A friend of mine recently mentioned how we’ve moved from a front-porch society to a back-deck culture. Where people once shared and related with neighbors as a course of life, interactions have become less common and more intentional. As a result, communities have fewer opportunities to influence moral standards through gentle corrections and role models.
As I study the financial crisis, and the hubris of the housing bubble, I often wonder why it was so easy for an industry of bankers and mortgage brokers to cast common sense aside. Greed is easy to understand. Destructive greed, however, is concerning. And it should be. For answers, I turn to academics and business people to understand the psychology and the reality of how good people make poor decisions.
Allan D. Grody, president of Financial InterGroup Holdings Ltd., has over four decades of experience in financial services spanning from global brands to start-ups. In his recent article for American Banker entitled, How to Risk-Adjust the Culture of Global Finance, Grody shared his own experience and observations of how small, internal communities foster values. In fact, this line stopped me in my tracks:
Globalization removed the intimacy in which culture is best transmitted.”
The more I thought it about it, the more it became clear that he’s right. Culture is most effectively cultivated in highly connected and trusting groups. Large companies with large distances between employees and company leadership risk deterioration of values and ethical standards.
Dan Ariely, a behavioral economist and author of the book The Honest Truth about Dishonesty, studied how our peers shape our assessment of right and wrong, which he says is distinct from legality.
We know what the laws are in principle, but what really shapes our decisions is what we see around us.
It’s an infection. If everyone around us is cheating, then we’re going to cheat.
Ariely’s research also confirms that distance matters when it comes to financial decisions. Each step that separates a person from money deteriorates honesty, whether it is credit cards, stock options, or collateralized debt obligations. According to Ariely,
These extra steps allow us to avoid seeing the consequence of our actions.
As a behavioral economist, Ariely studies how emotions affect decision-making. Increasingly, however, his research seeks to understand how communities or more specifically, peer pressure, influence moral standards.
Our peers shape our understanding of what is ok and not ok, which is distinct from what is legal and not legal.”
These insights from Ariely illustrate how his academic research dovetails with my observations during the financial crisis and with Grody’s extensive business experience.
In his article, Grody reflected on the culture of investment banks before they became global and while they were still privately held.
There was a feeling of closeness in professional firms back then – a sense of intimacy felt both culturally and physically. The personal mentoring was easier in this environment. Culture was transmitted almost effortlessly. In seeing a transgression, it could easily be remedied.”
The thing that impressed me most about Grody’s insights is precisely his decades of context, his knowledge of the financial services industry’s evolution, and his personal leadership experience. I recommend reading the article in its entirety and highlighted five additional observations, below.
Insights on corporate culture and changes in the financial industry– from Allan D. Grody
1) Culture is a product of shared beliefs that gets played out every day in one’s life, whether privately or professionally. The optimal state of a culture is to be common in both of those lives.
2) What skews culture in the financial industry is a widely held belief that winning is all that matters.
3) Globalization removed the intimacy in which culture is best transmitted.
4) Partners taking their own capital out of the business through public sale of its shares removed the tie to their best risk control.
5) The final nail in the coffin was the anonymity permitted by the evolving technological complexity, black box culture and pseudoscience of risk management that grew up in the now “too big to fail” giant financial institutions.
I invite your thoughts and perspectives on this subject and will respond to all comments.