Judgment Play

A man standing at a crossroads

If the banking sector was looking for a theme song, many people would probably think “Oops!… I Did It Again” by Britney Spears fits the bill. After all, despite expectations that the global financial crisis would lead to change, bankers acting badly continue to threaten the world economy. Indeed, as former head of BMO Capital Markets Eric Tripp puts it, “Markets rise and fall. Recessions come and go. But when it comes to the reputational challenge caused by bankers acting badly, not a lot seems to change from one year to the next.”

In a call to action published by Ivey Business Journal last year, Tripp looked back over his 30-plus-year career, pointing out that he can unfortunately “recall far too many cases of financial mad cow disease resulting from a range of judgment lapses, woeful product designs and a seemingly insatiable appetite for excessive leverage. Think about the savings and loan scandal from the 1970s and 1980s. Think about the conflicts of interest that existed between research departments and investment banking units in the 1990s. Think about Enron and WorldCom and the shockingly poor risk management at Long-Term Capital Management, Bear Stearns and Lehman Brothers. Think of the crimes committed by Bernard Madoff and Allen Stanford.”

What is behind all the repeat offences? The common answer assumes a widespread case of subjective morality. But insiders like Tripp, who retired last year, insist the number of really bad apples out there in the financial sector is relatively limited. So to help good bankers fight the cumulative impact of the bad, he left the industry with a series of recommendations, ranging from doing more to highlight industry successes to making a better effort to seriously question flawed industry practices. At the top of Tripp’s list of advice was a call for the banking industry to develop a common values-based standard. “Doctors have the Hippocratic Oath. Lawyers have the Bar. Corporate boards have standards set by the Institute of Corporate Directors. Portfolio managers have the Chartered Financial Analyst designation. But bankers have nothing but their word. And that just isn’t enough anymore.”

Tripp, of course, isn’t the only one to argue that the financial sector — despite all of its high-profile tomfoolery — is not dominated by Gordon Gekko types. As noted in “The Myths of Unethical Behaviour,” a 2015 IBJ feature by Jeffrey Overall, an Assistant Professor at the Nipissing University School of Business, only about a third of unethical corporate behaviour is driven by a desire for personal gain or promotion. The larger problem, according to Overall, is that good people can be coerced, or moved by performance pressures, into doing things that are contrary to their beliefs, especially if they are financially dependent on their employment.

Believe it or not, even Andrew Fastow, the former CFO of Enron, argues that most financial scandals do not happen because the business world is packed with corrupt individuals. In an IBJ interview with Ivey Business School Professor Gerard Seijts, who heads Ivey’s Ian O. Ihnatowycz Institute for Leadership, Fastow points out, “The media portrayed us as a bunch of sinister guys sitting in a dimly lit room trying to think of ways to rip people off. It wasn’t that way. When we did these creative deals, they weren’t hidden. We had parties to celebrate them. We got awards for them. Magazines wrote articles that extolled the virtues of them. I’m not sure that it’s fair to give myself the benefit of the doubt, but I like to think that I wouldn’t have done what I did if it had dawned on me that my actions were potentially criminal. It just never did.”

Fastow adds: “The fact that I did not see what I was doing as fraud, and the fact that I was not thinking that what I was doing could hurt people, doesn’t mitigate what I did. It indicts me further for lacking the character required to identify those things.”

Unless you have met the man, it is hard to accept the fact that Fastow was essentially a good kid from a good home, who received a good education from good schools, and he still somehow ended up a willing participant in one of the largest corporate frauds in U.S. history. It is much easier blaming Enron, along with all the other cases of financial-sector misconduct, on a lack of morals.

In some cases, of course, morality is indeed the central issue. And Tripp’s call for the banking industry to develop a common values-based standard clearly appears long overdue. But it is important to note that Fastow’s identification of character flaws as root cause of his involvement in Enron’s scandal indicates that the issue of business professionals behaving badly goes well beyond morals. In fact, framing the issue strictly as a morality problem is an issue in itself. After all, as pointed out in “Character’s Critical Role in Strengthening Judgment in Financial Institutions,” a white paper presented earlier this year at Northwind’s Financial Services Invitational Forum, the focus on morality leads to proposed solutions — ranging from expanded compliance programs and codes of conduct to compensation claw-back clauses — that aim to install and strengthen moral sensibilities for the purpose of positive behaviour modification. And these have proved largely ineffective.

Based on Ivey research spawned by the financial crisis, the paper’s authors — Ivey Professors Mary Crossan and Jeffrey Gantz, along with Ivey Executive-in-Residence William Furlong — conclude that it would be far more productive to interpret misconduct and misbehaviour in the business sphere as a failure of judgment caused by weaknesses in dimensions of character.

Doing this in the past was difficult because character has long been considered a subjective concept that eludes objective definition and therefore cannot be readily measured. However, the development of the Ivey Leader Character model, which has identified 11 dimensions of character (see Figure 1) that can become vices in excess or deficiency, has now opened the door to reframing executive misbehaviour as a judgment issue. And that opens the door to sustainable change because strengthening judgment is something most people in business aspire to achieve while they naturally tend to object to the notion that they are morally flawed and see solutions that seek to teach morals and ethics as condescending.

When the framework, which can be used to identify and address underdeveloped areas of Leader Character, is integrated into an organization’s HR systems and practices, the author’s argue it “not only substantially reduces the probability and impact of the catastrophic consequences of poor conduct, it also creates the foundation for the development of strong character to imbue strong judgment, which in turn will drive a robust culture of sustainable excellence.”

Figure 1 – Leader Character Framework


According to the white paper, the underlying rationale for this argument is two-fold:

First, focusing on the quality of judgment not only deals with issues of poor judgment but importantly extends to excellent judgment leading to sustained excellent performance. Essentially, by understanding the micro-foundations of excellent judgment the underpinnings of poor judgment are addressed.

Second, while few people self-assess as having issues of morality, strengthening judgment is something most people aspire to. Viewing character weakness as a judgment issue instead of a moral issue engages audiences who want to improve judgment but without the judging that is typically associated with moral agendas. The discussion can be had much more dispassionately and rationally, and the audience does not feel themselves either under attack or being judged in a very personal sense. Further, a discerning audience will quickly sense an opportunity to improve their own decision making and performance, making engagement very much in their own self-interest. Indeed, simply by explicitly framing the discussion in the self-interest of the listener we can substantially reduce barriers to engagement.

The authors conclude with six main points:

  1. The continuing issues of misconduct in the financial services industry indicate that the approaches and remedies employed to date have met with limited success. It is also clear that the financial services sector is too important to the overall functioning of the economy for this misconduct to persist. Indeed, key regulatory bodies have signaled that the status quo is simply not acceptable. New approaches, perspectives and initiatives are required.
  1. Reframing misconduct in the financial services sector to add business judgment to the moral issue represents a more complete formulation of the problem. This reframing has two very significant practical advantages. First, formulating the issue as primarily one of judgment does not meet the same emotional resistance that a “moral” framing will encounter. Further, initiatives to improve judgment, decision making and performance are widely shared, non-controversial aspirations that allow for a strong alignment of interests among all stakeholders. Secondly, the improved judgment, decision making and performance that results from stronger Leader Character places this initiative at the core of corporate strategy, leading to sustained and permanent change. In turn, improved character-based judgment will positively impact the context and culture within which decisions are made, fully activating and animating the many measures already put into place, while further improving sustainability and limiting the risk of an incorrigible individual and/or cultural regression.
  1. Leader Character must be present wherever there is a competitive/strategic requirement for strong competency. Warren Buffet has been quoted as saying, “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.” Using the language of Ivey’s 3C’s of Leadership, the three qualities would be Character, Competency and Commitment. The Financial Crisis was an excellent demonstration of the adverse consequences that can prevail when judgment (Character) is overwhelmed by technical expertise (Competency) and intense effort (Commitment). It is Leader Character that harnesses strong Competency and Commitment to produce sustainable excellence while simultaneously avoiding catastrophic outcomes.
  1. The dimensions in the Leader Character Framework are habits of behavior that can change over time, for better or for worse. Unlike physical or personality traits they can, through patient and thoughtful application, be consciously strengthened. And given their interdependence, strengthening underdeveloped dimensions has the effect of increasing the capacity and effectiveness of all other dimensions. Indeed, the imbalance of underweighted and over-weighted dimensions risks over-weighted dimensions becoming vices. Furthermore, if the dimensions are neglected then due to contextual pressures an individual’s character will atrophy with potentially disastrous results, in particular for those who occupy senior-level roles of leadership and responsibility.
  1. Strengthening Leader Character will positively influence and change an organization’s culture and (potentially) industry context. It does this in three ways:
    1. Decision making and judgments will incorporate an awareness of context, in particular negative context, that can create the downward gravitational pull that undermines judgment;
    2. Decision makers will possess more resources and strength which are needed to resist the powerful forces of negative context and “informal” culture;
    3. Positional leaders (management, boards and regulators) will possess greater judgment and insight to design, create and sustain holistic, positive and self-reinforcing cultures (“good barrels”) for their teams, organizations and industry.
  1. Embracing and implementing Leader Character represents an opportunity and a challenge to the Financial Services sector. Significant sustainable advantages can potentially accrue to the “first movers” for the leaders in financial institutions who instinctively understand the value that character provides in any enterprise that aspires to excellence. Although the challenges of implementing Leader Character may at times appear formidable, the costs and risks of inaction (or simply staying the course) in the current environment seem unacceptable. We strongly encourage leadership across the Financial Services sector to consider plans, approaches and initiatives directed at embedding Leader Character as a core strategy for the long-term prosperity of their organizations.

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