The Role of Personal Accountability in Reforming Culture and Behavior in the Financial Services Industry, By Christine Lagarde, Managing Director, International Monetary Fund
IMF News, November 5, 2015
Source details
- Canonical URL
- The Role of Personal Accountability in Reforming Culture and Behavior in the Financial Services Industry, By Christine Lagarde, Managing Director, International Monetary Fund
Other formats
Bibliographic details
- Authors: Christine Lagarde
- Published: November 5, 2015
Introduction and purpose
- Speech delivered at New York Fed, November 5, 2015; "As prepared for delivery."
- Objective: probe how to address systemic problems of culture and behavior in the financial sector and revive the telos (purpose) of the financial sector—to support economic activity, create value and jobs, and improve the well-being of people.
- Key premise: banks are "special" due to trading on time, custodianship of savings, merchant of trust, fiduciary duty, and beneficiary of state implied guarantees; with power comes responsibility to uphold the highest ethical standards.
Context: ethics, culture, and behavior — observed failings and public trust
- Crisis-era and post-crisis misconduct examples: rigging of interest rates and exchange rates, malfeasance, governance failures such as the London Whale.
- Public trust impact:
- 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."
- Regulatory and governance reforms have been advanced internationally; implementation remains the issue.
- Three pillars necessary to instill ethical behavior: regulation, governance, and the individual.
Individual accountability as catalyst for cultural renewal
- Two illustrative "for instances":
- Markets can exploit human psychology ("Phishing for Phools" by George Akerlof and Robert Shiller): firms and rating agencies engaged in "reputation mining," selling complex "rotten avocados" at triple A ratings instead of "good avocados"—decisions made by individuals.
- Sanctions have largely hit corporate balance sheets more than 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.
- Sanctions perceived as a "cost of doing business."
- Recent shifts toward individual accountability:
- Examples: prosecutions of top executives in Iceland; New York practice of professional disbarment in addition to court findings.
- U.S. Department of Justice policy shift to pursue individual wrongdoing more forcefully, tempered by a recent ruling raising evidentiary bars in an alleged insider trading case.
Forms of individual accountability and their role
- Recommended accountability measures:
- Criminal liability: strong deterrent though difficult to prove; seek criminal penalties when evidence exists.
- Civil penalties.
- Administrative and disciplinary actions, such as professional disbarment.
- Clarification: promoting individual accountability is not condemning risk-taking per se; it is about taking risks within a context of responsibility rather than assuming others will pick up the tab.
Promoting individual virtue and integrity — mechanisms and examples
- Culture definition: values and principles informing behavior even without explicit rules.
- Change is long-term and must be actively managed.
- Mechanisms to induce change:
- Reinforce incentives for prudent risk-taking and socially responsible fiduciary behavior.
- Oaths and integrity pledges:
- Dutch financial industry's Ethics Oath: akin to Hippocratic Oath; integrity vows include putting clients’ interest first; breaking the pledge exposes individuals to fines, suspensions, or blacklists.
- "As of April this year, this pledge has been extended to all 80,000 of the country’s bankers."
- Industry-level cultural change requires collective responsibility by multiple stakeholders.
Roles and responsibilities of key actors in effecting cultural renewal
- (i) Financial regulators and public authorities
- Legal and regulatory frameworks shape corporate values and individual behavior.
- Regulation aims to promote safe and sound risk-taking.
- Progress noted on addressing "too-big-to-fail": living wills and higher prudential standards for large banks.
- Remaining priorities: internalizing negative consequences of excessive risk, especially in nonbanks; ensuring effective implementation and enforcement.
- Caution: excessive reliance on compliance can create a false sense of ethical action.
- (ii) Industry leadership
- Management and boards set the "tone at the top"; promote "zero tolerance" toward unethical behavior.
- Seneca quote cited: "It is difficult to bring people to goodness with lessons, but it is easy to do so by example."
- Boards and senior managers must identify and change fundamentally flawed business models.
- Suggested industry actions:
- Develop a global code of conduct promoting individual accountability at all levels, in a spirit of cross-jurisdictional cooperation.
- Encourage recruitment and career progression practices that reward ethical behavior rather than solely profitability.
- Evidence of progress: cultural change gaining prominence in some systemically important institutions; emphasis on client focus and collaboration.
- (iii) Educators and civil society
- Cultural change should begin before professionals enter the industry.
- Education on ethical values: teach "what should I do" in addition to "what can I do."
- Business schools could emphasize high stature and professionalism over high bonuses.
- Civil society and religious communities can instill virtue and moral rectitude early (example: Archbishop of Canterbury program bringing youngsters to Lambeth Palace to instill such values).
Conclusion and IMF engagement
- Call for swifter action to restore trust and reassure the public that past misconduct issues have been dealt with.
- IMF contributions:
- Supported an incipient research agenda on ethics in finance.
- Leveraged convening power to bring together policymakers, industry specialists, clergy, and young professionals to develop shared understanding on instilling ethical behavior.
- Closing thought (Warren Buffett quote): "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."
- Encouragement: use sessions like this conference to exchange views on promoting individual integrity and restoring corporate trust — vital for both the industry and society.
Source: Christine Lagarde, Managing Director, International Monetary Fund — Speech delivered at New York Fed, November 5, 2015.