Supervisors on Supervision

“I’ve found that once lawyers start talking about ethics per se, we lose our audience. After all, what do lawyers know about ethics? We’re not hired to be philosophers. We’re hired principally because of our knowledge of the law. Our primary functions in an organization are to identify legal risks and advise on how to minimize them (if possible). 

We as lawyers may have a monopoly on legal advice, but we do not have a monopoly on ethical advice. It would be dangerous and counterproductive if the lawyer’s monopoly on legal advice ended up shutting down other viewpoints on ethical quandaries — particularly where a diversity of viewpoints and backgrounds can lead to better and more informed decision making.”

“Although we did not know for certain what the root causes of misconduct were, we had credible suspicions — many of which were shared by others in central banks, government, academia and even the private sector — that organizational culture played a material role.

For example, an organization sends powerful messages when it promotes and fires employees. It is only natural that other employees will try to replicate behaviors leading to the former, and try to avoid behaviors leading to the latter (assuming they want to keep their jobs and do well at them). 

Compensation incentives also influence conduct by pricing certain outcomes above others. Recruiting and training offer opportunities to communicate senior leadership expectations and to reinforce the importance of seeing the ethical dimensions of business decisions. Diversity and inclusion also play a role — a big role — especially if we want to avoid groupthink and encourage employees to speak up when they see something wrong. Finally, but perhaps most elusively, the way employees treat one another in everyday workplace settings matters.”

“About [2014], the New York Fed decided to use its position, influence, and credibility to ‘shine a spotlight’ on the issue of culture. We wanted to persuade the financial services industry to pay greater attention to the group norms that affect individual behavior and to use all available tools to strengthen norms that contribute to public confidence in finance.

The Global Financial Crisis and a subsequent litany of scandals prompted our action. Although the Dodd-Frank Act and its implementing regulations did much to improve the resilience of banks and the stability of the financial system, misconduct persisted. And, in several notable examples, bankers collaborated across institutions to accomplish their goals, strongly suggesting that behavioral problems were shared across the industry, or at least across large financial institutions.

In my view, and in the view of many of my colleagues, regulation and enforcement were a necessary response to the Crisis and to subsequent misconduct. We wondered, though, whether either was completely effective at addressing the root causes of misconduct. We doubted the industry and the public could rely on laws, enforcement actions, and lawsuits alone to improve the trustworthiness of financial services.”

“Almost every lawyer has had a difficult conversation, in which a client (or, for an in-house attorney, a client representative) has asked us for a narrow, legal view. 

Although the American Bar Association advises against an attorney becoming a ‘moral advisor,’ it has also cautioned that ‘purely technical legal advice . . . can sometimes be inadequate.’ 

In my experience, a request for purely technical advice from lawyers is a frequent attribute of decisions that later attract scrutiny, regulatory or otherwise. This type of request also tends to arise where the interests of one desk or line of business may not wholly align with the broader, long-term interests of the organization — which is the in-house lawyer’s client.
Lawyers are partners in trying to achieve the goals of the organization together with the business or operational departments. They are also guardians of the firm’s reputation, objectives, and integrity — which, at times, means saying no to business partners. In my experience, in-house lawyers offer the greatest value to their clients when they embrace the partner-guardian model. Finding the right balance is, of course, the art of our profession. 

Being a partner and a guardian does not pose insurmountable conflict. Done properly and skillfully — and that is key — one role enhances the other. A lawyer becomes a trusted advisor because she is also perceived as a guardian of the organization. Her ‘blessing’ carries that much more weight and influence.”

“Reference to a code of conduct has a number of salutary features. For one thing, referring to a code of conduct when providing non-legal advice allows an attorney to stay within a legal framework. After all, the code of conduct is an internal rule and has implications under many public laws. For another, referring to the code of conduct reinforces its salience in day-to-day decisions, helping the document to obtain greater traction within the organization. This may help curb the perception of some (perhaps justified) that codes of conduct are ‘little more than worthy statements with little or no impact on behavior’. A code of conduct, of course, does not provide an answer for every ethical dilemma. A code may, for example, mandate that employees act with integrity at all times. But what does that really mean in an actual, real-life situation? The attorney can be a partner with the business line and others in reaching a decision. The attorney must also be a guardian of the firm’s integrity by raising the question if no one else has.”

“It becomes clear why laws and regulations are insufficient to address the root causes of misconduct. Laws might provide the outer guardrails for what is ok and not ok. They can make certain kinds of transactions illegal — wash sales, or trades that artificially manipulate a fair market price. Within those boundaries, however, regulated firms and individuals make judgements about what is right and not right. 

Take compensation — a feature of European banking regulation, but not a significant component of US law. It’s one thing to impose caps on bonuses, or to mandate deferrals across several years. It’s another to decide, within the legal limits, the right level of compensation to help achieve desired outcomes. Each firm needs to decide for itself how it wants to operate, what kind of culture will achieve its goals, and what kind of incentives will reinforce that culture. I don’t think laws and regulation alone can get the job done.”

“Reference to a code of conduct has a number of salutary features. For one thing, referring to a code of conduct when providing non-legal advice allows an attorney to stay within a legal framework. After all, the code of conduct is an internal rule and has implications under many public laws. 

For another, referring to the code of conduct reinforces its salience in day-to-day decisions, helping the document to obtain greater traction within the organization. This may help curb the perception of some (perhaps justified) that codes of conduct are ‘little more than worthy statements with little or no impact on behavior’. 

A code of conduct, of course, does not provide an answer for every ethical dilemma. A code may, for example, mandate that employees act with integrity at all times. But what does that really mean in an actual, real-life situation? The attorney can be a partner with the business line and others in reaching a decision. The attorney must also be a guardian of the firm’s integrity by raising the question if no one else has.”

“If avoided persistently, the ethical dimensions of problems become less recognizable. When a truly serious ethical dilemma arises, employees will have little preparation for identifying it, much less resolving it. That concern motivated the New York Fed to launch the Education and Industry Forum’s case study project. Ethics is a skill and should be a habit. Like playing the piano or hitting a curveball, it requires sustained practice to maintain any facility and acquire some degree of mastery.”