2023 Comments, Commentary, and Conclusions | What is conduct risk?

“Throughout this report and its predecessor editions, we have seen the term ‘conduct risk’ used by regulators, policymakers, executives, lawyers, academics, and others,” London Business School Professor Tom Reader notes in an Our View article offered here, “But we don’t see the term defined with the sort of rigor that is typical of academic study or wonky policy papers.” [See the Our View Article What is Conduct Risk?] Citing vague and even conflicting efforts in this direction, Reader concludes that conduct risk appears to be one of those terms that we use on the assumption that “you know it when you see it.” This is unhelpful where we aim to facilitate the multi-party collaboration necessary to standardizing best practices in terms of governance and supervision alike.

“Research on human error has long distinguished between errors of commission (things done wrongly) and omission (things not done),” Reader observes. This calls out an important distinction between two forms of the conduct problem: misconduct and poor conduct. “Similar to errors of commission, misconduct generally refers to things done wrongly, and are deliberate actions whereby organizational members intentionally break rules or engage in malfeasance in order to meet personal goals or institutional incentives,” Reader offers. “Akin to errors of omission, poor conduct relates to things not done, and relates to failures in upholding conduct standards (rather than egregious breaking of them).”