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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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We may compare people that exhibit a low – or pre-conventional (Kohlberg, 1973) – level of ethical aptitude to children who will determine the rightness or wrongness of their actions on the basis of whether they get caught or not. The main difference between adults and children with a similar ethical capacity lies in adults’ cognitive capacity to design complex schemes in order to avoid getting caught. As long as they can do so, they will act with the purpose of immediate gratification without attending to the impact their behaviours might have on others.

202 Trust and Ethics in Finance The medium – or conventional – level of ethical aptitude is what most people equal ethics to when they think of, or use this term. At this stage, it is about behaving according to the rule of the law. Or similar to adolescents, it is also about acting in conformity with group expectations. Consequently, people won’t break the rules and may even experience guilt by doing so, even if they don’t get caught.

At a high – or post-conventional – level of ethical aptitude, it is not about being told how to live, or about how to give precise and definitive answers to moral questions, or about following a textbook. It’s rather about holding the space for an overarching framework for thinking to emerge. Indeed, such a framework is needed to make nuanced judgements around highly ambiguous dilemmas, to make sense of people’s and cultures’ different ethical structures, and to take a multiplicity of perspectives into account. Post-conventional ethics focuses on one’s intentions rather than one’s outward behaviours: from the outside, you may observe two individual exhibiting very similar behaviours, but they may actually be moved by very different intentions. At this stage, the challenge is about becoming a truly authentic and courageous individual who stays present and centred, holding to his – world-centric rather ethnocentric or egocentric – principles in the face of difficult and complicated choices.

We have yet to examine how to foster the development of integrated professionals that display excellence in both the exterior (technical) and interior (ethical) dimensions. It is time to move now from epistemology to application.

From philosophy to action Getting back to our main thesis, it is not by merely attempting to apply ethics as a band aid that we’ll be able to heal the deep wounds produced by the excesses of finance. For us practitioners, the question is how can we weave ethical concern or the interior dimension into the Reconciling Finance and Ethics 203 very fabric of everything we do in relation to ourselves, others, and organisations. In other words, one mode of framing the concept of ethics is that being ethical is about leading oneself with the purpose of being – and staying – in alignment with one’s values, thereby demonstrating personal integrity. In relation to others, ethical concern is about cultivating mutuality and engaging with others with the intention of fostering reciprocation and interdependence. Still at an organisational, interorganisational level and beyond, ethical concern is about being compelled to act with the purpose of advancing sustainability.

One particular practice that can blend these three objectives is called action inquiry. “It is a way of simultaneously conducting action and inquiry as a disciplined leadership practice that increases the wider effectiveness of our actions” (Torbert, 2004). The action part refers to our behaviours – what we do, what we say. The inquiry part points to questioning and reflecting – within ourselves, or in relation to others – as we engage in anything that we do.

To ground ourselves, let’s dive into the story of Steve Thompson, as he reflects on an incident with his boss, Ron Cedrick (excerpted from

Torbert, 2004, pp.14-16):

“Steve’s team is laying underwater pipeline when a storm begins to blow around their (…) platform.

The most critical part of this dangerous procedure is the launch and recovery of the six-man bell through the “interface” – the wave-affected first 25 feet below the ocean surface. Rough seas have separated more than one diving bell from its winch. When this happens, there is little hope of returning the divers alive.

It was my first job as project manager, so it was of particular importance to me that the crew was doing an outstanding job and Cedrick was extremely pleased with our performance. (…) And, no matter how difficult, his projects always came in ahead of schedule.

204 Trust and Ethics in Finance The bell had just gone into the water for an anticipated 12-hour run when the wind changed direction and was coming at us from the same direction as the moderate swell, just as it does before it really blows. I alerted the shift supervisor to keep an eye on the weather and went up to the bridge for a look at the most recent forecast and facsimile, which confirmed my suspicions.

Just then, Cedrick came up to me, “I personally appreciate the fine job you and your boys are doing and I know it’ll continue. I know the weather’s getting up a bit, but we have to complete the flow line connection today to stay ahead, so we need to keep that bell in the water as long as we can before we let a little ole weather shut us down. I’ve seen the respect those boys have for you and I know they’ll do what you ask.” “Yes, sir” I responded confidently. What was going on inside me at that moment sounded different though. The moment I reviewed the weather on the bridge, I became tense with fear. I was afraid I wouldn’t have the strength of character to shut down the operation in the face of my overwhelming desire to succeed objectively and in Cedrick’s eyes. I was also afraid I would have to deceive my people into thinking that pushing our operating limits was justified.

The outcome was all too predictable. I kept the bell in the water too long. The weather blew a gale. The recovery of the bell through 20-foot seas was perilous. I compromised the safety of the divers and set a poor precedent for the permissible operating parameters. I received no satisfaction from the major bonus Cedrick gave me for “pulling it off” – we did complete the flowline connection. Inside me, the awareness that I had manipulated and jeopardised the safety of my fellow workers galled my illusion that I was an honest, ethical man.” Reconciling Finance and Ethics 205 Now let’s just replace Steve Thompson with a portfolio manager or a trader who is subject to an intense pressure coming from every corner, clients, colleagues, and his or her institution. Now let’s just add the constraint that he or she has to act and take decision moment to moment.

How can ethical concern be put into the equation, not only before or after the fact, but as any situation unfolds second after second?

Here are some learnings that we can derive from Steve’s story:

To use a terminology borrowed tfrom systems theory, finance professionals have to engage in triple-loop learning. In other words, not only do they have to monitor their actions (single-loop) and adapt their strategy (double-loop) with the purpose of achieving some desired results, they also have to develop what Torbert calls a “super-vision” (triple-loop) that allows them to take a step back in the moment in order to, when necessary, give space for ethical concern to emerge. When recounting his experience, Steve Thompson shares how he felt tension and fear because he was facing multiple conflicts of interest as Cedrick pushed him to resume the operations: he wanted to stay true to the image his boss had of him; he wanted to perform well – who does not want to?

– he wanted to attend to the well-being of his team; and he wanted to view himself as an ethical man. What he lacked during his encounter with Cedrick was a capacity to not only be aware of the incongruity that was happening in himself, but also to maintain this awareness in order for him to change his course of action.

Torbert suggests several practices to advance one’s capacity to sustain inquiry in the midst of action: Noticing how we feel as we move from one activity to another, or after interactions we have with any interlocutor; keeping a journal to investigate the various territories of our experience – our achievements, our behaviours, our strategies, and our intentionality; attending to the way we speak – are we sharing our intent behind a conversation; are we elaborating on our thinking; are we inquiring into others’ opinions, and so forth?

206 Trust and Ethics in Finance Steve’s story brings out another issue, that of unilateral power. In the story, we can witness how Cedrick made use of his cognitive and interpersonal abilities to slyly put pressure on Steve. First, he relied on his primary positional authority as Steve’s superior; then he used his secondary positional authority as an expert; and finally, he minimised the situation by reducing the storm to some “little ole weather.” On a larger scale, we can see how such approaches resting on unilateral power – action without inquiry – can give birth to major scandals. Symmetrically, inquiry without action might lead to parapraxis – in the case of Steve Thompson, he had a glimpse of awareness that allowed him to feel some tension within himself, but not sufficiently to engage in a mutual conversation with his manager.

Moving from the personal to the institutional, we can say that the whole socially responsible investing (SRI) movement is practising a type of triple-loop learning. Strategically, it has deployed new approaches such as corporate engagement, community investing, and public policy advocacy (double-loop). The SRI movement also pioneered new methodologies to assess companies’ performance by taking economic, social, and environmental aspects into account. And it has enunciated a new purpose for investing. For instance, we saw previously that Trillium Asset Management Corporation’s raison d’être is to Invest for a Better World.

The SRI movement is a good indicator of how a whole domain of activities can evolve by putting ethics directly into the finance equation, by integrating the interior and exterior dimensions of any issue, and by weaving action and inquiry together. Companies are then invited to not only engage in single-loop operational changes, double-loop strategical adaptations, but also in a triple-loop reflection on their raison d’être. We can only hope for the SRI movement to spread so that corporations abandon a pursuit of profit devoid of ethics to fully embrace a triple bottom line approach full of ethical concern.

Reconciling Finance and Ethics 207 References Esbjörn-Hargens, S., 2006. “Integral Ecology: A Post-Metaphysical Approach to Environmental Phenomena”, AQAL Journal of Integral Theory and Practice 1.

Gardner, H., 1993. Frames of Mind: The Theory of Multiple Intelligences, New York: Basic Books.

Gardner, H., 1999. The Disciplined Mind, New York: Simon & Schuster.

Stagen Leadership Institute, 2004. Human Performance.

Torbert, B. and Associates, 2004. Action Inquiry, The Secret of Timely and Transforming Leadership, San Francisco: Berrett-Koehler Publishers.

Wagner, Richard B., 2006. “Integral Finance 201: The Four Dimensions of Money”, AQAL Journal of Integral Theory and Practice 1.

Wilber, K., 1998. The Marriage of Sense and Soul, New York: Random House.

Wilber, K. et al., 2008. Integral Life Practice, Boston and London: Integral Books.

208 Trust and Ethics in Finance




–  –  –

Every day we make decisions that involve financial and economic risks. Which investment option should we choose? What kind of car insurance should we get? Should we save money or spend it right away?

Risk can create opportunities. But it can also imply a possibility of loss which should be avoided whenever possible. Many of our financial decisions which involve risk are taken individually. In many of these cases the consequences, e.g. the gains as well as the losses, only affect the risk bearer himself. But, as the sub-prime crisis 2007-8 has shown, financial risks taken by individual parties can also be associated with costs for parties other than the risk creator – outside and within the financial system. Such cases have particular ethical relevance: The creation and dispersion of financial risk can potentially harm traders as well as society as a whole.

One of the means for dispersing risk is financial derivatives. Derivatives are a particular kind of tradable contract. As the name suggests, their trade value is derived from the value of other assets, historically commodities but also corporate shares, currencies, interest rates, etc. DeTrust and Ethics in Finance rivatives have often been said to have been involved in several financial debacles as the scandals of Barings Bank, Metallgesellschaft or the fall of LTCM for example. They are especially known for providing leverage. Through derivatives trading a whole range of different and complex products for managing financial risk has become available. Still, their impact on the aggregate level of risk society has to bear is unclear. This paper seeks to show that financial derivatives are an ethical matter. We have to ask ourselves which aggregate level of risk is ethically acceptable. And we have to be aware of the fact that the risks taken on the individual level can lead to the materialisation of external costs that may drastically reduce human welfare. In this paper, I will pursue a normative investigation of risk-taking and present three guidelines for dealing ethically with financial risk.

What are financial derivatives?

Four main forms of derivatives exist: futures, forwards, options and swaps. All of these instruments are traditionally defined as instruments that insure against, or transfer, risk. One of these basic types of derivatives, a forward, for example, is an agreement by two parties to engage in a financial transaction at a future (forward) point in time. An example of a forward might be an agreement for a farmer to sell ten sackfuls of potatoes to a merchant, six months from today, at a price agreed today, say 100 Euros, which is, let´s suppose for simplicity’s sake, the market price of today. If the market price of the underlying commodity, potatoes, goes up during the following six months, the value of the contract decreases, since its owner, the farmer, would then have the essentially worthless right to sell his potatoes at a price lower than the market price.

If the market price of potatoes decreases during the next six months, the value of the forward contract increases, since the forward would specify a higher price than the market price and the farmer could make a profit despite lower market prices. Thus, derivatives are at the same time inFinancial Derivatives and Responsibility 211 struments for managing, transferring and hedging against risks caused by possible fluctuations of the market value of the underlying asset: In case the market price of potatoes decreases, the farmer can sell his ten sackfuls at the agreed and higher price.

The other three basic types of derivative are similar to the forward contract just described in that they provide a means of trading risk: Futures contracts are standardised forwards, which means that they can be exchange traded. The standardisation makes it more likely that different parties can be matched up in the futures market, thereby increasing the liquidity of the market. An option gives the purchaser the option, or right, to either buy (call option) or sell (put option) the underlying asset at a specified price either at the expiry date or within a given period.

Swaps, which are much more recent financial instruments, are agreements to exchange, or swap, interest payments on loans (very often a floating rate and a fixed rate loan). These basic types of derivatives can be recombined as can be seen by financial constructions such as swaptions (a combination of options and swaps) and compound options (options on options).

The immense growth of financial derivatives

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