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Reputability LLP are thought leaders in the field of reputational risk and its root causes, behavioural risk and organisational risk. Our book 'Rethinking Reputational Risk' received excellent reviews: see www.rethinkingreputationalrisk.com We help business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Friday, 21 November 2014

How Culture can affect Honesty

We are delighted to welcome a guest blog post from  Professor Ernst Fehr, Professor Michel Maréchal and Dr Alain Cohn, working at the Department of Economics at the University of Zurich.  Their research, just published in Nature, suggests that culture can influence honesty.

Bank employees are not more dishonest than employees in other industries. However, the business culture in the banking industry implicitly favours dishonest behaviour. that is the conclusion of a behavioural study at the University of Zurich.

It follows that a change in cultural norms would thus be important not only in order to improve the battered image of the industry but also to improve actual banker behaviour.

In the past years, there have often been cases of fraud in the banking industry, which have led to a considerable loss of image for banks. Are bank employees by nature less honest people? Or does the business culture in the banking sector favour dishonest behaviour? These questions formed the basis for our new at the Department of Economics at the University of Zurich.

Our results show that people who are bank employees are not in themselves more dishonest than their colleagues in other industries. The findings indicate, however, that the business culture in the banking sector subtly encourages dishonest behaviour.  The results suggest that the implementation of a healthy business culture is of great importance in order to restore trust in the banking industry.

Our experiment

We recruited approximately 200 bank employees, 128 from a large international bank and 80 from other banks. Each person was then randomly assigned to one of two experimental conditions.

In the experimental group, the participants were reminded of their occupational role and the associated behavioural norms with appropriate questions. In contrast, the subjects in the control group were reminded of their non-occupational role in their leisure time and the associated norms.

Subsequently, all participants completed a task that would allow them to increase their income by up to two hundred US dollars if they behaved dishonestly. The result was that bank employees in the experimental group, where they had recently been reminded of their occupational role in the banking sector, behaved significantly more dishonestly.

A very similar study was then conducted with employees from various other industries. In this case too, the employees had recently been reminded of either their occupational roles or those associated with leisure time were activated.

Unlike the bankers, however, the employees in these other industries were not more dishonest when reminded of their occupational role.

Our results suggest that the social norms in the banking sector tend to be more lenient towards dishonest behaviour and thus contribute to the reputational loss in the industry,

We therefore believe that a change in norms is needed in the banking industry.  Social norms that are implicitly more lenient towards dishonesty are problematic, because people’s trust in bank employees’ behaviour is of great importance for the long-term stability of the financial services industry.

We suggest that concrete measures could be used to counteract the problem.  The banks could encourage honest behaviour by changing the industry’s implicit social norms.  Several experts and supervisory authorities suggest, for example, that bank employees should take a professional oath, similar to the Hippocratic Oath for physicians. If an oath like this were supported with a corresponding training program in ethics and appropriate financial incentives, this could lead bank employees to focus more strongly on the long-term, social effects of their behaviour instead of concentrating on their own, short-term gains.

Alain Cohn, Ernst Fehr, and Michel Maréchal 
Department of Economics at the University of Zurich
http://www.econ.uzh.ch/index.html 

Reputability LLP
London
www.reputability.co.uk

3 comments:

  1. Fascinating.

    Persons interested in this subject might want to get the transcript of the Senate Banking Committee's Hearings today called "Improving Financial Institution Supervision: Examining and Addressing Regulatory Capture -- Financial Institutions and Consumer Protection." The testimony of Mr. William C. Dudley, President and CEO, Federal Reserve Bank of New York was fascinating with respect to the role of "culture in the financial sector."

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    Replies
    1. Thank you. It would be helpful if you could provide a link to the evidence or, better still, to a good commentary.

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  2. Organisational honesty promotes and protects employee honesty philosophy. Corporate laws should evolve the scientific principles of ethical activity in order to promote citizen ethics. Comparison of a limited sample with diverse groups -- ultimate generalisation is a distortion in entirety. However, evolving the principles of change in norms for good is a welcome sign. I like it.

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