Tuesday, April 17, 2018

The economics of corporate misconduct @ How to build a culture capital


The economics of corporate misconduct @ How to build a culture capital

In March 2017, a Bloomberg article said, quoting data from Boston Consulting Group, that banks globally have paid $321 billion in fines since 2008 for an abundance of regulatory failings from money laundering to market manipulation and terrorist financing.

Come today, our newspapers are filled with banks having major employee misconduct and frauds. And these are evidence enough to show that the impact of employee misconduct extends beyond the individual and can impact the firm, the economy and financial markets more broadly.

Indeed employee misconduct causes a firm to become less resilient. It works in diverting management attention, loss of a firm’s reputation, its future business is impacted, demotivated workforce, and depleted capital to list a few.

This happens when a clear and guiding culture is not in place. For once, let us keep politics aside and try to learn why so much of toxic culture keeps brewing.

Kevin Stiroh, executive vice president and head of supervision at the Federal Reserve Bank of New York brings in a new perspective of Culture Capital. He says, “The possibility of employee misconduct — the potential for behaviours or business practices that are illegal, unethical, or contrary to a firm’s stated values, policies, and procedures — is a form of risk just like liquidity risk or operational risk. Investments in the cultural capital are one way to reduce that risk.”

An organisation’s cultural capital is the way an organisation operates. It is parallel to physical capital such as equipment, buildings, property, human capital, and brand reputation. In an organisation with a prominent level of cultural capital, misconduct risk is low.
So how do organisations go to build a culture capital that ensures, employee loyalty and customer retention with creating a happy workplace?

Control of internal factors: Employee misconduct is not always resulted of the dissatisfied employee. It is based on greed and manipulation. To ensure that such lure does not happen, organizations must make watertight security measures at multiple levels.

Short versus long-term: When financial organisations focus on short-term returns at the cost of long-run viability, another problem crops up. Think about the employee incentives which are compensated on short-term profits and losses and not long-term value creation. Each person working with the financial organisation, bank or non-banking financial company (NBFC) needs to believe that they will be part of long-term asset building.

Coordination failure: The failure to reach a common objective that is in the best interest of everyone is the major contributing factor in misconducts. For example, a bank goes strictly in its lending standards during a downturn to make sure its balance sheet looks good. But if every firm does the same, it will worsen the downturn and hurt the industry even stronger.

Financial firms looking forward to reducing misconduct risk face a coordination challenge, where short-term competitive pressures make it difficult to make long-term investments in building cultural capital.

Financial companies provide sustenance to the economy over time. This can be disrupted by employee misconduct, which hurts not only individual firms but to entire industry by decreasing trust and confidence in the financial sector.


Regards

Mr. Pralhad Jadhav 
Master of Library & Information Science (NET Qualified) 
Senior Manager @ Knowledge Repository  
Khaitan & Co 
Twitter Handle | @Pralhad161978
Mobile @ 9665911593

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