In that case, loyalty to a network of professional contacts was a powerful incentive to commit fraud. I am lucky to have had a very different experience at the New York Fed. I oversee a staff of legal, compliance, and law enforcement professionals who appreciate their paychecks but, in all candor, are not in it for the money—or, at least, not entirely in it for the money. What matters to them is the Federal Reserve’s public mission. A good way to encourage their best conduct is to acknowledge their contributions to that mission. But don’t take my word for it. A growing number of organizational experts and management consultants have concluded that job satisfaction and other intrinsic benefits matter as much if not more than extrinsic rewards, including pay. 7 This is not to say that incentive compensation is 3/7  BIS central bankers' speeches  weak tea. It is certainly a powerful motivator. My point is that, in your efforts to construct the most effective controls for your organization’s risks, consider both monetary and non-monetary incentives. Moral reasoning It is also important to promote moral reasoning. I know there’s a joke in there somewhere. After all, what is a lawyer doing talking about morality? And there is some tension in advocating moral judgment in a discussion about controls. Controls seek consistency and objectivity. Morality, by contrast, can be very personal or subjective. Controls often remove discretion. Moral reasoning is all about choice. But let’s be realistic.
Get creative It’s easy to say, in essence, “Don’t miss the forest for the trees.” Let’s acknowledge that the challenges you encounter in the first line of defense are a veritable thicket. To manage effectively the risks that your firms face requires intellectual agility and creativity. For now, I want to touch on a few considerations: diversity, choice architecture (especially incentives), and moral reasoning. These inputs can help you apply the three lines of defense model more effectively, especially in the face of rapid technological innovation. Diversity If you want to think nimbly, embrace diversity: the way we think, our backgrounds and areas of expertise, our experiences—including, but certainly not limited to, the ways that people treat us because of where we were born, our race, gender, pedigree, sexual orientation—and even our values. Diversity can help address the problem of silos that I described earlier. The problem with silos is not specialization, but blind spots. At the New York Fed, I don’t want economists making legal judgments, or lawyers performing economic analyses. But I very much want lawyers and economists to provide insights to each other based on their specialties. More generally, inviting outside views helps avoid common, human biases. 4 “Groupthink” is one well-documented bias. Another is the “endowment effect”—placing greater value on what one already has versus what one does not. What links these phenomena is an excessive preference for the status quo.