The next few years will show a concerted effort by the financial services industry to demonstrate a culture of ethics across organizations and their relationships. With the turmoil on Wall Street and crumbling banks, clients and politicians will be looking for those they can hold accountable and will most likely mandate a renewed focus on corporate ethics and responsibility.

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There is an unsettling sense that the bottom line of ethics is disappearing in business today. Much of this can be attributed to the philosophy that truth is relative and what is right for an individual is not necessarily right for another. This philosophy allows people to justify acts that benefit only (or mostly) themselves. Organizations are in a state of disarray as they attempt to define their values and communicate them to employees, third parties, stakeholders and clients. But a financial organization's ethics is actually the ethics of its people -- from the top down.

Unified ethics
Business ethics cannot be relative to each department and individual. Varying ethical standards lead to confusion, inaccuracies, and ultimately, to specific, material consequences (bad publicity, fines, imprisonment, etc.). When it comes to operating a financial organization, relative isn't acceptable; there must be a right number and a wrong number. Shareholders demand it, governments regulate it, economies require it, CEOs lead by it and customers expect it.

From the executive perspective, there must be a consistent, unified view of governance, risk, and compliance (GRC) across the organization. Executives and the board need to know the company's ethical bottom line, and hold to it rigidly. In addition, it must not only be ethically right, it must also have come about by ethical methods (how it is determined), ethical procedures (who determines it), and ethical policies (when and where it is determined).

This should be the basis for all government regulations of financial institutions and is why we have seen a move in other countries such as the United Kingdom and their Financial Services Authority to principle-based regulation. Principle-based regulation moves away from a series of checkboxes to focus on outcomes.

The following are guidelines for financial services organizations as they evaluate their approach to ethics:

Define your ethical benchmark. An ethical benchmark is a written standard to which the individuals of an organization are accountable. The organization needs to define its ethical benchmark in its code of conduct and supporting framework of policies, procedures, and controls. This starts with inventorying the current policies in the environment and comparing them to the corporate culture. Are employees adhering to the benchmark in day-to-day activities? The past few months have shown that many organizations that have failed had good policies that were ignored.

Understand that individuals have to buy in to ethics. Individuals -- from executives on down into the employee trenches -- must evaluate, decide on, and conform to the ethical benchmarks. For example, if executives and board members hold to a standard of honesty, it will be much less likely that a lower employee will decide to personally appropriate funds from the organization for his or her own personal needs, or that he or she will be able to embezzle for very long.

Communicate. Communication is critical. In order for individuals to take ethical accountability, it is necessary to clearly inform and train them on what is considered right and wrong in the organization. This goes beyond having policies published in a manual. Ethical communication requires training across the organization, extending to third-party relationships, as well. Financial organization leaders need to actively communicate and demonstrate ethical standards.

Monitor for unethical behavior. Some individuals lack integrity and will do what is wrong if they feel they can get away with it. Ethical training may be the carrot, but the stick of consistent disciplinary enforcement is also needed. Infractions of conduct need to be monitored for within the environment; this requires management monitoring, technical monitoring and enforcement of controls in business transactions, as well as individual monitoring and reporting through hotlines and whistleblowers. No one in the organization should fear retaliation if they report unethical conduct.

Ethics cannot be ignored. Today's business environment demands that ethics be defined clearly in an organizations code of conduct and communicated through writing and training. Financial services organizations are best served to begin an ethical review in the light of current events to determine the state of adherence and awareness to their code of conduct.

About the authors:
Michael Rasmussen (mrasmussen@corp-integrity.com) and Michael Landers (mlanders@corp-integrity.com) are with Corporate Integrity, LLC. Corporate Integrity, LLC is a strategy & research advisory firm providing education, research, and analysis on enterprise governance, risk management, and compliance.


This was first published in October 2008

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