Rules vs. Culture

Throughout the years, financial institutions have had their share of issues regarding fraud. As such, fines have been imposed and sweeping regulations have been implemented. After the financial crisis, banks focused on developing tougher rules through enhanced policies and procedures. Tighter controls have also been put into place to mitigate risk against nefarious behaviors. But despite all of these efforts, misconduct continues to plague our industry.

Why is that?

Although politicians in the US like to paint Wall Street bankers as greedy and corrupt, the reality is that all industries face their own challenges with misbehavior. Furthermore, environment plays a large role in employee conduct. Even individuals with strong moral identities are affected by their surroundings because the culture of an organization is stronger than the principles of an individual. Organizational psychologists would argue that culture is the one factor that can turn a boy scout into a criminal, if he works amongst thieves. So while the financial services industry searches for a silver bullet of virtue within their inventory of rules and controls, much more emphasis should be placed on culture.

So what is culture?

The formal definition is the habitual behavior within an organization, sustained and supported by reinforcement and perpetuated by consistency. In my own words culture is how we operate day-to-day and how we conduct business. It is how we treat our coworkers, our managers and our subordinates; it is also how we treat our clients. Culture is sustained and reinforced through reward mechanisms that are both formal and informal. So if you break company rules to achieve an outcome but your boss continuously gives you the "attaboy" praise, it is likely that you will develop a disregard for company rules. If many managers do the same a culture begins to form.

One fundamental challenge is that human behavior is such that no matter how good or ethical a person is, we are all capable of actions that we probably never thought possible. Most people do believe themselves to be honest, yet when faced with an ethical dilemma many of us do stumble. For example, what do you do when you notice that the checkout clerk at the supermarket overlooked an item at the bottom of your cart? Would you speak up? Or do you stay silent and hold your breath like the cat that ate the canary?

Most of us would think that staying silent in this scenario is not a big deal, but, in essence the frequency of small and dishonest actions like this one are cumulative. They then form the character of an individual much like employee behaviors form the culture of an organization. Practicing integrity even in seemingly insignificant situations builds muscle memory. The more you practice, the more likely it will become that you do the right thing when faced with an ethical challenge.

The same applies to individual behaviors within an organization. Practicing ethics on a day-to-day basis allows integrity to become second nature. This becomes critical when stress is added to the mix because in pressure situations we don't necessarily have the time to reason. Instead, we rely on the actions that are programmed into our muscle memory. As most of us know too well, stress is analogous to the high pressure jobs on Wall Street. So if our aim is to truly have an industry synonymous with honesty and trust we must focus on developing an ethical culture. But this can only occur by repetitiously practicing integrity so that it becomes part of our cultural DNA.