This list is only illustrative. It is not by any means exhaustive. The traditional means to address bad behavior are enforcement actions against the bad actors and the organizations where they worked. 1 This traditional response, in my view, is appropriate and I strongly support the actions that have been taken and that will continue to be taken. All enforcement actions, though, are essentially retrospective. Of course, we like to think that enforcement actions will not only punish but also deter. But I wonder if this hope is really a prospective strategy. We would better serve the public good if we could do something – anything – more forward looking, and complementary to what our enforcement colleagues are doing to deter future bad behavior. Ethical culture The new emphasis on an ethical culture within financial services firms arises from the policy interest in preventing some of the bad behavior that has been observed. Now I use the phrase “some of the bad behavior” deliberately. I fully embrace the goal of eliminating all bad behavior. But we cannot let the goal of perfection become the enemy of progress. We need to start making progress, so let us agree that perfection is probably not realistic. Even an organization with the strongest ethical culture will have episodic bad behavior. Although culture is no panacea, I believe that the ethical culture of an organization can improve the behavior of the people who work there.
Few would disagree with the following: The bad behavior that contributed to the Financial Crisis was evidence of a culture that was not strongly ethical. Let me also pose a challenge to those who are skeptical about the benefits of a strong ethical culture: If this is not a suitable method to prevent bad behavior by bankers, what alternative proposal do you advocate? The status quo is not acceptable. As a wise man once said, “Plan beats no plan.” The components of a strong ethical culture So what are the key components of a strong ethical culture? It is said that lawyers love a metaphor, and this lawyer is no exception. I like to think about ethical culture as if it were a package. The culture that we will have is derivative of what we put into the package, and there are clear choices to be made. The contents depend upon the type of organization, the kinds of people, and the nature of the skills needed to conduct the organization’s activities. Time will not permit me to cover this thoroughly, so let me cover a few items with a very broad brush. What goes in For starters, the conduct of the people in any organization will be strongly influenced by incentives. Let me mention the “big three.” Bankers, like lawyers, want to do [1] quality work, [2] with people they like and respect, and [3] receive fair recognition in return.