'Avoid fraud at banks: improve team atmosphere’
Unethical conduct by traders at banks is likely to be a continual problem as long as fraud cases are treated as the fault of a single rotten apple. Improving the team atmosphere reduces the likelihood of improper behaviour. This is the finding of psychologist Wieke Scholten from Leiden University in her PhD dissertation. PhD defence 29 March.
When cases of fraud are uncovered in the financial sector, the perpetrator is often painted by the bank as a rotten apple. However, according to most banks, removing these individuals does not generally resolve the problem. Scholten: ‘Drawing this conclusion means that the banks fail to look for the circumstances that have brought about this behaviour. They also ignore the question of why these fraudulent practices continue to occur at banks. As long as the 'rotten apple theory' is accepted, unethical behaviour by traders will continue to be an issue. Removing that one fraudster does not solve the problem. Team culture plays an important role in how traders behave.'
Wieke Scholten is Head of Audit Behavioural Risk at the Royal Bank of Scotland in London. Until a year ago she was superintendent of conduct and culture at the Nederlandsche Bank (DNB). Her research, supervised by Naomi Ellemers (professor at the University of Utrecht), is based on discussions and observations in the context of the DNB supervision of behaviour and culture at different Dutch and European banks. Her dissertation is studded with examples ad statements by governors, senior managers and traders at these banks.
Psychology and banks
Much is already known about behavioural patterns in teams and the associated risks. A lot can be achieved by addressing dysfunctional teams within banks as a means of reducing the risk of fraud. Addressing and modifying risky socio-psychological mechanisms in teams can help direct the ethical conduct of individual team members. Applying socio-psychological insights to the conditions that incite unethical behaviour can help us understand and improve present-day banking practices.
Two steps to combatting unethical conduct
In concrete terms, Scholten proposes mitigating the risk of unethical conduct in two steps. Banks and superintendents can use the model presented in her book to analyse possible causes of unethical behaviour at team level. Scholten: ‘Look inside “high-risk” teams at how traders and managers deal with mistakes, whether there is a climate of disapproval or inequality in reward and appreciation, and whether the team is aware of the moral implications of what they do.’ On the basis of this analysis, banks can then work to improve the team atmosphere so as to reduce the likelihood of unethical conduct on the part of individual team members in the future.
Special position of superintendents
Applying existing psychological knowledge in the context of the banking world is a new development. Supervisor Ellemers recognises the special position Scholten held: 'As a superintendent you have access to a target group that psychologists don't have contact with.' Scholten: ‘We let a bank under supervision know in advance that we would be conducting an enquiry into conduct and culture. My job was to look at how the communication went, what the climate was in terms of morals and leadership and what the risks are of behavioural patterns in teams.'
The individual in a team
Scholten stresses that causes of individual unethical behaviour can generally be found in conduct at team level. ‘Of course, an indiviual who commits fraud is guilty, but such conduct is also related to the direct environment in which he or she has worked.' It is for this reason that she tries to motivate banks to look more at teams than at individuals. 'An employee is hired by a bank and is part of a team at that bank, and in any team there are particular mechanisms at work,' Scholen as a socio-psychologist knows well. She has made extensive studies of psychological insights and applied them to banking practice. She tries to make the link between social psychology and banks, two worlds that do not share a common vocabulary.
Team atmosphere helps prevent fraud
For her research Scholte used anonymised discussions with managers and traders. 'As a superintendent of conduct and culture, you might ask traders, for example, what daily life is like in this team, how do they make decisions, how does the manager behave and what are the risks.' Scholten carried out three studies which showed that team atmosphere is a blind spot for banks in how they investigate fraud. Banks and superintendents can also be more effective in preventing unethical conduct if they study team atmosphere and make improvements. Sholten shows what the bank world is like with anonymised quotes from discussions with two major European banks. Her research has resulted in a framework tested on trading teams, which can be applied in practice. Banks and superintendents can use this framework to prevent unethical conduct.