Culture and Ethical Misconduct: Who is to Blame? (Round 1)

TL;DR: Surveillance is not the answer to prevent ethical misconduct. Culture change is. 

Bloomberg published on 15 February an interesting story on how banks are beefing up security to prevent the next ethical misconduct. In general, the need for banks to step up security in all aspects is clear. In the last 20 years, banks have confronted allegations of ethical misconduct from rogue trades to misrepresenting asset-backed securities and manipulating key interest and foreign exchange rates and improperly handling home foreclosures.

Indeed, banking history is replete with some painful lessons:

Lawsuits, regulator fines and losses from these misconduct have cost the biggest banks billions of dollars, and damaged reputations.

Whether Big Brother would be able to prevent an ambitious trader from taking unacceptably high risks or from deceptively selling flawed products to clients remains to be seen. In an industry where ambition rules, differentiating one alpha banker from another may be easier said than done. Which leads to the question: Is the banker the problem, or is it the banking industry itself?

A 2013 parliamentary report released by the UK government in the wake of the Libor scandal put the bigger blame on the system, rather than on the person. The report’s key points:

  • “A lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall.”
  • “Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace.”
  • “Rewards for success should be better focussed on generating long-term benefits for banks and their customers. Where the standards of individuals, especially those in senior roles, have fallen short, clear lines of accountability and enforceable sanctions are needed. They have both been lacking.”
  • “It is not just bankers that need to change. The actions of regulators and Governments have contributed to the decline in standards.”

All these indicate that while some kind of surveillance may be necessary, it is not the answer. Culture change is.

Next time: An analysis of two banks’ attempts to change corporate culture and which one appears to be succeeding. BRB.


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