A ‘climate of fear’ breeds unethical behaviour within financial institutions claims new research

BY Fraser Tennant

New research into the reasons why employees of financial institutions can become partial to unethical conduct has been published this week by PwC and the London Business School.

The research study, ‘Stand out for the right reasons: why you can’t scare bankers into doing the right thing’, was designed to investigate the role of emotions in determining when and why employees behave creatively as opposed to unethically when competing with colleagues.

The study is based on a survey of 2431 managers from UK financial services representing banking, insurance and wealth management.

The PwC/London Business School research reveals that when financial institutions take a ‘get tough’ approach to poor employee performance in terms of behaviour and reaching targets, they risk creating a climate of fear and breeding more unethical conduct in financial services – an outcome at odds with what regulators, businesses and the public actually want.

“We are not suggesting that rules and penalties for bad behaviour should be abandoned as it’s essential that people know what is acceptable and what isn’t, and criminal behaviour should be punished," said Duncan Wardley, people and change director and behavioural science specialist at PwC. “This is about the sorts of pressures that push ordinary, well-meaning people into behaving less ethically that they would want to by cutting corners and hiding mistakes.

As a counterpoint to this, the research also found that when managers were presented with situations where the positive outcomes of success were highlighted rather than the negative consequences or punishment for poor performance, they were more excited and much more likely to demonstrate innovative behaviour.

Mr Wardley continued: “Regulators and financial services leaders can change behaviour within companies by increasing emphasis on the positive outcomes of good performance, instead of solely focusing on the negative outcomes of the bad behaviour they want to stamp out.”

Additionally, whilst the study shows that the issue of monetary reward is still a contentious issue involving a public and regulatory desire for further sanction, it also recognises that too much pay regulation can ultimately be self-defeating.

“Tough medicine prescribed by regulators to curb conduct issues meets the public appetite for retribution," believes Tom Gosling, head of pay, performance and reward at PwC. “But pay regulation based purely on pay structures and penalties can unintentionally create the very conditions that make unethical behaviour more likely.

"An approach to pay regulation that focuses too much on pay instruments, deferral, and clawback can create the emotional states in which creativity is crowded out, focus on financial rewards is maximised and unethical behaviour is more likely.”

Report: Stand out for the right reasons - why you can’t scare bankers into doing the right thing

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