ETHICAL BEHAVIOR IN FINANCIAL INSTITUTIONS A LEADERSHIP IMPERATIVE

ETHICAL BEHAVIOR IN FINANCIAL INSTITUTIONS: A LEADERSHIP IMPERATIVE by Geoffrey K. Mugalu, Ph. D. Research Presentation Knowledge Without Boundaries Summit (KWB) August 14 th –August 17 th, 2018

Overview Introduction Background/Literature Review Gap Nature of the Study Results Findings Significance of the Study Management Implications Conclusion/Significance/Recommendations References

Introduction Leaders influence followers by demonstrating standards either in their conduct or by utilizing the institutional reward system to educate employees about the consequences of both ethical and unethical conduct (Den Hartog & Belschak, 2012). Financial scandals from companies such as Wells Fargo, Enron, Tyco, Arthur Anderson, World. Com, MCI, and AIG often are linked to leaders who might have sent ethically misleading signals to employees in these institutions. Increasing revelations of financial scandals involving senior corporate leadership (Tayan, 2016) and politicians (Smith & Walter, 2006) have surfaced concerns regarding the role senior leadership plays in the ethical behavior of financial institutions.

Background/Literature Review Massive and recurrent financial institutions’ failures bring to question senior leadership’s role in the ethical behavior of financial institutions (Holmstrom 2017). Senior leaders in financial institutions are responsible for the general performance and ethical behavior of their institutions (Thyer, Jagger, Atherton, & Ashe, 2009; Morgan, 2009). Strategic and authentic leadership competencies that create and nurture ethical behavior of financial institutions (Los, 2008) are essential for institutional reputation and credibility.

Background/Literature Review… Corporate ethical breaches continue to challenge moral virtues, cultural practices and professional values of decision-makers, especially senior leaders (Balaraman, 2017. Incentives, compensation and competitiveness overshadow ethical values reflected in ethically-questionable decision-making practices (Sheedy, Zhang, & Tam, 2017). Studies regarding ethical issues (Forte, 2004; Kuratko & Goldsby, 2004; Oke, Munshi, & Walumbwa, 2009; Thomas, Schermerhorn, & Dienhart, 2004) suggest that organizational policies direct the ethical path of organizations.

Gap It is unclear whether or not senior leaders’ characteristics specifically influence organizational ethical direction and behavior. 1). How do senior leaders at a publicly traded financial institution in the Northeast formulate and communicate ethical guidelines and policies? 2). How do senior leaders at a publicly traded financial institution in the Northeast provide ethics training and education? 3). How do senior leaders at a publicly traded financial institution in the Northeast role model ethical behavior? 4). How do senior leaders at a publicly traded financial institution in the Northeast hold people accountable for ethical behavior?

Nature of the Study The purpose of this qualitative-interview-based case study was to explore the principal themes of senior leaders’ role in the ethical behavior of financial institutions. Specifically, this study addressed how senior leaders at a publicly traded financial institution in the Northeast did the following: (a) formulated and communicated ethical policies and guidelines, (b) provided ethics training and education, (c) role modeled ethical behavior, and (d) held people accountable for ethical behavior. This study utilized a single case qualitative design (Giorgi, 1997) in which leaders in the selected financial institution were interviewed. Qualitative data analysis techniques, such as Nvivo software application, were used to disseminate the data.

Results 8 (100%) senior leaders indicated that formulating, enforcing, communicating and evaluating ethical guidelines and policies, and role modeling ethical behavior are senior leadership responsibilities; 5 (63%) of the 8 senior leaders indicated that their exemplary behavior is important for ethical behavioral emulation. 3 (37%) of the 8 senior leaders relied on their colleagues to enforce ethical behavior; 7 (88%) senior leaders indicated that consistence in decision-making practices is important when holding people accountable for ethical behavior. 1 (12%) did not know how to hold people accountable for ethical behavior violations; 5 (63%) indicated that termination sends a clear message to present and future ethical behavior violators. 2 (25%) supported education as a practical method of inculcating ethical behavior in institutions. 1 (12%) was indifferent. These results have nuanced managerial implications.

Findings The study found a unanimous agreement (100%) that senior leaders—by virtue of their hierarchical position in the organizations—are responsible for instituting and enforcing ethical policies, guidelines and practices; Some senior leaders (37%) were uncertain of when and how to enforce ethical behavior. Instead, they followed their peers’ behavior (ethical or not)and nature of decision-making practices; Although majority (88%)of senior leaders knew how to institute, reinforce, monitor and apply ethical guidelines and policies, some (12%) did not know how to hold their direct reports accountable for ethical behavior; There was evidence that termination (63%) sent a strong message to current and future ethical violators. However, termination alone may not deter ethically questionable behavior in organizations, especially financial institutions. Other methods such as education (25%) can be used. Indifference (1%) in how to hold ethical violators accountable suggested tha setting ethical policies should be complemented by effectively executing them.

Management Implications Understanding what ethical values are forms the first step for senior leaders to correctly formulate and propagate ethical behavior in their institutions; Periodically education and training senior leaders on how to monitor and enforce ethical behavior in financial institutions is essential for instilling and exemplifying ethical behavior in institutions; Presumptuous knowledge of ethical values results into making ethically questionable decisions, especially in financial institutions;

Conclusion/Significance/Recommendation This case study was specific to a given institution within the financial industry. Generalization may be difficult (Gall, Borg, & Gall, 1996). This study had the following limitations: 1). The selected financial institution might have different leadership approaches that were not representative of similar institutions in the industr 2). The scope of the current study might be challenged on grounds that the research findings could not be applicable to the larger industry. The study investigated a financial institution only located in the northeastern region of the United States. 3). The selected institution belonged to the finance and leasing industry. Th are other financial institutions, such as banks. Generalizability of findings a recommendations of the study may be limited to the institution under study (Miles & Huberman, 1984). Some senior leaders might not be willing to share certain information pertaining to them.

Conclusion/Significance/Recommendations This study is important because it enhances the understanding of senior leaders’ role in the ethical behavior of financial institutions in the United States, particularly at this time when there is evidence of financial institutional crisis. The current revelation of scandals and collapses of financial institutions in the United States, and around the globe, seems to increase a negative general perception aimed at corporate senior leaders. This study contextualized the current financial environment in terms of senior leaders’ contribution to institutional ethical behavior. Future studies should expand the score of scholarly investigation to include collaboration between senior leaders and floor managers who carryout day-to-day operations in financial institutions. Future studies should examine the effectiveness of imprisonment as a deterrent of ethical violation in financial institutions.

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