ABOUT THE AUTHOR: Alexandra Shaw is an Executive-in-Residence at the Ian O. Ihnatowycz Institute for Leadership. Previously she was an executive with TD Bank Group. She can be reached at ashaw@ivey.ca.
To navigate today’s rough waters, financial institutions (FIs) need leaders who exercise good judgment and avoid mistakes similar to those which led to the 2008 financial crisis – like taking on too much risk in pursuit of profit.
As reported in the Financial Post, industry regulators are examining FIs to determine whether they have the culture in place to avoid the behaviours that led to the 2008 financial crisis. They are looking for evidence that appropriate expectations are set by the Board of Directors and are cascading all the way through the organization to the front line businesses. This includes ensuring that FIs have in place the policies and behaviours that are required to maintain a risk-reward balance, which would safeguard the industry.
Why does FI culture need to change?
Scientific American wrote that the culture in the financial sector encourages the kind of dishonest behaviour that led to the 2008 financial crisis.
It is easy to vilify FIs; however, there seems to be a legitimate anthropological explanation for the dishonest behaviour observed in the industry.
Psychologist Kathleen Vohs’ research showed that simply just thinking about money could affect one’s behaviour, unknowingly, and that people who are primed by monetary cues, like seeing money or hearing about money, are more likely to act in their own self-interest. This process is known as money priming. As journalist Heather Brooke said, “If any of us were faced with a huge bag of free money and very little accountability, it would be human nature that you would make the most of it.”
People who work at FIs are around money. All the time. To offset the undesired effects of this continuous money priming, FIs need ongoing ways to create awareness and promote preferred behaviours in their cultures. They need strength of character.
What is character and why is it important?
The Greek philosopher Heraclitus said that, ‘‘A man’s character is his fate.’’
Researchers with the Ian O. Ihnatowycz Institute for Leadership at the Ivey Business School wrote that character is foundational to effective decision making and functioning. It shapes what we notice, how we engage the world, what we reinforce through rewards and punishments, what we value, what we choose to act on, how we deal with conflict and how we communicate.
Character is important at all levels of an organization, but it becomes especially relevant in the exercise of leadership. As Abraham Lincoln said, "Nearly all men can stand adversity, but if you want to test a man's character, give him power."
In their landmark study Leadership on Trial, a team of Ivey researchers looked into the role of organizational leadership preceding the 2008 financial crisis. They found strong leadership to rest on three pillars: competency, commitment, and character. A shortfall in any of these three pillars of leadership may lead to performance problems for an organization.
Lehman Brothers is a good example. Lehman Brothers' roots can be traced all the way back to the mid 1800s. Lehman had the competency and commitment to grow into an international investment bank, able to withstand many global disasters. However, a shortfall in character eventually led to the firm’s demise. Leading up to 2008, as outlined by the Yale School of Management, Lehman’s leadership team encouraged an aggressive deal-making, risk-taking culture. In the absence of pertinent regulatory constraints, the bank was able to intentionally take on increasing levels of risk, while repeatedly exceeding its own internal risk limits and controls. And, as described in The Economist, the investment bank’s executives went to great lengths to hide the risks they had taken on, by using an accounting treatment to transfer assets off the balance sheet. These behaviours ultimately led to the bank’s failure.
Conversely, as reported in the Ivey Business Journal, FIs like TD Bank Group, whose senior leaders had intentionally and objectively learned from earlier mistakes, and created and sustained a strategic risk culture, were able to survive the 2008 storm and prosper. TD’s culture included consistent behaviours that were supported throughout the leadership ranks. For example, TD’s leaders talked constantly about the bank’s risk appetite and what they were doing to ensure that they complied with it. And, they instituted formal executive and management development programs, which included desired behaviours and values like living transparently, showing excellent judgment and demonstrating unwavering integrity.
How do we change culture and behaviour?
We start with character. Much of our behaviour is driven by character – competencies determine what leaders can do, whereas leadership character determines what they will do in different situations.
While character may often feel subjective, intimate, or tricky to talk about and develop, it must make its way into leadership and development discussions. There are ways to make it easier. Ivey’s leadership model is one such way.
Ivey researchers identified 11 character dimensions, which contribute positively to leadership performance: Drive, Accountability, Collaboration, Humanity, Humility, Temperance, Justice, Courage, Transcendence, Integrity, Judgment.
They also note that excess in one dimension, without balance from the other dimensions, may lead to performance problems. For example, excess in Drive without Temperance could result in disproportionate risk-taking, like Lehman’s aggressive risk culture. Collaboration without Courage can descend into groupthink, like Lehman’s executive team and accountants colluding to transfer risks off the balance sheet.
The Ivey research team found that many organizations are comfortable with dimensions like Accountability, Collaboration, Drive and Judgment. In addition to the achievement of results, these dimensions are often embedded in selection, promotion, evaluation and development processes. But firms tend to be less familiar with the dimensions of Humility, Humanity, Temperance and Transcendence. Indeed, these qualities may sometimes be mistaken for weakness in more traditional FI cultures, and may even be actively or passively discouraged. For example, this may include criticizing an employee for making a mistake or asking for help; people may also be branded as risk-averse.
Since leaders need to be able to draw on all of the character dimensions to avoid excess and deficiency, I suggest that the key to leadership transformation in the financial industry is through increasing attention to character, including the less familiar, yet critically important, dimensions.
For example, after AIG’s 2008 government bailout, the late Robert Benmosche, AIG’s then CEO, was able to transform the company and eventually pay back taxpayers. He did this through strength of character. Benmosche seemed to have an abundance of some better-known character dimensions, like Judgment, Drive, Courage, Integrity, and Accountability. Yet, it was through balance of character, which also included strength in less well-known dimensions, that Benmosche was able to transform the company. His Humility (willing to identify and discuss mistakes, vulnerability) gained the trust of his employees, investors and other stakeholders. His Transcendence (future oriented, purposive) gave the company a sense of direction and the belief that they could pay back the debt. His Temperance (patient, prudent) allowed him to hold off on the sale of some assets until it was in the company’s best interests. And his Humanity (empathetic, compassionate) allowed him to stand up to severe and relentless public criticism in support of his employees and rebuild the spirit of the company.
To put this into everyday context, consider a mistake or ambiguous business decision, like whether to approve a risk limit breach or transfer risky assets off the balance sheet. To create a culture, in which employees speak candidly and transparently, and identify and escalate issues quickly, leaders will need to be seen as approachable. They do so by demonstrating Humility (modest, respectful, reflective), Humanity (compassionate, forgiving), Temperance (calm, self-controlled), Justice (fair, socially responsible) and Collaboration (open-minded, collegial).
These dimensions are also needed to create an environment in which employees are able to develop and access the Courage (determination, confidence) to speak.
Leaders will also need Judgment (critical thinker) and Accountability (conscientious, take ownership, accept consequences) to evaluate the situation and decide upon the best course of action.
Finally, leaders will need to draw upon Transcendence (creative, future-oriented) and Humility (reflective, respectful), for the organization to quickly recover, learn from its mistakes and move forward.
Had organizations like Lehman had such a culture leading up to 2008, disaster would likely have been mitigated or perhaps altogether avoided. Indeed, TD Bank had such a culture and it weathered the storm quite well.
What do FIs need to do to wisely navigate today’s challenges and avoid the mistakes of the past?
FIs need to create and sustain cultures that encourage desired behaviours. This means:
- Embedding, and increasing the importance of, character in ongoing leader selection, development, evaluation, promotion, and compensation processes
- Developing leadership character, including the less familiar dimensions, through education, coaching, experience, feedback and self-reflection
- Measuring leadership character, using 360-degree behavioural feedback surveys, like Ivey’s Leadership Character Insight Assessment (LCIA)
- Linking behaviour and character to incentive programs
As Mark Twain said, “Honesty is the best policy – when there is money in it.”
Well-developed leadership behavioral and character models, such as Ivey’s, put the critical aspects of leader character into everyday, understandable and actionable language. They give FIs an intuitive framework to educate, develop, measure and reward their leaders on character and behaviour – ultimately transforming culture.