One estimate claims asset management firms, or their parent companies, have paid $60 billion annually in fines and litigation costs related to cultural failures since 2010. It is no wonder that FINRA is now reviewing corporate culture and business ethics as part of its examinations.
What does this mean exactly? FINRA’s targeted exam letter, published on their website in February 2016, states “…FINRA is reviewing how firms establish, communicate and implement cultural values, and whether cultural values are guiding business conduct.”
In this letter, FINRA goes on to say that their exams will likely address:
- Policies and processes that help set the cultural tone and values of your firm
- Efforts to promote, strengthen, or change a firm’s culture
- Processes for communicating the firm’s culture and values from the top down
- Measurement of a firm’s culture, complete with documentation
- Processes used to identify and resolve cultural breaches
While the ethical standards against which firms may be judged could be unclear or inconsistent, what is clear is that being prepared for this new exam will help your firm avoid potential reputational risk.
Being prepared for this level of scrutiny goes beyond putting together a documentation file to present to the FINRA examiners.
According to Professor Nancy B. Rapoport at the University of Nevada Las Vegas, another step in preparedness might be to figure out what the actual default rules and incentives are in your firm that could contribute to ethical lapses, rather than focusing upon the documented policies and procedures that purport to govern corporate ethics. In her 2014 paper, “Nudging Better Lawyer Behavior”, Rapoport writes, “Every business that has failed, with its C-level officers indicted or sued, has had rules. The real (behavioral) incentives, though, cut against following those rules.”
Throughout the paper, Professor Rapoport details case studies in ethical lapses unintentionally caused by well-meaning organizational practices. One example is the case of one law firm’s decision in the 1980s to tie compensation to new business development, which led to fierce internal competition for new clients, resulting in a secretive sales culture and client deals that undermined the overall goals of the firm.
As was the case with that law firm, people work to meet the incentives they’re given — whatever those incentives may be. In order to help uncover what practices at your firm might be contributing to ethnically questionable behaviors, Rapoport suggests the following four steps:
- Identify both the questionable behaviors and the incentives or social pressures that may trigger that behavior
- Define what alternative behaviors or cultural practice your firm wants to encourage
- Create new incentives to support the organizational change
- Test to see if those new incentives create some different, negative side effects
Are you going to the 2016 Boston Financial Client Forum this year? Professor Rapoport will explore these steps in greater detail when she opens the event on Thursday, September 15.
If joining us for this exclusive event is not on your radar screen but you want to hear more, look for our wrap-up of Day One of the Client Forum here on Perspectives. Or follow #BFCF16 hashtag on Twitter to “listen” to her presentation in real time.