Although financial institutions globally have started addressing misconduct issues within their ranks, resolving them for the long term will require much more than just tightening rules and regulations. These institutions could boost their earnings by as much as $500 million a year by reducing their misconduct penalties by just 10 percent—indicating a significant opportunity.
Successfully addressing the conduct challenge requires a radically different approach—one that goes beyond compliance. Banking leaders must recognize that good conduct depends on ethics and organizational culture as much as it does on rules and systems.
It can often be employees’ short-term thinking and poor understanding of how to handle complex opportunities that are culprits, more so than rogue traders. In a fiercely competitive industry where shareholders want only growth, few companies would achieve it if they didn’t seize opportunities as they arise. Therefore, bankers may feel compelled to focus on getting deals done first and handling consequences later.
In such cultures, more rigorous rulebooks alone won’t ensure ethical behavior. Misguided individuals and mismanaged departments may just be following standard rules and practices that simply don’t equip them to make informed, ethical decisions. The key is to combine quantifiable incentives for employees along with accountability and ethical outcomes.
To establish that accountability, employees must ask themselves:
Am I responsible?
Am I capable?
Am I motivated?
Banks seeking to build the foundations of future success must broaden their approach beyond a discussion of structures and systems. They must also address fundamental questions of purpose and value creation with an Ethical Value Proposition (EVP).
An EVP must meet several criteria to achieve its desired impact. A commonly shared and articulated EVP can be the cornerstone of a bank’s ethical transformation. The key to its success is an approach that:
Engages senior leadership across the organization and embeds ethics as a core expectation of leadership
Builds an understanding and appreciation of ethics in day-to-day decision making and provides in-depth ethical training
Rebalances compensation away from revenue generation and toward client satisfaction and the creation of societal value, captured and quantified through the EVP and translated into individual performance metrics
Clarifies decision-making roles and processes to reinforce a global culture and common purpose
Banking leaders, investors and regulators are all beginning to question the wisdom of existing solutions to the ethics challenge. By harnessing new tools and methodologies, banks can transform their approach and restore confidence in the sector’s ability to build a culture committed to sustainable and long-term value creation.Read the Outlook Journal article: Beyond Compliance