This story accompanies a five-part series:
For bank executives, the nightmare scenario is finding out about misconduct that happened in your own organization — in the worst case, because regulators or prosecutors learn about it first. How can bankers avoid that dreaded phone call?
"It's a huge question and one the Fed has been really interested in," said Phil Nichols, a professor of social responsibility in business at the University of Pennsylvania's Wharton School in Philadelphia.
It's never too late to instill ethics into your bank, experts say. But getting a bank to operate differently can be challenging — and it doesn't work unless executives mean what they're saying.
"One of the most critical aspects of restructuring a bank's culture is that they have to really want to," Nichols said.
Bankers can learn from the experience of institutions that regulators have sanctioned for corruption, especially under the United Kingdom's rigorous Bribery Act, Nichols said. When the government takes over monitoring a bank, it typically requires that there be an ethics officer — separate from the firm's general counsel — who reports directly to the board. Regulators also insist on a notification mechanism, like a hotline, that any employee can use to report misconduct directly to the ethics officer.
To avoid allowing wrongdoing to happen in the first place, Nichols said, the bank has to embed principles of ethics into its procedures: "Research tells us that rules only go so far, but principles are what guide the conduct of people at a firm, including banks."
Then, the bank's officials have to stand up for the principles.
"That includes rewarding people for living up to the principles and publicly censuring noncompliance," Nichols said. "For instance, transparency: We welcome bad news because it gives us an opportunity to be better."
Nobody likes to tell their boss that things aren't going well, but for ethics to have a chance, it's important for staffers at all levels to know that the messenger won't be killed.
"You can make people less afraid to give bad news and change the balance of real or perceived risk: What's a better bet, to cover up or come clean?" said Ben Dattner, a New York City-based executive coach and consultant who frequently works with banking clients.
Bank executives looking to head off wrongdoing need to lean on objective metrics that can't be gamed, Dattner said.
"Board members and execs need to say, 'Not only do I care how you do it, but I'm going to closely monitor how you do it and I better have a clear causal understanding of how you do it,' " he said. "Show your work and have it be auditable."
It's crucial for banks to "reward honesty rather than just encouraging it," said Kelly Brown, a partner at Patriot Financial Partners in Radnor, Pennsylvania, which invests in banks and fintech firms. Employees who bring concerns to top management should be celebrated, and not just because it's illegal to fire or punish them.
"Whistleblowers should know with certainty that there are protections in place to safeguard them against retaliation," she said. "Having a robust whistleblower policy allows the bank to address the issues before it potentially gets out to the public."
Having updated compliance software and practices is also crucial to rooting out scandals early, she said.
"Stay modern with internal reporting and controls and keep eyes open for red flags," said Brown, a former bank executive. "Products on the market today are far superior to what was available in recent years."
Training supervisors is also important, especially since managers frequently get promoted without commensurate training in how to spot problems, she said: "Don't simply check the box in the required regulatory training for the entire company; promote the ability for leaders to attend specialized training to help them hone their leadership skills."
Although banks regularly train their employees, both for regulatory reasons and to meet internal policies, they need to do a better job of teaching staffers how to communicate, she said.
"Consistent internal communication helps employees feel trusted and connected to each other, which in turn increases the likelihood that if an event seems wrong or an issue becomes problematic, they would be more comfortable sharing the concerns without fear of retaliation," Brown said.
The best way to stop employees from committing fraud or other malfeasance to generate fake results is to turn a profit the real way, Dattner said.
"Leaders can make their organizations as competitive as possible so that there isn't implicit or explicit pressure to cut corners to make the numbers," he said. "If your organization can't actually compete and thrive in the real world, there's an incentive for vaporware and fantasy."
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