The Paradox of the Compliance-Performance Balance
There is an unavoidable tension in a business between maximising returns and the cost of compliance with financial standards, green goals, equity values, physical safety, safety from harassment and bullying, Treaty obligations and maintaining honesty and ethics. The state of organisational culture can encourage staff to walk this sometimes narrow path. The wrong messaging from managers can lead to deviation one way or the other, with longer-term costs, direct and indirect, to the business.
A classic case of miscommunication about this dilemma was in the venerable Wells Fargo Bank (WFB) in the USA. In 2016 the bank paid over $185m in penalties to US regulators. An audit discovered that employees opened as many as 1.5m deposit and credit accounts and half a million extra credit cards in the names of existing account holders, but without the customers' knowledge or consent. Customers learned about the accounts only after they started accumulating fees. US banks actively try and ‘cross-sell’ new bank services or products to existing customers, but with their consent. The CEO John Stumpf, in his defence, blamed the 5,300 employees who wrongfully opened such accounts and who were subsequently fired. Many, seemingly small and individual decisions, had led to major fraud.
So ... was the CEO correct to blame 5,300 ‘bad apples’? The bank had the appearance of being a ‘good barrel’. It had all the necessary compliance policies and systems in place, and publicly announced values of ‘integrity and performance’, and “We value what’s right for our customers in everything we do.” The bank was well regarded in the markets; its stock price doubled from 2010 to 2015. What made WFB a ‘bad barrel’ was an over emphasis on the performance side, and neglect, and sometimes deliberate over-ride, of the internal integrity systems. Stumpf wrote in a letter to shareholders that his goal was to have every customer holding eight bank products because “Eight rhymes with great”.
Staff had stringent quarterly sales targets with strong financial and other incentives for the ‘top performers’ and public humiliation in meetings or even dismissal for the worst. Staff were afraid. They felt they had to create the fake accounts to avoid punishment. They also felt they had to keep quiet about it and the practice was common and accepted across almost all the 7000+ bank branches. Senior management knew of the practice from 2013, but they assessed the financial risk of losing some disgruntled customers was small and so chose to accept it. Stumpf and one other senior executive eventually lost their jobs, and some of their massive retirement benefits; 5,300 junior staff lost their jobs.
Wells Fargo is a spectacular and egregious example of getting the ‘integrity and performance’ messaging and systems wrong, but every business has the same dilemma to some degree. Whatever the measures used (sales, production, etc), performance has to be weighed with integrity and compliance. Failing to maintain the balance has long term reputational and branding costs for a business, reduces staff retention, and has implications for job satisfaction and physical health costs of CEOs. At its worst it has legal risks.
Regardless of business size, navigating the integrity performance balance comes down to the psychology of multiple individual decisions by individual staff. ‘Everyone cheats a little bit’ (see Ariely for a good exposition on the psychology of dishonest behaviour). The Wells Fargo staff were each cheating a little bit, none were walking out of the bank with sacks of cash. SO how can a CEO can guide staff toward finding the balance by creating and sustaining a culture and decision architecture that minimises ‘cheating’? The following are a brief summary of the implications of social and cognitive psychology for pro-compliance behaviour in businesses.
- Walk the talk. Regardless of the number of policies and procedures in place, the strongest influence on decision-making of members of a team is what they observe the leader doing, not what the leader says or writes about.
- Talk the talk. Acknowledge and discuss integrity/compliance dilemmas when they arise. Tell your people you recognise the tension between standards and performance, and guide them on how you want them to make such decisions.
- Review your incentive system. Do you acknowledge and reward integrity in ways that have equal value to your staff? Getting an annual integrity certificate is fine but it counts for little if the person at the next work-station gets a raise for dodgy performance.
- Everyone cheats a little bit but a CEO can create nudges and systems which prompt integrity. Include measures of compliance, such as contributions to a Green bottom line, in staff evaluations and be seen to take them seriously. See that compliance roles, such as a sexual harassment coordinator, is not done on top of and existing work, but space is made for it by reducing the demand on that person in other areas. People bend the rules for immediate rewards and easily ignore long term costs to them or the company; develop a forward-looking conversation that includes the long-term costs such as loss of brand value of non-compliance.
- Promote a culture in which staff at all levels of the organisation feel free to speak up about errors, compliance corner cutting, and ‘little cheating’. Amy Edmondson gives a very good account of what is a ‘psychologically safe’ organisation and how to promote it.
- Acknowledge the uncertainty that is integral to integrity decisions with your staff. Let them see that you know what you don’t know. Ask for input on integrity questions or issues. Leader humility improves follower job attitudes, performance, and retention.
Authored by Tim Williams, one of our OD specialists.
If you would like some help with ethical behaviour in your organisation, contact Nicky at email@example.com or 03 943 2373.
Ariely, Dan ( 2012) The Honest Truth about Dishonesty.: How We Lie to Everyone - Especially Ourselves.
Amy Edmondson ted talk - psychologically safe workplace