I recently went one-on-one with Ken Wilcox. Ken is the former CEO of Silicon Valley Bank and the author of The China Business Conundrum and Leading Through Culture.
Adam: What is financial integrity and why is it so important?
Ken: I think financial integrity is a question of being honest and straightforward in your relations with others. It’s particularly important in banking because banking is really all about trust. Our products are largely kind of ethereal. There’s nothing concrete about what we do. Without trust, a bank cannot succeed.
Adam: You mentioned the importance of trust as it pertains to banking, but it’s universally applicable. Without trust, it’s hard for any business to succeed.
Ken: Absolutely right. And even though it sounds a little old-fashioned, I really think what Benjamin Franklin had to say a few hundred years ago is still relevant today, maybe all the more so. And that is, and I’m sure most people have heard this before, it takes lots of good deeds to establish trust, but only one failing to destroy it, and destroy it for a long time.
Adam: How would you define financial integrity?
Ken: I think financial integrity has mostly to do with the way you treat people, the way you treat your customers, and the way you treat your constituencies. If people suspect one of two things, they will lose their trust and ultimately not want to do business with you over time. Those two things are, number one, are you in it for yourself or are you in it for them as well? And number two, are you misrepresenting something? If people eventually see that your highest priority is making money for yourself and you do not care much whether or not they succeed, they will lose faith in you and ultimately find someone else to work with. The other is obviously people catching you lying or misrepresenting. They will abandon you over time.
Adam: What are the best practices for organizations to implement and for employees to follow to ensure financial integrity?
Ken: One of the things that we tried to do, and I think successfully did at Silicon Valley Bank back in the day, was create an environment in which, number one, employees were empowered to make decisions. And even more importantly, number two, when they were at a decision point, they would instinctively know how to make a choice that would be perceived as ethical, so that they never had to question the next step. They always knew, number one, take the ethical road, and number two, what that would look like. So it was a question of building a culture in which people felt that it was clear what was ethical and that ethics was the right course.
Adam: How do you do that?
Ken: That’s a darn good question.
Adam: That’s why I’m asking.
Ken: Number one is you have to pick the right people, because if you don’t pick the right people, you can’t train them to be ethical. I remember a long time ago when I was in charge of Silicon Valley Bank’s East Coast operation, headquartered in Boston at the time. This doesn’t go to ethics in particular, but it relates to client service in general. I was trying to figure out how to create a stronger culture exemplified by positive customer service. I mulled over that one day and decided, why don’t I just call the manager of an organization known for great customer service and ask how they do it? So I settled on the Four Seasons Hotel, called and asked for the manager. The boss, a guy named Robin White from the UK, immediately invited me for lunch and said he would explain how they did it.
What struck me most about what he said was that it’s less a question of training and more about picking the right people. If you pick the right people, minimal training will guide them. If you pick the wrong people, all the training in the world won’t help. In his case, it had more to do with customer service, but I think it applies to ethics too. He said they just look for people who naturally want to be helpful, the kind who clear the snow from a neighbor’s walkway or remember birthdays and send cards or gifts. Once they find those people, all they need to do is channel them.
So if you want an ethical organization, you have to pick ethical people. That’s number one. Number two is that people tend to subconsciously follow leaders. If leadership displays ethical behavior, people will copy it. If leadership displays unethical behavior, people will feel they have permission to behave the same. So you have to walk the talk. You must explain that ethics are important in the organization and consistently display ethical behavior yourself.
Some people lead because of their position, and others lead because of their personality, which causes people to consciously or subconsciously follow their example.
Adam: When it comes to fostering a culture of financial integrity, what are some of the challenges and pitfalls that everyone should be aware of, and how can they be navigated?
Ken: One of the big pitfalls in building that kind of culture is how to deal with a highly productive individual who is fundamentally inclined toward unethical behavior. That ends up being an internal conflict. You’ve got a salesperson on your team who is really good, at least in the short run, at selling a product or service, but they’re underhanded. They make it difficult for others to do their jobs and they go against your desire to have an ethical, client service-oriented organization. So how do you handle that?
We were quite disciplined in that regard. We felt that it was extremely important that people behave properly. From time to time, we had someone who was really productive and we would think, I don’t want to lose this person, and I don’t want them to go to a competitor. But at the same time, we couldn’t let things continue as they were. We would start by counseling them individually. Their manager would talk to them. If two or three sessions didn’t get us where we wanted to go, then several managers would come together and meet with them. It wasn’t about ganging up; it was about making it clear that it wasn’t just their boss who felt this way. It was the whole management team.
If that didn’t work, we would ask them to leave. We would explain that it just wasn’t going to work for us. You can find other people who can hit their numbers and achieve goals. But the negative influence of someone like that is extremely detrimental. People tend to subconsciously copy them. Others begin to think the leadership team is hypocritical, that we say we believe in doing the right thing, but we don’t really mean it, because we’re tolerating or even honoring someone who doesn’t act accordingly.
You can look at it from a bigger-picture point of view too. I’d like to bring up an international example. Prior to the financial crisis of 2008, China seemed to be moving a bit in our direction, trying to become a little more free-market oriented and a little less centrally planned. That was our belief, and I think it was true. Then the 2008 crisis hit, and the world lost faith in the American system.
I remember when it became public that we were in crisis, my Chinese conversation partners said, “You know what? We’re losing faith in the U.S. We’re not sure this is a good direction for us. Look where it got you.”
If you remember the 2008 crisis, it was, in a sense, very simple. Maybe I’m oversimplifying, but here are the key issues. Number one, mortgage companies, not banks, were at the center. Banks tend to be more conservative. Mortgage companies started originating more and more home loans and began engaging in practices aimed at increasing volume without caring about the outcomes. Could the borrower ultimately pay the mortgage or not?
They did two main things. First, they began what was called no-document lending. That meant they didn’t require proof of employment. So someone without a job could get a mortgage. Obviously, if you don’t have a job, how will you make your monthly mortgage payment?
Second, they stopped requiring down payments. Traditionally, if you bought a house, you had to put down 20 percent of your own money and borrow 80 percent. But these lenders started offering 100 percent loans, and then 110 percent. They’d lend you enough for the house plus money for a vacation or furniture. That proved to be disastrous over time.
There was more to it, of course, but it resulted in a massive crisis. It wrecked the economy for a few years. And people around the world began saying, “We’re not so sure about the American system anymore.” That was one of the saddest parts of it. Internally, many people were hurt, lost their homes, and we had a recession. But from an international point of view, America’s stature and reputation took a major hit.
When you get right down to it, it was traceable to bad practices.
If you look at the individual banks that have gone out of business in the 40 years I’ve been in banking, you see the same thing. We have a system that allows banks to fail when they make serious errors. Regulators shut them down. In almost every case where that happened, serious errors had been made. Sometimes it was bad judgment. Sometimes it was a lack of financial integrity.
The good part about the U.S. system is that we have enough latitude to take risks. The bad part is that serious mistakes inevitably happen in some cases. And the result is that banks disappear.
Adam: Given how essential trust is to financial integrity, do you have any other tips on how to build and maintain trust?
Ken: One thing I would say is to assess risk honestly and rigorously. Don’t talk yourself into thinking, “Oh, I can handle that risk. I can take it without doing serious damage.” Many people are so determined to do something that they convince themselves they can manage a fundamentally unmanageable risk. That’s one tip.
The other is something I learned a long time ago. If it’s too good to be true, it’s probably not true. It’s so easy for people, because we’re all driven by some amount of greed and a desire to win, to convince themselves that something is true simply because they want it to be. But if it seems too good, it probably isn’t real.
Adam: Why is managing confidential information so important?
Ken: Because you’re being entrusted with confidential information. People give you information about themselves that they don’t want anyone else to know. The simplest and most obvious example is a Social Security number. As a banker, you may need to have that number. It may be a necessity, and you ask them to share it with you. They don’t really want to, because it’s a very precious piece of information. If it gets into the wrong hands, it could cause a lot of trouble.
So when people give you their secrets, they expect you not to share them with anyone else. And furthermore, they expect you to guard those secrets so securely that even an intruder couldn’t get access. That is really what this is all about. You’re in a position where you need to ask your customers for their secrets, and they’re expecting that you’re going to guard them—not just refrain from sharing them, but protect them so an intruder can’t access them either. If you fail to do that, you’re in big trouble because people will immediately lose faith in you.
Adam: What are the keys to managing confidential information?
Ken: The keys to managing confidential information are a couple of things. One of them is helping your staff understand how to guard it. That means the people in your organization who have access to confidential information—your customers’ secrets—need to understand how to protect it. They have to make themselves impervious to intrusions from would-be thieves and hackers. Hackers and fraudsters are constantly calling people who work in banks, trying to trick them into disclosing private customer information. It’s really easy to make a mistake. That’s why you need to have really good training for your team.
I’ll tell you a funny story that’s not exactly what you’re asking about, but it relates closely. About 20 years ago, I came into the bank early. I often arrived around 7 a.m. to get work done before anyone else was in. I was at my computer, and all of a sudden, I got a flash report—an email popped up on my screen that appeared to be from a circuit court in California. It said I was being subpoenaed and offered me the chance to find out why if I just clicked a button.
We now know you should never click on something unless you’re absolutely certain where it’s going to take you. But at the time, I still needed more training. I got anxious. I thought, “I need to know what this is about.” So, very foolishly, within about 10 seconds, I clicked on the button.
My computer, for lack of a better term, blew up in my face. It had to be junked and replaced. Later, when the White Hats—the good-guy hackers—investigated, they determined that a team, we believed from China, was experimenting to see how they could access information. This was a test case, and I fell for it instantly.
What it demonstrated to me was, number one, you have to be extra careful, and number two, you have to help others learn how to be extra careful too. That’s the key: create a culture of carefulness when it comes to protecting the secrets your customers have entrusted to you.
This is more of a cultural issue than anything else. It’s about creating a culture where people feel comfortable admitting mistakes and getting help to fix them. Many organizations punish mistakes in ways that lead people to think, “How do I cover this up?” That only makes things worse.
The way you build your organization’s culture will have more impact on business outcomes than any carefully crafted strategic plan. Strategy is important, and you can hire consultants to help with it. But culture is even more important, and you can’t outsource it. If you’re in a leadership position, you have to take responsibility for it yourself.
It’s important that you demonstrate proper behavior, and that you publicly reward employees who display the right behavior. People look around and notice who is being rewarded. They then subconsciously gravitate toward the kind of behavior they see being celebrated. You have to call out good examples and reward them.
As for bad examples, it’s not necessary to be public, because that can create a culture where people hide mistakes. Handle those situations privately, but do handle them.
Adam: In your career, how have you seen issues around bribery, corruption, and fraud impact people and companies?
Ken: I’m not prepared to say our country is any better or worse than others, but I will say that my four years in China gave me the most exposure to the potential for corrupt behavior, because there is a lot of corruption there. We’re all aware of that. When Xi Jinping came to power at the end of 2012, he devoted a huge amount of time, energy, and resources to rooting out corruption. We saw that firsthand during the four years we lived in China building a bank in Shanghai.
Americans who go to China to work are constantly in danger of violating the Foreign Corrupt Practices Act. That’s a U.S. law that says, “Don’t engage in corrupt practices overseas.” You need to be extra careful because you may face unfamiliar situations, and you might inadvertently engage in behavior that qualifies as corruption.
In China, it often happens like this. There’s a strong culture of gift-giving. People often bring small gifts to meetings or lunches. Reciprocity is expected, so the next time, you bring a gift. But the value of those gifts can escalate over time. If you give me something of a certain value, I might give you something worth a bit more next time. Then you up the ante again. It may start with a red envelope. That envelope might get thicker over time.
Eventually, the gifts can become large. After a year in China, the person I worked with at our partner bank gave me a gift I suspected was too much. I had seen the same item in a store, and it cost about a thousand dollars. At Silicon Valley Bank, our rule was you couldn’t accept gifts worth more than $100. So I talked to our audit committee in the U.S., and they suggested I write a $1,000 check to charity to offset it. The other option would have been to return the gift, but in China that would have been seen as rude.
Fast forward a couple of years. Our bank was doing well, and one day someone from the Chinese Communist Party said, “We’re so impressed with your work. We want to give you a personal gift.” It was $400,000. I reported it to our U.S. audit committee and decided to put the money into the bank as capital—not to accept any of it personally.
If I had accepted it personally, I would have been in a compromised position. Not only would I have violated the law, but I would also have become vulnerable to extortion. If you accept a gift like that, and the government knows you’ve done something wrong, they can pressure you into doing other things you don’t want to do. That’s been a common problem for Western businesspeople in China. It starts small, like a frog in slowly boiling water, and before you know it, the gifts are far too big, but you’re already halfway in.
This isn’t unique to China, of course. We have similar issues here in the U.S. too. I think the guiding principle is: never do anything you wouldn’t want to see on the front page of The Wall Street Journal. That’s what our chairman used to say, and it’s good advice. People often end up doing something they wouldn’t want to see published, either because it offers a big advantage or because they think they’ll get away with it.
Adam: What are the best practices for organizations to implement and for employees to follow to mitigate and prevent bribery, corruption, and fraud?
Ken: I think it all comes back to culture. It’s important to build a positive culture and avoid building a negative one. Recognizing and praising people for doing the right thing is far more effective than punishing them for doing the wrong thing. Too much emphasis on punishment drives bad behavior underground. People then begin finding increasingly sophisticated ways to misbehave without getting caught.
Of course, when someone does something truly unacceptable and can’t remain in the organization, you need to move them on. It’s okay if others suspect the reason. But I really recommend not putting too much focus on punishment. Motivation comes through encouragement. Punishment should be rare and handled privately.
