Views on improving the integrity of global capital markets
11 July 2012

Ethics and Risk Management: Building a Culture of Integrity

Posted In: Uncategorized
Jon Stokes

In “Ethics and Risk Management,” a recent webcast sponsored by the Global Association of Risk Professionals (GARP), a panel of investment professionals highlighted a number of important aspects of developing a culture of integrity. Topics included identifying the drivers of unethical behavior and what firms can do to neutralize those drivers to achieve desired behavior. The panel reiterated the message that CFA Institute has long espoused — pursuit of high ethical standards goes beyond following the letter and intention of applicable rules and regulations. “Some of today’s biggest risks do not involve legal or compliance violations but instead rest on ethical considerations and the application of appropriate standards of conduct to business decision making.” 

The first step to addressing misconduct is to identify and countermand the drivers of unethical behavior.  These include: 

  • Lack of awareness where individuals overestimate their capability to identify and react to ethical issues
  • Ambiguous standards or unclear rules that create an environment for unethical behavior
  • Lack of ownership of the conduct so that there is no concern for the impact or repercussions of inappropriate behavior
  • Sense of entitlement that allows individuals to establish their own set of rules to put their interests ahead of others’
  • Dissatisfaction that will allow those feeling disgruntled or slighted to act out with bad intent 

To counteract these influences, the GARP panel suggested a model for influencing and reinforcing desired behavior across an organization. Elements of that model include establishing role models to lead by example, share success stories, and create an “archetype” for good behavior; setting unambiguous guidelines to develop an understanding and conviction on the part of staff for ethical behavior; reinforcing the message through training that ensures staff has necessary tools and information; and putting in place reinforcement mechanisms to award appropriate behavior and ensure violations have consequences. 

One of the panelists, Dan Currell, executive director with corporate integrity practice at the Corporate Executive Board (CEB), shared research suggesting that the two biggest factors in establishing the culture of integrity of an organization are whether:

  1. Employees were comfortable speaking up about unethical behavior they witnessed
  2. Employees felt that the firm would address misconduct once identified 

Currell stated that behavioral experience in the firm would contradict policies, procedures, and mission statement.  In other words, what employees observed about how the firm operated and what was tolerated would counteract any lofty principles or good intentions published but not practiced. Ethics would be undercut by behavior such that firms could perform the compliance function without actually complying.

While the somewhat overused aphorism “tone at the top” may be important, the reality is that, at least in large firms, “the top” is often too far away from many employees. The key driver of conduct is the immediate supervisor. A strong culture of ethics and integrity established by the leadership team of the firm must trickle down to “local” managers in the operation. To have a truly strong culture of integrity, companies must make sure that employees feel they can seek guidance and ask questions about ethical issues.  

Are managers equipped and comfortable to have a conversation about unethical activity reported by their direct reports? CEB’s research suggests that, on average, barely one half of managers feel prepared to respond to employee concerns. Indeed, while managers receive training from their company typically due to a regulatory need, a significant subset of managers do not believe they have received adequate training and do not feel prepared to respond to questions about misconduct. 

Recognizing the drivers of unethical behavior; taking steps to neutralize those drivers by establishing unambiguous guidelines for behavior, strong incentives, training, and positive role models; and training managers to act upon reported misconduct will allow firms to move beyond the tunnel vision of superficial regulatory compliance and create a deep and meaningful culture of integrity.

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

3 thoughts on “Ethics and Risk Management: Building a Culture of Integrity”

  1. Someone said long back that Goodness needs to be cultivated, Evil just happens, similarly the culture of integrity and Ethics needs to be cultivated day in day out and reminded everyday to oneself to help make right decisions.

  2. Dil Maya says:

    the two biggest factors in establishing the culture of integrity of an organization are whether:

    Employees were comfortable speaking up about unethical behavior they witnessed
    Employees felt that the firm would address misconduct once identified

  3. Jon Stokes, JD says:

    Thank you for your comment.

    We agree the firm support is critical in developing and maintaining a culture of integrity that supports ethical conduct of its employees. Open dialogue with employees and vigorous follow up of identified misconduct is a critical component of that culture.

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