Compliance Conference Part 1 V2 20090817

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


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


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.


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.


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.


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.”


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.


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.


“The line between good and evil

lies at the centre of every human heart”

Alexander Solzhenitzen


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)


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. ***


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.


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’


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


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


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


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


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


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


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


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


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


Ten years ago I turned my faceand it became my life

Haiku “Turning a blind eye”The consequences of following


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


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


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.


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.

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P.O. Box 327, Leichhardt NSW 2040Ph: 02 9564 0425Mobile: 0414 734 840Email: [email protected]: www.stormontconsulting.com

Thank You


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

Documents

Compliance Conference Part 1 V2 20090817