The origins of ethical failures
This article first appeared in the online edition of the Australian Financial Review on the 21st April 2016. Click here to view the original version.
Being at the coal face of the FX trading scandal that rocked the National Australia Bank in 2004 was both a curse and a blessing for me. A curse because as anyone who has been associated with an ethical failure will testify, they are not necessarily pleasant experiences. A blessing because there is no substitute for experiential learning.
The experience, coupled with my subsequent research and reflection, provided me with some very unique insights into how organisations sow the seeds for ethical failure. As the size and frequency of ethical failures gathered pace in the decade since the FX incident at the NAB, I felt compelled to share these insights. The result is my book, The Origins of Ethical Failures.
Admittedly, the current interest in my book is not necessarily because it is a literary masterpiece (as much as I try and convince my wife otherwise). Rather, ethics is highly topical at the moment for all the wrong reasons, and there is a desperate search for answers and remedies to the current malaise.
In this respect, I am the bearer of bad news – there are no straightforward answers. Explanations for ethical failure are multidimensional and complex, and by extension, so too are the solutions. We must resist our innately human desire to search and grasp for simple solutions.
This being said, there are some answers amidst the complexity. Although in of themselves these answers may not solve the problems, together they can provide the blocks that help us build institutions that are more resilient to ethical failure. Consider the following non-exhaustive list.
Firstly, rules, regulations and compliance, although necessary, are no panacea, something which (thankfully) we are all beginning to recognise and accept. Indeed in some cases, onerous compliance regimes can drive the very behaviour they were designed to avoid.
Secondly, organisations must cultivate a virtuous purpose that articulates how they are contributing to the greater good. It is in environments where self-interest pervades and people value profit above purpose that character, morality and ethical restraint can be in short supply. When money or money making becomes the raison d’être, run for the hills.
Thirdly, of course the “tone from the top” matters. But in large organisations, the centres of influence don’t just sit in the boardroom or around the executive table. Inevitably in all organisations there will be leaders who, at some stage, be it consciously or otherwise, behave in a way that compromises the organisation’s values. Failing to be aware of this and properly addressing it can create fertile ground for unethical conduct.
Fourthly, one of the best ways of drawing attention to inappropriate behaviour is to create environments where people not only can, but feel that it is their obligation to challenge and speak truth to power. All leaders are fallible, and even those with the highest standards can at times, unwillingly, compromise their standards. It is in these moments that they need to not only embrace feedback, but listen and respond to it appropriately.
Finally, there is performance and rewards. I only mention these here because so often they are held out as the primary driver of unethical conduct. To be sure, flawed incentive schemes play a role and need to be addressed. However, I question whether they are the only driver of ethical failure – they are one amongst many.
What is more concerning are environments that encourage the pursuit of money for money’s sake – my comments regarding purpose refer. In some areas of the banking and finance industry one could easily argue that this is exactly what exists. When banks pay out more in bonuses than dividends, as has happened at some institutions, then, just like prospectors flocked to the gold rush, rent seekers will flock to the banking industry.
The astute reader will notice that these building blocks are not just good for the ethics of the organisation. Properly implemented they will inspire greater commitment and discretionary effort from employees, engender increased loyalty from customers, and reduce scrutiny and oversight from regulators. All these benefits ultimately flow to the shareholder – as cliché as it sounds, good ethics is good business.
As NAB chairman Ken Henry so eloquently put it in the foreword to my book, “there are no simple answers … but there are answers”. Building ethical cultures is not easy and requires significant effort. At times it will generate conflict because it requires beliefs to be challenged and privilege to be surrendered. Above all else however, it requires courage, humility and character. I’d like to think that these qualities are not in short supply in the boardrooms of corporate Australia.