Thomas d'Aquino Lecture on Leadership February 25, 2013 | Richard Ivey School of Business, Western University

Core values [are] the responsibility of the financial sector and its leaders. Their behaviour during the crisis demonstrated that many were not being guided by sound core values.

Many in the wake of the crisis looked first to how compensation affects behaviour. Indeed, an important lesson was that compensation schemes that delivered large bonuses for short-term returns encouraged individuals to take on too much long-term and tail risk.

In short, the present was overvalued and the future heavily discounted.

To think that compensation arrangements can ensure virtue is to miss the point entirely. Integrity cannot be legislated, and it certainly cannot be bought. It must come from within.

Purely financial compensation ignores the nonpecuniary rewards to employment, such as the satisfaction received from helping a client or colleague succeed. When bankers become detached from end users, their only reward is money, which is generally insufficient to guide socially useful behaviour.

Few regulators and virtually no bankers saw these limitations. Belief in efficient, self-equilibrating markets fed a reliance on market incentives that entered the realm of faith. As Michael Sandel has observed, we moved from a market economy towards a market society.

This reductionist view of the human condition is a poor foundation for ethical financial institutions needed to support long-term prosperity.

To help rebuild that foundation, bankers, like all of us, need to avoid compartmentalization, or what the former chair of HSBC Stephen Green calls ”the besetting sin of human beings.” When we compartmentalize, we divide our life into different realms, each with its own set of rules. Home is distinct from work; ethics from law.

In the extreme, as Ed Clark observed, ”Bank leaders created cultures around a simple principle: if it’s legal and others are doing it, we should do it too if it makes money. It didn’t matter if it was the right thing to do for the customer, community or country.”

To restore trust in banks and in the broader financial system, global financial institutions need to rediscover their values. This was the conclusion of research conducted here at Western.

For companies, this responsibility begins with their boards and senior management. They need to define clearly the purpose of their organizations and promote a culture of ethical business throughout them.

But a top-down approach is insufficient. Employees need a sense of broader purpose, grounded in strong connections to their clients and their communities. To move to a world that once again values the future, bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors.

It has been said that, ”trust arrives on foot, but leaves in a Ferrari.” After the Ferrari screeched out of the parking lot in 2008, what steps have been taken to rebuild trust?

There has been progress.

As the new Basel capital rules are implemented, and the reliance on ratings agencies diminishes, market infrastructure improves; and as banks —  and, crucially, their investors —  develop a better appreciation of their prospects for risk and return, business models are beginning to change.

Global banks have made significant progress in reforming their compensation practices so that rewards more closely match risk profiles. In addition, boards of directors and risk committees are taking more responsibility to ensure that remuneration packages and employee behaviour are aligned with updated institutional cultures.

Unfortunately, a spate of conduct scandals, such as the LIBOR (the London interbank lending rate) rigging and money laundering, has overshadowed these steady and material improvements.

This underscores that it remains the collective responsibility of banks, regulators and other stakeholders to rebuild trust in banking. Banks need to participate actively in reform, not fight it. Until recently, too few bankers acknowledged their industry’s role in the fiasco. The time for remorse is far from over.

Ultimately, it will be down to individual bankers, including the Ivey grads who will go into finance. Which tradition will you uphold? Will your professional values be distinct from your personal ones? What will you leave those who come after you?


Mark Carney, Governor of the Bank of Canada.