Running head: ETHICS IN BANKING 1 Banking - Flying in an Ethical Path Wheeler, Katherine eVersity ETHICS IN BANKING 2 Abstract People place a lot of trust in their bank. They deposit their money in the bank for savings or ease of paying bills or they access credit to help them make purchases such as their home or a car. But that trust can be lost when banks or financial institutions act unethically, and it is very difficult to regain the trust once lost. Based on the public’s interaction with a bank their perception is skewed. If they are a customer, they may interact with individual employees or managers at different levels, if they are within the bank’s market they may hear or read news about the bank, or an ethical issue may impact the banking industry overall and effect almost everyone. All these touchpoints change a person’s feeling of a bank or banking in general. Combining several of them together, such as management of the bank, employees of the bank and news stories can positively impact the trust level a customer has of a bank. ETHICS IN BANKING 3 Banking - Flying in an Ethical Path A banking institution’s code of ethics should be written from the customer’s viewpoint and reflect the how the bank builds trust and integrity through actions. More critically, the actions of the employees from the CEO to the front-line employees should be reflected. Cutting costs on the implementation and overseeing of the code of ethics can lead to detrimental effects as seen with the housing crash in 2008 and the Wells Fargo scandal in 2013. Overview A strong code of ethics provides a banking institution a guiding light to always move in the best interest of the customer, the employees, and the shareholders. When flying a plane one completes a flight plan, in the business world the company’s code of ethics is the flight plan. A flight plan is completed prior to taking flight. Everyone knows the direction the plane is headed in from the upper management/corporate offices and the pilots (middle management) to the flight crew (employees) to the control tower (government), all are on the same page with the plan. The customers even have a basic flight plan, so they know how they will get from point A to point B. This is also critical in banking the commodity is different, it is the customer’s money. This money might be their life savings or the start of it, the beginning of owing their home or first car, or the money they use to pay their monthly bills. In comparing a banking institution’s code of ethics to a flight plan, identified were four groups that each needed to be aware of the plan. When one switches the thinking to banking the groups are: Upper Management- Board of Directors, Chief Executive Officer, Vice-Chairs (structure may vary based on size of bank) ETHICS IN BANKING 4 Middle Management – Division Managers (retail, credit cards, consumer lending, mortgage, investment, Human Resources, etc.), Regional Presidents, District Presidents/ Leaders Front-Line Employees – Line Level Managers, Branch Employees, Operations, Human Resource Analysts, Training, Loan Analysts, etc. Government Regulation Agencies – Federal Reserve System, Federal Deposit Insurance Corporation, and Comptroller of the Currency Each group has a responsibility towards either creating, upholding, and/or regulating the ethical standards for a financial institution. All should work together to build the strongest level of trust between the banking institution and the customer. When that trust is broken, ill will is very difficult to overcome. In addition, it can take up to five years to overcome the financial losses resulting in the loss of trust (Avery, 2016). As Webley & Werner (2008) mentioned to be listed on the United States stock exchange a company such as a bank must have a defined code of ethics. Therefore, there are many reasons for having defined code of ethics and many banks do. Unfortunately, more seems to be needed. Background Starting in 2008, poor ethical decisions hurt an entire financial industry causing it to nearly collapse. Worse, it can cause irreparable harm to customers. Many people lost their homes due to unethical mortgage practices. The housing collapse demonstrates one of the largest ethical erosions in an entire industry, where some involved in the entire process of lending money to buy a home did not act in the best interest of the customer. Most of the implicit unethical people were the executives and investors. The repercussions may well be felt for decades. Unfortunately, ethical dilemmas are not new to the housing market and banking. ETHICS IN BANKING 5 In the 1970’s the United Stated government made illegal red-lining in real estate. Badger (2017) traces red-lining back to the 1930’s when a neighborhood in Brooklyn was appraised for the government. Badger stated based on the “many brownstones in obsolescence and poor upkeep. Clerks, laborers and merchants lived there, about 30 percent of them foreign-born, Jews and Irish mostly. Also, this: Colored infiltration a definitely adverse influence on neighborhood desirability” (para. 1-2). This assessment resulted in the neighborhood to be circled in red on a map and rated a “D” (Badger, 2017). This is the lowest rating and generally mortgages do not receive any underwriting (Badger, 2017). The red-lining practice moved on to other cities throughout the United States and as of 2010 the harm done by the red-lining were still apparent in racial segregation, home values and credit scores (Badger, 2017). This is an example of the government not upholding an ethical and fair standard for all citizens and the effects still felt today. One of the most glaring examples of a bank and the employees failing to keep the customer’s trust was the Wells Fargo scandal that came to light in 2013. At that time, various allegations were made that to meet sales goals employees opened accounts without the customer’s permission (credit and deposit accounts) and employees worked unpaid overtime (Avery, 2016). The story resurfaced in 2016, as Avery (2016) found “as many as 1.5 million debit accounts may have been opened without customer consent and as many as 565,000 credit cards issued” (para. 5). Just over 5,000 employees were found to be involved in the fraudulent opening of accounts (Avery, 2016). One wonders how this is possible, it is possible because as Buchanan (2018) submits a company cannot risk its ethics, all the training and pep-talk about corporate ethics cannot change an employee’s bad judgement Marques (2012) advises asking questions to determine how to act in an ethical manner: ETHICS IN BANKING 6 “Would I do this if my family knew about it? Would I do this if it were published in tomorrow's newspaper?” she goes on to say that even these two questions may lead to different results based on each person (p. 5). That is because ethics is also personal and when faced with keeping one’s job to feed your family one is faced with a very difficult ethical choice. The bank makes that choice difficult and as Avery (2016) comments “When there are incentives that drive unethical outcomes – such as in the case of Wells Fargo employees being pressured to hit targets – then research shows that even the most ethical people may falter” (para. 8). Responsibilities and Duties As Buchanan (2018) states “A reputation is a terrible thing to waste” (para. 14). Each level of the bank has a unique duty to protect the company’s reputation. The one person that has the most interaction with a customer might be the branch employee or someone in the 24-hour banking department, or possibly someone who creates the mobile app. Within corporations, senior management wants to turn decision making over to the department managers and in some cases to the individual employees, but this comes at a risk because one wrong decision can become a challenge as evidenced by the arrest at a Starbucks in PA (Buchanan, 2018). It remains to be seen if Starbucks reputation is ruined as it does with Wells Fargo, in both cases the one qualification to look for when interviewing is integrity, as this is difficult to teach someone (Buchanan, 2018). For employees and front-line managers, the ethical responsibilities are to keep the customer’s best interests in mind, know and understand the bank’s code of ethics, engage in training for the code of ethics, and be an individual leader for ethical behavior. Middle management often faces a juggling act of meeting the ever-growing goals set by upper management and delivering the goals to the employees in a way that does not promote ETHICS IN BANKING 7 unethical sales behaviors. The lucky middle managers have a department without sales goals except they must justify their expenses year over year and face more and more cuts which can lead to other ethical dilemmas. These managers play a key role in distributing the code of ethics and modeling the behaviors outlined within the code; they can walk the talk in the most visible way (Webley & Werner, 2008). In addition, the bank demonstrates to the customers in the community by participating on local boards, volunteer activities, and community outreach; all generally done by managers at this level (Webley & Werner, 2008). Middle managers are most effective in creating a culture for honest communication and one that allows employees the ability to report unethical behavior without fear of retribution (Webley & Werner, 2008). The code of ethics must start somewhere and that is with the top of the food chain. Imagine being called into Andy Cecere’s office, the CEO of U.S. Bank, to discuss the article just published in Fortune Magazine regarding the most admired companies in the world. One might be concerned the article either does not list the bank or the bank is ranked lower than previous years, otherwise why discuss rather than celebrate. He wants to discuss it because the bank ranked number one among super-regional banks in eight of the nine categories (Business Wire, 2018). Mr. Cecere asks everyone to develop a plan to maintain the eight as well as hit the ninth, so the bank meets all customer, employee and shareholder expectations. Within U.S. Bancorp 2017 Annual Report (2018) it is noted that the Ponemon Institute has rated U.S. Bank as the most trusted bank for eleven years in a row. One of those reasons is also found in the U.S. Bancorp 2017 Annual Report (2018) “It’s how we do things that sets us apart. It’s how we earn and keep trust, and put people first (p. 1). Another group from our flight plan comparison is the government regulation agencies. The regulations these agencies create and impose range from consumer privacy and withdrawal ETHICS IN BANKING 8 limits on a savings account to lending limits on homes to how much excess cash a branch may keep on hand. Most regulations were enacted to protect the customers from banks gaming the system for extra profit or implementing unfair lending practices. For example, Regulation CC went into place to create set hold lengths for deposited checks based on certain conditions (Regulation CC, 2017). Prior to this regulation, banks were holding deposited funds longer than necessary to take advantage of earning extra interest. Some regulations lean more to gathering information for the government such as the Bank Secrecy Act which is the main law for both anti-money laundering and detecting terrorist financing (Bank Secrecy Act, n.d.). When a regulation is broken, either intentionally or unintentionally, one or more things may occur; the bank may be fined, their chartered can be revoked thus forcing them either to a merger or to be taken over by the FDIC, or they may simply be advised to stop the improper practice with a cease and desist. The cease and desist may or may not include corrective actions to be taken by a certain time. Employees of the bank may also be fined and/or serve jail time if found guilty of breaking a regulation. The Wells Fargo scandal ultimately cost that bank $190 million in fines and remediation plus $2.6 million in refunds of fees for the customers (McGrath, 2016). Statements from upper management indicating their lack of knowledge of any overambitious sales goals and indicating their appeal to sell a credit card to all customers that qualify (McGrath, 2016). Both sentiments seem to contradict the CEO’s claim that the culture is focused on what is best for the customer (McGrath, 2016). The fines by the government may sound large but compared to Wells Fargo’s quarterly earnings of $5.5 billion, the fine is a line item (Avery, 2016). All of the points seem to lead back to needing a carefully planned out code of ethics with checks and balances in place to keep the trust in place between the bank and the customer. ETHICS IN BANKING 9 Counterpoint Some may argue that a banking institution cannot control the employees and the employees do not write the rules. While it is not the government’s job to keep the trust between the bank and the customer. In some ways, they are right each individually group cannot do this by themselves. Even the customers have a responsibility to keep an eye on their own finances. To step away from banking for a moment, Webley &Werner (2008) Enron is a glaring example of a company that had a base of ethics it said it used to drive operations. Webley & Werner (2008) quoted Kenneth Lay “proud of Enron and it enjoys a reputation for fairness and honesty and that it is respected. … Enron’s reputation finally depends on its people, on you and me. Let’s keep that reputation high” (para. 5). In 2006 during the trail of the officers of Enron is was laid bare just how far they had strayed from their own ethics; driven by greed they caused great harm to the employees and shareholders many of whom never recovered. An example of a complete failure of a code of ethics making any difference. The Starbucks’ example clearly demonstrated an employee’s choice of personal choice overriding the company’s code of ethics (Buchanan, 2018). This action led to Starbucks closing stores to complete racial bias training as well as changing store policies and entering a settlement with the two gentlemen (Buchanan, 2018). Clearly, employee choice and the decisions they make independent of the code of ethics changes the ethical environment outside of the company’s control. The government institutes regulations seemingly as fast as they can write them or repeals the ones past just a few years ago. To what difference, in looking at the case of red-lining the effects are still being felt forty years later. The fines are seemingly a drop in the bucket for the banks. The small, community banks are faced with closing due to the cost of keeping up with the ETHICS IN BANKING 10 regulations according but with the Wells Fargo scandal any reduction in regulations seem unlikely as of September 2016 (Avery, 2016). It seems the government regulatory agencies are unable to reign in the banks. Conclusion There is a fallacy with those arguments, each is looking at the groups in a silo, like they are in their own corner trying to fly a plane from Los Angeles to Fiji. If an flight tried to do that the plane may end up in Poland with the pilots not talking to the flight attendants, the passengers yelling at the flight attendants, and the control towers along the way reporting a hijacked plane. The corporate office is left to straighten out the mess once the flight lands in Poland. No one wants their money to take that kind of journey. All the groups involved in the banking institution should work together to strengthen the trust built between the bank and the customer. Upper management creates the code of ethics with employee input, the implementation and management of the training and other efforts is robust and fully embedded into the culture of the company. All of management, at all levels, model the behavior. Goals reflect the intent of the code of ethics, the culture is open for discussion, and free from retribution. Employees should invest the time to learn the code of ethics as it is the roadmap for decision making. It assists the employees in doing what is best for the customer, the employee and the shareholders. Customers should be able to trust the employees they interact with and that handle their finances without losing sight of managing their money as well. By working together as a team, banking can fly a straight path to ethical behavior. ETHICS IN BANKING 11 References Avery, Helen. (2016, September 29). The collective struggle for better bank ethics. Euromoney, Retrieved from https://www.euromoney.com/article/b12kq31zwyy72x/the-collectivestruggle-for-better-bank-ethics Badger, Emily. (2017, August 24). How Redlining’s Racist Effects Lasted for Decades. The New York Times, https://www.nytimes.com/2017/08/24/upshot/how-redlinings-racist-effectslasted-for-decades.html Bank Secrecy Act (n.d.) Retrieved from https://www.occ.treas.gov/topics/compliancebsa/bsa/index-bsa.html Buchanan, Leigh. (2018, May 3). Starbucks's PR Nightmare Shows the 1 Thing You Can't Control When Your Business Gets Big. Inc. Magazine, Retrieved from https://www.inc.com/leigh-buchanan/starbucks-arrest-philadelphia-ethics-scale.html Business Wire. (2018, January 19). Fortune Recognizes U.S. Bank as a 2018 World’s Most Admired Company. Yahoo Finance, Retrieved from https://finance.yahoo.com/news/fortune-recognizes-u-bank-2018-203300384.html Marques, J. (2012, July). Ethics: Walking the talk. The Journal for Quality and Participation, Retrieved from https://www.academia.edu/11574059/Ethics_-_Walking_the_Talk McGrath, Maggie. (2016, September 8). Wells Fargo Fined $185 Million For Opening Accounts Without Customers' Knowledge. Forbes, Retrieved from https://www.forbes.com/sites/maggiemcgrath/2016/09/08/wells-fargo-fined-185-millionfor-opening-accounts-without-customers-knowledge/#1796170551fc Regulation CC. (2017, February 28). Retrieved from https://www.federalreserve.gov/paymentsystems/regcc-about.htm ETHICS IN BANKING 12 U.S. Bancorp 2017 Annual Report. (2018). U.S. Bank, Retrieved from https://www.usbank.com/cgi_w/cfm/annual_report/index.html#story3 Webley, S., & Werner, A. (2008). Corporate codes of ethics: Necessary but not sufficient. Business Ethics, 17(4), 405-415. https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.14678608.2008.00543.x
