‘Codes of Conduct’ – Marketing documents that continually fail investors – 27 May 2015

Why is it that Codes of Conduct, so well written and presented, do not serve their primary purpose of protecting investors or getting employees to act with integrity? Answer? Culture.

$251 billion in fines and counting…

I am not the first to write about the subject of greed or poor ethical behaviour, nor will I be the last.

But I am at a loss to understand why clients continually give their business to firms like JPMorgan Chase, HSBC, Bank of America, Barclay’s, RBS, UBS and Citi etc.  The same can be asked about why individuals (including myself), continue to bank or seek advice from the likes of Macquarie, CBA or NAB after their recent indiscretions here in Australia.

I am also at a loss to understand why highly paid executives, who come from good homes, understand the value of hard work and have excellent qualifications, continue to resort to behaviour that is morally suspect and in some cases criminal, in the chase for an extra dollar.

As perplexing, I completely fail to understand why the shareholders of these companies continue to provide them with capital, whilst also continuing to support the leadership teams that run them.  Is an investment in a thermal coal mine really worse than an investment in a financial institution that seems to systematically take advantage of their clients (who are everyday people)?

I just don’t get it, but I have attempted to answer these questions from a clients perspective.

  1. Greed: ‘I have to stay part of (provide capital to) my Swiss Bank or Wall Street firm because even with their warts, they will still make me money’.
  2. Fear:  ‘I don’t want to miss out on the deal flow’.
  3. Choice: ‘They all stink – so I chose the least stinky’.
  4. Apathy: ‘This behaviour won’t affect me, and I can’t be bothered with the paperwork to change’.
  5. But: ‘I read about all these behaviours but I really like the guy/gal I deal with’.
  6. Bailed: ‘No matter how bad things get, the regulators will bail me out.’

No doubt, a well trained psychologist would provide more relevant answers.  But before going on, I think it important to first understand what these ‘venerable’ companies have to say about ethical conduct and integrity, as laid out in their Codes of Conduct.

Code of Conduct Excerpts

From Jamie Dimond at JPMorgan Chase & CoIntegrity, It starts with You

  • Acting with integrity every single day is essential to protecting our firm’s reputation.
  • Each of us has a responsibility to always do the right thing for our customers, our shareholders, our communities and our industry.
  • No one at JPMorgan Chase should ever sacrifice their integrity for personal gain or a perceived business benefit.

From Sergio P. Ermotti at UBSCode of Business Conduct and Ethics of UBS

  • The principles and standards set out in the Code should (umm, don’t you mean “does”???) characterise all our business activities and all our dealings with our stakeholders, including clients, colleagues, shareholders, regulators (one of the regulators best customers – see below!) and business partners.
  • We aim  to deliver sustainable performance by working continuously to strengthen our reputation, as a rock-solid firm and provide consistent returns to our shareholders.
  • We demonstrate an unrivalled client focus at every level of our business, building relationships that create long-term value, focusing on investment returns and anticipating and managing conflicts of interest.

From Michael Corbat at CitigroupCode of Conduct

  • Treating our customers fairly and in a non-discriminatory manner is deeply rooted in our core principle of responsible finance.
  • We must fulfil this commitment by listening to our customers, understanding their needs and offering appropriate solutions so we can continue to earn what matters most – their trust.
  • We must put Citi’s long-term interests ahead of short-term gains and provide superior results for our stakeholders.
  • We must never compromise that integrity, either for personal benefit or for Citi’s purported benefit.

From Brian Moynihan at Bank of AmericaCode of Conduct

  • The Code of Conduct is based on our company’s values. It translates our values into the actions we should take as we compete in the marketplace and engage with customers, clients, shareholders, vendors and each other.
  • You should not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of facts or any other unfair-dealing practice.
  • As we work with our customers and clients to achieve their financial goals, it is important that we do business the right way — with honesty, integrity and fairness.

Based on the above Codes of Conduct, it is hard to work out where these firms are going wrong. That is, if every leader and employee just did what was laid out in their Codes, their reputations as venerable institutions would be well deserved.

But as a winning team will always say to a losing team when they might be getting a little bit lippy, “look at the scoreboard [%$#$%]”.

Some recent scoreboard highlights

Compare and contrast the examples below with the statements made in the Codes of Conduct above (and no, this is not an exam).

May 2015 – Six Global Banks fined $6bn for manipulating fx rates: Who?  Citigroup, Bank of America, UBS, JPMorgan, Barclays and Royal Bank of Scotland. What did they do?  “Brazenly cheating their clients to boost their own profits using invitation-only chatrooms and coded language to coordinate their trades.  UBS, which avoided a guilty plea over the forex debacle, pleaded guilty instead to one count of wire fraud and will pay a $US203 million fine for its role in rigging Libor after its involvement in the forex scandal breached an earlier DOJ agreement.”

October 2014 – RBS blows whistle on Swiss franc bank cartel: Who? Royal Bank of Scotland, JPMorgan, UBS and Credit Suisse.  What did they do? “The four banks were found to have colluded to set interest rate derivatives, which are used by investors and businesses to hedge against rate changes, while RBS and JPMorgan were fined over the Swiss franc Libor benchmark, which carried a much bigger penalty.”

August 2014: Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading up to and During the Financial Crisis Who? Bank of America, plus its subsidiaries in Countrywide and Merrill Lynch.  What did they do? “It sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitised loans. When the RMBS collapsed, investors, including federally insured financial institutions, suffered billions of dollars in losses. The bank has also conceded that it originated risky mortgage loans and made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).”  “In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together, and sold them off in securities – even when the bank knew a substantial number of those loans were defective,”

April 2014 – Deutsche Bank hit with largest Libor fine in history: Who? Deutsche Bank (as well as UBS).  What did they do? “Traders in London, Tokyo, New York and Frankfurt manipulated Libor, London’s benchmark for interbank borrowing, and its European and Japanese equivalents.”

November 2013 – JPMorgan Chase agrees record $13bn settlement charges over toxic mortgages. Who? JPMorgan Chase.  What did they do? “It made serious misrepresentations to the public – including to investors – about numerous transactions relating to residential mortgage-backed securities.”

Same names, same behaviours, same leadership, same shareholders. What gives?

It should be noted that the vast majority of employees who work at these organisation are honest, do act with integrity and are as angry as the rest of us for these wrongdoings.  They are proud of the firms that they work for and do take these events personally – I know this for a fact, having many friends who work at such firms.

So what is going on?

Culture is hard to change is what is going on.  As Clayton Christensen states in his best selling business book ‘The Innovator’s Dilemma’, “three classes of factors affect what an organisation can and cannot do: its resources, its processes and its values.”

To summarise, (and this book was written about why large companies continuously fail to profit from disruptive innovation) ,

  • “Once members of an organisation begin to adopt ways of working and criteria for making decisions by assumption, rather than by conscious decision, then those processes and values come to constitute the organisations culture. “
  • “When the capabilities have come to reside in processes and values and especially when they have become embedded in culture, change can become extraordinarily difficult.”

This explains why the same names continue to be mentioned in scandal after scandal – they don’t know how to behave any differently, so it would seem – that is, these behaviours are embedded in their cultures, which are most inimical to change!

On Australia Story this week, LT GEN David Morrison, who was charged with overseeing cultural change in the Australian Army in light of continued discrimination against women said, “How do you move a culture? You can either move it at glacial speed over generations, or you can move it through a series of shocks that step things forward more dramatically.”

Time will tell whether the banks are moving at a glacial speed toward change or not – it could be argued that coping $251bn in fines, would provide ample ammunition for the leadership teams to make sweeping changes, and fast.  At time of writing this blog, I note that ASIC is featured in an AFR article “tell(ing) investment banks corporate culture shift ‘needs to happen now’.”  According to the article, “KMPG has found the big UK banks have paid almost 60 per cent of their profits in fines and repayments to customers“.

The CFA Institute are headed in the right direction

In recognition of the major damage (perceived and real) that the above behaviours cause our industry, the CFA Societies wants industry professionals to swear an oath. ‘”CFA Societies Australia says financial services professionals should take a “personal oath of integrity” to guard against the sorts of dubious practices that led to the financial crisis and the recent financial planning scandals. “As charter holders, we believe the way to achieve the levels of ethics and integrity that investors so rightfully deserve and expect is to ensure the individuals in our industry take a personal oath of integrity that puts investor rights front and centre of everything they do, every day.”‘

Whilst I recognise that this is a noble gesture from the CFA Institute (and it is), I don’t see how it is any different to the existing Code of Conduct statements that are embedded in each firms employment contracts; that is, even after an employee (who may be a CFA Charter Holder) signs their employment contract, some still choose to behave appallingly, or worse still, criminally.

As Plato said, ‘Good people don’t need laws to tell them to act responsibly and bad people will find a way around the laws.’

But at least they are attempting to raise the bar.

Other ideas to change behaviour and culture

My remedy to fix these constant failures that are not normally mentioned in the press include: –

  1. Hire more women in finance – the ‘alpha’ male thing does not seem to be working out so well.
  2. Delist the firms and turn them into partnerships – this will get them focused on long term term decision making.
  3. All employee holdings and trading activity to be made available each day for all to see.
  4. Break the firms up into smaller units that are easier to regulate and manage.
  5. Sales teams to report to risk managers and not to sales managers.
  6. Create a Nobel Prize for whistleblowing – let’s hero worship people who call these poor behaviours out.


And if these ideas fail, when combined with the more normal suggestions for seeking change (e.g. longer bonus vesting periods, training and development, major changes to incentives, changes to leadership and boards etc etc), then…

A public flogging in the town square is in order.

Final word

Our industry is too important to the real economy to have these scandals continue because of the actions of a few greedy, mostly male executives, overseen by a few greedy, mostly male board members.  We must restore faith through real actions, and not through Codes of Conduct that read well but that do not seem to work in delivering the right behavioural outcomes.  But whilst the leadership teams continue to remain in place that have overseen the above misdemeanours (and there are so many more), I expect to see no change any time soon.

Only in the finance world, does the coach get to keep his job no mater how badly his team plays, or how badly they behave whilst on tour.

Andrew Fairweather, Founding Partner



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