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Lecture confronts ethical reform in finance

| Sunday, October 12, 2014

Chairman of Citigroup, Inc. Michael O’Neill gave a lecture Friday morning on ethical reform in the financial industry. The lecture marked the third installment of the “Boardroom Insights” lecture series hosted by the Mendoza College of Business.

O’Neill said in the wake of the 2008 financial crisis, there was a perceived absence of ethics in the industry. He cited allegations made by critics of big banks, most notably the president of the New York Federal Reserve Bank William Dudley, who in 2013 said “there is evidence of deep-seated cultural and ethical failures at many large financial institutions.”

In response to these allegations, O’Neill said Citigroup’s Board of Directors developed several reforms to promote ethical behavior in the workplace, including defining shared company values, ensuring fair compensation and training employees in making sound decisions and equipping them with the tools to identify issues in the workplace.

O’Neill said Citigroup focused on implementing clear punitive measures to breaches in the code of conduct.

“The last and terribly important reform is to demonstrate unambiguously the consequences of contravening the [rules],” he said.

Part of Citigroup’s ethical reform is the emphasis that crimes of omission will be treated similarly as crimes of commission, O’Neill said.

“If someone sees something untoward, and doesn’t report it, he or she will be deemed as guilty as the party who committed the infraction,” he said.

O’Neill said Citigroup is also addressing the question of fair compensation, which he described as a “complex” task, given the fierce market for top talent.

“I can assure you that any firm that unilaterally decides to [lower compensation] will be quick to suffer from brain drain,” he said.

Though executive compensation in the financial industry is disproportionally high, O’Neill said Citigroup implemented policies to deter mismanagement.

“For our senior management, 60 percent of compensation is now delivered in deferred stock … invested over time,” he said. “We also added stringent and broad clawbacks that allow us to take back previously awarded compensation if we later find evidence of poor conduct.”

Amidst high-profile scandals and growing popular distrust, O’Neill said it was crucial for the financial industry to deliver on their promise to reform workplace ethics.

“Standing on the soapbox preaching about ethics and codes of conduct without unambiguously demonstrating the consequences of misbehavior is probably more harmful than helpful,” he said. “In fact it may provide a perverse incentive to try to circumvent the rules, as those who have often done so go unpunished.”

Despite the challenges of instituting widespread corporate reform, O’Neill said Citigroup continues its efforts to curb ethics violations and hopes other companies will follow suit.

“Perhaps more than anything else these days, we all recognize that this is a long journey, but we’re determined to reach the destination,” he said.

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