Lecture 4 Flashcards
The psychology of supervision
Stimulating compliance (= following the rules) and ethical behaviour of individuals and groups working in regulated organizations as a supervisor. By applying and enriching psychological insights.
Way of working: together with colleagues in supervision and in academia.
Difference in approach: academics vs psychologists
Many academics think that they have an important topic, they dive into the literature and write an article, they hope that the world will read it. Psychologists do it completely different. They ask what the problem is and start from there.
Regulation
Rulemaking
What is supervision?
Supervision = monitoring and enforcement
“Supervision should ensure that an institution subject to regulation follows the rules correctly and uniformly, that they adequately manage their risks and that they adhere to certain minimum standards.” - European Union Committee
“Collecting information on whether an act or matter satisfies the relevant requirements, followed by forming an opinion, and, if necessary, intervene” - Dutch Government
Why is supervision needed?
Think evil: how can you maximise your profits as a company? Some examples:
- Forming a cartel
- Ask for consent and sell their data for a lot of money
- Faking reviews
Therefore, everything is regulated.
What does the AFM do?
They ensure fair competition between businesses and protect consumer interests.
Definition unethical behaviour
Any organizational member action that violates widely accepted (societal) moral norms.
What types of behaviour do supervisory bodies discuss?
There is illegal behaviour, there is unethical behaviour and there is illegal and unethical behaviour.
As a supervisor, it is very easy to focus on the overlap, illegal behaviour that the society is angry about or finds important.
But there are also a lot of behaviours that are illegal but not unethical. Maybe not a lot of people get angry about this, but there might be a good reason for it being illegal.
People do worry a lot about unethical behaviour, even if it’s legal. Sometimes something is not regulated, and thus not illegal, but very immoral. A lot of scandals are because of unethical behaviour. You need a moral compass to do the right thing.
Supervisory bodies don’t only want to discuss illegal but also unethical behaviour.
What does Sparrow (2000) say to supervisors?
You are too scared, you only focus on the illegal stuff, but please focus on the important stuff. Focus on the unethical stuff too. Pick important problems, fix them, and tell everyone about it!
Supervisory bodies are then also trusted by the general public, because you actually want to trust the food you eat.
Supervision from a legal and economic perspective
Rules and regulation => organization (a black box of human behaviour) => outcomes
Assumption: Rules and sanctions (e.g., fines) are known to all concerned and automatically steers human behaviour in the right direction.
Rules and regulation are in place and known to everyone. The organization deals with the rules and regulation in a black box. And thus the outcomes will automatically be in line with the rules and regulations.
Supervisors will put their focus on the outcomes of the organisation. They will look at these outcomes and check whether they are in line with the legal requirements. They will find the companies that don’t align and/or who don’t comply, give them a large monetary fine. They then hope that the other organizations somehow read about the fine and be deterred from engaging in that same behaviour.
However, those legal enforcement trajectories of finding take years and years. Furthermore, many other organizations don’t even read about the fine, or they don’t identify with that organization and therefore won’t look at if their own company complies with the rules. The fine of the other company does not really impact them.
The law is the most important in steering human behaviour in society, they’re the rules we all agree on. But it can never capture everything (e.g., unethical behaviour).
The supervisors only look at the outcomes, not the rules and regulation or the organization.
Supervision from a psychological perspective
Supervisors advocate to really understand human behaviour in the organisations that are under supervision. And how they are stimulated or not to comply with the law and behave ethically. They are going to open the black box. They also look at themselves, supervisory behaviours.
Inside the black box: for example look at leadership, how employees are managed. How the culture is in the organization. How they structure the culture, for example their reward structures (ethical or not).
Thus, behaviour and culture supervision (psychological perspective), looks at supervisory behaviour, organizational behaviour and the outcomes.
It’s not always easy to follow the rules, there are a lot of rules and sometimes are contradictory. Therefore you cannot even assume that everybody knows the law, that they want to comply with the law, or that they can comply with the law. Sometimes, the way they are incentivised steers them in a totally different direction.
Supervisory behaviours
How supervisors in supervisory organizations behave towards the CEOs of the organizations they supervise, how they communicate with them, what they focus on and what they expect from them.
What power do supervisors have?
They have a lot of power, not only to impose a penalty/fine, but they can also revoke the license to operate.
- E.g., when there is real misconduct in a bank, the AFM can retract their licence to be a financial organisation. They can also fire the CEO or the whole board. They have real power.
Regulatory pyramid
From bottom to top:
- Convince, instruct or advise
- Collaborate to influence prevailing norms
- Give warning
- Impose penalty
- Revoke license
The first three are promoting willingness, the last two are connected to law enforcement.
Emphasizes the importance of starting with less intrusive interventions and escalating only if these measures fail
- Base: persuasion
- Middle: deterrence (afschrikken)
- Top: punishment
What kind of warnings can supervisors give according to the regulatory pyramid?
A formal warning: an official letter stating the consequences when they don’t comply.
An informal warning: a call asking whether they knew about it.
Collaborate to influence prevailing norms
Second step of the regulatory pyramid.
For example a dialogue with the board of directors or the supervisory board.
Convince, instruct or give advice
First step of the regulatory pyramid.
They can also educate, make the knowledge more comprehensible for the organizations. It is a really good thing when supervisory bodies make it really easy and understandable for firms what they have to comply with. This way they cannot state it is too difficult.
What is culture?
Culture is the pattern of artifacts, norms, values, and basic assumptions which describes how the organization solves problems and teaches newcomers how to behave.
“The way we do things around here.”
People wear similar things and do similar things. They look around at the behaviour and adjust themselves in order to fit in.
What is a healthy organization culture predictive of?
- Financial performance of the organization
o Financial organizations need to perform in a stable manner - Organizational effectiveness
- Employee well-being
- Ethical behaviour
- Compliance
- Learning
- Innovation
- Quality of service to customers
True or false: a healthy organization culture is less important than formal control
False.
A healthy organization culture is more important than formal culture (e.g., systems, procedures, structure, and strategy).
Saying: “Culture eats structure for breakfast”.
Who do employees look at to infer the culture of an organization?
Employees look at each other, but more importantly, they look up to their supervisors and boss. They want to perform well so they look at them.
Bad apples or corrupting barrels? Preventing traders’ misconduct
Example of viewing misconduct in organizations:
Kweku Adoboli, the British trader who was fired and convicted in 2012 for losing $2.3bn of the Swiss bank UBS. Adoboli spent nearly four years in prison for exceeding his risk limits and hiding this by booking fictitious hedging trades. For years, using these methods, he made millions for the bank. In 2010, he was promoted as the Director and was awarded a ￡250.000 bonus (which he never received), on top of his ￡110.000 salary.
Adoboli’s co-worker: “Kweku Adoboli was the man to turn to if you had screwed up. He would fix it for you. We didn’t know how he did it, but we didn’t want to know.”
Adoboli: “Others did in fact know, and actively encouraged it”
Would you be satisfied as the responsible supervisor?
No, he probably wasn’t the only one. He’s probably part of a bigger problem and that problem isn’t fixed yet.
They need to evaluate the culture and investigate their personnel.
The bank itself is probably really happy because it is easy damage control.
Corrupting barrel approach
One bad apple is often part of a bigger problem (e.g., the social system, the culture).
You always have to know whether it was indeed just one bad apple, but oftentimes there were bystanders that let it happen. Therefore you often have to dive into the barrel as well, and into the climate of the organisation.
Social psychological root causes of misconduct in teams
Task
Relationships
Climate
How can tasks in teams lead to misconduct?
Ineffective error approach
- Denial
- Empathy
- Blame & punishment
- (learning = effective)
Errors are unintentional errors. Only when people feel psychologically safe to share their errors, you can learn from each other. But when people are making an unintentional error, and they feel dumb and like they will never get an important project again if they tell about it, people will be really careful to never be vulnerable. Then they will not share with each other and therefore not learn. This is an ineffective error approach.
This is a warning sign for misconduct.
What is a root cause for misconduct that can occur at the level of relationships in a team?
Outcome inequality
- Perceived injustice, envy
When there are a lot of differences in outcomes individual team member receive. For example, one gets a very high bonus while someone else doesn’t. When there are a lot of feelings of injustice or envy, you have to be very careful. According to this article that is a red flag, just like when there is an ineffective error approach.
How can the climate lead to misconduct?
Moral climate
- Neglect
- Inaction
- Justification
In a climate of moral neglect, the moral issues are just not dealt with. The basic thinking is wondering whether something is legal, and if it’s legal we do it, which is moral neglect.
In a climate of moral justification, they justify their actions by saying “we have to behave like this because otherwise we would go bankrupt”.
Error
Unintended deviations from plans, goals or feedback processing, as well as incorrect actions resulting from lack of knowledge.
Errors are unintentional.
When does error management culture exist?
When employees dare to admit to their errors and active communication takes place about errors.
Error management culture
Errors are detected, analyzed and corrected quickly, and knowledge is actively shared within the organization with a focus on learning from errors.
When there is a higher error management culture, there is on average less misconduct.
What is error management culture related to?
- The direct manager
- Tone at the top
- Learning in an organization
Mediation model
Error management culture is a mediator between the tone at the top and the direct manager, and learning.
- The tone at the top, as well as the direct manager have a direct effect on learning.
- The tone at the top and the direct manager also have an indirect effect on learning through error management culture.
What can you use to build an error management culture?
The LEARN framework.
The LEARN framework
Let the board take ownership
Engage employees
Align structure and culture
Refocus from person to system
Narrate the best examples
The L of the LEARN framework
Let the board take ownership
Top management plays an important role in forming and shaping the culture of an organisation. Hence, effectively building an error management culture starts with the board taking ownership.
The E of the LEARN framework
Engage the employees
Don’t just decide what they have to do differently but ask them, because employees often know best what can be improved.
The R of the LEARN framework
Very important one
Corresponds with looking at the barrel.
When an error is made, you can focus on the person and see that person as a bad apple. But you can also look at the broader system in which the employee operates, and see if there are system wide problems. Then you can prevent the next employee from making the same error.
- E.g., an employee forgets his laptop in the train. You can get mad at the employee or think “oh well, this person is really not knowledgeable about all the things that can occur in case of a data leak. Maybe nobody ever discussed this with the employee or the laptops are not safe.
The N of the LEARN framework
Narrate the best examples.
What often happens is that they take the bad examples of the errors and communicate only about the errors, but this only makes it heavier.
You can also narrate the good examples in a way in which the team learned about the error, dealt with the instance and how it’s better now. In this narrative you focus on improving.
Twin peaks model
Jointly DNB and AFM supervise the entire market.
DNB supervision
Prudential supervision.
They economically examine whether a financial organization is stable.
Covers banks, insurers and pension-funds.
AFM supervision
Conduct supervision
Conduct = behaviour
- For example, behaviour towards customers. So, they supervise how organizations behave towards customers in all kinds of ways.
Covers banks, insurers, pension-funds, stock market, financial advisors and the accountancy sector.
AFM
Mission: The AFM is committed to promoting fair and transparent financial markets. As an independent market conduct authority, we contribute to sustainable financial well-being in the Netherlands.
The transparency of a company is important, without this the consumers can’t make an informed decision.
Financial products …
… are very complex
- It’s very difficult to comprehend some financial products.
… are intangible
- You can’t touch them and you don’t know if they have a good impact.
… have a big impact
… have a low buying frequency
- Because you don’t buy it frequently, you don’t have a lot of opportunities to learn.
… have a long incubation time
- E.g., if you have a funeral insurance, you will never know if it works out the way you want to.
… have systemic effects
- E.g., if a bank goes bankrupt this has an effect on other banks because they are related.
True or false: consumers often see the differences between good and bad products and services.
False.
Consumers often don’t see the differences between good and bad products and services.
Reputation & learning effects don’t work very well.
Wells Fargo example
“Wells Fargo’s pressure-cooker sales culture comes at a cost. One former branch manager discover(ed) that employees had talked a homeless woman into opening six checking and savings accounts with fees totaling 39 dollars a month. ‘I’m not aware of any overbearing sales culture’ chief financial officer Timothy Sloan said in an interview.”
Why is financial supervision important?
Because customers do not always easily understand whether products are good or bad due to the complexity of financial products.
Furthermore, financial institutions have not always acted in the best interest of their customers (nor society as a whole).
The goal of supervision is to ensure that financial institutions really behave in the best interest of their customers.
Prevention is better than a cure.
Culture in financial services
“Culture in financial services is widely accepted as a key root cause of the major conduct failings that have occurred within the industry in recent history, causing harm to both consumers and markets.”
Core elements that predict (non-)compliance and (un)ethical behaviour in organizations
- Ethical leadership! Tone at the top!
- Error management culture
- Psychological safety
- Responsible rewards and recognition
- Balanced decision making
- Low instrumental climate
Study on how executive boards set the stage for unethical behaviour in the financial sector
Large scale study in which they examined how employees viewed the board of directors being focused on commercial interests and consumers’ interests and whether they thought that the board received fare pay in comparison to their own pay.
They assessed the instrumental work climate.
Furthermore, they assessed how many incidents those employees personally observed in the last year of unethical behaviour towards their own organization (e.g., fake calling in sick) and towards customers (e.g., painting a rosy picture towards a customer of a mortgage while there is some small writing).
Results and hypothesized model from the study on how executive boards set the stage for unethical behaviour in the financial sector
- The perceived board’s commercial focus was the most important predictor of the perceived instrumental work climate.
- The perceived unjustified board pay is another predictor of perceived instrumental climate.
- Perceived instrumental work climate is positively related to more unethical behaviour towards their own organization and unethical behaviour towards customers.
- Perceived board’s focus on consumers’ interests, was negatively related to the perceived instrumental work climate, unethical behaivour towards their own organization and unethical behaviour towards consumers.
How do executive boards set the stage for unethical behaviour in the financial sector with their behaviour regarding board pay, commercial interests and consumers’ interests?
Their behaviour can trickle down in the organization, via a more instrumental climate and set the stage for (un)ethical behavior in the financial sector.
Who is important to influence as a supervisor?
The tone at the top!
The board of directors and the supervisory board.
