May 2020 Issue
Ethics and financial services (FS) make for awkward bedfellows in the eyes of many, especially so in the wake of the financial crisis and the sector’s subsequent mea culpa. Today, in 2020, some 12 years after the fact, the question of how thoroughly the FS space has cleaned up its act retains its validity.
While the FS sector can point to regulatory compliance, among other things, as an example of its restorative efforts, creating and maintaining an ethical framework in this sphere is as challenging as ethics themselves are to define.
The 2018 Financial Conduct Authority (FCA) discussion paper ‘Transforming Culture in Financial Services’ defines ethical behaviour as the habitual behaviours and mindsets that characterise an organisation. “There are numerous drivers of behaviour, many of which we and firms can identify and therefore manage,” states the paper. “The FCA’s focus is on assessing the main drivers, such as a firm’s purpose, leadership, approach to rewarding and managing people, and governance arrangements.”
In an earlier report, ‘Creating an Ethical Framework for the Financial Services Industry’, Herbert Smith Freehills and the London School of Economics and Political Science contend that it is logical for the FS industry to be subject to higher ethical standards than other commercial sectors given the vital role that financial institutions play in supporting a modern economy and society, such as safeguarding money and providing domestic lending.
“The question of what these ethical standards should be, how we judge them, and what we are ultimately aiming for, is central to this debate,” notes the report. “While we may agree the norms at a high-level, how they are applied in practice will be hotly contested and bitterly fought. What constitutes a ‘mis-sold’ product for one person, may be seen as a fair transaction for another. Clients and shareholders can also push firms to conclude transactions or pursue profits at the expense of ethics.”
Furthermore, says the report, the fundamental principles that any ethical FS services firm should instil include: (i) not pursuing profit at the expense of everything else, including reputation; (ii) behaviour that is marked by integrity, fair dealing and acting in the best interests of clients; (iii) commitment to and delivery of technical excellence; (iv) prioritising good ethics over the instructions of clients where they conflict; (v) looking beyond the question of what is legal – ie., being prepared not to act in a certain way on the basis that it is unethical, even though it is legal; and (vi) consistent application of positive ethical behaviour across the industry.
“While the FS sector can point to regulatory compliance, among other things, as an example of its restorative efforts, creating and maintaining an ethical framework in this sphere is as challenging as ethics themselves are to define.”
“Having a culture of compliance is perhaps the most important piece of a compliance programme for any global financial institution,” says Doug Davison, a partner at Linklaters. “Most regulators around the world have focused like a laser on an entity’s ‘tone at the top’, that is, what is the message senior leadership is sending about what it expects from its employees in terms of right and wrong?”
In the view of Ann Skeet, senior director of leadership ethics at Santa Clara University, ethics in the FS space will be a major topic in the US this year, with a presidential election meaning that more Americans will be thinking about how their elected officials legislate and regulate FS. “The settlement in the Wells Fargo case, in which the bank having agreed to pay $3bn to settle claims related to its creation of millions of fake accounts to meet sales goals, might be an important milestone for the bank’s management, but the hangover effects, in terms of eroding public confidence in financial institutions, still linger.”
With investors intrinsically trusting financial institutions with their money and expecting them to invest it with integrity, adhering to the above-mentioned principles as part of a strong ethical framework must be considered essential for FS professionals.
Constructing a framework
Once the key principles have been agreed, constructing a framework which embraces ethics, culture and conduct is the next port of call, with senior management and board buy-in a core component of the task.
“A strong ethics framework starts with identifying that there are ethical issues to resolve,” observes Ms Skeet. “Having a framework for ethical decision making helps build the muscle memory we all need to remember to be on the lookout for ethics. A framework should emphasise facts, consider stakeholders, and look at the issues through a range of lenses representing modes of moral reasoning. These lenses prompt people to consider the answers to questions designed to help evaluate options.”
The lenses for shaping ethical decision making include: (i) the utilitarian approach – which option will produce the most good and do the least harm?; (ii) the rights approach – which option best respects the rights of all who have a stake?; (iii) the justice approach – which option treats people equally or proportionately?; (iv) the common good approach – which option best serves the community as a whole, not just some members?; and (v) the virtue approach – which option leads me to act as the sort of person I want to be?
“FS organisations can add to these questions if they have certain values they are committed to upholding,” continues Ms Skeet. “These values further define what is considered ethical in that organisation. It is important that these also be turned into some form of question that employees can use to actually make decisions, and that they be linked to the organisation’s mission and purpose.”
Furthermore, underpinning ethical intentions is the support that can only be provided by an organisation’s most senior levels. “Having the right tone or culture at a firm is unquestionably the necessary foundation on which any ethics or compliance programme is built,” says Mr Davison. “Senior management and boards typically understand – given a number of franchise-threatening ethics lapses in organisations, as well as exposure to personal liability – that developing and implementing a successful ethics framework is critical.”
Likewise, Ms Skeet considers it vital that the board and senior management team are committed to ethics. “Boards have an obligation to have some insight into the ethical culture of the company,” she suggests. “And senior management teams need to model the behaviour they would like to see in the company and allocate resources to others in the company that are needed to support ethics. Additionally, board and C-suite members are also individuals and their own moral autonomy needs to be respected for ethics to take hold.”
Skimping on ethics
Recent corporate ethics disasters, such as money-laundering scandals, unethical conduct and fraudulent employee behaviour and false disclosures in annual securities reports, clearly illustrate how poor management of so-called ‘soft’ business ethics issues can rapidly translate into hard outcomes costing billions.
“Breakdowns in ethical frameworks can result in a range of consequences,” says Mr Davison. “Particularly significant breakdowns may well expose the entity and its individuals to meaningful risk of civil actions, regulatory proceedings, criminal prosecutions and events that could end up threatening the survival of the organisation itself. Even if legal proceedings do not result, the costs and distraction of such matters can really undermine what can be accomplished in terms of business growth.”
In the view of Ms Skeet, market forces will keep ethics at the forefront for the foreseeable future. “FS firms that overlook ethics do so at the peril of value erosion,” she says. “Millennials, as both employees and consumers, are making decisions in the marketplace based on their understanding of companies’ values and their commitment to them. For both employee retention and market share, companies that invest in ethics will be at an advantage.”
Codes of ethics: disseminating policy
To avoid falling foul of ethical breakdowns, companies are well-advised to spend substantial time and money installing codes of ethics utilising appropriate channels, such as training, compliance programmes and in-house watchdogs, to disseminate the key elements of their policy and ensure investor and wider stakeholder understanding.
“The more broadly ethics can be distributed in a company, the better,” suggests Ms Skeet. “This provides all employees with a useful rubric for decision making, which is reinforced when people feel educated about ethics and empowered to use them in everyday decisions.”
According to Ms Skeet, there are three main opportunities to introduce ethics into organisations: (i) at the time of a problem or breach; (ii) in the normal course of setting policy and developing products; and (iii) when companies transmit their cultural expectations through human resource processes such as hiring and orientation, as well as regular culture assessment.
“Companies that regularly assess their culture for ethics increase their chances of identifying opportunities to introduce, use and transmit ethics,” she continues. “Companies that use ethical deliberation methodologies in the normal course of business reinforce and promote ethics.” In Ms Skeet’s experience, companies that rely on data and information when making decisions involve those affected by decisions in the consideration of alternatives, consider the downstream effects of decisions, use consensus when possible, and share the reasoning behind decisions once they are made, are more likely to encourage ethics.
“Dissemination is typically accomplished through both general and focused training in particularly risky areas, as well as education of a company’s policy on its website, frequent commentary from senior leadership to employees and other stakeholders, and in actions,” adds Mr Davison.
Ethical futures
Virtually all the high-profile ethics and compliance failures in recent years share one common feature: leaders who did not value or embody ethical behaviour – ethical nonchalance which ultimately affected entire workforces.
“A leader needs to recognise fundamentals in the practice of ethical leadership,” says Ms Skeet. “In addition to their own character, the degree to which leaders create a community, encourage ethical behaviour, honour the obligations that come with their specific roles, clarify culture when things go wrong, and invest in designing incentives and systems that promote ethics, will contribute to promoting ethics in companies.
“Companies that respect the moral autonomy of individuals have a greater chance of establishing a climate of trust,” she concludes. “Such a climate contributes to the promotion of ethics in organisational culture.”
© Financier Worldwide
BY
Fraser Tennant