Anxiety breeds amorality: regulating financial institutions

September 2015  |  FEATURE |  BANKING & FINANCE

Financier Worldwide Magazine

A common axiom has it that when placed into a high-pressure situation, human beings rarely perform to the best of their capabilities.

True, in some circumstances, certain people – perhaps a top performing athlete or a business leader – may discover inspiration amid the pressure which allows them to enhance their performance. But for most, operating in an environment filled with fear and anxiety is not conducive to innovative and ethical behaviour.

It is this element – the influence of pressure on behaviour – that is the focus of a recent PwC and London Business School research study, ‘Stand out for the right reasons: why you can’t scare bankers into doing the right thing’, which examines the reasons why employees at financial institutions can find themselves behaving in an unethical manner.

The study, based on the views of more than 2000 UK financial services managers in the banking, insurance and wealth management spheres, asserts that anxiety breeds amorality. Anxious financial services managers are more than twice as likely to behave in an improper fashion when they are competing with colleagues to close a deal, reap financial rewards and jostling for promotion.

Furthermore, much of this behaviour is the product of an organisation’s rule enforcement system, which often creates the very behaviour they are trying to avoid. In a nutshell, the question being posed is this: is generating excitement about winning, rather than a fear of losing, the key to fostering a culture of innovation and ethical behaviour among financial services managers and the institutions they work for?

Changing behaviours

A particularly compelling aspect of the PwC/London Business School research is the revelation that a ‘get tough’ approach by financial institutions to poor employee performance, in terms of behaviour and reaching targets, risks breeding a climate of fear which, in turn, leads to an ever-greater degree of unethical conduct – an outcome clearly at odds with the expectations of regulators, businesses and the public.

“We are not suggesting that rules and penalties for bad behaviour should be abandoned as it’s essential that people know what is acceptable and what isn’t, and criminal behaviour should be punished,” clarifies Duncan Wardley, a PwC director specialising in cultural and behavioural change in business as well as one of the authors of the research study. “This is about the sorts of pressures that push ordinary, well-meaning people into behaving less ethically than they would want to by cutting corners and hiding mistakes.”

As a counterpoint, the research also found that when managers were presented with situations in which the positive outcomes of success were accentuated rather than the negative consequences of poor performance, they were emboldened and much more likely to respond in an innovative manner.

On a similar note, the 2013 CFA Institute report – ‘A crisis of culture: valuing ethics and knowledge in financial services’, considered the question of the financial services’ record on ethical conduct and the role a strong culture plays in the entrenchment of good behaviour. The report states that: “There is little doubt that strengthening culture, including the promotion of ethical conduct and greater knowledge, is a priority for the top echelons in the financial services industry.”

That said, the CFA Institute does concede that it could take years before demonstrable change is seen at all levels of the organisational structure – a view underlined by the report’s disclosure that 53 percent of financial services managers believe that career progression at their firm would be difficult without being flexible on ethical standards.

Accentuate the positive by mitigating the negative

In the years since the 2008 global financial crisis, the public perception of the financial services industry has of course been resoundingly negative. Indeed, the 2015 Edelman Trust Barometer found that the industry ranked next to last (media took last place) in a study designed to identify the most trustworthy global industries among a field of 15. Some believe this image will be difficult to shift. Others consider it nigh on impossible.

“The negative image of the financial services industry is linked to the lack of credibility of the sector following the breaches of trust in the past few years,” suggests Ksenia Zheltoukhova, a research adviser at the Chartered Institute of Personnel and Development (CIPD). “The PwC/London Business School report sheds some light on the potential reasons behind unethical behaviour, which is helpful for developing interventions to address the problem.”

One such intervention identified by the PwC/London Business School study is to lead employees into an emotional state conducive to ethical behaviour. The study states that its research “clearly shows people who are competing with their colleagues are more likely to behave ethically when they’re excitedly pursuing rewards than when they’re fearfully avoiding punishments. By presenting competition in a more positive way, leaders can create a culture of excitement rather than fear, and help people behave more ethically.”

Recognising the importance of good leadership

As alluded to in the study, the importance of good leadership should never be underestimated – especially within the confines of a financial services institution. Good quality leadership is without doubt a fundamentally important component in the transformation of workplace cultures and, consequently, a driving force for the reaffirmation of ethical conduct.

Exemplifying the importance of leadership in this context is a 2013 CIPD survey of employees in the UK banking, brokerage and investment and insurance sectors which found that financial services leaders “might be ineffective in communicating organisational values”. For example, the survey shows that although 6 in 10 senior managers said they were aware of values in their organisation, only 36 percent of staff at other levels said the same. In addition, more than one in 10 employees (13 percent) said their organisation’s values are weak or very weak.

The findings of the CIPD survey show that while leaders might be aware of the required organisational values, they do not demonstrate them often enough.

The regulation of behaviour

Enhanced regulatory scrutiny of the financial services industry by the likes of the EBA, FINRA, FCA and the SEC is slowly but surely leading to ever greater cooperation between regulatory authorities and financial services organisations – a relationship that, it is hoped, will transform cultures and mitigate the consequences of bad behaviour.

“Regulators and financial services leaders can change behaviour within companies by increasing emphasis on the positive outcomes of good performance, instead of solely focusing on the negative outcomes of the bad behaviour they want to stamp out,” asserts Mr Wardley. “Additionally, whilst the study shows that the issue of monetary reward is still a contentious issue involving a public and regulatory desire for further sanction, it also recognises that too much pay regulation can ultimately be self-defeating.”

As far as Ms Zheltoukhova is concerned, the major challenge is in the development of relevant and accurate measures which account for the frequently intangible inputs in the value that people add to financial services organisations, including various facets of talent and behaviours. Taking the measures proposition further, the CIPD, in partnership with the Chartered Institute of Management Accountants, has developed a framework for human capital reporting through its ‘Valuing Your Talent’ program.

Taking a balanced approach

As with most things in all walks of life, balances must be struck. In the case of financial institutions, it is the ability to strike a balance between fostering a culture of communication, creativity and innovation versus the continuation of a ‘get-tough’ approach to poor performance. However, putting this balance into practice is easier said than done.

“There is a concern that with so much attention focused on short-term responses to poor performance, there is not enough emphasis or investment in designing programmes that develop employees over time, but offer greater benefits and more sustainable organisational cultures in the long term,” observes Ms Zheltoukhova. “As the PwC/London Business School report shows, the short-term measures may sometimes act as barriers to the effect of some more fundamental culture change programmes. There should be clear policies and procedures in place for dealing with poor performance. However, most of the effort should be spent on developing and supporting the right culture and behaviours. Line managers are best placed to make judgments about poor and good performance, and should therefore be trained and empowered to supply the right levels of autonomy and support to their teams,” she adds.

In terms of the rigorous sanctions prescribed by regulators to curb conduct issues as well as satisfying the public appetite for retribution, Tom Gosling, head of pay, performance and reward at PwC, believes that regulations on pay based specifically on pay structures and penalties can unintentionally create the very conditions conducive to unethical behaviour. “An approach to pay regulation that focuses too much on pay instruments, deferral and clawback can create the emotional states in which creativity is crowded out, focus on financial rewards is maximised and unethical behaviour is more likely,” he says.

Conclusion: long-term cultural shifts

Clearly, much remains to be done to tackle the systemic conduct issues that exist throughout the financial services sector. And, as we have seen, research studies from the PwC/London Business School and CFA Institute play their part in tackling the vagaries of the sector, by investigating the role of emotions in determining when and why employees try to beat internal competitors using creativity, as opposed to resorting to unethical behaviour.

“Changes in the financial sector have to support long-term cultural shifts, starting at the top of the organisations,” suggests Ms Zheltoukhova. “The changes also need to tackle the culture of the financial sector, or ‘the way things are done around here’, and develop a sense of responsibility to a range of stakeholders, not the business alone. In the CIPD survey, when asked about their most important stakeholder, a third of financial sector employees named shareholders, with junior employees more likely to say that was the case. Financial services organisations need to raise the ethical competence of their people, teaching them about making choices when stakeholder interests may come in conflict.”

Similarly, the CFA Institute’s report identified that there remains a number of “deep-rooted tensions” that will make creating a strong culture a big challenge for the financial services industry over the years to come. “The results show that the industry has further to go on its journey to drive up ethical standards and embrace professional education,” notes John Rogers, former president and CEO of the CFA Institute. “It also shows signs of a shift in culture by recognising the benefits of global ethical standards and industry knowledge, and addressing agency issues. If we are to move the industry forward it is incumbent upon everyone within the industry to align their personal and organisational values with those that serve client, shareholder and societal needs. Aspiring to adopt these values will create more resilient firms and a stronger future for finance.”

However, it is likely to take some time to alter public perceptions through behavioural change in the financial services sector.

© Financier Worldwide

BY

Fraser Tennant