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We should remember that in an integrated socio-economic vision, apart from the market, the state and the civil society are pursuing the same objectives, and each has a comparative advantage due to its inherent characteristics. Of course it is laudable for a commercial bank to clean up a public park, but it would be better for the state to take charge of that – as it is one of its normal tasks – or, if it does not, civil society should demand that it does so. If stock exchange employees repaint a school, that is all well and good, but there must surely exist a foundation and voluntary workers who know how to make a good job of this kind of initiative.
We suggest that financial institutions running CSR activities channel their efforts into activities they are best at. Instead of teaching the rules of the road, they could be teaching basic financial concepts to young people in schools, or concentrating on developing new micro-finance products for the less well-off, thus strengthening social links.
Our proposal may well meet with criticism from those who say that it may allow these financial institutions to forget about the other CSR objectives, particularly those linked to the environment. However, taking care of the environment, for example, does not only depend on major investment in the world outside. If all institutions share the same vision, small internal actions may contribute significantly to achieving environmental objectives: better communication across IT networks in order to save paper, installing equipment to promote economic sustainability, giving up the use of aerosol cleaning products that damage the ozone layer, sorting rubbish, using low consumption light bulbs, and so on.
Ethics vs Finance? 313 By following these recommendations, financial sector institutions can become an efficient and civilising means of fighting for greater fairness and will help create the reciprocal links society needs.
The importance of education The ideas that financial theory tends to create about market players ends up by influencing their actual everyday behaviour. A study carried out among students from different faculties in a university in the United States showed that Finance and Economics students educated in the way rational agents should act are more likely to act in a selfish way than students from other disciplines. This happens because the individuals concerned perceive that if they act in a way that is contrary to what is considered rational the consequences would be a loss of time or money.
Education is one of the most powerful drivers of cultural change. Creating a financial system that can make a contribution to the common good depends on education. It is therefore vital that universities and business schools include ethics as a basic element of their study programmes across the board, rather than as optional courses or one-off seminars.
Fortunately, after the latest crisis, more and more centres of financial studies have recognised the importance of teaching ethics to their students. If the majority of institutions were to follow suit, a good critical mass of ethical financiers of the next generation would already be in training.
According to George Orwell, “Sometimes the first duty of intelligent men is the restatement of the obvious.” The latest financial market crisis gives us the opportunity to reintegrate ethical principles into the theory and practice of the sector, something “obvious” that seems to have been forgotten recently. There is a well-known saying to the efTrust and Ethics in Finance fect that in business “there is no such thing as a free lunch”. If the financial industry continues to function with a disregard for ethics, there will always be someone – whether it be financial players or society in general – who will end up paying dearly.
Bibliography Benedict XVI, “Caritas in veritate” (Charity in Truth), Papal Encyclical, Rome, 2009.
Bruni, Luigino/ Zamagni, Stefano, “Economia Civile” (Civil Economy), Il Mulino, March 2004 Ferullo, Hugo Daniel, “Luz y sombra del pensamiento economico moderno” (Light and shade in modern economic thought), Tucumán: UNT, May 2006.
Ferullo, Hugo Daniel, “La complejidad social del pensamiento económico. Ensayos” (The social complexity of economic thought. Essays), Tucumán:
Sen, Amartya, “The Role of the Ethical Company in the Modern World” – Speech on ethics in international business for a trainer-training session, 2009.
Stigler, George J., Economics or Ethics? – Tanner Lectures on Human Values.
Zak, Paul/ Knack, Stephen, Trust and Growth, Claremont Graduate University – Centre for Neuroeconomics studies, and the World Bank – Development Research Group (DECRG), 1998.
IN SEARCH OF HONESTY AND ALTRUISM
Ethics in general is concerned with human behaviour, which is the acceptance or “right”, or non-acceptance or “wrong”, based on conventional morality. General ethical norms encompass truthfulness, honesty, integrity, respect for others, fairness and justice. They relate to all aspects of life, including business and finance. Financial ethics is therefore a subset of general ethics.
Ethical norms are essential for maintaining stability and harmony in social life, where people interact with one another. Recognition of others’ needs and aspirations, fairness, and co-operative efforts to deal with common issues are examples of aspects of social behaviour that contribute to social stability. In the process of social evolution, we, as human beings, have developed not only an instinct to care for ourselves but also a conscience to care for others. Situations may however arise, in which the need to care for ourselves runs into conflict with the need to care for others. In such situations, ethical norms are needed to guide our behaviour. As M. Dempsey (1999) puts it: “ethics represent the attempt to resolve the conflict between selfishness and selflessness; between our material needs and our conscience.” 316 Trust and Ethics in Finance Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the conceptual framework of modern financialeconomic theory and the widespread use of a principal-agent model of relationship in financial transactions. The financial-economic theory that underlies the modern capitalist system is based on the rationale of profit maximisation, whereby individuals become self-centred, and aim to maximise their own profits and serve their own interests. The principalagent model of relationships refers to an arrangement whereby one party, acting as an agent for another, carries functions on behalf of that other. Such arrangements are an integral part of the modern financial system, and it is difficult to imagine it functioning without them.
When moral behaviour is foolish The behavioural assumption of the modern financial-economic theory runs counter to the ideas of trustworthiness, loyalty, fidelity, stewardship, and concern for others that underlie the traditional principalagent relationship. The traditional concept of agency is based on moral values. As R. Duska (1992) explains it: “To do something for another in a system geared toward maximising self-interest is foolish. Such an answer, though, points out an inconsistency at the heart of the system, for a system that has rules requiring agents to look out for others while encouraging individuals to look out only for themselves, destroys the practice of looking out for others.” The ethical dilemma presented by the problem of conflicting interest has been addressed in some areas of finance, such as corporate governance, by converting the agency relationship into a purely contractual relationship that uses a carrot-and-stick approach to ensure ethical behaviour by agents. In corporate governance, the problem of conflict between management (agent) and stockholders (principal) is described as an agency problem. This theory is value-free because it does not pass judgment on whether the maximisation behaviour is good or bad and is not concerned with what might constitute just pay for the manager. It In Search of Honesty and Altruism 317 removes the ideas of honesty and loyalty from the agency relationship because of their incompatibility with the fundamental assumption of rational profit maximisation.
Most of our needs for financial services – management of retirement savings, money market and fixed income investment tools, and protection against unforeseen events, to name a few – are such that they are better entrusted to others, as we have neither the ability nor the time to effectively manage them on our own. The corporate device of contractualisation of the agency relationship is, however, too difficult to apply to the multitude of financial dealings between individuals and institutions that take place in the everyday financial market. Individuals are not as well organised as stockholders, and they are often unaware of the agency dilemma. Lack of information also limits their ability to monitor an agent’s behaviour. Therefore, what we have in our complex modern financial system is a paradoxical situation: on the one hand, the everincreasing need for getting things done by others, and on the other, the dimension of human nature that tends towards selfish behaviour. This paradoxical situation, or the inconsistency in the foundation of the modern capitalist system, can explain most of the ethical problems and declining morality in the area of modern finance.
Four categories of ethical questions
In general, the kinds of ethical questions that emerge in finance fall into four general categories; particular problems may relate to more than one specific level. A. Wicks (2003) defines those levels from the broadest to the most specific as follows: society, corporations and corporate policies, stakeholders (with focus on employees) and personal.
The societal level focuses on the basic institutions of society and the arrangements created to make them work. The focus here is on the conduct of financial affairs: what are the larger goals for financial welfare, and how should the economy be structured to best realise such goals? Is 318 Trust and Ethics in Finance capitalisation the preferred method of structuring an economy? Is the American version preferable to alternative models, such as those found in Japan, Germany, or Canada? What sort of role should government play with respect to business and functions of financial institutions?
At corporate level, the emphasis is more specific, relating to the operation of a particular company and the groups that affect or may be affected by its operations (for example: suppliers, customers, stockholders, local communities, employees). Pertinent questions include: the relative importance of these groups to the firm, what are the mutual obligations and duties owed to and by each of these groups, and how the firm can develop strategies and forms of interaction among stakeholders to realise its primary goals.
At stakeholder level, the focus is on the approaches a firm takes in its relationships with its various stakeholders, including employees. What sorts of contracts are equitable? What employee rights (over and above those dictated by law) is it appropriate for the firm to acknowledge and observe (for example: is e-mail confidential)? What are the reciprocal responsibilities between workers and the firm? Issues of leadership, motivation, rewards and incentives, and layoffs are all part of this field.
Finally, the personal level is related to how people should treat each other in their roles within the firm. To what extent do I have duties to respect others: to be honest and open with them, to value their contributions, to empower them? How are roles defined, and do they create reasonable expectations of employees both as persons and as individuals who fill work roles? An underlying concern here is the issue of the extent to which the firm treats people strictly as a means to achieving its ends, rather than as an end to be respected regardless of the financial status of the firm.
In Search of Honesty and Altruism 319
Violations of trust and loyalty
The most frequently occurring ethical violations in finance relate to insider trading, stakeholder interest versus stockholder interest and investment management. Businesses in general and financial markets in particular are rife with examples of violations of trust and loyalty in both public and private dealings. Fraudulent financial dealings, influence peddling and corruption in governments, brokers not maintaining proper records of customer trading transactions, cheating customers of their trading profits, unauthorised transactions, insider trading, misuse of customer funds for personal gain, incorrect pricing of customer trades, and corruption and larceny in banking have all become common occurrences.
Insider trading is perhaps one of the most publicised unethical financial behaviours of traders. Insider trading refers to trading in the securities of a company to take advantage of material “inside” information about the company that is not readily available to the public. Such a trade is motivated by the possibility of generating extraordinary gains with the help of non-public information (information not yet made public). It gives the trader an unfair advantage over other traders in the same security.
Arguments for ethical management Managing in ethical ways is not merely about avoiding bad outcomes. According to R. Bruner (2006), there are positive arguments for bringing pressure to bear on financial decision-making.
The first argument is concerned with the notion of sustainability.
Unethical financial practices are not a foundation for enduring, sustainable enterprise. According to R. Bruner, this first consideration focuses on the legacy one creates through one’s financial transactions. What legacy do you want to leave? To incorporate ethics into our financial mindTrust and Ethics in Finance set is to think about the kind of world that we would like to live in and that our children will inherit.
The second argument calls for ethical behaviour that is capable of building trust. The branding of products seeks to create a bond between producer and consumer: a signal of purity, performance, or other attributes of quality. As markets reveal, successfully branded products command a premium price. Bonds of trust tend to pay. If the field of finance was purely a world of one-off transactions, it would seem ripe for opportunistic behaviour. But in the case of repeated entry to financial markets and transactions by, for example, active buyers, intermediaries, and advisers, reputation can be of great importance in the shaping of expectations. This implicit bond, trust, or reputation can translate into more effective and economically attractive financial transactions and policies.
Finally, ethical behaviour builds teams and leaders, which underpin process excellence. Standards of global best-practice emphasise that good business process drives good outcomes. Stronger teams and leaders result in more agile and creative responses to problems. Ethical behaviour contributes to the strength of teams and leadership by uniting employees around shared values and by building confidence and loyalty.
An objection to this argument is that, in some settings, promoting ethical behaviour is no guarantee of team building. Indeed, teams might even fall apart over disagreements on what is ethical, or what action it is appropriate to take. But typically, this is not a failing of ethics per se, but rather of the teams’ process management for handling disagreements.
Ethical codes beyond laws and regulations
Ethics sets higher standards than laws and regulations. To a large extent, the law is a crude instrument. It tends to result from unacceptable behaviour rather than to anticipate potential behavioural patterns. It contains gaps that can become recreational exploitation for the aggressive businessperson. Justice may be neither swift nor proportional to the In Search of Honesty and Altruism 321 crime. To use only the law as a basis for ethical thinking, is to settle for the lowest common denominator of social norms.