Does Your Bank Need A Chief Ethics Officer?

In an article titled To Restore Trust in Banks, Build Ethics into Business Decisions in American Banker, the authors wrote:

“If a bank decides to have a formally designated individual (i.e., Chief Ethics Officer) with principal ethics responsibility, what steps should it consider to make the role effective? Such an executive could update and promulgate the company’s ethics policy and be responsible for training employees about their ethical responsibilities. He or she could help to illuminate decisions about what is “right or wrong,” even where there may be a legal argument to justify an institution’s proposed products, pricing or conduct. He or she also could be the senior officer to whom whistleblower complaints would be directed. The ethics officer might also be charged with identifying and investigating wrongdoing involving individual conduct to help ensure that the institution’s ethical culture is grounded in ethical behavior and not simply an abstract policy. In addition, he or she could be an advisor on products, services and programs, evaluating them in the light of fairness to their intended users.”

In many of these potential roles and responsibilities, there’s a strong whiff of “after-the-fact-ness,” meaning that the involvement of this chief ethics officer would come after some potentially unethical behavior was committed (with the exception of the training role).

A better solution would prevent unethical behavior (although, if you read my prior post on financial education, you might guess that I don’t think ethics education would be particularly successful). And, in fact, not only is that implied by the title of the AB article, but the authors write:

“One alternative or supplement to appointing a single officer to champion ethics is to require that bank decision processes explicitly incorporate ethics—whether the bank “should” as opposed to whether it “can”—into major decisions on products, programs and business initiatives. Especially given the subjective nature of ethical requirements, making ethics decisions part of a process that will incorporate the views of multiple executives may assist in capturing a broader corporate consensus.”

Sounds like a good idea, but seems impractical. The recommendation implies that many decisions that involve an ethical choice can be easily identified and isolated. That’s way too simplistic an assumption.

Every “issue du jour” in the business world produces calls for a Chief Fill-in-the-blank Officer. We’ve seen Chief Reengineering Officers, Chief Knowledge Officers, Chief Customer Officers, Chief Innovation Officers, Chief Security Officers, Chief Data Officers…and the list goes on and on and on. These calls rarely address some important questions, however:

  • How much budget should Chief Fill-in-the-blank Officers get to do what they’re supposed to do?
  • What are the limits, boundaries, goals, and metrics for these positions?
  • Are these permanent or temporary roles?

Lots of questions about these Chief roles, and yet the pundits who write articles advocating for the creation of these positions never seem to have any answers to the questions.

The authors of the AB article are lawyers, and they write:

“In some banks, general counsels are considered de facto ethics officers (and sometimes even hold the title of chief ethics officer).”

There’s a lawyer joke in here somewhere, but I’m going to let it pass, because I know that someday I may need a lawyer to get me out of trouble, and the last thing I need is some lawyer saying “oh, you’re the guy who made that nasty lawyer joke in a blog post back in December 2014.”

Another thing that bugs me about the “Chief Ethics Officer” proposal–as well as some of the other recommendations in the article–is that there is no root cause analysis regarding the ethics problem.

How can you know what the solution to a problem is if you haven’t defined the causes of the problem?

So what are the possible root causes of an ethics problem in banking? I’m going to need your help to come up with some more, but I can think of a few possible explanations off the top of my head:

1) Bankers are inherently corrupt cretins.

Sadly, I know there are people out there who believe this to be true (I’m thinking specifically of two Twitter buddies, neither of whom I will mention by name). We’ve been though this before. It’s not true–despite some folks’ misguided notions.

2) Banks’ cultures nourishes unethical behavior.

The authors of the AB article–like many other observers writing on the subject of bank ethics–raise the subject of a bank’s culture:

“The ethics officer might also be charged with identifying and investigating wrongdoing involving individual conduct to help ensure that the institution’s ethical culture is grounded in ethical behavior and not simply an abstract policy.”

This doesn’t get at the root cause, because there must be something that influences and shaped the culture in the first place. Like having a workforce comprised on unethical, inherently corrupt cretins. Which isn’t the case.

3) Bankers have incentives to engage in unethical behavior.

The problem (the root cause) is one of risk vs. rewards. The rewards for unethical behavior are greater than the risks of getting caught (or, at least, the perceived risk that one will get caught). When the perceived reward is greater than the perceived risk, people will engage in behavior to reap that reward.

If #3 is the root cause–and I believe it to be, at least, more so than #1 or #2–then the “fix” needs to be something very different than a Chief Ethics Officer running around promulgating policies, sanctioning lapses, and listening to whistle blowers.

The fix needs to be an adjustment of the rewards (i.e., compensation and incentives) and risks (penalties). In other words, it isn’t the legal department that’s important to the fix–as the authors of the article propose–but the HR department.

Unfortunately, this is anything but an easy fix. Changing the rewards/compensation structure organization–especially an organization like a large bank–borders on the impossible.

Being perceived as as unethical is not a desired image for any bank, so–from my parochial view–this becomes a marketing problem, because of the public relations and market perception implications.

So maybe the Chief Marketing Officer–and not the general counsel–should be the de facto Chief Ethics Officer?

Just as there is a risk/reward tradeoff that influences an individual’s behavior, there is a risk/reward tradeoff at the organizational level, as well. This is probably why unethical behavior persists in the industry–the downside of paying fines doesn’t outweigh the revenue gains of the behavior in question.

Marketers could model and address this. Is there an overall benefit to being perceived as honest and ethical, at an aggregate market level that could outweigh some potential gains in a few opportunities that are won with unethical behavior?

Even if that were impossible to do, if the Chief Marketing Officer is responsible for creating awareness and affinity for the organization through advertising and marketing efforts, shouldn’t that executive be responsible for preventing the actions that erode the positive affinity?

(Don’t think I don’t know that I’m going to get little support for making the CMO the chief ethics officer).

Bottom line: So I don’t know what the answer to fixing the “ethics” problem is in banking. What I do know is that creating a Chief Ethics Officer position isn’t likely to fix much. And it especially won’t fix much if the bank creating the position doesn’t first figure out what it’s trying to fix in the first place. 

I also “know” one other thing: From 30 years of consulting, I’ve come to believe that, in most cases, lawyers are usually not the solution to a business problem. I really don’t mean that as a slight to lawyers. My point is that I believe that the fix to most business problems is more operational in nature, rather than legal (or regulatory, for that matter).

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