Accountability is one of those buzzwords that is often thrown around but possibly not always well understood. These days attempts are even made to regulate accountability – witness the UK’s Senior Managers’ and Certification Regime (SMCR) and Australia’s Banking Executive Accountability Regime (BEAR). These regimes are designed to enhance individual accountability, making it harder for senior executives to hide behind group decision-making processes and ignorance.
What does accountability mean and how does it relate to risk governance?
Accountability refers to an implicit or explicit expectation that one's decisions or actions will be subject to evaluation by some salient audience(s) with the belief that there exists the potential for one to receive either rewards or sanctions based on this expected evaluation (Hall and Ferris, 2011[I]).
Research into accountability exploded in the 1980s and 1990s, and a significant review paper was published in 1999 by Lerner and Tetlock[ii]. This literature identified that under certain conditions, accountability is associated with better outcomes. Interestingly, accountability can reduce a number of the biases that are particularly problematic in risk management such as overconfidence and groupthink.
Research suggests that accountability works because individuals are concerned about their image and status and seek approval in the eyes of others. As accountability entails the expectation of a future evaluation, individuals position themselves to defend their decisions and behaviour. When people expect to justify their actions, they want to avoid appearing foolish. They prepare for evaluation by searching for reasons to justify their actions, so they analyse a wider range of relevant information, pay more attention to this information, anticipate counterarguments and are more self-reflective. Accountability seems to invoke more ‘system 2’ or analytical thinking, as opposed to the automatic style of thinking that is associated with many of the behavioural biases.
Sanctions can be imposed, for example, through the remuneration system i.e. bonuses withheld or clawed back. Under the SMCR there is also the possibility of regulatory fines imposed on individual executives and also jail sentences. But these sanctions are only part of the story. Accountability works to a large extent because people, being social creatures, are concerned about their reputation and status. Having clear individual accountability when things go awry means that the mechanisms of shame and humiliation are invoked. Fearing potential future shame, executives respond by discharging their duties with greater care and diligence.
Can you regulate to create accountability? In 2019 UK Finance, an industry body, produced a report[iii] evaluating the industry’s experience of the SMCR to date. The findings were quite positive for both culture and behaviour.
At Macquarie Business School we’re conducting research on the BEAR and its impact on Australian banking so far. The research will be released in 2021 but early findings are also encouraging. For example, ‘felt accountability’, is highest for those registered as ‘accountable persons’, suggesting that such executives and directors are indeed experiencing a greater sense of scrutiny. Interestingly higher levels of felt accountability are not associated with excessive work stress. Rather, work stress is associated with poor risk culture, where executives perceive a gap between the espoused and the enacted culture of the organisation.
Do look out for more findings from Macquarie Business School in early 2021.
Professor Elizabeth Sheedy is a risk governance expert at the Department of Applied Finance, Macquarie University. She uses a range of research methods to build understanding of behaviour in financial services.
[I] Hall, A. T., & Ferris, G. R. (2011). Accountability and extra-role behavior. Employee Responsibilities and Rights Journal, 23(2), 131-144.
[ii] Lerner, J. S., & Tetlock, P. E. (1999). Accounting for the effects of accountability. Psychological bulletin, 125(2), 255.
[iii] UK Finance (2019) SMCR: Evolution and Reform https://www.ukfinance.org.uk/policy-and-guidance/reports-publications/smcr-evolution-and-reform