An ethical foundation is vital to a healthy, successful financial institution, and it starts with the board of directors.
“Ethics is something that you carry with you every day,” says Samuel Combs III, CEO of the management consulting firm COMSTAR Advisors and the governance committee chair at $2.7 billion First Fidelity Bancorp, based in Oklahoma City. “It begins with the leadership team, of course, [and] boards.”
As a guiding principle for the organization, a code of ethics provides a pathway to govern. And the rise of environmental, social and governance (ESG) initiatives, with their emphasis on customers, employees and communities, puts additional pressure on corporate behaviors. While a bank’s regulators require a certain level of ethical standards, some organizations have taken the lead in driving an ethical approach to banking to garner consumer trust. The board should be at the forefront of these discussions, yet, incorporating an ethical approach to banking does not come with a paint-by-numbers guide. Instead, it’s driven by management, and shaped by the questions and insights boards can bring to the conversation.
Organizations often go wrong with their ethical duty not on the personal level, but due to a systemic breach, says Steve Williams, the president and co-founder of Cornerstone Advisors. “When people get caught up in something, it’s seen as normal when it shouldn’t be,” he adds. “Systemic pressure, that can happen in any place; you have to believe it can happen here, in order to protect against it.”
Board members have a limited opportunity to peer into the day-to-day of the organization and understand how it’s operating from an ethical standpoint. Combs advises directors to look for “signals,” and ask questions about the gray areas of finance and the business’s success.
“To mutually arrive at a standard, the board must set the expectations,” says Combs. “It’s up to the management to live up to those standards.”
When financial reports are produced, if results prove far better than expected or end up very true to estimates quarter after quarter, it’s important to inquire as to how the bank achieved the numbers. It doesn’t mean something has gone awry, but you should ask to ensure liberal accounting tools or untoward sales practices are not being used. Another sign? Maybe there’s a sense that employees’ engagement has dropped significantly. Boards must seek to answer why. It requires asking further questions about sales processes, deposit efforts and the management of the institution. “It’s a signal that you should look further,” adds Combs.
This doesn’t mean that the board needs a separate ethics committee to manage this process. “I believe it should be engrained in all committees,” says Williams. Ethics should be the backbone for all deliberations in the audit, governance, compensation, risk and other committees of the board, informing how members analyze, question and provide guidance.
This thread should also trickle down to how the board makes decisions and evaluates performance. Reevaluating the code of ethics, whistleblower policies and other internal documents should be conducted once a year, and should be done with some “degree of visibility,” says Williams.
What Should a Code of Ethics Address?
Sources: Office of the Comptroller of the Currency, Federal Deposit Insurance Corp.
- Prohibitions and monitoring relative to conflicts of interest, insider activities and self-dealing
- Confidentiality of bank, customer and employee information
- Maintaining accurate and reliable records
- Compliance with applicable laws and regulations
- Fair dealing, including the use of privileged information and misrepresentation of facts
- Protection and use of bank assets
- Expectations that employees, executives and directors deal honestly with the bank’s auditors, regulators and legal counsel
- Screening the backgrounds of potential employees
- Whistleblower policy, which allows employees to safely report concerns about bank practices
- Periodic ethics training
- Updating ethics policies to reflect new business activities
- Consequences that could occur if executives, employees or directors breach the code of ethics or otherwise participate illegal behaviors Process.”
When looking at these documents, hold them up to the board’s actions and performance. How did the board make decisions, based on the code of ethics? When tough issues arose, did the board make the easy decision or take a tougher route that was more in line with the code of ethics? Did the board, in its decision making, represent the bank’s core values? Consider incorporating these questions into the board’s performance evaluation. You may not have a perfect score, but regularly revisiting the board’s deliberating process will ensure that living to the bank’s values becomes second nature, says Williams.
Failing to have this ethical background can lead to a significant backlash against the company, both from a legal perspective as well as harm to its reputation. The board at Wells Fargo & Co., for instance, received significant criticism for not questioning gray areas in its results and sales processes, which led to more than $3.7 billion in fines levied by the Consumer Financial Protection Bureau. Damage to its culture and reputation promises to be longer lasting.
An emphasis on ethics should also be found in how the board evaluates management, and how management evaluates the rank-and-file. Williams says it should even bleed into how a director may compliment an executive on a social site like LinkedIn. Has the director complimented the manager based on reaching some sales target? Or does the compliment reflect that the person lived up to the ethical core of the organization? It’s often telling when ethics isn’t emphasized in what directors publicly acknowledge.
That said, it’s important for potential directors to consider avoiding certain opportunities, even if the challenge of reshaping a poorly run organization may be an initial draw. Combs says he once considered joining the board of a non-bank entity that had some questionable ethics, which had become public. At the time, he felt he could have the opportunity to change what the organization would look like moving forward.
However, he eventually passed on the role because he wouldn’t have the levers to make change from the board position. “If you like a challenge, it’s fun to do the work,” says Combs. “You have to know [the organization] is willing to do the hard work.”
The same diligence and decision making must occur when the board is presented with possibilities, some that could improve the bank’s bottom line but would be counter to the institution’s ethical framework. It’s in those moments where the decisions made by the board could determine whether the bank experiences an ethical failure down the line.
Sometimes the right decision will be the hard one, even if the easy one is technically legal.
“Regulatory compliance does not cover all our needs for ethics,” says Williams. “Be much broader and active in that reflection.”