Internal and external approaches to controlling rogue behaviour

Abstract

This paper addresses the reasons for the continuing occurrence of rogue behaviour among financial institutions. Risk-taking is seen as a necessary component for the functioning of successful financial institutions and rogue behaviour as a pathological manifestation of this risk-taking. The conventional approach to eliminating rogue trading is to impose external controls on the traders and their financial institutions. The authors (and others) argue that this approach is inherently flawed because of the dynamic nature of financial markets and the need for financial institutions to innovate. They then argue that successfully addressing the problem of rogue behaviour requires traders themselves to assume responsibility for aligning their actions to the organisation’s culture of appropriate risk-taking. It is shown that this may be accomplished by the use of strong moral leadership to create a socially positive organisational culture. Within this context, a theory of moral development is used to show how risk-takers at financial institutions can become self-regulating through the adoption of a principled moral stance.