Far to go: New research examines ethical behavior on Wall Street

Ann E. Tenbrunsel has made a career out of studying a concept called “ethical fading” – or simply put, why good people do bad things.

Tenbrunsel, the David E. Gallo Professor of Business Ethics at the University of Notre Dame’s Mendoza College of Business, co-authored a book in 2011, “Blind Spots: Why We Fail to Do What's Right and What to Do about It,” examining the topic. The researchers studied real-life examples of profound ethical failures, such as Enron, sales of the defective Ford Pinto, the downfall of Bernard Madoff and the Challenger space shuttle disaster. They found a common theme: Individuals like to believe they will stand up for what’s right, but they all too often overestimate their ability to do so, and end up acting in unethical ways without having the intention.

More recently, Tenbrunsel trained her research lens on Wall Street, co-authoring a study, The Street, The Bull and The Crisis, with law firm Labaton Sucharow LLP, which often represents whistleblowers in cases involving financial industry wrongdoing.

The survey, the most expansive of its kind, polled more than 1,200 U.S. and UK-based financial services professionals to examine views on workplace ethics, the nexus between principles and profits, the state of industry leadership and confidence in financial regulators. With findings pointing to a continued disregard for ethical engagement and alarming new tactics to silence potential whistleblowers, the industry appears to be faltering in its reform efforts.

Profits, Not Principles 

In one of the most concerning findings, 47 percent of total respondents feel it is likely that their competitors have engaged in illegal or unethical behavior to gain an edge. While nearly one in five professionals feels it is at least sometimes necessary for financial services professionals to engage in illegal or unethical activity in order to succeed, a full 32 percent feel compensation structures or bonus plans pressure employees to compromise ethical standards or violate the law. Of those surveyed, 27 percent don't agree that the industry puts the interests of clients first. 

How severe is the ethical breakdown? Twenty-two percent of respondents said they have observed or have first-hand knowledge of actual wrongdoing in the workplace. On an individual level, a quarter of those surveyed say they would likely engage in insider trading to make $10 million if there was no chance of being arrested. Employees with less than 10 years of experience are more than two times as likely to use non public information than those with more than 20 years of experience, reporting 32 percent and 14 percent respectively.

"Most disappointing is the lack of change in many of the results when compared to surveys from previous years,” said Tenbrunsel. “Despite significant energy and efforts, it appears we need to continue to think about how to improve the culture of ethics in the financial services industry and most likely, in other sectors as well."

Secrecy Agreements Mask a Corrupt Culture 

Perhaps the most disturbing findings relate to efforts to stifle reports of misconduct. Despite the unwaivable right to report potential wrongdoing to law enforcement, and the federal government's public effort to identify and punish organizations that illegally attempt to silence employees, 16 percent of those polled said their company's confidentiality policies and procedures prohibit reporting potential illegal or unethical activities directly to law enforcement. 

One out of every 10 respondents reported they have signed or have been asked to sign a confidentiality agreement that specifically prohibits reporting potential illegal or unethical activities directly to law enforcement. For those who make more than $500,000 annually, that number rises to 25 percent. Of the total sample, 19 percent feel it is likely that their employer would retaliate against them for reporting wrongdoing. 

"When corporate whistleblowers are prohibited, discouraged or retaliated against for reporting crime to cops, we should all be scared—very scared," said Jordan A. Thomas, chair of the Whistleblower Representation Practice at Labaton Sucharow and co-author of the report. "The widespread, systematic and previously unknown scope of gag orders in Corporate America is a wake-up call for the SEC and other law enforcement authorities. These tactics are particularly insidious because they keep local, state and federal law enforcement organizations in the dark about all types of wrongdoing—everything from large-scale corporate frauds, environmental accidents and public safety concerns." 

Hope for the Future 

According to both U.S. and UK survey respondents, financial regulators and law enforcement authorities play a critical role in detecting and deterring corruption. In fact, 61 percent of all respondents felt authorities in their country were at least somewhat effective at detecting, investigating and prosecuting securities violations.

Even more promising is the 89 percent of financial services professionals who indicate a willingness to report wrongdoing given protections and incentives such as those offered by the SEC Whistleblower Program. This result—coupled with the high percentage of individuals who report awareness of wrongdoing in the workplace—offers the industry's best hope for reform. However, as 37 percent of respondents say they are still unaware of the program, it is imperative that regulatory and enforcement authorities and financial services firms step up efforts to educate employees and the public on the importance of reporting wrongdoing in the workplace, internally or externally.

"The SEC Whistleblower Program and other similar programs have effectively deputized all of us to report possible violations of law. As a result, the probability of detection has dramatically increased. Responsible organizations would be wise to redouble their efforts to establish and maintain a culture of integrity—where doing the right thing and speaking up are the norm," Thomas said. 

Survey Methodology 

Between Dec. 22, 2014, and Jan. 23, 2015, 1,223 participants were surveyed using an email-based online panel. Respondents were employed in the financial services/banking industry in the U.S. and UK as account executives, financial/investment/wealth advisors, financial analysts, investment bankers, branch/operations management, and portfolio managers.