Q: You recently wrote a paper on the various prudential approaches used to hold senior executives personally accountable for misconduct. Why is it argued that senior executives should be held personally accountable for risk management failures and misconduct that occurs far below their available visibility?
A: Post-mortem reports that typically follow material risk management failures or misconduct scandals invariably point to poor oversight by bank boards and senior management, combined with incentive structures that encouraged excessive risk-taking. These incentive structures line the pockets of those at the top who may have been the very same people who were in positions of authority when the alleged wrongdoing occurred. The traditional playbook for dealing with egregious failures in risk management or misconduct has been to levy fines on banks. But these fines are usually paid by banks’ shareholders (‘corporate expenses’). And it is much more palatable for bank boards and senior management to consent to such fines since they are not being held personally responsible for the alleged infractions. This dynamic creates a never-ending cycle where those at the top get rewarded for creating the conditions that led to the alleged misconduct, but when the corporate wrongdoing surfaces, it is banks’ shareholders that foot the bill.
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