Earlier this week, New York Fed President Bill Dudley participated in a panel discussion on culture and conduct in the financial services industry. This conversation should serve to remind us that while the industry has made progress on the issue, significant work still remains to promote accountability, ethical conduct, and open dialogue and diversity of thought. As we continue to consider these questions, I thought I’d share my perspective on how lawyers can play a critical role in shaping an institution’s culture.
Here’s something you might not expect to hear from a lawyer about the world of banking, much less one who holds the title of General Counsel at the Federal Reserve Bank of New York: When a new, junior banker, fresh out of school, thinks about where to turn for advice to resolve a workplace matter, I highly doubt the first person she calls is the bank’s lawyer.
What’s more, that junior banker is not going to memorize vast stacks of compliance handbooks to make sure that she can cite to every single one of the rules before she clicks “send” on every e-mail.
Of course, that probably does not come as a surprise. Junior bankers — just like any new employees — typically first learn what is truly important, what is really accepted, and what leads to success or failure from observing the world around them. That’s not irrational or non-compliant or lazy. It’s normal. We all pay attention to the conduct of our immediate peers and supervisors as a shortcut for deciding how to behave.
Meanwhile, in-house lawyers have their hands full with legal questions. Banking is, after all, both highly complex and highly regulated. Moreover, compliance handbooks are not paperweights. They are invaluable risk management references. In short, well-considered legal advice and clear rules and policies are necessary in a well-functioning organization. But they are not in and of themselves sufficient for good decisions.
If, like me, you are concerned about conduct in financial services, then I urge you to pay close attention to the norms within individual firms and across the larger industry, not just to the rules.
The shared norms of any organization or community are sometimes referred to as “culture.” Those norms are communicated in many ways — including, quite powerfully, through repeated behavior. Remember my example of the junior banker. She does not always have time to undertake a considered analysis of every decision. Like all of us, she relies on shortcuts. And a prime shortcut is to look around, see what succeeds, and follow suit.
If that junior banker has her eyes open, so should the in-house lawyers who advise a firm and help safeguard its reputation.
Why lawyers? Well, I’m a lawyer, and what I know is that in-house lawyers generally possess a high degree of independence and insight. We are a part of a firm, but also stand somewhat apart from the business. What’s more, we are members of a larger profession — a guild, if you will — with its own ethical code and professional expectations.
If that doesn’t convince you that lawyers have a role to play, consider this. The Department of Justice considers a corporation’s culture when it determines whether to indict the entity on the basis of misconduct by its employees or directors.[1] So, in assessing an organization’s criminal liability, it would be foolish for lawyers not to consider culture.
And, given the right circumstances, culture may also affect the safety and soundness of financial institutions and the stability of the broader financial system. That’s why, as a lawyer for our central bank, I’m concerned about culture.
Even if lawyers are not consulted on every one of the thousands of decisions a banker makes in a day, they can help to positively shape culture.
In-house counsel at financial institutions are called upon to dispense advice in a fast-moving and complicated regulatory environment. Lawyers must help clients make hard choices under circumstances where the outer bounds of the law are not always clear. When an institution’s culture encourages its employees to do not only what is legal, but also what is prudent, there is a much better chance that the organization and its employees will end up on the right side of the legal line. After all, our laws are not arbitrary rules written in a vacuum. Laws are often an expression of society’s collective morality and ethics — albeit an imperfect expression at times. Lawyers can help bring about a type of culture aligned with prevailing morals and ethics by staying attuned to the risks that can emerge when a firm focuses solely on what is legal, and not on what is right.
I am not blind to the fact that the financial institutions are for-profit entities operating in a competitive marketplace. Creating a cushion between the outer bounds of the law and accepted practice will sometimes mean leaving money on the table. And, in a competitive market, there are only so many times a firm can say “no” and remain in business.
At the same time, however, there are only so many times a firm can walk right up to the legal line before going over it. And once that is the direction that a firm’s culture begins to take, it can be very difficult to change direction. In fact, it may only get worse.
The in-house counsel’s job is to help clients follow the law prudently. There’s an urban legend at the New York Fed that one of my predecessors — I will not say who — used to have a stamp that said, “LEGAL BUT STUPID.” I still haven’t found that stamp, but you get the point. Just because your client can do something, doesn’t mean it should.
In my experience, there are a few distinct norms that help individual employees in large organizations decide what they should do. Part of a lawyer’s job, in my view, is to be on the lookout for circumstances that lack any of these factors.
First, lawyers need to be present in order to observe and to be heard. That means lawyers should be in the room when risk assessments and business decisions are made.
Second, healthy cultures deliver the news — both good and bad. Lawyers, not known for being shy, can help facilitate balanced communication.
Third, senior leaders demonstrate openness to questions and alternative ideas. I work with a bunch of lawyers and economists. Believe me, I know how tempting it is to say, “Enough with the questions and ideas!” But if you want to be able to spot conflicts or hear the bad news, you have to encourage challenge and welcome dissent.
Fourth, employees have to raise their hand. President Dudley likes to say that one of the greatest risks to any organization is an employee who sees something wrong but does not say something. It is mission-critical that employees feel comfortable escalating potential problems, even if that means challenging accepted points of view. Early escalation keeps small problems from becoming large problems. No culture can ever eliminate all problems. We’re all human. But a good culture will identify and address problems before they become crises.
My colleagues and I at the New York Fed have tried to shine a spotlight on culture as a way of encouraging firms to address potential weaknesses that are not solved by laws and rules alone. Firms must be thoughtful stewards of their cultures. And lawyers can play an important role in that mission by helping clients not only follow the law, but do so prudently.
[1] U.S. Attorney’s Manual § 9–28.500–600.
This article was originally published by the New York Fed on Medium.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
