Culture of Corruption in the Financial Industry: A Closer Look

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A closer look at new research data about corruption in the financial industry: is the industry as far behind on organizational culture as it might seem? 


A recent study, “The Street, The Bull and The Crisis: A Survey of the US & UK Financial Services Industry” conducted by the University of Notre Dame and Labaton Sucharow LLP, provides striking data that suggest a culture of corruption is entrenched in the U.S. and U.K. financial industry. The study—a followup to a similar study they conducted in 2012—was based on the responses of more than 1,200 financial services professionals. Here are seven of the more eye-catching findings:

  • More than one-third of respondents who earn $500,000 or more per year have witnessed or have first-hand knowledge of wrongdoing in the workplace.
  • Nearly one in five respondents feel financial services professionals must, at least sometimes, engage in illegal or unethical activity to be successful.
  • Nearly one­-third of those asked believe compensation structures or bonus plans at their company could incentivize employees to compromise ethics or violate the law.
  • Nineteen percent said that their employer would likely retaliate if they reported wrongdoing in the workplace.
  • Twenty-three percent of all respondents believe it is likely that fellow employees have engaged in illegal or unethical activity in order to gain an advantage over competitors or others at the company.
  • Twenty-five percent of respondents said they would use nonpublic information to make a guaranteed $10 million, if there were no chance of getting arrested for insider trading.
  • One in ten said they had directly felt pressure to compromise ethical standards or violate the law.

The core finding of the study is that there has been little change in the ethical environment within the financial industry since their initial study in 2012. The study’s authors and other commentators lament that little seems to have changed despite laws such as Dodd-Frank in the U.S., high-profile prosecutions, steep fines and penalties, and the professed diligent efforts of the industry to clean itself up. The lack of change recently was underscored by the brazen collusion to manipulate key international interest rates that led to five banks pleading guilty to criminal charges and agreeing to pay more than $5 billion in combined penalties.

In addition, the authors of the study suggest that the data shows that “a culture of integrity has failed to take hold” in the financial industry and that “a large number of individuals [are] in the midst of—and losing—an ethical battle of the highest order.” This is, of course, of great concern given the potential devastating effects on the economy that could result from failings in the financial industry.

This conclusion got us thinking. How do the survey results for the financial industry compare to similar data for other industries?

Our Culture Assessment Data Indicates Financial Industry May Not Be Such an Outlier When it Comes to the Health of Its Culture 

The data we have collected over the years from our culture assessments of organizations in a wide range of industries shows that the study results for the financial industry are not as out of line with benchmarks across all industries as it might initially seem.

  • Fear of Retaliation: On average, 65 percent of the respondents in our culture assessments feel they could report unethical behavior to their manager without fear of retaliation (35 percent would have at least some fear of retaliation). Compare that to the 81 percent in the financial industry survey who said they believed they could report without retaliation.
  • Pressure to Compromise Standards or Policies: In our culture assessments, 56 percent of participants have said that they never feel pressure compromise the company's policies or code of conduct in order to achieve objectives (44 percent feel such pressure “rarely”). Compare that to the 10 percent in the financial industry who said they had directly felt pressure to compromise ethical standards or violate the law.
  • Direct Knowledge of Wrongdoing: Eighteen percent of NAVEX Global culture assessment respondents indicate that they have personally observed conduct they believed violated company policy or its code of ethics. Compare to the 22 percent in the financial industry who said that they had had witnessed or had first-hand knowledge of wrongdoing in the workplace. (Note: while the number was 34 percent for those earning $500,000 or more per year, the overall rate was 22 percent.)

While the questions asked of participants in the two surveys are slightly different and respondents may have interpreted them differently, this data offers at least some insight into how the financial industry compares to others—and suggest that the financial industry may not be dramatically less ethical than other industries.

There is some risk that those in the financial industry might interpret this small comparison as evidence that there is no problem to be addressed—the financial industry is just like everybody else, which is good enough. That would be a great shame. Rather, the perhaps the more powerful—and unsettling—interpretation is that, in key ways, other industries aren’t much different from the financial industry, and therefore have plenty of work to do to enhance a deep-rooted culture of ethics.

What Culture is Your Organization Really Building?

While a lack of improvement over the two years between the two financial industry studies is disappointing, it’s not necessarily a surprise: The root of the problem is culture, and culture changes slowly.

Ultimately, culture is a result of the totality of messages employees receive at work. For example:

  • What do senior leaders say—and how often?
  • What do first-line and middle managers say—and more importantly, what do they do?
  • What behaviors do pay bonuses and other incentives reward?
  • What do co-workers expect from each other and how do they behave themselves?
  • Is the training on ethics compliance high quality or low quality? (Has the organization invested in quality training or do they appear not to care about the underlying subject matter?)
  • Does the organization share details (even if sanitized) of issues that have been reported and the outcomes of the resultant investigation?

These, and many other messages, convey to employees what values an organization really has. Not all messages are equally powerful, of course.

Are You Hampering Your Organization’s Culture Initiatives?

The impact of a CEO who sends a well-crafted email once a year to all employees touting the importance of doing “the right thing” likely will be swamped by the impact of a line manager who repeatedly tells employees to “get the job done, whatever it takes” and who rewards those who produce “results,” even if the results are achieved by “bending” the rules or skirting standard process.

Monetary incentives also carry a loud message—if the company is willing to pay extra to reward certain outcomes, then those outcomes must be important. Similarly, cheap-looking, superficial training suggests that an organization is just paying lip-service to a topic.

Employees who are unaware of actions taken when misconduct has occurred may assume that nothing is done, and therefore that misconduct is tolerated, if not condoned. And, whatever the message, a message sent repeatedly will have more impact than an occasional one (advertisers certainly know this!).

In this context, it is easier to see why culture changes slowly. Because employees typically receive a wide variety of messages from a range of sources, a change in one or two of the messages will have a limited impact, especially initially. It is only with sustained change, with repetition and consequences for what is rewarded in the workplace, that measurable changes in behaviors across the broad employee population are likely.

Conclusion

It’s not a huge surprise that things have not changed dramatically in the financial industry since the 2012 study. Quick results would require massive changes to the way that employees are incentivized, the messages line and middle managers send, information shared with employees, etc.—and there’s little evidence that such sweeping changes that might accelerate change have occurred.

For all employers, perhaps the most powerful “takeaway” from the financial industry survey is that their own culture may not be as healthy as they would like, and that real change will take a dedicated, holistic approach and sustained effort at all levels of management.


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