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Broken systems beget bad behavior

When a corporate culture becomes a breeding ground for employee misconduct, co-workers and customers — and in some cases entire communities — pay the price.

The financial services industry has suffered a string of conduct and culture failures over the past decade. Among the notable scandals: mis-selling of products, opaque pricing, lack of appropriate client disclosures, anti-money-laundering deficiencies and bullying and harassment. The damage has been tremendous: fines and lawsuits, management time diverted away from business growth and loss of customer trust.

It is tempting to chalk these incidents up to a few lone wolves who cast aside ethics for short-term, selfish gain. Some observers might even conclude the industry itself is to blame, for attracting too many people who are predisposed to bend the rules.

But these explanations are far too simplistic. Sure, there are bad actors, but the overwhelming majority of people in financial services come to work each day meaning to do well, or at least to do no harm. In many cases, the individuals involved in conduct failures didn’t profit excessively — and in some cases they didn’t profit at all. What’s more, behavioral lapses aren’t exclusive to the financial services industry, as recent cases in the technology, automotive and aerospace industries have demonstrated.

A closer look shows that corporate scandals both within and outside the financial services industry share several common elements — structural failings that created cultural breakdowns and, ultimately, led to misbehavior. In short, the problem isn’t the people, it’s the culture.

The firms most susceptible to conduct failures suffer from a lack of clarity on how their high-level values translate to day-to-day expectations. For example, while many banks have a mission statement about putting customers first, it may not be clear to front-line people across the institution what that means in their daily job and in the gray areas where there isn’t an absolute “right” or “wrong.” Making the right judgment call requires an understanding of the firm’s expectations; if the expectations aren’t clear, it can be easy even for well-meaning employees to stumble across the line.

Sometimes the message can get muddled through many layers of an organization. Many financial institutions are sprawling enterprises with multiple business units and numerous office or branch locations. Making sure everyone understands senior leadership’s intent on culture and values is difficult. It can be like a game of “telephone” in which the message at the end is vastly different from the beginning. This happens in most large organizations, in part because the person next to you has more influence on what you believe and how you act than the people at the very top of the hierarchy.

Another common problem in large institutions: the trade-off conundrum. Running a large, complex and profitable business means making trade-offs between multiple strategic priorities such as innovation, efficiency, risk mitigation, white-glove client service, cost management and so on. While there is often no right or wrong answer, the trade-offs must be explicit. For instance, innovation requires risk-taking and a willingness to make mistakes. All too often, management doesn’t explicitly make (or communicate) a necessary trade-off, pushing conflicts down through the organization so that individuals find themselves balancing irreconcilable demands. A prime example of this is when an organization states a goal to provide a high level of client care, but customer service representatives are evaluated based on the number of calls processed in a day.

Fear can also be a strong driver of behavior. Left unchecked, toxic subcultures fueled by fear can lead to undesirable behavior across an enterprise. This can include fear of losing one’s job, fear of not fitting in, fear of retribution, fear of disappointing one’s manager, fear of failure and so on. The ability to identify toxic employees — especially managers — and the willingness to impose consequences, particularly when the individuals are high performers, is critical. A herd mentality often evolves in organizations lacking diversity or openness to dissent and challenge. In these organizations, employees mimic the behaviors (good and bad) of the majority group due to the high price paid by those who are different and speak out.

Some organizations, meanwhile, underestimate the importance of strong middle managers. In many large organizations, the only way to reward outperformance — and get people pay raises — is to promote them to the managerial ranks, regardless of their ability or desire to lead, inspire or develop others. Today, many organizations are realizing some of these people lack the management skills required to navigate the increasing complexity of modern organizations and workforces. Managing and leading businesses and people in today’s environment is far more complex than ever before and managers need the appropriate skills and time to do it well.

Firms that are beset by many or all of these problems are creating the perfect conditions for misbehavior. Even the best people sometimes make poor decisions when they are placed in bad circumstances. Expectations by investors, customers and the public are higher than ever, while transparency has increased and threats from competitors and from illegal actions such as cyberattacks require constant guarding. Internally, organizations are dealing with increasingly complex product offerings, rapid adoption of artificial intelligence and workforce transformation. Against that backdrop, it’s no wonder some firms have experienced cultural failures recently.

But financial institutions and others can sidestep these problems by creating a culture by design rather than by default — providing clear and consistent messaging, allowing for diversity of thought and debate (and whistleblowing if needed) and fostering middle management. The companies that prioritize these elements will likely stay out of the headlines for conduct failures and will continue nurturing client relationships during a period of intense competition and technological change. Those that don’t, won’t.

by Elizabeth St-Onge


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