In a 2009 report on the crisis, the OECD observed that “corporate governance routines did not serve their purpose to safeguard against excessive risk taking”. A crucial shortcoming in many cases was the corporate culture within financial institutions. It is therefore no surprise that “weaknesses in risk culture are often considered a root cause of the global financial crisis”. We all know too well how loans were systematically sold to people who were clearly unable to repay. Lenders operated on a legal, but ethically questionable, originate-to-distribute business model – this saw the risks associated with sub-prime mortgages being repackaged and sold off to unsuspecting third parties. Another sobering example of the link between culture and crisis comes from a finding of the Financial Crisis Inquiry Commission in the United States on Lehman Brothers. The Chief Risk Officer was stripped of her role after raising red flags on risks, in the face of intense competition from other investment banks. As we all know, the bank went on taking much more risk that it could reasonably manage – and the rest, is history. While the global financial crisis has inspired much conversation about ethics and culture, these issues are by no means new. Throughout the 2000s, an estimated 45 million payment protection insurance (PPI) policies worth around £ billion were widely mis-sold to customers in the UK. Many people did not even know that they were buying a PPI policy.
These rules emphasise sensible governance structures – such as preventing control function officers from having their bonuses determined by the profits of business units they oversee. They also require risk-adjustments in quantifying bonuses – for instance, two traders who bring in the same profits, but expose the firm to different levels of risk, are rewarded differently. The other area that is important to fostering a healthy culture at the situation-level is “speaking up”. It is important that there are clear and robust whistleblowing arrangements for employees to raise legitimate concerns about illegal or unethical practices. In addition to the statutory protection offered for whistleblowing to authorities, it is also important that financial firms have internal arrangements for concerns to be raised within the organisation. However, whistleblowing only makes up a small portion of a speaking up culture. In fact, it is a last resort which will not need to be used in an organisation with a healthy culture of open discussion. For professionalism and integrity to prevail – it is crucial that financial firms encourage constructive challenge and healthy debate. This is particularly pertinent for the more ambiguous issues of ethics, professionalism and integrity. (c) Person We have discussed the elements of “system” and “situation”. The third element that is critical for a healthy culture is that of the “people”. I pointed out earlier that the evidence of psychology suggests that the “system” and “situation” are far more likely to predict actual ethical behaviour compared to personal convictions.