I was speaking recently with a colleague with years of experience as a criminal prosecutor. She observed that the first step on the path to criminal ruin often begins with one seemingly small, often rushed choice. My own experience from years of seeing mistakes in the financial services industry leads me to agree. People—especially junior employees—too often decide sooner than they must, without taking the time to raise their hand and ask for help. So do not confuse thinking quickly and creatively with choosing rapidly in every instance. When considering what structures in your organization can help people make good decisions, consider ways to build in adequate time to decide. Incentives In any discussion of choices, it is critical to consider incentives. Compensation is a powerful form of incentive. We need to think creatively about how to structure compensation in ways that promote conduct aligned with the values and long-term financial interests of the firm. Bill Dudley, the President of the New York Fed, has proposed one possible improvement. Pay material risk takers and senior managers in the form of deferred debt, which vests in line with the mediumand long-term risks for which they are accountable.6 The idea is to create a performance bond for bankers akin to the security deposit that a tenant provides to a landlord. But, believe it or not, money is not the only way to motivate people. One lesson of the LIBOR scandal is that employees are motivated by more than pecuniary gain.
Salience can be achieved by prompting about moral codes—through language that emphasizes words like “moral,” “ethical,” and “good.” Discussions by leaders and key culture carriers—that is, esteemed colleagues regardless of rank in a hierarchy—can also help if they address ethical dilemmas that arise in the course of business decisions. Finally, salience occurs through proximity of decision-makers to those affected by decisions.12 So, look for ways to make the human consequences of choices more apparent. In my view, a habit or culture of considering what is right, and not merely what is permissible, will help any organization attract, retain, and develop high-quality employees. It will promote individual wellbeing and will contribute, over time, to an industry that makes fewer errors of judgment. Do not rest Above all, remember that this is a marathon, not a sprint. So your organization now has three lines of defense—great! But your work is not over. You still have to question whether your organization can be better controlled vis-à-vis its risks. The challenges and opportunities facing your firm do not stop changing. You need to adjust accordingly. I encourage you to ask questions about the three lines of defense model and how it is applied in your organizations. Here is one of the questions on my mind: How do the three lines of defense take account of advances in technology? Technological solutions in financial services are becoming cheaper, faster, more easily available—almost off-the-shelf—and help make your business more efficient and profitable. But do you know how these solutions work?