While the conduct of people entrusted with upholding the espoused values and principles of the organisation has always carried inherent risk, Conduct Risk has only recently been brought into sharp focus following the events of the Global Financial Crisis (GFC). Unlike market risk, credit risk or operating risk, this aspect of risk is the least understood and consequently an aspect of risk that is not being managed well. The Financial Conduct Authority (FCA) UK (created in 2013 along with the Prudential Regulation Authority to replace the Financial Services Authority thought to have failed in safeguarding markets and consumers during the GFC) has provided guidance on Conduct Risk. Regulators all around the world are watching closely.
The approaches to managing Conduct Risk have so far focused on driving more regulation, rewriting risks manuals, introducing new risk frameworks and governance structures. While these are necessary for consistency, these alone will not guarantee success in driving down Conduct Risk or developing more ethical corporate cultures. The reason is obvious – because it is not possible to create rules to cover every eventuality. In fact worryingly, the more rules you create the more people are lulled into a false sense of security, relying on the existence of the rules and failing to think more deeply about what is right and the role our personal conduct plays.
Added to this inherent complexity is that an action can be legally right but morally reprehensible. That is to say conduct risk can lurk in the case of decisions where the legality of the choice is not in question, but where the longer term consequences of the decision generate questions of morality.
While this pre-occupation with rules and regulation has continued since 2008, compliance costs have risen dramatically, without any guarantee that our organisations are operating in more ethical ways. It has even paralysed some organisations into not pursuing genuinely good opportunities for fear of failing the conduct test in the eyes of a more critical public.
Conduct Risk is about individual judgment and until our judgment skills are strengthened, pretending we can legislate or regulate for every instance of poor or sub optimal conduct is not only ill thought. It is also based on the flawed assumption that as leaders of large complex organisations, we have in our power the ability to manage the entire human chain of judgments a long way from the Risk Function of a large dispersed organisation.
The answer is found in building deeper understanding and skills in how we judge. Risk frameworks will not help you do that. Skilfully facilitated conversations that generate deeper insights and slowing down our thinking in more heedful ways are required for real individual and collective learning to occur.
At the heart of Conduct Risk is the desire for fair customer outcomes, and the adverse consequences of behaviour that prioritises commercial interests such as profits over consumer interests (a fair deal or fair value). These challenges are behavioural in nature and call for every executive and team to behave in ways that ensures and preserves the delicate ‘systems’ equilibrium required when working with complex communities of stakeholders.
Our preferences in deciding on a given situation is influenced by 3 questions and each of us demonstrates a different profile relative to these ethic preferences, that is to say these questions will resonate differently for different people:
1) What do the rules say? (the ethics of compliance)
2) What does the situation demand? (the ethics of reason)
3) Who is this good for/who could we harm? (the ethics of care)
This framework is based on the extensive and ground breaking research conducted by Roger Steare in the UK in developing the Moral DNA, an instrument that we have used as a critical part of designing and facilitating powerful learning interventions with teams to raise awareness of their preferences and generate actionable insights about how these preferences can materially impact the decisions they make. Critically it helps us to calibrate and recalibrate in a behavioural sense the moral compass we use when faced with both complex and (seemingly) simple decisions about what is right.
Organisations will be safer when rule driven behaviour is replaced by ethically centred behaviour.
Ignorance (about the impact of decisions on customers) is no longer an acceptable excuse. Invest now in the judgment skills of your leaders.
Contact firstname.lastname@example.org for more information on how to embed a culture of ethical care and conduct in your organisation.
Written by Meena Thuraisingham
Director and Principal, Talent Invest
Meena Thuraisingham is a consultant, author, executive coach and thought leader in the area of People and Culture. An organisational psychologist by training, she founded TalentInvest, a niche consulting practice, advising global clients in the UK, Asia and Australia in Capability and Culture. Meena is also a regular speaker internationally on leadership effectiveness and culture change.
Her published books are The Secret Life of Decisions, Careers Unplugged and Derailed!. Get Your Copy Today