By Gary M. Stern, contributor
FORTUNE -- Turning a blind eye to the wrongdoing of colleagues has become the norm at many financial services firms. Despite the MF Global debacle, the rogue traders at UBS and Societe Generale, the subprime mortgage mess, and Goldman Sachs' tarnished reputation, most corporate employees continue to withhold information about misconduct by colleagues on issues they know are wrong, until it turns into a major financial imbroglio, according to a recent study.
In fact, employees do not report 50% of observed misconduct. And even when unethical behavior is reported, 60% of managers said they'd only divulge information to a senior executive if the impact of the case exceeded $1 million, according to a 2011 study of 500,000 employees at 150 companies (many, but not all, financial services firms) over four years, conducted by Corporate Executive Board, an Arlington, Va.-based consulting firm.
The improper conduct goes unreported because people "fear retaliatory action, including losing their job, failing to get promoted, failing to get a bonus," explains Thomas Monahan, chairman and CEO of Corporate Executive Board. Many employees expect that the misconduct will be buried under the table and no action will be taken. Indeed, companies have failed to create a healthy, ethical culture where people feel "they will not be retaliated against and the company will go and do something" about the wrongdoing, Monahan suggests.
When illegal practices go unreported at a financial services firm, the stakes are high. Firms face significant fines and legal costs, reputation damage, and tightened regulatory scrutiny. Fines of $100 million have been leveled against companies that have defied the U.S. Foreign Corrupt Practices Act, says Monahan.
Why would it take a one million dollar loss to influence staff to blow the whistle on an illegal practice? Monahan says, "People need to be highly convinced that this is a potential catastrophe to take the risk." Otherwise, they'll stay mum and avoid the threat to their career stability.
The rogue UBS trader arrested last week raises questions about the bank's risk management practices. But the profession is so close to gambling that all traders walk a very fine line. By Shelley DuBoisSep 19, 2011 12:26 PM ET
Washington, February 20 -- The Federal Government today announced that for the first time in more than eight years, and possibly longer, it would begin to enforce finance and banking laws.
The announcement came on the heels of the Government's second requisition of information from UBS, a Swiss banking company that has allegedly been offering tax-free havens for savvy American investors for some years.
The move was viewed with consternation by many MOREBing - Feb 20, 2009 11:13 AM ET
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