The Role of Personal Accountability in Reforming Culture and Behavior in the Financial Services Industry, By Christine Lagarde, Managing Director, International Monetary Fund

November 5, 2015

Christine Lagarde
Managing Director, International Monetary Fund
New York Fed, November 5, 2015

As prepared for delivery


President Dudley—thank you for your generous introduction.

I would also like to thank the staff of the New York Fed for organizing this conference, which brings together financial industry specialists and policymakers to find common ground on how best to address a problem that has become systemic in the sector – that of culture and behavior.

The New York Fed has been a leader in championing efforts to reform culture in the financial industry. Indeed, we at the IMF share this objective with the Fed.

The theme of ethics in finance is one that we have pushed for some time now. The goal? To revive the telos of the financial sector—its purpose and broader responsibility to society. After all, the goal of the financial sector must be not only to maximize the wealth of its shareholders, but to enrich society by supporting economic activity and creating value and jobs – to ultimately improve the well-being of people.

As President Dudley just noted, “banks are special” – trading on time, custodian of savings, merchant of trust bound by fiduciary duty, and beneficiary of state implied guarantee makes banks indeed very special. In today’s world, the financial industry wields immense power over societies, economies and people. With this power comes the responsibility to uphold the highest ethical standards.

Context: Ethics, Culture, and Behavior

Yet, what we saw during the crisis and its aftermath was quite different. Reckless behavior was followed by episodes of misconduct that persisted well after the onset of the crisis—from rigging of interest rates and exchange rates to malfeasance and governance failures such as the London Whale. These actions tear at the very fabric of the financial industry.

In the process, the financial industry’s most valuable asset – trust – became its biggest casualty. Public opinion of the integrity of the financial system is still the lowest in a very long time. According to a 2014 Harris Poll, up to 45 percent of the people rated the overall reputation of the industry as negative. The industry ranks third from the bottom after government and tobacco. This is cause for serious concern.

It would be all too easy to fall into a “bank-bashing” mode. This is not the purpose here. The purpose of gatherings such as this conference is to probe how we can all do better—“how to improve the apple barrels” as President Dudley mentioned.

So how can we go about promoting ethical behavior in finance? Clearly, regulation and a robust governance structure are key. If the regulatory and governance framework provides incentives for inappropriate behaviors, even the best meaning individual will find it difficult to promote an ethical culture.

The good news is that the international community endorsed an appropriately ambitious global financial reform agenda—an effort in which the IMF has been actively engaged.

For example, we have contributed to the analytical agenda on how compensation and governance structures can be reformed to reduce excessive risk-taking. This was the subject of our October 2014 Global Financial Stability Report. We have seen some encouraging progress on these front. The issue now is implementation, in both letter and spirit.

However, regulation and governance are only two pillars of a framework that can instill ethical behavior in finance. The individual is the third pillar without which there can be no equilibrium.

In his Groundwork of Metaphysic of Morals, Emmanuel Kant said: “Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end but always at the same time as an end.”

So if the financial industry is to put people before profits, and society before shareholders, we need to see a change in the values and behavior of individuals themselves. We need a culture that holds individuals accountable for the consequences of their behavior—good and bad. And that change in culture must come from within. It must be determined, sustained, and encouraged throughout the organization, from top to bottom.

In short, the new ethos of the financial industry must be more aligned with its telos.

Against this background, I would like to share my perspectives on two topics:

  1. First, the role of individual accountability in changing culture and behavior in the financial services industry—bringing about a cultural “renewal”; and

  2. Second, the role of different players in effecting this "renewal" - regulators, industry leaders, and educators

1. Individual accountability—a powerful catalyst for “cultural renewal”

Why does individual accountability hold such promise as a powerful catalyst for cultural renewal? First, let me share with you a couple of “for instances” that I find relevant here.

The first “for instance” is about the ruthless nature of some market structures. As our former IMF colleague George Akerlof and his co-author Robert Shiller argue in their recent book “Phishing for Phools”, markets can be pretty ruthless in exploiting weaknesses in human psychology. Finance is no exception.

In fact, the authors offer a compelling narrative of how rating agencies – and banks behind them – precipitated the crisis by engaging in what they describe as “reputation mining.” In a nutshell, banks and rating agencies decided to subordinate their good reputation for selling “good avocados” – or appropriately rated simpler securities – and instead “phool” their clients by selling them “rotten avocados” – complex securities of dubious quality.

The reason? With growing size, reach, and complexity came a change in the incentive structure that made it profitable for firms to engage in reputation mining. Rotten avocados were being offered at the same price, or triple A rating, as the good avocados. Yet the takeaway here is that firms did not change their business model, nor establish new policies, nor actually made decisions—individuals did.

This brings me to the second “for instance.” Despite evidence of actual malfeasance in several cases, it has been mostly corporate balance sheets that have borne the brunt of legal sanctions for reckless behavior—not individuals.

By some estimates, fines levied on large banks in the United States and Europe over the last six years amounted to $230 billion. This represents about 1.5 years of average net income of a group of global systemically important banks.

In fact, sanctions directed at financial institutions have come to be perceived simply as a “cost of doing business,” which calls for adequate provisioning. Think about it. A large global bank recently announced higher-than-expected third quarter profits—an outcome in part ‘facilitated’ by lower regulatory costs and fines!

It is only recently that regulators have begun to take further steps to actually hold individuals accountable for their actions. This is the case in Iceland for example, where top executives guilty of misconduct have been prosecuted; or here in New York, where parties found guilty in the courts of law could additionally face professional disbarment

There is also the shift in policy of the U.S. Department of Justice allowing more forceful pursuit of individual wrongdoing. This encouraging shift has been slightly tempered, however, by the recent ruling in a widely publicized case of alleged insider trading on Wall Street. The ruling raises the bar to providing evidence and could make prosecution of such offences more challenging.

Individual accountability

So clearly a good place to start to strengthen personal accountability is criminal and civil liability. The sheer exposure to potential criminal liability acts as a deterrent. Indeed, criminal liability is never easy to prove, yet, if evidence of misconduct exists, justice should not shy away from seeking criminal and/or civil penalties at the individual level.

Individual accountability should not be confined to criminal liability. When appropriate, it should also include civil penalties as well as administrative and disciplinary actions such as professional disbarment. Such changes can provide the right set of incentives for ethical behavior and deter malfeasance through intentional misconduct as well as reckless risk-taking.

This brings to me an important point. Efforts to pursue individual accountability should not be misconstrued as condemning risk-taking altogether. After all, life is about taking risks. But they have to be taken in a context of responsibility, not in a context of irresponsibility because someone else will pick up the tab if it goes wrong.

Promoting individual virtue and integrity

In essence, what is needed is a culture of greater virtue and integrity at the individual level in the financial industry.

Culture consists of the values and principles that inform behavior within an institution, even in the absence of explicit rules and instructions. So by promoting and instilling “virtuous” norms in individuals within the firm, a cultural renewal within the industry can be induced.

Clearly, changing culture is a long term process. It is also one that has to be actively managed –just like any other business aspect.

One way of inducing such cultural change is by appealing to the moral compass of individuals – by reinforcing the incentives for prudent risk-taking and a socially responsible exercise of their fiduciary duties. How?

The Ethics Oath recently introduced by Dutch financial industry is a good example. Much like the Hippocratic Oath for physicians or oath for lawyers, the Dutch industry is holding its executives accountable to an oath and a set of integrity vows that include putting clients’ interest first. Breaking this pledge exposes individuals to fines, suspensions, or blacklists. Importantly, as of April this year, this pledge has been extended to all 80,000 of the country’s bankers.

So promoting individual integrity is crucial for inducing a cultural change at the firm level. For this change to take hold at the industry level, however, other stakeholders need to step in. This is a collective responsibility.

2. Effecting a cultural renewal—a role for every player

Which takes me to my second topic – the role that each player in society has in bringing about this cultural renewal. I will consider three groups of actors.

(i) Financial regulators and public authorities

The first group includes financial regulators and public authorities. Inducing cultural change in individuals and corporates requires an adequate legal and regulatory framework where corporate values and behaviors can develop as intended.

One of the objectives of financial regulation is to promote safe and sound risk taking decisions. Regulation, therefore, has the ability to affect individuals’ behaviors. As I mentioned earlier, the financial sector reform agenda is appropriately focused on the regulatory and governance frameworks. And good progress has been achieved on this front.

As an example, important strides have been made in addressing the “too-big-to-fail” problem. This includes articulating robust living wills and instituting higher prudential standards for large banks. Still, more work is needed to internalize the negative consequences of excessive risk behavior, especially in nonbanks.

Yet, as we all know, regulation is only as good as its implementation by the industry and enforcement by the supervisor. Furthermore, excessive reliance on regulation and supervision allows people to feel that as long as they are “complying,” they are acting ethically – which is not always the case.

(ii) Industry leadership

This brings me to the second set of actors—the financial industry itself. All good principles and intentions on ethics and integrity will only be effective if there is buy-in at the top. After all, the most important internal choices are made by management under oversight of the board of directors.

As Seneca said: “It is difficult to bring people to goodness with lessons, but it is easy to do so by example.”

In other words, the Board needs to set the right tone at the top. It needs to promote “zero tolerance” toward unethical behavior.

Board members and senior managers are also the primary actors in identifying and changing business models that are fundamentally flawed. What can ethical people do if they end up in a firm or industry where the basic business model is flawed?

Fortunately, cultural change is beginning to gain prominence at some systemically important institutions, and not just on trading floors. Core principles of client focus and collaboration are becoming common themes in business practices.

But I would submit that the industry can aim higher, and I would suggest that the global financial industry lead by example and develop a code of conduct that promotes individual accountability at all levels. It could do so in a spirit of cooperation across all jurisdictions as well. This code should also encourage recruitment and career progression practices that seek to reward ethical behavior instead of merely focusing on profitability.

(iii) Educators and civil society

Finally, inducing cultural change could, and in fact should, begin at an earlier stage – even before young professionals join the financial industry. For this reason, educators and civil society, the third group of actors, also have an important role to play.

Education on ethical values clearly has to be part of this cultural change. This calls for individuals to be educated in values that not only respect the rules but also seek to pursue the public good. Individuals should base their actions not only on “what can I do,” but above all on “what should I do” – as President Dudley previously noted.

It also calls for nurturing individuals who are proud of their profession and its value to society. For example, business schools could adopt a different paradigm about the meaning of individual success. By placing more emphasis on high stature and professionalism, as opposed to high bonuses.

Civil society and religious communities praising and promoting virtuous behavior can also help push forward – and uphold – such change in culture. A good example is a program administered by the Archbishop of Canterbury bringing youngsters from all corners of the world to live in Lambeth Palace for a year. The idea is to instill a culture of virtue and moral rectitude at an early age so that they can exercise ethical leadership at a later stage.


In conclusion: financial institutions, national authorities, and the international community have begun to respond to the issue of ethics in finance. Still, swifter action is needed to restore trust in the financial sector. The public needs reassurance that misconduct issues that caused the failures in institutions and markets in the past few years have been dealt with.

For our part, the IMF has supported this effort on several fronts, including through an incipient research agenda on ethics in finance. We have also leveraged the convening power of the Fund to shed new perspectives on this issue – bringing together policymakers, industry specialists, clergy and even young professionals to develop a shared understanding of how to instill ethical behavior at all levels in finance.

I started by arguing that the appropriate regulatory and governance framework must be in place to support the ethics of behavior of individuals. Yet the opposite is also true. Without individual integrity, even the best regulatory and governance structures can be gamed.

So let me leave you with this thought, from Warren Buffett: “In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you."

Today’s sessions offer an excellent opportunity to exchange views on how to promote integrity at the individual level and restore trust at the corporate level. This is vital—for the industry, and society.

Thank you.


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