Lecture 4 - Supervisory bodies Flashcards
What is supervision?
Stimulating compliance and ethical behavior of individuals and groups working in regulated organizations as a supervisor (monitoring and enforcement)
Regulation
Rulemaking
Supervision
Monitoring and enforcement
Unethical behavior
Unethical behavior is defined as any organizatioal member action that violates widely accepted societal moral norms
Example of behavior that is illegal but not unethical
Driving the company’s car 3km/h above the legal speed
Example of behavior that is both illegal and unethical
Insider trading
- Prohibited by law
- Creates uneven playing field, leads to lack of trust
A supervisor should…
Pick important problems, fix them and tell everyone about it
Supervision from a legal and economic perspective
“Rules and sanctions are known to all concerned and steer human behavior”
They hope organizations will learn from getting a fine - they cannot always catch unethical behavior
Supervision from a behavioral perspective
Supervisory behavior (communication, focus) leads to organizational behavior (leadership, culture, organizational structure) which leads to outcome
The regulatory pyramid
Emphasizes the importance of starting with less intrusive interventions and escalating only if these measures fail
1. Base: convince, instruct and influence norms
2. Middle: deterrence (give warning)
3. Top: impose penalty, revoke license
Culture is predictive of…
Financial performance
Employee well-being
Organizational effectiveness
Ethical behavior
Learning
Quality of service to customers
Contributing factors to misconduct
- Moral climate (neglect, inaction)
- Outcome inequality (perceived injustice)
- Error approach (denial, blame)
What is an errror?
Unintended deviations from plans, goals or feedback processing, as well as incorrect resulting from lack of knowledge
Error management culture
Employees dare to admit to their errors and active communication
Error are detected, analyzed and occured quickly, and knowledge is actively shared within an organization with a focus and learning from errors
Bias in Supervision & Stephen Greenspan’s Loss in the Madoff Affair
Bias in supervision occurs when decisions are influenced by personal feelings rather than objective criteria, often due to groupthink or misplaced trust.
Stephen Greenspan, despite his financial knowledge, lost money in Bernie Madoff’s Ponzi scheme. Madoff’s promises of high returns, combined with Greenspan’s trust in authority, led to poor judgment and financial loss.
Regulatory decision making bias
Individuals fail to critically assess risks due to emotional biases, trust, and social influence
DNB - Prudential supervision
DNB is responsible for ensuring the solidity of financial institutions.
DNB supervises financial entities like banks, insurance companies, etc.
DNB focuses on protecting the financial stability of individual institutions and minimizing the risk of failure
AFM - conduct supervision
Conduct and information supervision
AFM ensures that financial markets function fairly and transparently
Regulates behavior of financial firms making sure they act in the best interests of their consumers
Wells Fargo - a non-Dutch example
- In 2016 it was revealed that employees at Wells Fargo had opened millions of unauthorized bank accounts in customers’ names without their consent
- This was done to meet aggressive sales targets set by the bank’s management resulting in inflated performance metrics
- Example of conduct supervision failure: involved unethical behavior of the bank’s employees which led to financial penalties
Financial products are…
Complex
Intangible
Big impact
Low buying frequency
Long incubation time
- Consumers often don’t see the differences between good and bad products and services
Take home messages
- Financial insitutions have not always acted in the best interest of their consumers
- Financial products are complex products - customers do not readily understand whether products are good or bad
- Financial supervision is important
Culture as a rootcause of harmful behavior
Culture in financial services is widely accepted as a key root cause of the major conduct failings that have occured within the industry causing harm to both consumers and markets
Core elements that predict compliance and ethical behavior in organisations
Error management
Psychological safety
Responsible rewards and recognition
Balanced decision making
Low instrumental climate
Ethical leadership - tone at the top!
What factors influence unethical behavior in the hypothesized model?
Perceptions of the board’s commercial focus.
Perceptions of the board’s focus on consumers’ interests.
Perceptions of unjustified board pay.
Tone at the top
- Board members’ behavior sets the tone for ethical and unethical behavior throughout the organization, especially in the financial sector
- Supervision should prioritize infuencing the board of directors and supervisory board to establish the right ‘tone at the top’
