• Dennis Gentilin

A question of ethics: Navigating ethical failure in the banking and financial services industry

Updated: Jan 27, 2018

Below is an edited version of a speech I delivered to a Chartered Accountants Australia and New Zealand event in Auckland on the 20th September 2016. The event coincided with the launch of their paper titled “A question of ethics: Navigating ethical failure in the banking and financial services industry”.


Unfortunately, and rather ironically, last week we were provided with another example of why we are here tonight. Wells Fargo, the U.S. based bank that prides itself on being a community rather than Wall Street Bank, was found to have been (amongst other things) opening fake bank accounts that resulted in customers being charged fees and issuing credit cards that customers had never applied for.


Regulators have levied a total of $185 million USD in fines, and Wells Fargo has dismissed over 5,000 employees for being involved in the wrongdoing. Despite this, CEO and Chairman John Stumpf claims that the incident does not reflect deeper cultural issues in the institution, but rather is the result of a few bad employees.


Errr, no.


Let’s be clear, no organisation is perfect, and there will always be occasions when a handful of employees go rogue. But when 5,300 employees are dismissed for maleficence, this points to a systemic ethical problem. And like all systemic ethical problems, there are some very common themes that underpin the incident at Wells Fargo. I want to spend the next 15 minutes talking about four of these themes.


The first theme is how systems can shape the character of the people operating within them. Systems that promote and normalise unethical conduct can cause even good people to behave in very uncharacteristic ways. For those of us who have never found ourselves in situations where wrongdoing is normalised, this statement might be difficult to reconcile with. However, as scary as it may seem, we are all susceptible.


Yes, there are good people who will always do the right thing, just like there are bad people who will always do the wrong thing. But these people are in the absolute minority. The majority of us, as much as we like to think otherwise, are open to compromise. And if the situation we find ourselves in dictates that to survive and get ahead there is a need to behave in a questionable manner, then there is a strong likelihood we will be seduced and tempted.


A second theme is that leadership plays a central role in shaping the system that incubates the unethical conduct. Leaders do this in both formal and informal ways. Typically, in the aftermath to an ethical failure, the focus is placed on the formal mechanisms that leaders have designed and implemented – codes, compliance frameworks, policy documents, performance and reward schemes and other such artefacts.


These are obviously important, and all the commentary suggests that they played a central role in the incident at Wells Fargo. As articulated in a complaint lodged by the Los Angeles attorney in May last year, Wells Fargo has “an ambitious and strictly enforced sales quota system”. According to the complaint, this system has, “predictably and naturally, driven its bankers to engage in fraudulent behaviour to meet those unreachable goals.”


Without wanting to downplay the important role of formal mechanisms, my experience shows me that far more important are the informal mechanism. These are the powerful messages that leaders in the organisation send through their every action, choice and decision. Because everything a leader does, no matter how seemingly inconsequential, sends a signal. And over time these signals tell employees what the organisation really values. So in the aftermath of ethical failures like the one experienced by Wells Fargo, it is important to ask the following types of questions.


Firstly, how many people did leaders dismiss for failing to meet their sales targets? Also, who did leaders reward, promote and hold out to be champions of the business? Were they ethical role models, or those that consistently hit their targets using dubious means? Furthermore, did leaders at some point have access to information suggesting that something was amiss, and through their failure to take action send a loud message that the wrongdoing was acceptable? Or, worse still, did some leaders actively engage in the wrongdoing themselves, thus explicitly condoning it?


These are the defining moments in organisations. These are the moments that matter. It is these types of moments that are pivotal in helping create and maintain a system that incubates ethical failure. There will always be goals and targets in organisations, but it is the actions of leaders that will determine whether people respond honestly when falling short of targets and use it as an opportunity to learn, or whether they adopt an “any means justifies the ends” attitude.


Another question that needs to be asked is this: At any point, did someone at Wells Fargo raise concerns about the conduct of the sales staff? And if so, were their concerns heeded, investigated and appropriately addressed? I would hazard a guess that there were people within Wells Fargo who did harbour concerns. Some, feeling that speaking up was futile or associated with consequences, remained silent. Meanwhile others, despite their best efforts to speak up, found that their voice fell on deaf ears.


And this is a third theme that underpins the majority of ethical failures. In the months and years that precede the incident, those who attempt to raise concerns and shine a torch on the wrongdoing are not listened to. Worse still they are shunned, ostracised and perhaps even forced to leave the organisation. It is the failure to embrace these multiple “whistleblowing moments” that results in what could have been a minor incident decaying into a big scandal. One of the best ways to supplement an organisation’s formal compliance mechanisms is to cultivate a culture rich in challenge and feedback.


The final theme that underpins the majority of ethical failures is that organisations, and in some cases entire industries, lose sight of purpose. This is particularly relevant to the banking and finance industry. I am not for a moment suggesting that the entire industry lacks virtue. There are many good people in the banking and finance industry doing very honourable work. However, in certain pockets of the industry, we lost sight of our moral obligations.


Instead of joining the industry to give of themselves and contribute to customer and community, people have joined the industry to give to themselves. Money and money making has been given precedence over making a contribution to the greater good. In some cases, the needs of management has been placed ahead of all stakeholders, including the shareholder. It’s a position that was eloquently articulated by Mark Carney, the governor of the Bank of England, in a speech he delivered in 2014 at the Conference on Inclusive Capitalism:

In the run-up to the crisis, banking became about banks not businesses; transactions not relations; counterparties not clients. New instruments originally designed to meet the credit and hedging needs of businesses quickly morphed into ways to amplify bets on financial outcomes.

When bankers become detached from end-users, their only reward becomes money. Purely financial compensation ignores the non-pecuniary rewards to employment, such as the satisfaction from helping a client or colleague succeed.


For me, this is one of the key challenges facing the banking and finance industry. It needs to re-orientate itself so that service to other is placed ahead of service to self, and primacy is given to their social purpose. Like I said in many areas of the industry this work is well underway, but in others there is still a lot of work to do.


This work is not straightforward. There is no technical solution – no compliance framework, no policy manual, no code of conduct that can fully help us navigate the challenges associated with this work. And it requires strong leadership. Absolutely is starts with boards and executives, but leaders at all levels of the industry play a role. They must, in both their actions and words, demonstrate a deep commitment to a higher purpose, and begin valuing principles ahead of privileges.


Thank you.

© 2018 by Dennis Gentilin