A Better Approach to Avoiding Misconduct

Use nudges to complement traditional methods of risk management.

by

and

Tijs Besieux

by

and

Tijs Besieux

From the Magazine (May–June 2022) · Long read

Suzanne Saroff

Summary.

Despite substantial regulatory reform following the 2008 financial crisis, financial firms are still suffering from fraud and other forms of ethical misconduct. As a result, they have collectively paid out more than $400 billion in fines over the past 12 years. A 2019 Harvard Business School study found that among a sample of Fortune 500 companies, more than two instances of internally substantiated misconduct occur each week, on average. It’s becoming increasingly clear that the traditional approach to financial regulation—imposing formal rules and investing in a strong compliance function to ensure that institutions, managers, and employees comply with those rules—cannot protect firms against excessive risk-taking and financial misconduct.

The authors of this article draw on their experience advising some of Europe’s largest financial institutions to present an alternative approach to compliance that is based on the principles and discoveries of behavioral psychology. It involves understanding the contextual drivers of human behaviors and introducing small changes, or “nudges,” to eliminate misconduct at the source.

Idea in Brief

The Problem

Despite reforms in regulation following the 2008 crisis, financial firms have continued to suffer from ethical misconduct and have collectively paid out more than $400 billion in fines since then.

Why It Happens

The traditional approach to preventing misconduct—formal rules and a strong compliance function—is based on the assumption that people are rational agents. But behavior at work is driven by subjective biases and professional contexts.

The Solution

Financial institutions are increasingly acknowledging people’s behavioral drivers and managing them with changes—or “nudges”—in processes or organizational contexts. These changes may seem small, but they can have profound effects on behavior.

Despite substantial regulatory reform in the aftermath of the 2008 financial crisis, financial firms have continued to suffer from fraud and other types of ethical misconduct. As a result, by 2020 they had collectively paid out more than $400 billion in fines. One 2019 Harvard Business School study of Fortune 500 companies—based on a sample of firms on that list—found that on average, they experience more than two instances of internally substantiated misconduct each week.

A version of this article appeared in the May–June 2022 issue of Harvard Business Review.

WS

Wieke Scholten is a behavioral risk expert at &samhoud, a strategy consulting firm based in the Netherlands, and the former head of a behavioral risk team in the internal audit function at NatWest in London.
FV

Femke de Vries is a professor by special appointment in supervision at the University of Groningen, in the Netherlands, and a managing partner at &samhoud.
Tijs Besieux is an independent researcher at Harvard Business School. He is a senior advisor at &samhoud and the founder of Voice Up.

A Better Approach to Avoiding Misconduct

Idea in Brief

The Problem

Why It Happens

The Solution

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