Bad apples or corrupting barrels? Preventing traders’ misconduct
| Pages | 366-382 |
| Date | 14 November 2016 |
| DOI | https://doi.org/10.1108/JFRC-06-2016-0051 |
| Published date | 14 November 2016 |
| Author | Wieke Scholten,Naomi Ellemers |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Bad apples or corrupting
barrels? Preventing
traders’ misconduct
Wieke Scholten
Expertise Centre Governance, Behaviour and Culture,
De Nederlandsche Bank, Amsterdam, The Netherlands, and
Naomi Ellemers
Department of Social and Behavioural Sciences, Utrecht University,
Utrecht, The Netherlands
Abstract
Purpose – This paper aims to identify social psychological root causes of misconduct by traders and
offers practical guidelines to prevent misconduct.
Design/methodology/approach – The authors use insights on social psychological mechanisms to
examine current business practices observed in the context of supervisory activities. Case examples
were collected at Dutch and European banks, including major institutions. This is an opinion peace that
interprets regulator experiences from a social psychological perspective.
Findings – The authors characterize standard responses to misconduct in trading as reactive and
elucidate why this “bad apples” perspective is insufciently effective. As an alternative, the authors
address the social psychological root causes of misconduct within trading teams. The “corrupting
barrels” model identies ineffective error approaches, outcome inequality and dysfunctional moral
climates as contextual root causes in team dynamics. The model uses current insights from empirical
research in psychology to do so.
Practical implications – This paper species practical guidelines that help prevent future
misconduct among traders.
Originality/value – Addressing the contextual root causes of misconduct at the team level will help
banks and nancial supervisors to improve their effectiveness in preventing misconduct. In the context
of standard “bad apples” approaches, the “corrupting barrels” model offers an original perspective.
Keywords Trading, Culture, Social psychology, Unethical behaviour, Misconduct, Root causes
Paper type Research paper
A rogue traders’ tale
The personal story of Kweku Adoboli, the British trader who was convicted in 2012 for
losing $2.3bn of the Swiss bank UBS, was published in Fall 2015 (Fortado, 2015).
Adoboli spent nearly four years in prison for exceeding his risk limits and hiding this by
booking ctitious hedging trades. For years, using these methods, he made millions for
the bank. In 2010, he was promoted as the Director and was awarded a £250.000 bonus
(which he never received), on top of his £110.000 salary.
A former UBS trader was quoted saying that Adoboli was the man to turn to if you
had screwed up. He would x it for you: “We didn’t know how he did it, but we didn’t
want to know” (Fortado, 2015, p. 5). Adoboli says that “others did in fact know, and
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JFRC
24,4
366
Journalof Financial Regulation
andCompliance
Vol.24 No. 4, 2016
pp.366-382
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-06-2016-0051
actively encouraged his behaviour for more than two years as long as it was protable”
(Fortado, 2015,p.8).
Adoboli was convicted and condemned by the public, being the perfect mascot of The
City’s “greedy” and misbehaving bankers, at a moment when public trust in banking
reached an ultimate low. Yet, according to Adoboli:
by holding up himself and Tom Hayes, the former UBS and Citigroup derivatives trader who
was jailed […] for manipulating Libor, as rotten apples in otherwise a clean industry, the banks
are moving on without considering what happened to allow or even encourage their
misconduct (Fortado, 2015, p. 11).
We may never know what caused Adoboli to commit fraud. But the targets and praise
Adoboli received from his management, the calls for aid from his teammates and the fact
that others chose not to ask questions likely inuenced the way he acted. We, therefore,
argue that punishment of individuals such as Adoboli in itself is not sufcient to prevent
future misconduct. Root causes of such misconduct can also be found in the professional
context in general and the dynamics of the trading team in particular. As long as these
contextual root causes are not dealt with, chances are considerable that similar
misconduct cases will emerge in the future.
This contribution addresses contextual root causes of misconduct from a social
psychological perspective. We argue that shared behavioural patterns reecting the
climate within a trading team can contribute to the (mis)behaviour of its individual
members. We propose that the behaviour of individuals at work is inuenced by their
direct social context: their colleagues, managers and the teams they work in. Addressing
the contribution of team level factors to the behaviour of individual traders can move
forward prevention of misconduct.
Misconduct
Misconduct refers to intentional unethical behaviour. Examples are sabotage such as
the misrepresentation in nancial reports, theft, mis-selling of nancial products to
professional clients, failing to report information on deals or manipulation of nancial
markets. In lay terms, these acts and omissions are referred to as “fraud”. Unethical
behaviour thus includes illegal behaviour that breaches regulatory or legal rules, for
instance, regarding collusion of market prices. However, Kish-Gephart et al. (2010)
dene unethical behaviour in a work context more broadly, namely, as organizational
member actions that violate widely accepted (societal) moral norms (Trevinˇo and
Nelson, 2007). Thus, although unethical and illegal behaviours overlap, some
behaviours that are not illegal can be considered unethical and qualify as examples of
misconduct – such as behaviours that violate professional codes of conduct. Unintended
errors and accidents are excluded from our conceptualization of misconduct.
Misconduct of traders is a current and continuous problem. Multiple frauds by
traders have received public attention and even reached courtrooms (Table I), and it is
easy to imagine that more cases exist.
The problems identied are not contained within a specic organization and
continue over time despite increased regulatory scrutiny and supervision. This suggests
that it is not easy for those in practice to learn effectively from prior occurrences. The
2008 Kerviel and 2011 Adoboli cases, for example, both involved back ofce
manipulation of accounts and creation of false accounts, but could have been prevented
367
Bad apples or
corrupting
barrels?
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