Seven Years Later, Wall Street Hasn't Learned Anything

After one of the largest surveys ever done on the financial-services industry, it's clear that ethical breaches abound—and more than a few people know about them.

Hans Deryk / Reuters

It’s been said many times, in many places, even well before the Great Recession: The culture on Wall Street is terrible. It encourages bad behavior. More recently, there are concerns that the Wall Street that caused the financial crisis is back.

A new report by The University of Notre Dame, commissioned by the law firm Labaton Sucharow, which represents whistleblowers, has some alarming numbers to add to this well-trodden narrative. The report surveyed more than 1,200 people in the financial-services industry—account executives, wealth advisors, financial analysts, investment bankers, operations managers, and portfolio managers—in both the U.S. and the U.K. to look at whether increased regulations, along with calls for a cultural change, have had any demonstrable effects.

So how does the financial-services industry view its own behavior, legally and ethically? Not so great, it turns out. Nearly half of the respondents felt that it was likely that a competitor has engaged in unethical or illegal activity in order to gain an edge. Perhaps more shocking are those who say they’ve witnessed such wrongdoing: 23 percent reported personally observing or having firsthand knowledge of misdeeds. That number jumps to 34 percent when looking only at those earning more than $500,000, suggesting that enhanced status and earnings bring a higher likelihood of witnessing wrongdoing.

“I think that the U.S. law-enforcement regulatory authorities are going to be troubled by the results of this survey, but the U.K. ones will be particularly troubled,” says Jordan Thomas, a partner at Labaton Sucharow and the former assistant director at the Securities and Exchange Commission. “This is actually indicative of an industry.”

In the survey, 25 percent reported that they would engage in insider trading if there was a guaranteed $10 million payday at the end of the line and the chances of being arrested were nil. More troubling, those with less than 10 years of experience were twice as likely to say yes to this illegal payday. Overall, the U.K. scored worse than the U.S. on ethical measures ranging from knowledge of wrongdoing to insider trading. Additionally, 10 percent of all respondents reported having felt pressure at their company to violate the law or compromise ethical standards.

Ann Tenbrunsel, a professor of business ethics at University of Notre Dame’s Mendoza College of Business, is a co-author of the report. Her research covers ethical breakdowns in corporations, looking specifically at why they happen. She says that despite significant efforts from a regulatory perspective—such as SEC fines and the Dodd-Frank Act—and money spent on ethics training, well-intentioned reform efforts just aren’t producing results yet.

“To me, as a researcher in this area, it says what we’re doing isn’t working to the extent that we wished it was,” says Tenbrunsel. “People seem more aware of the regulation, but that hasn’t necessarily impacted behavior. Then being aware of regulation isn’t enough.”

The report also looked at the factors preventing employees from reporting illegal or unethical behavior. Both Tenbrunsel and Thomas believe that whistleblowing isn’t just difficult to do in the culture of Wall Street—it’s become increasingly harder in the age of gag orders. A quarter of respondents in the survey earning $500,000 or more reported that they signed a confidentiality agreement that prohibits them from reporting illegal activities to the authorities. “The thing that blows my mind is that, as a former DOJ and SEC law-enforcement attorney, seeing the proliferation of secrecy agreements and policies that prevent people from reporting wrongdoing,” says Thomas.

While the SEC whistleblower program is anonymous, with monetary rewards, the fear of retaliation and blacklisting discourages people from coming forward. Additionally, workers in the financial-services industry don’t yet trust that companies will protect whistleblowers.

“Essentially, if you look at the things that are impacting people's ability to report, you have policies, agreements, retaliation, which silences other whistleblowers down the road,” says Thomas. “And then if you also see the statistics about pressure to engage in unethical illegal behavior … it's a sad state of affairs.”

Despite 39 percent of the respondents feeling that regulatory agencies are ineffective at policing the financial-services industry, 89 percent reported that if they were offered protection, anonymity, and monetary rewards, they would report wrongdoing. Tenbrunsel believes that the way forward is understanding the incentives people currently have to cheat, along with dismantling the culture of stifling whistleblowing. As salaries and bonuses on Wall Street bounce back, if old-fashioned shame isn’t working, then the hope is that cultural change and the right incentives will.

“The fix to it isn’t just identifying the bad apples, but to understand the bad apples,” says Tenbrunsel. “It’s not just a few evildoers … the widespread nature of this. There’s a lot of ways that individual organizations can contribute to the unethical culture potentially unaware that they’re doing so.”