I Really Planned On Being A Crook – Not!

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

A few years ago RSD Solutions did a training session for a group composed of members of the front and back office operations of a multi-national bank.  The session was focused on ethics, and more particularly ethical debacles in the context of breakdowns between oversight between the front and back offices.  Needless to say the dynamics of the group was interesting.

As part of the session we did an examination of many of the well known trading debacles that had occurred up to that time – Barings, Soc. Gen. etc.  We examined roughly two dozen such situations.  It was a fascinating exercise.

One of our conclusions was that after examining all of the available public evidence, (we did not interview any of the related parties, nor did we seek out non-public information), was that each of the debacles and supposed ethical breaches started off really small.  In many, if not most cases, these debacles started with a small mistake.  That’s right, a mistake, and not a deliberate “testing” of the system to see how far it could be stretched (or skewed, or gamed).

In other words, our central conclusion was that most debacles were not necessarily a deliberate ethical attack or ethical breach, but instead something that happened quite unintentionally. 

A second conclusion was that each of these mistakes grew to a debacle for two reasons.  (1) the central individuals involved did not believe that a mistake would be tolerated, and (2) in order to cover up or correct their mistake they then (and only then) undertook actions that they knew were definitely not kosher.  Inevitably things snowballed from there.

We currently hear so much bemoaning the lack of ethics in the markets and in risk management.  The debacles of our time are always being brought forth.  The general population quite naturally assumes that everyone involved in finance is a crook.  I do not think that is true.  I believe (perhaps being very naive) that most individuals in finance are ethical and desire to be so on a continuous basis.

Perhaps it is time to think a bit more carefully before we put systems in place to curb ethical breaches.  Perhaps, counter-intuitively, fewer systems would be more appropriate!   Perhaps it is time for more faith in our fellow workers, rather than less faith.  Perhaps it is time to allow for more mistakes and more forgiveness, rather than less tolerance and less ability to accept mistakes in the context of which they were made.

Perhaps it is time to think, show empathy and understand in context, rather than systemize everything in the sake of rules, regulations and ethics.