Bank of Montreal Financial Group

Ethics has recently become an important topic of discussion amongst directors across North America's boardrooms. Whether this is a response mainly to prevent their company from being involved in the next 'scandal' or whether it is driven by changing societal values and increased competition, there is no doubt that today ethics are a more important factor in business decision making. Many companies have implemented or revised codes of ethics, and the Bank of Montreal (BMO) is no different.

Operating in a number of markets around the world offering personal, corporate and commercial financial services across a variety of business units (see Appendix A), BMO is one of the hundreds of financial institutions in North America that society relies on to protect their life savings. Thus, BMO has many stakeholders and like the majority of its competitors, has a code of ethics in place to try and prevent employees acting unethically and harming those stakeholders.

While in the financial sector there is a wide array of rules that must be complied with, BMO has taken a surprisingly values-based approach to its code of ethics, with the corporation trusting its employees' judgments in taking the best decision when faced with an ethical issue. Unlike the 'rule-books' of some companies, BMO's code of ethics, named "First Principles - Working With Integrity" is a concise, well-presented and instructional document that outlines the company's expectations of employees, and gives them guidance as to how to act when faced with an ethical dilemma.

The foundation of the code is the catchphrase 'Is it fair? Is it right? Is it legal?' which encourages employees to think carefully about how to act ethically. There are also six principles by which BMO lives by: doing what is fair and honest; respecting the rights of others; working to the letter and the spirit of the law; protecting privacy and confidentiality; dealing with conflicts of interest; and conducting ourselves appropriately. This report will analyze the code; discuss the training, communication and control initiatives of BMO; and provide some recommendations as to what should be changed in the ethics program at BMO.

 

As Bird and Gandz (1991) state, organizations have moral obligations to stakeholders. The Bank of Montreal has many stakeholders - customers, clients, suppliers, employees, investors, regulators, government, and the public - and has a code of ethics in order to encourage employees to act ethically and in so doing minimize or eliminate harm done to these stakeholders as a result of the company's actions. The risks of not having a code of ethics to operate business by are extremely high, especially in the financial sector. There are a vast number of rules and regulations that are imposed on financial institutions by regulators, legislation and the government, and if companies fail to comply with these rules, or make unethical decisions, many people's life savings can be heavily eroded as a result.

Competitively, ethics today provides a strategic edge, particularly with the public perception of banks as corporate conglomerates which charge high fees and close unprofitable branches just to maintain healthy bottom lines. Whilst a code of ethics won't change this perception overnight, banks must strive to become more transparent and honest in the eyes of the public. As most companies in the industry today are publishing codes of ethics, it is quite apparent that the costs of not implementing an ethics program can be substantial. Thus, BMO has increased the use of the code and has implemented it across the entire organization.

According to Scott Kerr, Senior Manager of Compliance at BMO, the code of ethics has been around for 'at least ten years, and probably longer.' The First Principles document was overhauled in 2001, with the company changing its presentation, and most importantly it's content. During the development of the code, many stakeholders from within and from outside the corporation were consulted as to what should be in the code.

The Bank is concerned not only with what actions are taken by employees, but also with the appearance of unethical conduct (for example an employee may have certain information that he or she is not entitled to, and after an investigation it may be discovered that the employee had that information, and never acted upon it, yet the appearance is that the employee could have acted unethically). Thus the code explicitly mentions stakeholders and communicates to employees that the Bank must retain the trust and respect of these stakeholders, by adhering to "honesty, integrity and the highest of ethical standards."

The Bank of Montreal has taken a values-based approach towards their code of ethics. By focusing on the 'Is it right? Is it fair? Is it legal?' message, BMO implies that they trust their employees to make sound ethical decisions, and that a code of ethics doesn't have to be a hundred-page document outlining precisely what actions may or may not be done. As discussed by Paine (1994), what she calls an 'Integrity Strategy' towards ethics codes concentrates on enabling responsible conduct rather than preventing criminal misconduct. Although BMO is not entirely values-based, it does enable responsible conduct.

By urging employees to 'do what is fair and honest,' and 'conducting ourselves appropriately,' the bank empowers employees to make responsible and ethical decisions, even if they are 'to the letter and spirit of the law.' Although BMO makes a point out of obeying the law, this does not automatically mean that the code of ethics is compliance based. Indeed, the Bank asks of employees not only is it (a particular action) legal, but also whether it is fair and right. A values-based code of ethics must incorporate the law as minimum standards, but as pointed out as one of BMO's six principles, employees must not only work to the letter of the law, but also to its spirit.

There are a number of other clues throughout the code that indicate it is more values-based. For example, the code is simply set out, and reiterates core values and guiding principles (the 'Is it right? Is it fair? Is it legal?' slogan, and the six First Principles) rather than emphasizing 'legalese' details imposed from above - BMO's code of ethics takes a 'we believe approach' (for example, 'we commit to conducting our relationships in a fair an open manner,' and 'each of us has a duty to protect the privacy and confidentiality of information') rather than an enforced 'Thou shalt not...' mentality.

It can be seen that ethics is taken seriously at BMO, with an introduction from the Chairman/Chief Executive Officer who states that 'we seldom find more capable guides (in making ethical decisions) than our own good values and judgment,' and through this communication, BMO shows that ethics is important not only at the frontline, but also in top-level management. By committing to the First Principles document, Tony Comper sets the bar high, and leads by example. As Stewart (1996) states, providing a role model encourages moral behavior in a company's employees. Trust also plays an important role, as employees will be less tempted to act unethically when the company makes them responsible for their actions (ibid).

BMO places a high emphasis on trusting their employees to act responsibly when making decisions. Employees at BMO are viewed as social beings guided not only by material self-interest, but also values, ideas and peers. This suggests that BMO believes its employees are at the second (conventional) level of cognitive moral development according to Kohlberg (in Trevino and Nelson, 1995). According to Kohlberg's theory, individuals go through stages where different influences affect how people decide what course of action is morally correct. At level one, individuals' decisions are guided by the punishments expected as a result of a decision, however at level two, individuals are influenced more by the expectations of peers and society.

BMO believes in its employees to be capable of making ethical decisions and trusts them to do the 'right and fair and decent thing' (First Principles). By not making a great issue about punishment in the code, BMO perpetuates this kind of thinking and instead tries to instill high expectations in its employees, so that they are guided by the expectations of their peers and society when it comes to ethical decision-making. This issue shows that BMO trusts their employees to 'do the right thing' and is another indicator of a values-based approach.

BMO not only takes a values-based approach to their code of ethics, but also takes a values-based philosophical approach to ethics. As defined in class, ethical values are 'core beliefs which are inherently concerned with what is intrinsically good or right and the way one should act.' These values translate into principles, and in BMO's case, they have six principles that stem from their core values of doing what is right, fair and honest.

One of these principles is dealing with conflicts of interest. Within the section of the code that deals with this principle, the Bank guides its employees on receiving gifts: 'as a rule of thumb, a gift of more than nominal value is not acceptable.' While this may seem a strict commandment, there are only a few instances in the code where these 'thou shalt not...' statements are made, and it stems out of the values-based approach to ethics. The Bank wants to uphold its values of honesty and integrity, and in turn has developed guiding principles and instructive statements.

Finally, BMO takes a top-down approach to implementing the code of ethics across the organization. By having a corporate compliance department that is responsible for many issues surrounding ethical decision-making, and management personally committing to upholding the standards outlined in the code, BMO successfully integrates ethics and management, through a variety of measures.

For instance, the code was developed after an extensive consultative process with various stakeholders, leadership provides yearly reviews and updates on the code, there are punishments for failing to comply with the code - yet each employee is treated fairly and whistleblowers are protected, every employee has to sign a document each year stating they have read and understood the code, and ethics is integrated into organization-wide training programs. Through the implementation of the code and the organization-wide processes put in place to promote and uphold ethics within the organization, BMO is successful in having a values-based approach towards ethics that is integrated across all levels of management.

 

At the Bank of Montreal, employees are not given specific ethics training. Instead, ethics is interwoven into other substantive business activity training. This does not mean that employees are merely handed the code of ethics and expected to read and internalize it - on the contrary employees discuss ethics within the context of general business during training sessions. A similar approach is taken towards senior managers in that ethics is not delivered in isolated training - it is entwined with other issues. While Paine (1994) suggests that an integrity-based approach towards ethics should integrate ethics into company systems, there should also be more distinct training and communicating regarding ethics. This is an area that BMO could improve upon, and is mentioned in the recommendations section.

The case studies in the code of ethics have been developed by the Corporate Compliance Department based on the inquiries they have received over time from employees regarding conflicts of interest, confidentiality and so on, yet are not specifically discussed in training sessions. These hypothetical situations have been included in BMO's code of ethics in order to make the booklet 'as practical as possible' and easy for employees to relate to. Again, this could be an area for improvement, as employees are expected to individually process and analyze these case studies - perhaps a more effective approach would be to provide a forum for the discussion of these case studies.

As discussed in class, communication about ethics and integrity must come straight from the top in order to engender an organizational culture of ethical behavior. The first section of the First Principles document contains a message from the Chairman and CEO, and this sets the scene for the entire organization. By informing employees that ethics is taken seriously by even top-level managers, a corporate culture of ethical behavior is promoted. Even in BMO's mission statement, it is mentioned that integrity is a core value, and that the company's competitive advantage is its people who abide by those core values.

Thus, there is organization-wide communication that ethics is important at BMO. The catchphrase 'Is it fair? Is it right? Is it legal?' is also important in communicating to employees the approach taken by BMO with regard to ethics. By providing this guideline within the primary communication tool regarding ethics (that is, the First Principles document), employees understand how the company tackles ethical decision-making at a practical level.

The code of ethics also has references to other company documents and policies which outline in greater detail expected levels of conduct and expand on particular issues and discuss issues that go beyond ethics - for example norms of service, legislative requirements and so on. In total, the effect of all this communication is that employees realize that ethics is a serious concern for BMO, and the commitment to ethical behavior starts at the top of the organization, and is expected from all employees.