Mitigating Banking and Financial Risk Requires Better Leadership Selection


On December 14th, 2017 the Australian government launched the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry. The Commission was launched on the heels of numerous banking scandals involving the Big Four Australian banks. The Commission provided a preliminary report in August of 2018 and the final report was made public in February of 2019. Ultimately, the Commission found evidence of bribery, forgery, inadequate lending practiceslying to regulators, and even charging fees to people who were dead.

The preliminary Commission report concluded that the primary cause of this misconduct was:

“…greed – the pursuit of short-term profit at the expense of basic standards of honesty…From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales…When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done.”

All of this brings back memories of the 2007-08 financial crisis in the US. Much like in the US, calls for more stringent regulations are inevitable. However, such regulations are unlikely to mitigate devious financial practices in the future. Indeed, as the Commission pointed out:

“…The law already requires entities to ‘do all things necessary to ensure’ that the services they are licensed to provide are provided ‘efficiently, honestly and fairly’. Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime…”

Further, the strategies currently being implemented to mitigate the risk-taking culture of banking and finance risks do not appear to be working. As Alessandra Capezio, a professor at the Australian National University, points out, the problem is not the standards and regulations of the banking and financial industries: it is the people in the industry, particularly the leadership.

It should surprise no one that the banking and financial services industries attract people who are interested in, and motivated by, money. Our own data on the personalities of more than 10,000 leaders in the banking and financial services industries from all over the world confirm this: people in this sector score well-above average on Commerce, a scale measuring the degree to which one is interested in business and financial pursuits.

However, being interested in money is not all that makes banking and finance leaders unique. They also score higher than average on Power – the desire to have authority over others and control of resources, Ambition – the tendency to take charge and compete with others, and Mischievousness – the tendency to manipulate others and bend the rules. Further, banking and finance leaders also tend to score below average on Security – the desire for predictability and stability, Prudence – the tendency to display high moral / ethical standards, and Dutiful – the tendency to conform and obey regulations set by others. Overall, these data paint the picture of the typical banking and financial industry leader just as described by the Commission and Capezio: greedy, risky, manipulative, and self-interested.

This is not to say that all banking leaders fit this description. In fact, the history of corporate financial scandals – including the recent banking scandals in Australia – is peppered with moralistic whistleblowers who brought the truth to the public. But these folks are exceptions to the rule.

What can be done about the problem of risky and malicious practices that seem to run rampant in the banking and financial services industries? The answer is not more regulations. As we have seen time and time again, the kinds of people who become leaders in these institutions are not bound by regulations. If the root cause of the problems facing the banking and financial services industry is the leadership, then the solution is to select better—more ethical—leadership. Fortunately, there are hundreds of years of research on the science of personality, leadership, and organizational effectiveness that can be used to inform leadership decisions. Unfortunately, many organizations – including financial organizations – continue to ignore the benefits of scientifically-validated personality assessments for leadership selection. In doing so, they put themselves, their employees, and their customers at risk.