Risk professionals are called upon to monitor, measure, and manage risk throughout corporations. It’s all too easy to get caught in the thicket of regulations, methodology, and topical issues. Thank heavens that that, every once in a while, the Global Association of Risk Professionals (GARP) encourages its membership to look at the bigger picture: ethics. A panel of four specialists convened to discuss various aspects of ethics in risk management in a webinar on June 21, 2012.

When it comes to doing the right thing, it is no longer just a good conscience that should motivate someone to report unethical behaviour. “There are now substantial monetary incentives,” noted the first panellist, Peter Went, VP, Banking Risk Management Programs at GARP. He was referring to the corporate whistleblower provisions (Section 922) of the Dodd-Frank act that offer the whistleblower from ten to thirty percent of the monetary sanctions against the offending company.

Went remarked that an organization needs a universal ethical culture that goes beyond merely following the letter of the regulations. Creating a clear governance structure is essential. Went closed his remarks with optimism, pointing out that the body of professional standards continues to evolve and is indeed having an effect. For example, accounting standards were modified after 2001 to avoid future Enron debacles.

The second speaker, Hans Helbekkmo, Expert Principal, Risk Management Practice, McKinsey & Co, has spent years studying the drivers of ethical and unethical behaviour. Personnel shortcomings may be seen to fall into one or more of five categories, which Helbekkmo went on to discuss point-wise:

(1)    Lack of awareness

(2)    Ambiguous standards

(3)    Lack of ownership

(4)    Sense of entitlement

(5)    Dissatisfaction

Wrongdoing could be largely unintentional, said Helbekkmo, if there is a lack of awareness. For example, stress-testing might occur with too much optimism in selected parameters if people are unaware that it is human natures to underestimate how badly things can go wrong. Ambiguous standards can be present on a small or large scale. As an example of the small scale, Helbekkmo challenge the audience: “if there is truly a clean-desk policy in effect, why don’t we see that on every desk at quitting time?” He compared it to the “broken windows” theory in criminology, with its constant low-level visual reinforcement of the central message—it’s important to clean up small problems—to reinforce the impression that the company truly cares about the clean-desk policy.

Wrongdoing can occur because an employee has an overweening sense of entitlement. Helbekkmo referred to the “bagel experiment” carried out by “the Bagel Man Paul F.” and memorably described by Stephen J. Dubner and Steven D. Levitt in their book Freakonomics (and in a NY Times column before publication). The experiment showed how pernicious the sense of entitlement can be. Bagels were provided in coffee rooms throughout a company. Beside the tray of bagels was a coin box and a note asking people to contribute based on the honour system. The takings, Paul F. discovered, were most askew for the higher levels of management.

Helbekkmo said that a sense of a lack of ownership can lead to unethical behaviour. It’s “somebody else’s problem,” therefore an employee is less likely to speak up about perceived abuses. [In my opinion, this type of problem is exacerbated when working understaffed and to a tight deadline. I would be interested to see if researchers could link the rise of unethical behaviour to periods following the downsizing of risk management departments.]

There are four ways organizations can influence and reinforce the desired behaviour, according to Helbekkmo. He said that an understanding of risk objectives and a conviction of meeting them must permeate the organization. There should be role modelling of the expected behaviour and robust mechanisms of reinforcement. To address the lack of awareness, there should be development and training.

Helbekkmo noted the above four-pronged approach “will only reach the workforce if they are intrinsically predisposed to listen.” Employees need to feel attachment to their workplace, and sadly, attachment appears to be declining. He cited a study by Jason Jennings which showed a shocking 72 percent of the US workforce feels no attachment to their place of work.

“Financial reward and punishment is not enough,” said Helbekkmo. Appropriate tools and a supportive culture are needed, too. ª

The webinar presentation slides can be found at: http://www.garp.org/risk-news-and-resources/webcasts/on-demand-webcasts.aspx?page=1