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«Global TrusT and EThics in FinancE Innovative Ideas from the Robin Cosgrove Prize Carol Cosgrove-Sacks / Paul H. Dembinski Editors Trust and Ethics in ...»

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TrusT and EThics

in FinancE

Innovative Ideas from the Robin Cosgrove Prize

Carol Cosgrove-Sacks / Paul H. Dembinski


Trust and Ethics in Finance

Innovative ideas from the Robin Cosgrove Prize

Trust and Ethics in Finance

Innovative ideas from the Robin Cosgrove Prize


Carol Cosgrove-Sacks / Paul H. Dembinski

Globethics.net Global 6

Globethics.net Global

Series editor: Christoph Stückelberger. Founder and Executive Director of

Globethics.net and Professor of Ethics, University of Basel/Switzerland Globethics.net Global No. 6 (Formerly Globethics.net Series) Carol Cosgrove-Sacks / Paul H. Dembinski (eds.) Trust and Ethics in Finance: Innovative ideas from the Robin Cosgrove Prize ISBN 978-2-940428-40-3 (online) ISBN 978-2-940428-41-0 (print) © 2012 Globethics.net Cover Design: Juan-Pablo Cisneros Editorial support: Páraic Réamonn, Sibilla La Spina Globethics.net Head Office 150 route de Ferney 1211 Geneva 2, Switzerland Website: www.globethics.net Contact: infoweb@globethics.net Availability: This book can be downloaded from the Globethics.net library, www.globethics.net, for free. Print copies can be ordered from Globethics.net, infoweb@globethics.net, for CHF/USD 13 (South) or 25 (North), plus postage

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Remembering Robin



The Evolution and Global Role of the Robin Cosgrove Prize, 2006-2013

Carol Cosgrove-Sacks Ethics and the Economy: A Tense Relationship

Paul H. Dembinski Credo + Credibility = Credit

Christoph Stückelberger PART I BEYOND COMPLIANCE

1 Ethics: A Diet for Highly Leveraged Financial Markets.... 47 Jakub Kuriata 2 Ethical Cash Management? A Possible Solution................. 65 Leire San-Jose 3 Ethics and Order in the Disorderly World of Finance....... 79 Elise Pellerin and Marie Casimiro 4 Ethics or Bust: Beyond Compliance and Good Marketing 93 Clare Payne 5 Ethics: The Key to Credibility

Felippe Araujo 6 Emotions, Personal Ethics and Professional Life:

The Lost Link

Meredith Benton 7 The Financial Sector and the Behaviour of People:

What to Do?

Carlos Eduardo Estapé Viana 8 Decision: The space between the Code of Ethics and Ethical Behaviour

Carmen Lucia Carmona Paredes 9 Ethics: Essential Prerequisite of the Financial System.....155 David Sifah PART II: STANDARDS AND VALUES

10 Social Impact Ratings: How to Make Responsible Investment Appealing

Jonathan M. Wisebrod 11 The Reconciliation of Finance and Ethics: Integrating the Interior and Exterior Dimensions of Reality..................191 Faly Ranaivoson 12 Financial Derivatives and Responsibility – How to Deal Ethically with Financial Risk

Simone Heinemann 13 Internationalism, Institutions and Individuals:

Systemic Changes for a Systemic Ethical Crisis

Geoffrey See 14 Accountability and the Second Line of Defence...............239 Immaculate Dadiso Motsi-Omoijiada 15 Redefining Capitalism: An Ethical Rating and its Contribution to Development

Jaime Pozuelo-Monfort 16 When Small Companies Dabble in Disinformation........ 269 Saif Ullah PART III: SOLIDARITY AND SUSTAINABILITY.......... 279 17 Solidarity Finance and the Democratisation of Money... 281 Nicolás Meyer 18 Ethics vs. Finance? An analysis of the Origins, Problems and Future Perspectives of this Relationship

Bruno Federico Fernández 19 In Search of Honesty and Altruism

Raina Abdul Rahim Mousa 20 Microfinance: Getting Money to the Poor or Making Money out of the Poor?

Joy Mueni Maina Kiiru 21 The South and Carbon Dioxide: Every Cloud has a Silver Lining

Jem Bendell and Inderpreet Chawla 22 Investing as if People and Planet Mattered

Pernille Jessen 23 Virtuous Enterprises: The Place of Christian Ethics...... 367 Jan Thomas Otte APPENDICES

I The Global Prize Jury

II The Ibero-american Jury

III The Robin Cosgrove Prize

IV The Authors


Robin Cosgrove graduated from Oxford University in 1996 with an MA in Japanese and Economics. He joined Barclays (BZW) on their Japanese Equities Desk, moving to Japan and later to Dresdner Kleinwort Benson Securities. Subsequently he joined UBS Warburg, moving to Morgan Stanley Japanese Equities, with clients including Gartmore, Penta, Moore Capital, Lotus, Wharton, Barings and Fidelity. In 2004 he moved back to London to become the manager of the RAB Capital Japan Fund. He travelled widely in emerging markets and planned to create a foundation to assist young finance professionals to obtain international awareness and training to help them develop a commitment to ethical financial practices that he believed was essential for them to attract sustainable investment and secure economic development. He was uncompromising in his demands for himself and for his friends and colleagues and believed passionately that sustainable success could come only through high standards of integrity. Sadly he died before his plans could come to fruition.

“Trust is the lifeline of finance – building trust is essential” Professor Tamar Frankel, Boston University School of Law1 From the Emilio Fontela Lecture, meeting on Ethics, Finance and Responsibility, Observatoire de la Finance and the Award of the Ethics in Finance Robin Cosgrove Prize 2011, Geneva


–  –  –

Has the business community lost the ethical plot? Over the past two decades successive boom and bust cycles have thrown up extraordinary examples of ethical failure. First, the dot.com era in the US produced scandals at Enron, WorldCom, Tyco International, Qwest, HealthSouth and sundry others. Andersen, one of the big five global audit firms, disintegrated when the US Department of Justice investigated its audit failures at Enron.

In the first decade of the new millennium Europe saw fraud at Parmalat, where the US and European investment banks turned out to have connived in concealing the Italian dairy company’s dire financial plight.

Royal Dutch Shell, once regarded as a beacon of ethical solidity, was found to have cooked the books by inflating its production reserves.

Volkswagen was beset by charges of bribery and corruption, while Siemens ran into trouble with the US Foreign Corrupt Practices Act.

Then in the protracted financial crisis that began in 2007 the behaviour of US banks in the sub-prime mortgage market was shown to have been outrageously rapacious towards borrowers, while retail banking in Europe was marred by a succession of mis-selling scandals – the financial world’s pet euphemism for rip-offs. Fraud charges have been brought against senior executives of Fannie Mae and Freddie Mac, the big US semi-official mortgage institutions. Goldman Sachs, the world’s pre-eminent investment bank, has been exposed by a departing senior executive in an article in the New York Times as being hell-bent on 12 Trust and Ethics in Finance fleecing its clients, which Goldman bankers referred to as muppets. It had earlier paid $550m to settle a case brought by the Securities and Exchange Commission for misleading investors without admitting or denying wrongdoing.

In China the falsification of company accounts has turned into an epidemic, leaving auditors unable to form an opinion. The Japanese company Olympus provided one more example of concealment of losses. All of this took place against the background of top executives’ pay spiralling to unprecedented levels regardless of corporate performance. In banking the bonuses continued even after the banks were the recipients of the greatest bail-out in financial history. Finance was at the epicentre of ethical failure.

It has to be acknowledged, then, that the environment into which the Robin Cosgrove prize for innovative ideas in finance was launched was more than a little challenging. How can this be rationalised? Some argue that these ethical aberrations were simply a reflection of the business cycle. When times are good and share prices soar, ethical standards tend to drop as people become greedy and succumb to temptation. When companies fail in the bad times and fraud is exposed, moral standards are reemphasised. Yet there is surely more to it than that.

I would argue that there has been a secular decline in ethical standards. In part this stems from the change from a world of heavily regulated and cartelised markets, in which managers enjoyed paternalistic power with relatively little accountability, to one of liberalised markets in which greater emphasis is placed on shareholder value. Chief executives are now in a capital-market pressure cooker, with fund managers and analysts becoming ever more vocal in their demands for value.

Their definition of value is narrowly financial. Together with the requirement for quarterly reporting, this has bred a hitting-the-numbers culture, with attendant temptations for executives to cook the books to meet capital market demands.

Preface 13

This spur to short-termism has been compounded by the growth of performance-related or equity-type incentives, whether in the form of conventional bonuses or stock option rewards. The metrics used to calculate these performance-related rewards are mainly such crude yardsticks as total shareholder return and earnings per share, usually measured over absurdly short time periods. The accounting numbers in the calculation are, to a degree, manipulable. The result is that incentive structures are at odds with the requirements of decent ethics. When that is the case, it is inevitable that ethics will sometimes become the casualty.

The problem of short-termism has been compounded in finance by the growing opacity and complexity of markets, notably the over-thecounter markets in derivatives and structured products. Also by the ascendancy of traders over corporate financiers and commercial bankers in the banking hierarchy. A transactional culture now prevails. On the trading floors, many regard themselves as hired guns, borrowing the capital of the bank to support their individualistic pursuit of personal profit.

Loyalty to the organisation is minimal. The culture of the trading floor owes more to the animal kingdom than to the fiduciary ethos that used to be seen as central to the workings of finance.

Equally problematic are the assumptions of economics and of modern finance theory, which put heavy emphasis on the behaviour of “rational” agents who seek to maximise their own welfare through opportunistic behaviour. The pursuit of material wealth is assumed to be the justification for individual and group behaviour. For anyone lacking much of a moral conscience this amounts to an implicit ethical – or rather, unethical – agenda, given that acting other than opportunistically is perceived as irrational.

Much of the response to the scandals referred to earlier has been in the form of increased regulation. An ethics industry has grown up, with myriad ethics courses appearing in business schools and countless conTrust and Ethics in Finance sultants devising ethics codes for large corporations. People at the top of the corporation have thus outsourced ethics. An internal market has thus developed to shift moral responsibility around the organisation. All of this has spawned a culture of compliance and done nothing to prevent a plethora of corporate scandals and ethical lapses. Few are convinced by the statements of ethical principles produced by large corporations, still less by investment banks. So what can be done to address the ethical deficit in business and finance?

The progenitors of the Robin Cosgrove prize rightly perceived a need to raise consciousness about the advantages of an ethical culture in finance. And one of the themes that emerge repeatedly throughout the essays in this book is the economic and social value of trust, whether in economies, markets or corporations. Trust is particularly important in financial markets. This becomes obvious if a comparison is made between financial and retail activity. With food, drink and clothes, consumers are quick to detect poor quality and will take their custom elsewhere. In contrast, many retail financial decisions are infrequent. People often make a decision on their pension only when they join the pension scheme and when they are preparing to leave it. By the time you discover you have made a mistake with a pension, a mortgage or car loan, it may be too late to do much about it. This makes it harder for the financial markets to identify rogues than in other industries. It is a sad fact that financial institutions that engage in widespread mis-selling rarely go out of business. They may be fined by the regulatory authorities. But senior management often regards the fines, which anyway fall on shareholders rather than managers, as an operating cost of the business.

This has bred a serious loss of confidence among the public about banking and finance. Against the background of excessive boardroom pay, the legitimacy of wealth creation and of the Western forms of capitalism is increasingly questioned. That underlines the importance of the Robin Cosgrove prize agenda. And the good new is that the environment

Preface 15

for that agenda is not uniformly hostile. Many business people now recognise that companies and financial institutions operate in the social system and that their activities have social consequences. They also grasp that in running a business most decisions cannot be taken on the basis of a pure economic calculus and that simply complying with the law is not enough.

I would argue that ethics provide a complement to the internal constitution of the company that sets out the objects and rules for the conduct of the company’s business. Likewise that the contract between management and shareholders is necessarily incomplete: shareholders cannot be expected to sanction each and every decision taken by operational management. In fact, most shareholders – and not just ethical investment funds – would wish management to avoid making the maximum possible profit if, for example, this entailed abuses of human rights. To give just one illustration, how many pension scheme beneficiaries would be happy to profit from financing the building of a pipeline in Myanmar with forced labour? There are occasions when management has to make its best judgement of shareholders’ views and allow ethics to trump a narrow profit-maximising course of action.

A reading of the essays that follow encourages the view that trust in business and finance is vital. It creates social capital that facilitates cooperative behaviour both in society and in organisations. Bad behaviour erodes trust and forces people to place heavier reliance on the law and regulation. And the more transactions have to be governed by contract, the more cumbersome and expensive business and finance become, as everything has to be negotiated, agreed, litigated and enforced. Such legalism, as a substitute for trust, gives rise to what economists call transaction costs. At a social level, according to the American thinker Francis Fukuyama, a lack of trust imposes a kind of tax on all forms of economic activity. At the corporate level, I would add, trust is an informal, low-cost substitute for cumbersome internal controls within the comTrust and Ethics in Finance pany and external regulation without. In an ethical culture everyone knows they can do the right thing decisively and with confidence. The business will tend to attract high calibre people of principle. Relations with customers and the general public will be enhanced.

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