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Unethical behaviour in the financial industry has become something of a cliché in the years since the recession, when its misdemeanours were laid bare. Now, new research has found that workers in the financial advisory industry influence how likely their colleagues are to commit financial misconduct, with people who witness deviant behaviour more likely to behave badly themselves. The paper underlines how individual bad behaviour can become contagious within the culture of organisations.

The research analysed the propensity of co-workers to commit misconduct by looking at financial advisers whose co-worker groups had changed as the result of a recent company merger.

It found that an adviser is 37% more likely to commit misconduct if their new co-workers – introduced to the brand post-merger – have a history of misconduct, compared with an adviser working in the same firm who is merged into a branch with no history of misdemeanours. This result implies a social multiplier of 1.59 – when an adviser carries out misconduct, that case results in an additional 0.59 cases of misconduct by their colleagues.

Poor behaviour is most probably spread through social interaction, with the paper citing previous research on the evidence of peer effects on crime and bad behaviour – such as the work of Bayer, Hjalmarsson and Pozen ( 2009 ). “In our setting of financial misconduct committed by white-collar professionals, no formal training programmes teach advisers how to commit misconduct. Because of the need for secrecy, misconduct techniques and social norms can only be transmitted through informal channels, such as social interactions.”

One notable feature of misconduct in the financial industry is that it arises in clusters, says William Gerken, assistant professor of finance and PNC research fellow at the University of Kentucky, one of the paper’s authors. “Certain firms and certain areas have much higher rates,” he adds.

“But clustering of misconduct is not limited to the advisory industry; we’ve seen it in many settings – financial analysts covering tech stocks during the dotcom boom and financial statement misreporting. If you extend the concept of the workplace, you could think of the outbreak of doping in the Tour de France as another example.”

Contagion is just one reason behind this clustering of misconduct, however. It could also be down to self-selection into a group because of similar characteristics – or simply individuals making judgements because of the costs and benefits of certain behaviours. Knowing whether it’s contagion that’s driving the bad behaviour can help regulators and practitioners fix the problem, says Gerken.

The researchers also found that co-worker influence is asymmetric: while there was evidence of contagion in misconduct, there was no significant evidence that good conduct is contagious. 

This surprised the researchers, because peer effects are often thought to be a result of people mimicking the behaviour of others to fit in. It’s why peer effects often occur among children – and, if peer effects are down to social norms, it would suggest the same, or symmetric, effect for good and bad behaviour. Instead, the research identified asymmetry – which is more consistent with peer effects because of social learning, explains Gerken.

“As most employees are generally engaging in ‘good’ behaviour, we learn little from observing others behaving well. We may assume they have similar beliefs above the costs and benefits of misbehaviour,” he says.

“If we observe someone who is misbehaving, however, it is shocking and salient, and causes us to rethink our beliefs about the costs and benefits of bad behaviour.”

So, how can businesses prevent the spread of bad behaviour? Understanding the causes of misconduct, and the elements shaping corporate culture, is key for managers looking to prevent it.

“Misconduct is rarely formally taught, so how knowledge and social norms related to misconduct develop give key insights for understanding how corporate culture arises, and how managers can shape it,” says Gerken.

Employee behaviour is malleable and organisational culture is constantly developing. When considered alongside another study that the researchers are working on – showing how personal financial stress can lead employees to commit misconduct – the findings highlight how bad behaviour at an individual level can become a wider problem for the whole organisation if left unchallenged. 

Reference:

Is Fraud Contagious? Co-worker Influence on Misconduct by Financial Advisers, Stephen Dimmock, William Gerken, Nathaniel Graham. The Journal of Finance, Volume 73, Issue 3.