May 31, 2019

Look closer: the paradox of law and ethics

Manage Culture

by Elizabeth Arzadon

On the subject of ethics, lawyers get an unfair rap. Almost on par with used car sales man. Or dare I say it… bankers? But when it comes to misconduct in the financial services sector, I do think lawyers have a conflict of interest. Before I make too many enemies with that statement, let me explain.

The Royal Commission is currently shining a spotlight on misconduct in the Australian banking, superannuation and financial services sector. For lawyers motivated by a healthy pay cheque, it’s a good time to be in the profession. But it’s also an encouraging time for those motivated by deeper purpose. Or is it?

In a discussion about one of the many examples of bank behaviour currently giving rise to litigation, a barrister friend said to me today: “A little compliance with the law might have framed some appropriate ethical decision-making!”. I could absolutely see where he was coming from, but unfortunately, therein lies the conflict.

Non-compliance with the law is a symptom, not the root cause of decisions that put an institution’s best interests before those of customers, shareholders and market integrity. Fixing compliance with the law only fixes compliance with the law…unfortunately there will remain all manner of poor behaviour that inevitably falls outside the bounds of legal restraint (until a new law is created to reign it in).

But ineffectiveness at addressing root causes of misconduct is not the only downside of a focus on legal compliance. The real problem is that it makes the issue worse: an emphasis on legal responsibilities decreases leadership focus on ethical decision making. The two are often not one and the same.

The logical stance is that it isn’t a question of ‘either/or’: institutions should make decisions that are both legally AND ethically sound. But let’s consider the reality of organisational decision making. APRA’s Prudential Inquiry into CBA’s conduct is a good example of the role complexity can play in undermining effective senior leadership decisions. Research (for example, Simonson & Nye, 1992) shows that when the complexity of a situation reaches a level where the “correct” answer is just not clear, people default to the option that is the most easily justified. So when it comes to ‘good conduct’ leaders have two goals:

  1.  make sure decisions are legally justifiable
  2.  make sure decisions are ethically justifiable.

Except research also says that when you give people multiple goals, they tend to really focus on only one (Shah, Friedman, and Kruglanski (2002). Which one? The answer is the less ambiguous one. So, it seems like a good thing that the current environment is increasing the clarity of legal obligations but it also means the gap in ambiguity between the law and ethics is ever widening. And that has unintended side-effects.

While lawyers interested in ethics might have some cognitive dissonance over this paradox, non-executive directors are those perhaps most challenged by it. Charged with both legal and ethical responsibilities, NEDs need to consider this quandary, and the effect it has on leaders, their decision-making, and the culture of institutions they govern. There are no easy answers, but the first step has to be open discussion about it.