Wall Street, Fleet Street, Main Street: Corporate Integrity at a Crossroads

By Jordan A. Thomas  JUL 30, 2012 12:50 PM

Labaton Sucharow shares the results of its groundbreaking survey of financial services professional in the US and UK.

 


In the aftermath of Lehman Brothers' collapse, the US passed Dodd-Frank and the UK established the Independent Commission on Banking. But, can governments effectively strengthen corporate ethics? We took our questions to the street: Wall Street, Fleet Street, and Main Street.

We surveyed 500 professionals–evenly split across the United States and the United Kingdom–working in various segments of the financial services industry. We asked about personal ethics, corporate culture, and possible misconduct. We asked about competitors. We asked about the regulators and law enforcement authorities that oversee the financial services industry.

Key Findings

The results were both alarming and, in some cases, encouraging. Among our key findings:
With more than five decades of experience prosecuting high-profile and high-stakes corporate wrongdoing, securing historic financial recoveries for prominent institutional investors around the world and compelling landmark corporate reforms, we at Labaton Sucharow are certain of one thing: We are at a crossroads. The best way to ensure that the financial marketplace operates with greater transparency, fairness and accountability is to recognize the powerful troika–regulators, corporations and individuals–that has the ability to establish and strengthen a culture of integrity that will create lasting change in the financial markets.

Who Engages in Misconduct?

Do you need to break the rules to be a success?

Given the difficult financial times we live in, when jobs are scarce and bonuses hang in the balance, we asked respondents whether financial services professionals have to engage in unethical or illegal activity in order to be successful. The results were disheartening:
Recognizing that it is often easier to acknowledge wrongdoing perpetrated by others, we asked respondents to tell us about the likelihood that staff in their company have engaged in illegal or unethical activity to be successful.
Not surprisingly, when assessing their competitors’ integrity, respondents reported a much stronger causal connection between unethical or illegal activity and success.
Given that one in four respondents reported that misconduct may be a necessary factor for success, we were curious to what extent ‘getting caught’ factored into financial professionalsdecision-making. Accordingly, we asked financial services professionals across the US and UK how likely they were to engage in insider trading in order to make $10 million.
The Regulatory Landscape

Following the financial crisis of 2008, the primary regulators of the financial services industry—the SEC and Financial Industry Regulatory Authority (FINRA) in the US and the Serious Fraud Office (SFO) and Financial Services Authority (FSA) in the UK—have all made significant overhauls to their structure and strategic focus. And the fact is, the number of enforcement actions and monetary sanctions secured by these organizations is on the rise. Nevertheless–
 
and surprisingly–the financial services professionals we surveyed did not report a high level of confidence in their financial regulators.
Specifically, we asked if these financial regulators are effective at deterring, investigating and prosecuting securities violations. The majority of respondents didn’t think so.
Ethical Culture

In March of this year, corporate integrity was thrust into the international spotlight with the public resignation, through an Op-Ed in the New York Times, of a Vice President at Goldman Sachs. One of the primary drivers of the resignation, and a much debated fact in its aftermath, was his claim that Goldman Sachs didn’t really value its clients, but instead, put the bank’s pecuniary opportunities ahead of its clients’ best interests.
 
Recognizing that the degree to which organizations value clients is a strong indicator of ethical culture, we asked respondents if their employers put the interests of clients first. Although the vast majority of respondents signaled a client-oriented culture, the significant percentage of respondents who believed that their organizations did not put clients’ interests first is an area of concern.

In both the UK and US, 86% of financial services professionals reported that their employers put the interests of clients first.
Consistent with this finding and underscoring our belief that valuing clients is a natural outgrowth of a strong ethical culture, when asked to rank their organizations’ ethical values, 84% of professionals surveyed felt their employers had fairly to very strong ethical values.

Ethical Compromise: Do Financial Services Professionals Feel Pressure to Engage in Misconduct?

In the business community, where success is too often defined in quantitative terms, we wondered if professionals in the financial services industry felt that their compensation, bonus plan or other factors created pressure to compromise ethical standards or violate the law.
The best way to avoid corporate scandals is to establish and nurture a culture of integrity in the workplace. Too often, scandals result from a long chain of mistakes, where one breakdown in judgment cascades to another breakdown, and then another. In time, isolated and seemingly random unethical or illegal choices snowball into front page scandals.
 
Misconduct at Work

With trillions of dollars under management, investors and citizens must have confidence in the integrity of the financial services community. Any degree of misconduct in the industry is a serious matter.
Is Retaliation a Concern?

Yes. And the numbers are compelling. While 14% of all respondents believed that their employers were likely to retaliate if faced with a report of wrongdoing in the workplace, we noted hedging in the responses. In fact, of all financial services professionals surveyed, only 35% felt certain that their employer would “definitely not” retaliate.

In the US, there was a 10-point gender differential among financial services professionals with 22% of female respondents believing that they would be retaliated against if they reported wrongdoing in the workplace compared with 12% of male respondents.

Consistent with these findings, fear of retaliation may play a major role in the reluctance to speak out against misconduct. One in five of professionals we surveyed was not sure of, or had serious doubts about, how their employers would handle a report of wrongdoing.

Are Whistleblowers the Answer? 

As noted above, in 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Included in the Act was the charge to the SEC to establish a whistleblower program that would serve to detect and deter misconduct. The SEC Whistleblower Program, finalized and implemented in August 2011, has broad extraterritorial reach. And, other jurisdictions around the globe are considering and implementing similar programs to encourage individuals to break their silence and report possible violations of the law.

Are these programs reaching the grassroots?

We turned our attention to the financial services sector, the primary target of regulatory reform. We asked industry professionals if they would report misconduct in the workplace if it could be done with the factors present in the SEC Whistleblower Program—anonymity, employment protections and a monetary award. A startling 94% of all financial services professionals would do so. Equally encouraging, 90% of all respondents would encourage a spouse or loved one to report misconduct.

However, only 44% of financial services professionals were aware of the SEC Whistleblower Program. Not surprisingly, there was a 10-point differential between US and UK financial services professionals; only 39% of UK respondents were familiar with the SEC Whistleblower Program compared to 49% of US respondents.

In the short term, these staggering figures will undermine the tremendous potential of the SEC Whistleblower Program.
To establish a broader context, in 2011, we probed the American public’s awareness of the SEC Whistleblower Program in our "Ethics & Action Survey." We were dismayed to find that only 32% of respondents were aware of this critical investor protection initiative. Here, in the instant research, we are concerned to note a relatively insignificant difference in awareness between the general public and the financial services sector. Two years after Dodd-Frank established historic reforms to the financial services sector, industry professionals should be more ‘in the know.’

Education is the answer. We must do a better job of bridging the gap between the regulators and industry. And we must turn our focus from compliance to the ethical culture within our organizations. Until we begin a robust dialogue about corporate integrity—the extent to which it doesn’t exist and the extent to which it must–we cannot create significant and lasting change within the financial services industry.

Methodology
Populus conducted 250 online interviews in the UK and 250 in the US with senior individuals within the financial sector, including, but not limited to, Fund Managers, Bankers, Analysts and Asset managers. Respondents were screened to ensure that only senior individuals qualified and that interviews were spread across a variety of different roles within financial markets. The sample was drawn from online panels and the screening criteria created a regional distribution towards the major financial cities of London and New York City. Populus is a founding member of the British Polling Council and abides by its rules. Further information can be found at www.populus.co.uk
No positions in stocks mentioned.