US report lifts lid on ethics in finance firms

05 February 2015 -


Walls Fargo and JP Morgan Chase among firms that have taken decisive steps to enforce good behaviour since downturn began

Jermaine Haughton

From sub-prime mortgages and tax evasion to LIBOR rigging and insurance mis-selling, Wall Street and The City of London alike have received copious flak since 2008. But as regulatory pressure mounts – and, with it, questions from investors and the press – senior leaders in finance firms are making ethical cultures a priority to avoid further bad behaviour. That is the conclusion of a wide-ranging report published this week by the Wall Street Journal.

In one example that the paper highlights, Wells Fargo CEO John Stumpf has taken the innovative approach of creating a monitor to keep track of its workers’ satisfaction levels, on the basis that engaged employees are much more likely to act ethically. Indeed, Wells Fargo measures worker satisfaction through a “happy-to-grumpy” ratio, which was recorded at 8:1 in 2014 – up significantly on the 3.8:1 for 2010.

Managers are proving vital in extolling the virtues of ethical conduct. For example, JP Morgan Chase held a special exhibit and week-long speaker series in mid-December on the bank’s principles at its Park Avenue headquarters – featuring input from the company’s control officer together with heads of diversity, and administrative and corporate strategy. Last year, the board at Citigroup created a new committee on ethics and culture, telling shareholders that it is aware “of the pervasive public perception that many members of this industry do not behave ethically”. The senior managers of many other firms, including Bank of America, have also been drilling employees on their ethical responsibilities in the financial industry.

Regulators in both the US and the UK have made it clear to bosses that banking needs a stronger ethical code of conduct – not just in writing, but in practice, too. And one of the most vocal figures campaigning for greater ethical behaviour from banks is Federal Reserve Bank of New York executive vice president and general counsel Thomas C Baxter.

In a speech to an audience of finance chiefs at the Bank of England on 21 January, Baxter said: “The new emphasis on an ethical culture within financial services firms arises from the policy interest in preventing some of the bad behaviour that has been observed. Now I use the phrase ‘some of the bad behaviour’ deliberately. I fully embrace the goal of eliminating all bad behaviour. But we cannot let the goal of perfection become the enemy of progress.”

Echoing former BP chief Lord Browne’s recent remarks that imperfection can be managed through improved talent management, Baxter added: “We need to start making progress, so let us agree that perfection is probably not realistic. Even an organisation with the strongest ethical culture will have episodic bad behaviour. Although culture is no panacea, I believe that the ethical culture of an organisation can improve the behaviour of the people who work there. Strengthening the ethical culture of financial services should therefore reduce the volume of bad behaviour we have been seeing.”

The Wall Street Journal’s report explained how bank executives and regulators are pushing for ethical behaviour not to be shown as just a “black-and-white issue” – such as whether to take money from the till – but in “more nuanced situations, like whether to report a trading loss right away or to try to fix it before anyone else notices”. For that to be a reality, banks must have strong, ethical values systems, integral to their spirits and motivations and the way they fit within their industry.

That change will certainly not occur overnight, and will take copious time and resources to get right. Already, according to the Wall Street Journal, banks are paying tens of millions of dollars to consultants to help them measure and enforce culture. Those professionals are tasked with forming frameworks for the banks to follow, as well as observing communication between various bank divisions to ensure they spot red flags.

In his speech, Baxter discerned three crucial considerations that employers need to think about in creating ethical culture: incentives, the example set by senior management and a robust code of conduct. On incentives, Baxter argued: “Bankers, like lawyers, want to do 1) quality work, 2) with people they like and respect, and 3) receive fair recognition in return … Each should be tied to ethical considerations. If the only consideration with respect to compensation and promotion is how much money the individual made for the firm, then that communicates a message that is inhospitable to a strong ethical culture.”

In what he labels “character at the top” – or leading by example – Baxter argued that senior management has a key role to play for setting a model of how to act ethically. “Employees will be influenced by the actions of key management, and not merely by the songs they sing,” he said. “If those actions are in harmony with stated mores, then the combination should foster a strong ethical culture.” Finally, the Reserve exec said that the third essential component – a code of conduct – should be based on “a foundation of the shared and well-understood values of the institution”.

Baxter also warned that banks must stop labelling suppliers, clients and other companies they do business with as “counterparties”, as it wrongly frames those parties as mere props for profit making. “Viewing customers as profit opportunities is inconsistent with a strong ethical culture,” he said. “In my experience, firms that consider their operational model as service provider tend to have a better culture than those firms that consider their operational model as money maker.”

Similarly, Baxter believes that banks must change their self-perception from “money-making machines” to valuable financial intermediaries for customers – and must also abandon “short-termism” in their handling of employees. Warning that the constant movement of staff from institution to institution in recent times had urged people to prize their individual careers over their current employer’s credibility – especially during crises – Baxter said: “Annual bonuses that reward immediate book value without reflecting tail risk to the organisation reinforce short termism. Changing the time horizon for compensation will be a significant feature of meaningful cultural reform.”

In its recent report The MoralDNA of Performance, the Chartered Management Institute (CMI) urged managers to focus on purpose, values, people and culture as a means of spurring ethical – and efficient – work environments. “The best performing organisations,” it said, “have a purpose that serves others, not one that is self-serving for senior executives. They have strong moral values that inform better decisions. They encourage leaders to take time to develop their ability to inspire and lead customers as well as colleagues.”

Download the full report here.

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