Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
    • Moody's - Climate Risk Insurers series
    • Webinars
    • Podcasts
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive
Quick links:
  • Home
  • The Actuary Issues
  • April 2017
04

When culture goes wrong

Open-access content Monday 3rd April 2017 — updated 5.50pm, Wednesday 29th April 2020

In the second of his short series of articles to demonstrate risk management in practice, Paul Harwood explains what we can learn from financial scandals of the past

2


In 2012, Forbes magazine reported that Wells Fargo cross-sold better than any other similar institution. But in 2016, 5,300 Wells Fargo employees were fired because they established over two million phony accounts. Staff routinely did this, with or without informing customers, to benefit from sales incentives.

The amounts lost by customers (sometimes money was borrowed and returned once the incentive was triggered) tended to be small. At inception, these were victimless, or at least victim-light, actions. Their commission might be explained as 'normalisation of deviance', the repeated tolerance of activity at the margin of acceptability, while the wider impact is lost. This erosion happens while those involved are convinced of their personal probity. They believe that their behaviour is proper, rigorous and right.

Normalisation of deviance was cited by sociologist Diane Vaughan in her investigation of the decision to launch the fatal Challenger shuttle mission. She found engineers were not 'amoral calculators', but '…quite moral and rule abiding as they calculated risk'. Through normalisation, they had systematically deluded themselves: 'they redefined evidence that deviated from the standard so that it became the standard'.

The result is that good people engage in wrong-but-accepted activities, which appear to be victimless, at least initially. JK Galbraith's description of embezzlement fits: "Weeks, months, or years elapse between the commission of the crime and its discovery. This is the period… when the embezzler has their gain and the embezzled feels no loss. There is a net increase in psychic wealth." For Wells Fargo, this was embezzlement of information. While no-one knew, there was no pain.


A new 'normal'

Invoking relative standards is part of normalisation. 'It's what everyone was doing'. In retrospect, we are unsympathetic to these arguments, especially when behaviour contrasts with mission statements. In these circumstances, professionalism and a commitment to the public interest come into its own. The problem at the time is whether there has been a real change ('things are different now') or simply a convenient perception of one. That's a hard call to make without an ethical touchstone. With one, it becomes straightforward, but no less commercially difficult to communicate.

Wells Fargo would have been better incentivising the reporting of unethical practices. Why don't firms get serious about encouraging such debates? They would provide a continual, robust tyre-kicking of the ethics of business practices and models. Firms repeatedly assert that their people are their single greatest asset. Listening to them should be important.

Is it too expensive? Hardly. Look at how much Wells Fargo lost. Maybe it is too messy to have to deal with employees who have higher ethical standards than their firms. Aren't these the best people to listen to though? If there are too many of them, that in itself is a strong signal. 

Maybe it's a definition problem. One man's unease is another's approach to achieving a goal. Discussing this across and up and down a firm provides a proper debate about risk tolerances and forces an openness about business activity that might otherwise not happen. It is true engagement.


A problem for the future

Wells Fargo's own published statements about culture were gold-plated and best practice. Too often, those responsible for governance relied on documentation without testing its veracity. Non-executives are reluctant to interfere with management. But then the documentation presented is all there is. By definition, there is no effective challenge. In which case, how can non-execs provide any comfort? 

Firms issue their mission statements with the full support of their boards. Employees, sometimes quite senior, accept that these statements can be close to meaningless. Meaningless but unchallenged? This feels like the first step to deviance normalisation. If the most widely publicised statement lacks integrity, what cultural message does that send?

There have been too many financial services scandals where the steady erosion of standards has masked an expensive future problem. The resulting widespread loss of trust will take decades to restore. A robust commitment to professionalism, to integrity and to considering the absolute, not relative, ethics of commercial activity is essential to re-build the reputation of the sector. The actuarial profession has well established structures in its approach to professionalism. As a thought experiment, perhaps as a profession, and to test these structures, it's worth considering how we might have intervened to prevent some of the recent problems.


This article appeared in our April 2017 issue of The Actuary.
Click here to view this issue
Filed in
04
Topics
Regulation Standards

You might also like...

Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Life Actuarial Trainee

England
Up to £55000.00 per annum
Reference
145815

Catastrophe Manager - Top Performing Syndicate

England, London
£70000 - £94000 per annum
Reference
145814

Senior Pricing Analyst

London, England
£40000 - £80000 per annum
Reference
145813
See all jobs »
 
 

Today's top reads

 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2023 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited. All rights reserved. Reproduction of any part is not allowed without written permission.

Redactive Media Group Ltd, 71-75 Shelton Street, London WC2H 9JQ