Practical analysis for investment professionals
05 April 2013

Culture of Integrity Requires Financial Firms to Renew Focus on Middle Management

It seems like there is not a day that goes by without reading about some type of scandal involving a financial institution. Many people have come to view banks and financial services firms as dens of iniquity in which money, profits, and bonuses are objects of worship and fealty. In fact, according to the 2013 Edelman Trust Barometer, an annual trust and credibility survey, banks and financial services firms were the least trusted industries in both 2012 and 2013. In the latest survey, well more than half of the respondents who were familiar with the financial scandals that have occurred over the past year attributed them to a corporate culture driven by outsized remuneration, corruption, and conflicts of interest.

So how can banks and financial service firms create a culture of integrity within their organizations that will encourage ethical behavior and restore the public’s trust and confidence in them?

“Tone at the top” is a mantra that we hear time and again as the cure for the ethical decay that is permeating financial organizations. If top management acts with integrity and both exhibits and promotes ethical behavior, the thinking goes, so will their employees. Unfortunately, this approach does not appear to be working. Most of the unethical behavior that we have all read about lately (think Libor) has not occurred in the “C-Suite” but rather at the “M-Level.” In other words, middle managers and their subordinates, not top level executives, have been at the center of most of these scandals. Therefore, if financial institutions really want to create a culture of integrity, they must also establish a “tone at the middle.”

A recent study conducted by the Center for Creative Leadership called “The Irony of Integrity” (PDF) supports this view. The study examines the relationship between four character strengths — integrity, bravery, perspective, and social intelligence — and the performance evaluations of top-level executives and middle managers in the same organizations. The strengths were selected because they represent “positive personal qualities that indicate virtue and human excellence” and are viewed “as important in the selection and development of managers, particularly at the top levels of management.” They are defined as follows:

  • Integrity: Leaders with integrity are “consistent in the face of adversity, show consistency in their words and actions,” and “act with authenticity and honesty by speaking the truth, presenting themselves in a genuine way with sincerity, showing no pretense, and taking responsibility for their own feelings and actions.”
  • Bravery: Leaders who are brave are those who “act with valor by not shrinking from threat, challenge, difficulty, nor pain.” They “speak up for what is right even when opposition exists” and “act upon conviction despite facing an unpopular environment.”
  • Perspective: Leaders with perspective can see the big picture in terms of business opportunities and challenges, understand the strengths and weaknesses of their competitors, and make decisions that position the organization for long-term success.
  • Social Intelligence: These leaders are aware of their own and others’ motives and feelings, and have the agility to adapt their behavior to what the situation dictates.

Not surprisingly, the study found that the more integrity, bravery, perspective, and social intelligence that top and middle managers have, the higher their performance ratings. What is surprising, however, is that the relative importance of these character strengths differed depending on who was the target of the evaluation. Integrity, bravery, and social intelligence are all significant predictors of performance for top-level executives. But social intelligence is the only character strength that is a significant predictor of performance for middle managers. In addition, integrity and bravery are significantly more important predictors of performance for top-level executives than for middle managers.

These findings provide both a possible explanation for the unethical behavior of individuals within an organization as well as a possible approach for addressing the problem. If middle managers are not evaluated or promoted on the basis of their integrity or bravery, then why should they be consistent, honest, or trustworthy? Why should they take the lead on unpopular actions or speak up for what is right in the face of opposition? Why would they hire employees who exhibit these characteristics?

The problem with the “tone at the top” mantra is that C-level executives are more outward facing — they are the ones who interact with shareholders, the media, and other external stakeholders. They are responsible for articulating the organization’s code of ethics and conduct, and for espousing its mission, vision, and values. Although their character strengths of integrity and bravery may affect public perceptions and opinions of their organization, they often may not have a significant or direct impact on rank and file employees.

Which brings me back to “tone at the middle.” Focusing on the M-level is crucial because middle managers are more inward facing and have greater interactions with internal stakeholders. For example, they are responsible for communicating the vision, values, and mission of the organization to their subordinates. They also must communicate the thoughts and feedback of their subordinates to top executives. And they often bear the burden of any efforts to implement organizational change or new strategic initiatives.

Perhaps most importantly, middle managers are often on the front lines when it comes to identifying and managing potential conflicts and other ethical issues that can arise when new policies or procedures are implemented. They are also responsible for ensuring that such policies are applied fairly and are effective in achieving the stated goals and objectives. Because employees engage with middle managers in the daily operating activities, they have more of an opportunity to monitor their words, behavior, and nonverbal cues than do top executives. As a result, the character and actions of middle managers likely have more of an impact on the behavior and attitudes of employees.

That’s why creating a culture of integrity requires focusing on the M-level and ensuring that middle managers adopt, personify, and manifest the character strengths of top executives. Middle managers must “walk the talk” by being consistent, honest, and trustworthy in their decision making and actions. They must take responsibility for their own feelings and actions, and present themselves in a genuine and sincere way. They must speak up for what is right and act upon conviction in the face of an unpopular environment. To reinforce this behavior, middle managers must be evaluated, rewarded, and promoted based on these strengths and attributes.

Think about it: If middle managers are evaluated and promoted based on character strengths such as integrity and bravery, they will likely seek out similar strengths in prospective and current employees. And current employees will see the type of character strengths and behaviors that are rewarded with promotions. If financial services firms can institutionalize this virtuous circle, there’s hope of winning back the public trust — and achieving a far less dispiriting result in surveys of corporate trust.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©

About the Author(s)
Michael McMillan, CFA

Michael McMillan, CFA, was director of ethics education at CFA Institute. Previously, he was a professor of accounting and finance at Johns Hopkins University’s Carey School of Business and George Washington University’s School of Business. Prior to his career in academia, McMillan was a securities analyst and portfolio manager at Bailard, Biehl, and Kaiser and at Merus Capital Management. He is a certified public accountant (CPA) and a chartered investment counselor (CIC). McMillan holds a BA from the University of Pennsylvania, an MBA from Stanford University, and a PhD in accounting and finance from George Washington University.

3 thoughts on “Culture of Integrity Requires Financial Firms to Renew Focus on Middle Management”

  1. Raymond says:

    The inextricable ties and nonpareil pressure among performance, pay and job security are the causes of the middle level faux pas.

  2. Al Watts says:

    This is a useful distinction between the C-level and mid-management when it comes to ethics and integrity. For sure, not only in the financial industry but every industry, more emphasis on hiring for character and greater alignment with desired ethical ends would pay dividends. I invite you to explore resources on my web site for positioning integrity as a practical business strategy: Thanks!

  3. Greg says:

    Speaking of “tone at the top” … why has CFA Institute been silent about the massive ethical breach at the Federal Reserve (releasing minutes a day early, but only for political cronies)?

    Unlike a previous incident (when some investors heard about the 30yr bond being restarted) and the SEC being unwilling to prosecute Bernie Madoff even though they were sent boxes and boxes of evidence … this recent ethics lapse at the Fed may have been an “honest mistake”.

    But in the private banking sector, even an honest mistake would result in severe disciplinary proceedings — and almost certainly would result in termination.

    Please explain why public servants are not held to the same ethical standards as Wall Street bankers … never mind the standards of the general public.

    I applaud Bill Gross (a CFA member) for trying to stir up public anger over this, but at the same time CFA Institute should be embarassed that John Rogers has been very quiet on this issue.

    Does CFA Institute take ethics seriously or not?

    Time to “set the tone at the top” — starting with government regulators. If CFA Institute doesn’t speak up and condemn the Fed’s ethical lapse, then please stop telling us how important ethics is supposed to be.

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