A number of scandals in banking, both during and after the 2008 financial crisis, suggest that a ruthless focus on the bottom line had been fostered on Wall Street.

How to create more ethical cultures in financial services has been a major point of discussion since that time. But how can banks know when they have fostered a culture that supports employees doing the “right thing” in difficult situations? Is it simply when banks avoid the types of major scandals caused by rogue employees, as exemplified by the foreign exchange and Libor-fixing cases? Or is it when employees begin to demonstrate a moral compass on the job? These are difficult questions to answer, but there are several steps banks can to begin to address them.

Part of the answer involves hiring and retaining the right workers. It goes without saying that when financial institutions hire people, they are looking for experience, expertise, intelligence, communication skills and any other professional attributes that might be required in a particular role. What many firms don’t necessarily do is explicitly look for people with a strong track record of integrity and ethical behavior. I call this a “strong moral character resume.”

Given the damage done by ethically challenged employees to their companies and their clients, this seems, more than ever, an important criterion that is often overlooked. While an individual’s ethical standards and moral compass may not necessarily be clear on paper, companies should probe a candidate’s personal code of ethics during interviews and case studies before their selection. When employees with strong codes of ethics are around, this encourages others to behave in similar ways.

Another part of the answer is to build ethical “nudges” into our processes and procedures that remind employees and clients of the right thing to do — before they go down the wrong moral path. In a recent episode of the podcast Hidden Brain, Dan Ariely explains why setting the stage for honesty is more effective than asking someone after that fact whether or not they lied. His research found that behavior can turn based on simple procedural decisions, such as whether a person testifies to being honest at the start or the end of a process. When a person signs a document at the beginning of a form certifying that what they are saying is true, it improves honest answers by about 15%. While it may seem odd to sign at the beginning, that is exactly what happens when a witness takes the stand in a courtroom. The act of lying after certifying that one is being honest apparently pricks one’s consciousness in a way that makes it harder to do it.

Once a year, typically, a bank asks its employees to read through its code of ethics and then certify that they have read and understood it. Clearly this is insufficient — the code is quickly forgotten, and in any case, it is seen as a check-the-box exercise to remove oneself from the list of employees who have not yet read the code. Reminders of the code and how it applies in real-time to every day actions should become integrated with the daily work routine. Schoolchildren pledge allegiance to the country every day. Would something similar, a daily reminder to uphold the firm’s code of ethics, be useful in the work environment too?

At the same time, it’s important for financial institutions to realize that making ethical behavior automatic requires practice. That’s why banks need to demonstrate and reward ethical behavior on a daily basis. At Bridgewater, for instance, employees dive deep into their actions and mistakes to identify what they did wrong and how to make better choices the next time around. Such exercises could easily be applied to situations with moral dimensions as well, perhaps even using external case studies. After the foreign exchange scandal, banks continue to hold up those circumstances to employees as an example of how not to go about their business. The actions of employees in actively colluding via chat rooms, outside of the scope of normal communication channels, to fix exchange rates and interest rates, are now widely held up as examples of bad behavior to be frowned upon and treated as beyond the pale. Shoving them to the dustbins of history is not enough — one should teach employees about these episodes so that they can be avoided in the future.

It’s also crucial for senior executives to recognize that tone is set at the top: Top officials need to exercise the type of moral leadership they want to see from their workers, and today we can see that is being interpreted in broader ways than simply avoiding the next FX scandal. Citigroup provides a recent example in its decision to make changes to the way it does business with gun merchants. Its new policy, announced in late March, prohibits the sale of firearms to customers who have not passed a background check or who are younger than 21. It also bars the sale of bump stocks and high-capacity magazines. The policy applies to clients that offer credit cards backed by Citigroup or borrow money, use banking services or raise capital through the company.

Michael Corbat, the company's chief executive, told The New York Times: “We don’t pretend that these answers are perfect, but as we looked at the things we thought we could influence, we felt that, working with our clients, we could make a difference. Banks serve a societal purpose — we believe our investors want us to do this and be responsible corporate citizens.”

This type of action is perhaps a harbinger that answers the question posed above: An ethical culture is measured not simply by the avoidance of major scandals, but by the demonstration of a moral compass by employees throughout the company.

If leaders make clear that they will not tolerate ethical lapses in themselves or at their institution, then employees will get the message. If, however, they say one thing but practice something else, this will not convince anyone. There is an opportunity, perhaps even a requirement, for banking leaders today to take moral stands on issues that concern everyday life, from #MeToo to gun control. It is clear that employees and customers are watching their words and actions closely. Building an ethical culture today is wrapped up not just with saying the right things but also in doing them. Execution of a comprehensive ethical culture program should start today.

Andrew Waxman

Andrew Waxman

Andrew Waxman is an associate partner in IBM Global Business Services' financial markets risk and compliance practice. He is the author of the book "Rogues of Wall Street: How to Manage Risk in the Cognitive Era."

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