Academic journal article Business Law International

Character's Essential Role in Addressing Misconduct in Financial Institutions

Academic journal article Business Law International

Character's Essential Role in Addressing Misconduct in Financial Institutions

Article excerpt

This article examines one of the critical causes of misconduct that has persisted in the global financial services industry despite the warning flags raised from the financial crisis of 2008-09 and the very public shaming of major financial institutions (FIs) that have violated various regulatory regimes.1

The authors argue that many acts of misconduct are consequences of failure of judgement owing to weaknesses in leader character. By so doing, the article pivots away from the prevailing popular wisdom that such acts of misconduct are consequences of the moral or ethical shortcomings of 'bad' people. Rather, it takes the view that these acts of misconduct are usually the result of poor judgements made by people with underdeveloped character dimensions working in organisational cultures that allow or encourage them.

The article defines character as an amalgam of virtues and values that, individually, collectively and interactively affect the way leaders perceive situations, as well as make and implement decisions. The principal dimensions of character are integrity, drive, collaboration, humanity, humility, justice, courage, temperance, accountability, transcendence and judgement (see Figure 1). The authors' research suggests that character can be assessed and developed, and that leaders with character can infuse character-based decision-making into the culture of the organisations they lead.

When we use the word 'leader', we are not just referring to those in formal, positional leadership roles such as chief executive officer (CEO), chief financial officer (CFO) or chief risk officer (CRO). We also include those who are willing and able to exert influence on leaders. Legal and financial advisers, for example, may not be in executive roles but they can have a substantial influence on the ways in which executive leaders frame and understand issues and make their decisions.

Further, the authors contend that lawyers could and should play an important role in preventing such misconduct if they had a better understanding of the effect that character has on executive decisions. Whether as trusted advisers, compliance professionals, inside counsel or regulators, such understanding would enhance the quality of advice they give or actions they take and would prevent them becoming complicit in wrongdoing. Beyond that, they could become an integral part of building healthy, sustainable organisational cultures that quickly recognise and address potential misconduct even before it happens.

In this article the authors:

* describe the types of poor conduct that have continued to plague the financial industry since the onset of the financial crisis;

* review the media coverage and academic literature that has tended to analyse and frame misconduct as an ethical or moral issue and why, framing it this way, the solutions designed by regulators, boards and management to address it has been met with only limited success;

* introduce a more complete interpretation of the sources of poor conduct and misbehaviour in the financial industry using the Ivey Leader Character Framework;

* discuss the implications for FIs, regulators and their legal advisers, justifying the authors' position that character must be a legitimate topic of conversation, exploring lines of inquiry related to character, and suggesting criteria by which responses could be assessed; and

* finally, propose how this approach to character might be implemented in ways that will strengthen the business judgement of the leadership, organisational culture, and approach to risk management and regulation throughout financial services organisations.

Poor conduct persists in the financial services industry

Since the 2008-9 financial crisis, there have been numerous and widespread instances of poor conduct continuing to take place within FIs across the globe. Some of the more egregious, recent examples include:

* Retail fraud: In September 2016, Wells Fargo will have to pay US$185m to settle charges that its employees had fraudulently created more than two million deposit and credit card accounts in order to achieve performance targets and earn bonuses. …

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