[authors: Christian Hunt and Adam Turteltaub*]
AT: Before we get into the heart of the interview, I want to make a quick detour into your background. You spent most of your career in the financial services arena, working at UBS, Deutsche Bank, and the United Kingdom Prudential Regulation Authority, a part of the Bank of England responsible for regulating financial services. Finance tends to stay off to itself when it comes to ethics and compliance. It’s a bit of a black box to the rest of us. What do you think they do well that the rest of the industry could learn from?
CH: I’m not entirely sure what drives that “black box” perception. The ethics and compliance challenges in financial services (FS) are similar to those faced by other industries. It’s just a different context. While there are industry-specific dynamics and regulations—for example, non-FS companies aren’t required to hold “capital,” assets that ensure the firm can withstand losses—the idea of ensuring a business is ethical and compliant is the same. Although my background is in FS, I now do more work with non-FS clients!
FS has lessons for other industries in the complexity and nature of the regulatory landscape. Many of the regulations that banks have been managing for some time, such as financial crime prevention and conduct—how firms and individuals within them “conduct” themselves, in other words, their culture and behavior—are things other industries are also now having to deal with.
AT: Are there any areas, particularly on the ethics front, where they need to catch up?
CH: Yes! Part of the reason FS is so heavily regulated is the historical failings of the industry. It isn’t “safety critical” in the way that, say, transport is. But as we saw in 2008, when things go wrong in FS, it has huge societal implications. Decision-making in the industry—within regulators and firms—hasn’t always fully reflected that.
Finding examples of unethical behavior in FS is easy. Take Wells Fargo, where millions of accounts were fraudulently opened on behalf of customers without their knowledge to meet unrealistic sales targets. It illustrates how incentive programs and poor cultures within FS have led to terrible outcomes. Many people, particularly in investment banking, are also paid disproportionately—I’d argue unjustifiably—high salaries relative to the functions they fulfill and societal value they add.
At its core, banking fulfills a vital social purpose, but the industry has often strayed from that, with ethical consequences. Things are changing, but there’s still some way to go.
AT: You have embraced a behavioral science approach to ethics. Can you explain what that is for those not familiar with the term?
CH: There are many definitions of “behavioral science” (BeSci). The one I use is “the understanding of the real drivers of human decision-making.” In other words, the study of factors that lie behind human behavior, not the stories we tell ourselves and others to justify our decisions, but the real reasons.
That’s relevant to ethics and compliance because both are in the business of influencing human decision-making. Organizations can’t be ethical or compliant of their own accord; it’s the people within them who will determine whether they are. To achieve that means influencing the decision-making of the people within it.
Many of the presumptions about human decision-making that we use in designing ethics or compliance programs are, unfortunately, flawed. We need to design processes based not on how we would like people to behave but on how they are likely to behave. For that reason, BeSci is a core skill that ethics and compliance professionals need in their tool kits.
AT: Where did your passion for behavioral science, which we share, begin? For me, I think it started with a Dan Ariely TED Talk.
CH: I’ve always been interested in what makes people tick. At university, I studied literature which—when you think about it—is all about human behavior. We tend not to write novels and plays about inanimate objects; they’re all about people. That curiosity stayed with me, and I took every opportunity to learn more.
Thanks to Nudge, by Cass Sunstein and Richard Thaler, I became aware of the existence of BeSci as a field of academic research. It was when I transitioned from the regulator to UBS in risk and compliance that I realized this wasn’t just something that was of personal interest, it was the core of my job.
AT: It’s been encouraging over the last few years to see more and more compliance and ethics professionals start to embrace a behavioral approach, although I’m guessing it is still in the minority. Why do you think some continue to drag their feet?
CH: Let’s have some fun with this question and apply a behavioral lens! Here are a few reasons why some people might be reluctant to adopt BeSci.
The first is resistance to change. Some people find new ideas threatening and like to stick to what they know. They will sometimes deploy arguments—often untested—that the regulator wouldn’t approve or that they need more evidence these techniques actually work. That’s a topic we should return to in more detail!
Others rely on what I call the “Employment Contract Fallacy”—the idea that because we employ people, we can just tell them what to do, so we don’t need to think behaviorally. That’s legally correct and can be valid in some situations, but where our desired outcome has a qualitative component, or we can’t monitor what employees are doing, we need to work with them.
As for it being a minority, more practitioners are using a form of BeSci in their work than we might think. Many do so intuitively without realizing it. When I meet them, they’re delighted because I can give them a rationale for what they’re doing and help them justify and refine their existing approaches.
AT: How do you think we can build the evidence that a more behavioral approach will be a more effective one?
CH: Let me answer that with a question: How do we know that existing approaches are effective? We generally don’t. There’s a presumption that because it’s what we’ve always done or it’s what everyone else is doing, it must be effective. Yet, we know traditional approaches have their flaws. So, if we’re going to require evidence that behavioral approaches work, we should also apply those same standards to traditional approaches!
Fortunately, there’s plenty of evidence that behavioral approaches can be very effective—not just from academic research but also in other contexts. Advertisers spend billions using BeSci to influence people to buy products and services, and we can see it used by governments in compliance-like fields, from security to health campaigns. Finally, there’s a growing body of evidence that BeSci techniques do work effectively in ethics and compliance programs.
AT: Despite their progress in understanding compliance programs beyond an emphasis on culture, are you seeing prosecutors understanding the value of thinking more behaviorally?
CH: I’m coming at this with a European perspective, so this may be a case of “lost in translation.” When I read the word “prosecutor,” I see a focus on minimizing legal exposure rather than fixing underlying issues. I recognize that the consequences of prosecution are severe, but my intuition tells me it would be better to avoid that rather than have a good story to tell in court!
Regulators (as opposed to prosecutors) I speak to are increasingly recognizing the important role BeSci can play. While it may be more prevalent outside the US, I’m seeing lots of positive movement, even in jurisdictions where one might not expect it. In many countries, there’s interest in developing a “just culture” approach that promotes a collaborative relationship between regulators and regulatees. That doesn’t reduce penalties for rulebreakers, but firms are given more of an opportunity to innovate to find smarter solutions. The way to succeed in that environment is to ensure you can demonstrate your program isn’t just performative—what I refer to as “compliance theatre”—but that it actually works.
AT: I think their embrace of the value of a culture is a start, but I wonder if they are taking a wait-and-see attitude. Along those lines, one area where many compliance officers have dragged their feet is in terms of sharing internal incidents of things that have gone wrong. Many fear there is too much legal risk in sharing incidents and how they were handled. Instead, they seem to perennially wait and see. What would you tell anyone who is hesitant?
CH: The behavioral lesson here is that humans look for reciprocity. If others don’t share with us, then we won’t share with them. Industries that generally manage risk well—at least in their core activities—are those like the airlines that share information on incidents. An issue in one firm could easily arise elsewhere, particularly if they’re flying the same aircraft.
Regulators play a key role by actively encouraging firms to share incidents. That, in turn, is reflected in how firms interact with their employees. It’s something I’d like to see in other industries.
AT: Incentives are an area where I believe behavioral science could be particularly helpful. Too few incentive plans take compliance and ethics into consideration. How can we change that?
CH: Incentive plans play a huge part in influencing behavior. That’s why they exist! Behind every undesirable behavior is some form of incentive that has driven it. Perhaps a desire to inflate a bonus or simply to hit a minimum sales target to avoid losing a job. Yet, all too often, these unintended consequences—which every plan will have by default—are ignored or downplayed.
I would like to see more regulators require firms to demonstrate an understanding of where their incentive plans risk causing unintended consequences and to have plans in the palace to monitor and mitigate those risks. That is where I think BeSci could be really helpful.
AT: What is some of the language we should be trying to incorporate?
CH: We should start from the principle that most employees are showing up to work with a desire to do the right thing. Our frameworks and language need to reflect that and actively support them in doing so. Meanwhile, bad actors—who, let’s not forget, won’t pay attention to training or comms—need to be deterred or caught by other means. Yet, often, we forget this and treat all employees as if they are potential criminals. To come back to reciprocity, this impacts the way they respond to us.
We must also recognize that noncompliance can result from good people having ethical lapses or blind spots. We need to help them not to have those!
AT: Switching gears a bit, can a behavioral approach work globally? Cultures vary widely globally. Can you take one approach, or do you need to customize it?
CH: There’s a lot we can do globally. But we must also recognize where that isn’t the case and adjust accordingly. Head office decrees often don’t respect the cultural realities on the ground in other locations, even within the same country! I rather like the idea of “think global, act local.” In other words, have global principles and policies but also recognize that we must tailor things.
AT: All these efforts take place in a very changing work environment. While we have seen some organizations start moving back to in-person work, a huge portion of the workforce is likely to be working mostly or completely at home indefinitely. How do we create a culture with people sitting in their spare bedrooms? I sometimes worry that we have been overly reliant on legacy culture, or am I being too pessimistic?
CH: We know from BeSci that a major driver of human decision-making is the environment, and intuitively that the way we behave in one environment may be different from how we behave in another. With remote working becoming more prevalent, the human risks facing organizations will evolve. Relying on practices that might have worked when everyone was based in the same location is potentially risky. BeSci can help here by giving us tools to think about how we can solve the problem.
AT: Thank you, Christian.
*Christian Hunt is author of Humanizing Rules and founder of Human Risk, a consultancy and training firm that brings behavioral science to ethics and compliance, in Munich, Bavaria, Germany and Adam Turteltaub is Chief Engagement & Strategy Officer at the Society of Corporate Compliance and Ethics and Health Care Compliance Association in Eden Prairie, MN, USA.
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