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Ethics and Wall Street: Reactions and Reform

In the wake of the financial crisis of 2008, many thought ethics reform would come quickly to Wall Street. New laws did come, in the USA and UK. But is the culture changing for the better? A new report suggests that there has been little change in the last three years, and there may be some worrying trends among younger employees.

Authored by Ethical Systems collaborator Ann Tenbrunsel, professor at the University of Notre Dame, and Jordan Thomas of Labaton Sucharow, LLP, "The Street, The Bull and The Crisis: A Survey of the US & UK Financial Services Industry" paints a bleak picture- especially concerning young professionals, who reported being more open to engaging in illegal and unethical behavior, and those who earn over $500,000, more than a third of whom say they've actually witnessed, or have firsthand knowledge of, wrongdoing in the workplace. Companies were also cited for silencing potential whistleblowers and creating internal structures that made reporting misconduct both difficult and, in some cases, grounds for dismissal. Across many questions, ethics tended to be slightly worse among men than among women, and in the UK compared to the USA

You can find a quick summary of the report in this article by NPR. To go beyond the summary, we asked our expert suite of collaborators for their reactions. Linda Trevino, distinguished professor at Penn State University, offered these thoughts:

"This is certainly bad news but ...is anyone surprised? There is little or no reason to expect that industry ethics would have improved since the financial crisis: No one is in prison. Companies paid some fines and moved on. In fact, it seems that these organizations are working pretty hard to silence potential whistleblowers, despite the SEC's counter-efforts. If that's true, it's going to make the problems even worse."

By not punishing corporate malfeasance more broadly and significantly, the government has sent the message that ill-gotten gains are worth the risk. Therefore, there is little motivation for organizations to actually make the needed changes to facilitate more ethical behavior.

Hal Movius, of Movius Consulting, spoke to how situations drive behavior, suggesting three components that can foster misconduct:  “Incentive misalignment (i.e., short-term performance rewards misaligned with client interests); technical complexity (which makes it harder for banks and regulators to recognize what is actually happening); and opacity (a lack of transparency in tracking and reporting what has happened). He also noted that, as the study reinforces, the cultural norms of Wall Street have become extremely hard to change--and people have too much to lose by "rocking the boat." Movius makes a further distinction worth noting: that people who have too much to lose include not only those that work on Wall Street, but our elected officials who do not want to upset a massive and powerful donor base.

So, how do you actually create change? Research says that it must start with a clear and unambiguous tone at the top. Leaders must talk about ethics, act ethically, and make it clear that the company rewards ethical behavior. But that's just the start; mid-level managers must be on board too, for direct supervisors typically have a greater influence on employees than do leaders further removed. When leaders skirt the rules, it is important to act swiftly in meting out justice. Ron Berenbeim, adjunct professor at NYU Stern School of Business argues that putting executives in jail should be more common. (See Judge Jed Rakoff for support on this point.) For executives presiding over companies involved in major scandals, but who are not personally involved, Berenbeim believes that CEO resignations should be mandatory and companies should not reward them for negotiating a good settlement.

It is also imperative that businesses better understand how decisions are made, and the many potential influences that can shift behavior from personally unacceptable to professionally permitted. As Jeffrey Kaplan, of Kaplan & Walker LLP remarked, "Financial services are a rough ethical neighborhood...I don’t think I’ve seen an industry where the opportunities for wrongdoing are, generally speaking, as great." 

Perhaps the most significant method to reform Wall Street is to supplant money/salary as the key measure of success. David Hirshleifer of UC Irvine notes that when making money is an overriding success measure, it can shift the industry-wide culture toward making profits, relative to other values. Further, if the people the financial industry hires are increasingly self-selected as greedier people (i.e. people who are single-minded about making money) lower ethics becomes the norm. As we have previously advocated, to attain a culture of ethics, companies should instill a shift in mindset from a shareholder/short-term perspective that rewards temporary upticks in profit to a more stakeholder/long-term outlook that prioritizes long term value creation.

The bottom line is that better ethical behavior will come when legal reforms lead to, or are supplemented by, changes in the culture and norms of the financial industry. As Tenbrunsel explains, "Just more regulation without addressing the individual, organizational and industry-level factors probably isn't going to have a very significant impact." Addressing all of those factors simultaneously is our goal at Ethical Systems.