior management to resolve those conflicts in a way that sends an unequivocal message about its ethical and reputation priorities.

Ms. Williams stressed that nothing could be more vital to the ethical climate of an organization than the example set by its leaders—the “tone at the top.” While the OCC generally would not dictate a particular result here, except, of course where an individual’s conduct violates a law or rule or misuses bank resources, the agency will note if the behavior of senior management is not supportive of the articulated goals and values of the organization.

“We not only look to senior managers to set the right tone; it’s also their job to enforce it,” Ms. Williams said.  “Accountability is key.  Ethical companies not only reward ethical behavior; they penalize misbehavior.”

Ms. Williams concluded by noting that as organizations get larger, the potential increases for mistakes and misjudgments because of competitive pressures, particularly if employees are pressured or incented to pursue profits at any costs. Structural governance and checks and balances are vital to sound governance and important protections against reputation risks.

“But, the ultimate protection for banking organizations, and for the people responsible for running them, is to instill in all employees a dedication to high standards of fairness and ethical dealing; to make clear throughout every corner of the organization, that no deal, no sale, no loan, no customer, and no profit opportunity, is worth compromising the bank’s name, integrity, and reputation,” Ms. Williams said.

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