By Dr. Robert Hurley, director of the Consortium for Trustworthy Organizations, Fordham University.
Not only are major banks paying record fines levied by regulators, but survey data shows that they are also suffering a stunning decline of public trust. The Consortium for Trustworthy Organizations’ research suggests the reason that these trust violations keep happening and damaging banks’ reputations is that senior management and boards of directors are working too hard at implementing the wrong governance model, hinged completely on so-called “tone at the top.”
Take the example of JPMorgan Chase’s “London Whale” fiasco. That series of events, and the nearly one billion dollars in fines, occurred despite the fact that the company had an impressive board, a major external auditor in PWC, hundreds of on-site regulators, and a large internal ethics and compliance group headed by Stephen Cutler, general counsel, who has been described as the formally “feared” Chief of Enforcement at the SEC.
What’s more, Jamie Dimon, chairman, president, and CEO of JPMorgan Chase & Co., had earned a reputation as a great manager. As Cutler once stated, “I can’t tell you the number of times I’ve heard Jamie Dimon tell someone to ‘Do the right thing, and I don’t care what it costs’.”
Other major companies have had their troubles along these lines. So, why do these major trust violations keep happening?
This was the subject of a recent MIT Sloan Management Review article, entitled “Designing Trustworthy Organizations,” that my colleagues and I published based on extensive research on both high-trust organizations and their low-trust counterparts over the past decade.
The short answer is that there is an overemphasis on “tone at the top,” and the espoused culture and compliance, and an underemphasis on “behavior in the middle” and the culture in actual practice. *
How boards ought to work
Boards should stop focusing on ethical codes and compliance programs, we maintain, and should start developing capabilities to assess behavior and determine how the organization is really functioning.
To do this correctly, directors need to move away from the silos separating the Compliance and HR departments and start measuring organizational trustworthiness in a way that takes an integrated look at the organization.
A close examination of the London Whale trust violation supports this view. The email records between some of the actors in this drama show that one of the root causes of this trust violation was a desire to delay communicating problems until solutions could be designed and presented along with the bad news.
Our read: The subculture existing in the bank’s Chief Investment Office at the bank had too much fear and a lack of candor. This led to deception and ultimately to a failure to inform senior management, regulators, and investors of material information.
Incongruent subcultures were also at the heart of the Goldman Sach’s Abacus deception and the Libor issues within UBS, RBS, and Barclays. Despite simplistic rationalizations of “bad apples” and “rogue employees,” our research at The Consortium for Trustworthy Organizations shows that major trust violations nearly always have underlying systemic root causes. It’s not bad apples, but bad barrels that are the problem.
High-trust companies develop organizational systems that send stakeholders reliable and consistent signals of trustworthiness.
For example, General Electric is an organization that has shaped a culture with an intense performance-focus, while at the same time reducing deception by conditioning people to understand that integrity violations cannot be compensated for by superior financial performance.
GE also has very robust systems for whistle blowing. GE catches and makes an example of people who breach their code of ethics. The Compliance Department at GE is in the culture-shaping business with the cooperation and involvement of line leaders. IBM has been similarly successful in shaping a high-integrity and high-performance enterprise culture and largely avoided rogue subcultures by concentrating on behavior in the middle, not tone at the top.
How do you build a strong middle?
The Comptroller of the Currency publishes a Director’s Book outlining the role of national bank directors. It states that banks’ “Board of Directors must create a corporate culture and work environment that supports responsible, professional and ethical behavior.”
The problem is that boards currently do not have the tools to do this.
At the Consortium for Trustworthy Organizations, we have developed and validated a survey that measures the depth and pervasiveness of the embedding of six elements of trustworthiness in the organizational system.
Having employees at all levels in the organization take 20 minutes to do an online survey provides the board with a robust report that may identify the weak links in the chain of trust.
Following are some sample areas of measures that, had the JPMorgan Board probed, could have provided an early warning that a Whale might have been roaming the London office.
Element of Trustworthiness/Questions (five-point agree-disagree scale)
• I am proud to be working for this company.
• Employees care enough about the company to speak up if they see something wrong.
• Departments and groups cooperate with each other to serve stakeholders.
• Roles, responsibilities, and accountabilities are all well-defined.
• Leaders carefully consider all stakeholders’ interests when making decisions.
• Leaders are good at listening to others.
• The culture reinforces being fair in dealing with all stakeholders.
• The culture reinforces excellence and being the best at whatever we do.
• Products and services are carefully tested before they are launched.
• External or third-party agents that might affect our reputation are carefully selected and monitored.
Predictability and Integrity
• Execution of our strategy is reliable and consistently excellent.
• Leaders match their actions to their words.
• The culture reinforces admitting mistakes and fixing them.
• There is an effective system for detecting violations of our values and unethical or illegal conduct.
• The culture reinforces asking tough and probing questions to fully understand issues.
• Leaders can hear bad news without punishing the messenger.
• Processes for listening to and responding to all stakeholders are excellent.
• Employees are able to report wrong doing without fear of retaliation.
Boards have a key role in helping to build trustworthy organizations However, the focus on traditional audit committee and compliance metrics must shift. Boards need new tools and new approaches to get at “behavior in the middle” and the organizational culture in practice.
Let’s stop wasting our energy on practices that are not solving these organizational trust problems.
About the author
* [Editor’s note: Indeed, The New York Times noted last year that Cutler saw both ends of the process, stating: “In a speech in 2004 to the General Counsel Roundtable, he said: ‘You’ve got to talk the talk; and you’ve got to walk the walk. Both are critical to maintaining a good tone at the top., And he called for more accountability: ‘Hold all of your managers accountable for setting the right tone. That means disciplining or even firing them when they have failed to create a culture of compliance. Human nature being what it is, there will be those who break the rules. But if managers don’t do enough to prevent those violations, or let them go unaddressed for too long, then they should be held responsible — even in the absence of direct involvement in those violations’.”