A Wall Street Journal article earlier this week laid out how hard it is for banks and regulators to ensure that an “ethical culture” defines big-bank corporate decisions and incentives. As a customer of one U.S. G-SIB replete with culture, I feel a bit like an anthropologist sent to live among the natives – a recent experience with this behemoth demonstrates that cannibalism continues despite all these earnest, important efforts. A little story and its moral follow.
In December, my husband and I instructed our bank to execute a series of transactions in which appreciated shares are donated to various charities. Several of these were in the same approximate amount to different organizations. Each was ordered in writing and confirmed by writing and then again orally with the servicing broker responsible for execution. All were then to be executed well before year-end, which was two to three weeks away from the transaction orders.
But, one of these asset transfers was in fact not executed. We discovered this by finding the relevant asset still sitting in our account upon review of the January statement. The reason, we were subsequently told, is that someone somewhere at the bank saw repeated, similar transactions and decided we couldn’t have meant the last of them. It then simply was cancelled and no one told us to allow for a correction before year-end.
This error is just a screw-up, not the ethical lapse. That came when we alerted the bank about the execution lapse, noting the added tax liability now befalling us as well as the embarrassment of having failed to honor one of our charitable commitments. The bank’s response: make the contribution in January, but file your 2014 taxes as if you had made the contribution in time. No worry, said they, the bank would give us a letter telling the IRS we had meant to be good.
The sums involved are not large, especially to this G-SIB. The problem even in these hard times for the largest banks is not the cost of making us whole for their execution lapse. It is, I would guess, that the manager of this operation buried deep in the bank’s bowels would have to confess these failings and thereby risk a black mark on the performance report that drives his compensation. Facing a choice between seeing if a customer could be suckered into a misdeed for which only the customer could be held liable or correcting the error – fully acknowledged by all at the bank as its own – the bank is hanging us out to dry.
Recognizing that telling fibs to the IRS is ill-advised, we declined the bank’s suggested remedy. As a result, a decision about correcting this error and compensating us for it is wending its way through the bank’s corridors. When last we heard, it was at the “highest levels” – meaning that mid-level cultural incentives are insufficient to ensure a correction.
The moral of this story is that incentives will always trump culture. Bankers do not get into this line of work because they’re born philanthropists. They do it because they like and want money. That’s fine – economic functioning critically depends on folks who want to think about finance and make money for themselves as they fire up an essential engine of growth and community empowerment. And, because abstract thinking about growth and empowerment can all too easily be put aside when real-world questions like take-home pay come up, the new emphasis also on ensuring an ethical culture has rightly become a regulatory and corporate priority.
For the ethical-culture thing to work, it needs to go beyond fine words to restructure incentive compensation. Much here is being done on the trading floor and in senior suites to realign compensation consistently with change-in-culture pronouncements. However, ethical challenges occur throughout a company, as my little tale of woe demonstrates. Thus, throughout the bank, compensation must also be aligned with culture and reward error correction in concert with punishing miscreants. Management also needs to ensure that incentives demand that solutions are developed with the customer’s, not just the bank’s, interest kept fully in mind.