For bank executives, the nightmare scenario is learning about misconduct that occurred in their own organization, at worst, because regulators or prosecutors find out first. How can bankers avoid that dreaded phone call?
“It’s a great question and one that the Fed has been really interested in,” said Phil Nichols, a professor of social responsibility in business at the Wharton School of the University of Pennsylvania in Philadelphia.
It’s never too late to instill ethics in your bank, experts say. But getting a bank to operate differently can be challenging, and it doesn’t work unless executives know what they’re saying.
“One of the most critical aspects of restructuring a bank’s culture is that they really have to want it,” Nichols said.
Bankers can learn from the experience of institutions that regulators have penalized for corruption, especially under the harsh UK Bribery Act, Nichols said. When the government takes over supervision of a bank, it typically requires that there be an ethics officer, separate from the company’s general counsel, who reports directly to the board. Regulators also insist on a reporting mechanism, such as a hotline, that any employee can use to report misconduct directly to the ethics officer.
Nichols said that to avoid allowing wrongdoing to happen in the first place, the bank must embed ethical principles into its procedures: “Research tells us that rules only go so far, but principles guide people’s behavior.” in a company, including banks”.
So bank officials have to uphold the principles.
“That includes rewarding people for adhering to the principles and publicly censuring non-compliance,” Nichols said. “For example, transparency: we welcome bad news because it gives us the opportunity to be better.”
Nobody likes to tell their boss that things are not going well, but for ethics to have a chance, it is important that employees at all levels know that the messenger will not be killed.
“You can make people less afraid of breaking bad news and change the balance between what is real and what is perceived: what is better, cover up or confess?” said Ben Dattner, a New York City-based executive coach and consultant who frequently works with banking clients.
Bank executives seeking to prevent wrongdoing must rely on objective metrics that cannot be manipulated, Dattner said.
“Board members and executives need to say, ‘Not only do I care about how you do it, but I’m going to closely monitor how you do it and I better have a clear causal understanding of how you do it,'” he said. . “Show your work and make it auditable.”
It’s crucial that banks “reward honesty rather than just encourage it,” said Kelly Brown, a partner at Patriot Financial Partners in Radnor, Pennsylvania, which invests in banks and fintech companies. Employees who raise concerns with senior management should be celebrated, and not just because it’s illegal to fire or punish them.
“Whistleblowers need to know with certainty that protections are in place to safeguard them against retaliation,” he said. “Having a strong whistleblowing policy allows the bank to address issues before they potentially go public.”
Having up-to-date compliance software and practices is also crucial to stamping out scandals early, he said.
“Stay current with internal reporting and controls and watch for red flags,” said Brown, a former bank executive. “The products on the market today are far superior to those that were available in recent years.”
Training supervisors is also important, especially since managers are often promoted without proper training on how to spot problems, he said: “Don’t just check the box on required company-wide regulatory training; build leaders’ ability to attend training to help them hone their leadership skills.
While banks regularly train their employees, both for regulatory reasons and to comply with internal policies, they need to do a better job of teaching employees how to communicate, he said.
“Constant internal communication helps employees feel trusted and connected to one another, which in turn increases the likelihood that if an event seems wrong or an issue becomes problematic, they will feel more comfortable sharing their concerns without fear of retaliation.” Brown said.
The best way to prevent employees from committing fraud or other misdeeds to generate false results is to profit the real way, Dattner said.
“Leaders can make their organizations as competitive as possible so there’s no implicit or explicit pressure to cut corners to make the numbers,” he said. “If your organization can’t compete and thrive in the real world, there’s incentive to vaporware and fantasy.”
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