Opinion: just why do financial institutions here and elsewhere continue to repeat the mistakes of the past? 

The Irish Banking Culture Board (IBCB) is an independent industry initiative established and funded by the five retail banks in Ireland. Its aim is to rebuild "trust in the sector through a change in behaviour and overall culture", with a goal "to act as a transformative influence on culture within the banking sector". While it's clear that the banking sector in Ireland does require close regulatory supervision (the job of the Central Bank of Ireland) and conduct guidance (the IBCB’s objective), the IBCB's Mr Justice John Hedigan and his colleagues face significant challenges.

We are playing a long game if the aim is to rebuild trust and change culture in any banking sector. The need to strike a balance between banks’ predilection to engage in zero-sum game strategies (see the mortgage tracker scandal) in line with their fiduciary imperative to maximise shareholder wealth and ensure bank profitability does not compromise societal expectations is virtually impossible. Banks in multiple regulatory jurisdictions engage in questionable and, at times, criminal conduct. Globally, banks have been fined more than $321 billion since 2008, of which $204 billion was in the US alone. Yet despite these financial reprimands, banks continue to repeat the sins of the past. Why? In the case of Irish banks, that’s the €37 billion question.

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From RTÉ Radio 1's Morning Ireland, Minister for Finance Paschal Donohoe on new rules to hold bankers responsible for financial failures

The fact that academics, mostly economists, remained quiet about early warning signs predicting our own banking crisis in 2008 is illustrative of the challenges academics face as they try to provide objective analysis in an apolitical manner. Arguably, some academics didn’t challenge enough in the run up the Irish banking crisis, but some did and ended up becoming pariahs or were dismissed as "Cassandras". For example, Morgan Kelly from UCD provided crystal clear evidence of Ireland’s impending housing crisis in a working paper from February 2007, but key decision makers at that time remained unconvinced.

There were other warning signs about the potential instability of the Irish banking sector from as far back as 2004 and 2005, some of which were highlighted in the Central Bank’s own Financial Stability Reports. Indeed, it was argued at the 2015 Oireachtas inquiry into the Irish banking crisis that the Central Bank had "suppressed" and "censored" the true state of the financial system long before the crisis hit. They did so in an effort to strike the right "tone" given the politics involved in giving an honest assessment of the financial system. Bad news is often unpalatable and there was obviously no spoonful of sugar to help the medicine go down in the Central Bank. Still, in the decade since the banking crisis, Irish banks have come a long way, but there is still much work to do.

At a recent Oireachtas Joint Committee on Finance, Public Expenditure and Reform hearing, Mr. Justice Hedigan informed the members that there "is a serious problem with the culture in the banks". He argued that "embedding ethical behaviour in banks is an ideal whose day has come in Ireland and around the globe". Arguably, the question of ethical decision-making in the corporate world rarely comes into play. Organisations don't intentionally commit unethical acts, but most organisations don’t apply ethical implications to everyday business decisions either.

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From RTÉ Radio 1's Today With Sean O'Rourke Show, an interview with Mr Justice John Hedigan, chairman of the Irish Banking Culture Board

Economist Milton Friedman is often misquoted in his observation that the only social responsibility of business is to maximise shareholder wealth. What he actually said was that "business should use their resources to engage in activities designed to increase its long term profits so long as it stays within the rules of the game". That is to say, "engage in open and free competition, without deception or fraud". Banks’ leadership have a fiduciary responsibility to maximise returns for their shareholders, which was the point Friedman was making, but he emphasised that business should do it without breaking the law. 

At the Oireachtas hearing, the IBCB’s challenges were clearly set out and the battle to change Irish bank culture would not be easy. Committee chairman John McGuiness summed up the challenge when he stated that the culture established in banks and passed onto a new generation of bankers was shocking.

Perhaps, but not surprising. Berger & Udell's Institutional Memory Hypothesis argues that "lending institutions tend to forget lessons they learned from problem loans as time passes since their last loan bust". New employees had no experience of the negative impact of previous poor decision-making and therefore their own decision-making is framed without the benefit of downside risk awareness. Other theories also help explain why people behave and make questionable decisions. Social Learning Theory and Social Cognitive Theory provide explanations for how and why people act in a social situation: we learn from what others do in the work environment. But while academic theories are useful, they rarely make their way into public discourse.

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From RTÉ Radio 1's Morning Ireland, reporter Mary Regan on the appearance of the Irish Banking Culture Board before the Oireachtas Finance Committee.

So why do banking institutions continue to repeat the mistakes of the past? Why is it so damn difficult to change culture? The literature focused on answering that particular nugget is voluminous. The academic research exploring recidivistic conduct in corporations has found common factors to help answer why firms repeatedly engage in misconduct. Qinqin Zheng and Rosa Chun define corporate recidivism as "corporate behaviour or patterns of repeated misconduct" in which actions are captured over a time series.

Three factors influence whether individuals will engage in recidivistic misconduct: motive, opportunity and choice. Motive reflects factors that directly or indirectly result in specific types of behaviour and is associated with desires, unmet needs and deficiencies. In the context of corporate misconduct, organisations may engage in questionable activities as a response to financial and economic pressure.

Research argues that key decision makers in highly profitable firms are more likely to engage in misconduct, while decision makers in lower profitability firms were less likely. Structural and regulatory rather than ethical factors are also likely to be incorporated into the decision-making process within organisations with strong performance in an effort to determine how to avoid detection of wrongdoing and illegal activities. Whereas motive and pressure might reflect the desire to engage in specific types of conduct and behaviour due to financial or economic pressure, opportunity reflects the presence of favourable conditions.

Why is it so damn difficult to change culture?

Opportunity is fundamentally about the attractiveness to pursue one course of action over another due to the low probability of being caught or because the financial sanctions associated with being caught are not considered a deterrent. If the motivation and opportunity are present, the choice to engage in corporate misconduct is predicated on internal organisational factors that either facilitate or inhibit individuals or groups to engage in misconduct.

The organisation’s ethical and risk climate have been highlighted as potential triggers for misconduct among employees. A company's climate is seen as a key determinant in how employees viewed risk and risky decisions and previous experiences of how the firm may have rewarded or sanctioned types of behaviour informs decision-making of employees faced with a choice between two options. The degree to which the market are aware of the firm’s existence and its brand and value may act as a moderating factor in a firm’s predilection to engage in repeated misconduct.

READ: What I learned about Irish banking culture from whistleblowers

Industry insiders can become blinded by the true effect of a firm’s climate and often mistake it for the effect of culture. Culture is a very broad construct: if it can’t be easily defined, it can’t be easily understood. The work of the IBCB may be a transformative influence in Irish banking culture, but it may also be a case of using a walnut to crack a sledgehammer: well-intentioned but ultimately not all that effective.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ