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People Risks, Compliance Motivation and Culture
PART 1: The Problem
Keryl Egan,
Stormont Consulting
Presented at the 6th Annual Financial Services and Compliance Conference, Sydney, February 9-11, 2009
Copyright 2009 Keryl Egan and Stormont Consulting
Overview Problems in compliance motivation
Case Example: NAB Forex
Analysis: Contributions from Psychology & Sociology
Part 2: Solutions-Influencing compliance behaviours
Copyright 2009 Keryl Egan and Stormont Consulting
Overview The Problems
Behavioural risk: violating the code of conduct
Agency risk: not acting in the client’s interests
Moral hazards and fraud e.g. NAB, Barings, Société Générale, Enron
Operational, financial, legal, reputational consequences
Copyright 2009 Keryl Egan and Stormont Consulting
Overview: Problems within Problems Risk Management and Compliance Status
Regulations seen as obstacles, rather than valuable. Global Financial Crisis impact – increased external regulations
Fraud – Uncommon Limits to managerial experience of fraud and thereby development
of innovative solutions.
Behavioural Risk Observable but seldom acted upon early enough Early warning signals – bullying, harassment, deception,
misinformation, influence networks, discrimination and power plays.
Copyright 2009 Keryl Egan and Stormont Consulting
Overview: Analysis NAB and the PWC Report 2004
Individual hazards: The Integrity of people, destructive and risky behaviours
Systemic hazards: Weakness in the risk and control
framework, governance and culture.
Interactive effects between the systemic and individual factors which create conditions for non-compliance and fraud.
Copyright 2009 Keryl Egan and Stormont Consulting
Overview: Seeking SolutionsThis presentation uses: Research and theory from social psychology to understand
systemic hazards such as moral disengagement and non-compliance.
NAB Case Study to discuss integrity of people and culture from the point of view of individual agency and systemic hazards.
Part 2-Research and the new Influencer Model to introduce an organised response to behavioural and cultural risk.
Copyright 2009 Keryl Egan and Stormont Consulting
NAB Case Study: Integrity of the People and the Slippery Slope Excerpt from PWC Report 2004
“The Traders initially misstated profits and losses by‘smoothing’, but this developed into using falsetransactions to conceal significant losses. They did notbehave honestly and we can only assume that they believed they would earn enough profit in the future to recover the concealed losses.”
Copyright 2009 Keryl Egan and Stormont Consulting
NAB Case Study: The System and the Culture Excerpt from PWC Report 2004
Excessive focus on process, documentation and procedure manuals rather than on understanding the substance of issues, taking responsibility and resolving matters.
Arrogance in dealing with warning signs (i.e. APRA letters, market comments).
Management tendency to ‘pass on’, rather than assume, responsibility.
Issues not escalated to the Board and bad news suppressed.
Culture provided opportunity for the Traders to incur losses, conceal them and escape detection despite ample warning signs.
Copyright 2009 Keryl Egan and Stormont Consulting
Learning from Social Psychology: Social ModelsStanley Milgram and The Compliance Recipe
Milgram demonstrated the extreme pliability of human nature. Almost anyone could be totally obedient or almost everyone could resist authority pressures.
Want total compliance? Provide social models of compliance by having people observe peers behaving obediently.
Want people to resist authority pressures? Provide social models of people who rebelled e.g. reward rogue traders.
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“The line between good and evil
lies at the centre of every human heart”
Alexander Solzhenitzen
Copyright 2009 Keryl Egan and Stormont Consulting
Offer a cover story: a big lie that justifies any means to achieve the desirable goal you want (NAB-a “Big” personality makes a trader)
Contract or oblige them in some way to behave as you want
Give them roles that seem to live their positive values
Present basic rules to be followed that seem to make sense but then can be used to justify mindless compliance. (NAB Duffy “my way or the highway”
Make the rules vague and change them as necessary.
Reframe reality with desirable rhetoric. (NAB an the BOAT Book – “Biggest of All Time”)
How to Win Hearts and Create a Toxic Culture (Philip Zimbardo)
Copyright 2009 Keryl Egan and Stormont Consulting
How to Win Hearts and Create a Toxic Culture (Philip Zimbardo)
Diffuse responsibility for negative outcomes; others will be responsible and actor won’t be held liable.
Start the path towards ultimate crime with a small, insignificant step
Gradually increase the steps on the pathway so they are hardly noticed as different from prior actions*
Change the nature of the influence authority from initially just and reasonable to “unjust” and demanding, even irrational**.
Make the exit costs high and the process of exiting difficult. ***
Copyright 2009 Keryl Egan and Stormont Consulting
How to Morally Disengage Others (A. Bandura)
How to morally disengage people from their destructive conduct
Moral justifications and euphemistic labelling for one’s conduct
Minimising, ignoring or misconstruing the consequences (no need to tell anyone, we’ll win the money back tomorrow)
Displacing or diffusing responsibility (it’s the bank’s fault, “profit as king”)
Dehumanising the victim and attributing blame to the victim – arbitrary labelling of victims (APRA and other banks denigrated and dismissed)
Aggression rises with practice – gives a sense of power and dominance.
What began with individuals becomes a culture.
Copyright 2009 Keryl Egan and Stormont Consulting
How to Create a Mind-set for Moral Disengagement
Provide systemic pre-conditions to corrupt
Make people anonymous (usually a uniform or mask)
Dehumanise victims and dismisse authorities (contempt, abuse and arrogance)
Grant permission to control others – NAB Head trader given tacit permission, despite complaints re his bullying behaviour
Create a unique setting: high status, NAB ‘untouchables’
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Creation of a Mindset: Cognitive controls are knocked out orminimized. Suspension of conscience. self awareness, personalresponsibility, commitment, liability and morality. Power and powerlessness Dominance and submission Freedom and servitude Control and rebellion Identity and anonymity Coercive rules and restrictive roles
Central Issues in The Mindset of the Morally Disengaged
Copyright 2009 Keryl Egan and Stormont Consulting
PWC Report on NAB: Integrity of the PeopleIndividual Pathologies and Vulnerabilities
Individual pathology interacts with systemic pre-conditions to influence others
Integrity and Character
Judgment and problem-solving
Values and compliance
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Integrity of the PeopleRisk and Individual Behaviours as Warning Signals
Serial Bullying is a morally disengaged mindset Dominance and Aggression Deception and masked intent Contempt and abuse Sadistic preoccupations Development of followers and disabling of detractors Construction of influence networks and political play Strong potential for criminal activity
Copyright 2009 Keryl Egan and Stormont Consulting
Individual Pathologies and Risk Copyright 2009 Keryl Egan and Stormont Consulting
Alpha Under Pressure
Vulnerable
Insecure
Anti-social or Psychopathic
Motivation Achievement
Following orders, Survival
Praise
Recognition
Entitlement
Self-interest
Power, Money
Degree of Intentional harm
Harm accepted
in service of organizational goals
Expects resilience
& robustness
Harm to others for own psychological survival
Shame prone
Pay-back for humiliation
Planned harm others in interest of self.
Gratuitous verbal violence/ sadistic intent.
Overt and covert assault.
Response to
Effective Challenge
Anger, Anxiety
Depression
Agitation
Anxiety, rage
Defends grandiosity & ego
Tragicomic, ridiculous claims
Threatens litigation
Resists accountability
Plays the victim
Intensifies aggression
Criminality unmasked
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Integrity of the PeopleSerial Risk and the Psychopathic personality
Charming, grandiose, seductive
Clever, cunning, convincing
Self-interest always prevails, even if masked
No authentic empathy or remorse but very good imitations of these
Damage to others is intentional
Copyright 2009 Keryl Egan and Stormont Consulting
Integrity of the PeopleCovert & Overt Psychopathic Behaviours Covert psychopathic behaviour of a serial kind
Uses political influence and power play Dismantles usual checks and balances through influence, starts with
small steps e.g. Ken Lay, Jeffrey Skilling and California energy crisis Keeps the process invisible and silent Passively resists accountability
Overt type of psychopathic behaviour and bullying Corporate permissions for bullying become obvious More openly abusive, rages & manipulations (NAB and Mr. Duffy) Achieves the silence of others via observable intimidation, lies and
convincing reframes of rationale Denies responsibility
Copyright 2009 Keryl Egan and Stormont Consulting
Integrity of the People Falling for The Psychopathic Trap
DISABLEMaintains fear via isolation
Positions target as an accomplice having limited credibility
Rhetoric used to reframe realityEscalates abuse & intimidation
TRAPInfluence network
Abuse maintains complianceRewards offered for followers
Exit made difficult
SNARESeduces with charisma or promise of rewardIsolates naive target
Induces fear/excitement Subtle Manipulation
Copyright 2009 Keryl Egan and Stormont Consulting
Integrity of the People How People Respond to the Psychopathic Trap
IN TOO DEEPConfused, shamed
Fearful & powerlessLoss of agency & initiative
NO WAY OUTDefends position
Maintains loyalty to bullyStressed under-performance
Fear of Discovery and Consequence
SNAREDCompliantDependent
Subliminal fear
Copyright 2009 Keryl Egan and Stormont Consulting
Integrity of the People Why People Silently Observe or Follow
Followers: Initially seduced by the ‘charisma’ of the AlphaStar or bully Seeking recognition and power May be naïve or misinformed, set up to be vulnerable Fed a manufactured version of reframed reality and information. Affect contagion and “mobbing”.
Observers: Know what is going on and turn a blind eye Fail to speak up or challenge the wrong-doing Enable the wrong to persist
Copyright 2009 Keryl Egan and Stormont Consulting
Ten years ago I turned my faceand it became my life
Haiku “Turning a blind eye”The consequences of following
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Interaction between Individual Pathology and Systemic FailuresCopyright 2009 Keryl Egan and Stormont Consulting
Multi-Hazards create a powder-keg Governance: Lack of adequate risk controls and leadership Culture : Fear, intimidation and silent observers Individuals: Psychopathic personality steps into the leadership vacuum
Drawing from Wikipedia
Swiss Cheese Model
Copyright 2009 Keryl Egan and Stormont Consulting
The Interaction between Individual Pathology and Systemic Failures Copyright 2009 Keryl Egan and Stormont Consulting
Active failures: •Rogue traders actively deceived and hid their mistakes,•Constructed mechanisms to conceal losses, manipulated regulations
Latent conditions: •Culture not focused on responsibility, failure to communicate bad news •Failures in risk controls and governance
Swiss Cheese Model
Drawing from Wikipedia
Copyright 2009 Keryl Egan and Stormont Consulting
Compliance: A Battle for the Human Heart Non-Compliance and criminal activity results from a web of multiple causes.
The environment has been perfectly designed to produce the behaviours and eventually the breach of trust which occurred at NAB and Enron.
The solution is to actively design social and structuralfactors so that the environment is pro-social.
Part 2 will look at how to use Influencer, a Vitalsmarts methodology, to create a culture, step-by-step, that ascends into a constructive and productive whole.
Copyright 2009 Keryl Egan and Stormont Consulting
Influencer
In Part 2 of People Risks, Compliance Motivation and Culture,Influencer is applied to a hypothetical case in financial services
Influencer is a Vitalsmarts training programme. Keryl Egan is aVitalsmarts certified trainer and consultant for Crucial Conversations and Influencer.
.
Copyright 2009 Keryl Egan and Stormont Consulting
P.O. Box 327, Leichhardt NSW 2040Ph: 02 9564 0425Mobile: 0414 734 840Email: kerylegan@stormontconsulting.comWebsite: www.stormontconsulting.com
Thank You
Copyright 2009 Keryl Egan and Stormont Consulting
References
APRA, March 2004: Report into Irregular Currency Options Trading at the National Australia Bank
Calavita, K and Pontell, H: Heads I win, Tails you lose: Deregulation, Crime and Crisis in the Savings and Loan Industry 1990
Bullen, D: Fake : My Life as a Rogue Trader. Publ. by Wiley 2004
Heimer, C. “Thinking About How to Avoid Thought: Deep Norms, Shallow Rules, and the Structure of Attention” in Regulation & Governance (2008) 2, 30–47
Miller, A. The Sociology of Good and Evil A. Miller, Guildford Press, NY, 2004
Patterson K, Grenny, J, McMillan, R, Switzler,A “Crucial Conversations: Tools for Talking when Stakes are High” NY 2002
Patterson K, Grenny, J, McMillan, R, Switzler,A. “Influencer” McGraw Hill, NY 2008
Price Waterhouse Coopers. Investigation into foreign exchange losses at the National Australia Bank 12 March 2004
Sheedy, E “ Applying an Agency Framework to Operational Risk Management” CMBF Papers No.22 Applied Finance Centre, Macquarie University, August 1999
Enron: The Smartest Guys in the Room HDNet Films 2005, Dendy DVD
Steare, R “ What’s wrong with business: Integrating Profitability, Responsibility and Ethicability”® Price Waterhouse Coopers
Stevens, Glen: “Education, Integrity and Common Sense.” MAFC Issues Paper, 2003
Dianne Thompson “Accountability and Board Functionality: National Australia Bank’s Experience”. Paper for presentation at the 11th Finsia - Melbourne Centre for Financial Studies Banking and Finance Conference, “Banking and Securities Markets: Convergence, Innovation and Regulation” 2006
Zimbardo. P: “A Situationist Perspective on the Psychology of Evil: Understanding How Good People Are Transformed into Perpetrators” in A. Miller, The Social Psychology of Good and Evil. Guildford Press, NY, 2004