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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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36 Trust and Ethics in Finance As Duncan Foley has stated, even if the contrast between these two views remains important in the world of ideas, the functionalist approach is in practice totally dominant in the twenty-first century. In a recent work called Adam’s Fallacy: a Guide to Economic Theology,7 Foley points out, with only slight overstatement, that the division of society into two ethically distinct spheres began with Adam Smith. One is the economy, which has a positive impact on society because it is governed by the pursuit of self-interest that typifies homo oeconomicus (in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome); the other is the rest of society, particularly the private sphere, where the pursuit of selfish interests must be reconciled with other goals (in which the pursuit of self-interest is morally problematic and has to be weighed against other ends). Foley says that today’s world is still largely ruled by this ethical duality, not to say schizophrenia, which continues to distract it when making both individual and collective choices.

According to Paul Ricoeur’s famous definition, ethics means aiming to live “a good life with and for others in just institutions”.8 Ethics is thus a stance that people adopt in all circumstances of life, whether in political, economic or interpersonal relations, and whether in the public or the strictly private realm. Ricoeur’s definition leaves no room for the schizophrenia inherited from the Enlightenment and further reinforced by positivism – every act, without exception, involves the same pursuit of a good life. Anthropologically speaking, these two views of ethics – which for simplicity’s sake we will call Smith’s view and Ricoeur’s view – are thus totally incompatible. This brings us back to the aforementioned contrast between ethics of business (which is endogenous to Cambridge MA: Belknap Press (Harvard University Press), 2006, p. 260.

Ricoeur, Paul, Oneself as another, Chicago: University of Chicago Press, 1992; originally published in French as Soi-même comme un autre, Paris: Le Seuil, 1990 (quote from p. 202).

Ethics and the Economy 37 the context) and ethics in business (which is exogenous to it, and transcends it).

To survive in the post-Smithian world, people thus need (at least) two separate ethics: one for the economy, and the other for everything else. Luhmann’s ideas, which posit a multiplicity of specialised subsystems and logics, are thus merely extensions of the dichotomy introduced by Smith. It follows that only those capable of changing the logic of their behaviour according to the context – people with multiple, interchangeable ethics – can survive in such a highly specialised environment. In contrast, those incapable of making such adjustments will be unfit to survive. The difference between Smith’s and Ricoeur’s views thus implies a fundamental difference in outlook, between people with more than one ethical face and those with a single, coherent system of values – a difference that pervades the current debate on ethics and the economy.

Four areas of conflict In the second part of the article, the two aforementioned ethical options will be used to shed light on four key topics and point out their differing, not to say conflicting, implications.

Remuneration From the point of view of the ethics of business, the issue is not so much the actual level of remuneration as the way in which it is determined. Smoothly functioning markets are supposedly all that is needed to ensure true prices. As long as market forces have been given free rein, their verdict is implicitly just (in the moral sense), for it helps increase economic efficiency and hence every player’s welfare. However, this does not convince the advocates of ethics in business, who move beyond mere procedure to question the justness of the level of remuneration, particularly in terms of commutative justice. Debates on the just price, 38 Trust and Ethics in Finance which go back well beyond the Enlightenment, are part of a continuing effort to identify the level at which prices or remunerations may be deemed unjust or unjustified, either as such or because of their impact on social cohesion.

The nature of businesses The modern business (joint-stock company) is a fairly recent legal entity. It is a place where capital and labour can work together to create added value, to which they are ultimately entitled. Is it an instrument used by owners of capital to maximise their return on investment, or a community of stakeholders with a common purpose? The answer to this question is crucial when deciding whether the management of modern businesses should focus on shareholder value (which means outright exploitation) or acknowledgement of the partners’ wish for a just distribution of effort, risk and reward. Here again, those who advocate ethics of business will go for economic efficiency, whereas just distribution of the fruits of joint effort will be the criterion adopted by those who reject ethical schizophrenia.

Philanthropy has a good press these days. Captains of industry who distribute fortunes built up in the course of a lifetime are much admired.

However, a seldom-asked question is which of the two approaches to business management enabled them to build up their fortunes in the first place – exploitation, or partnership with stakeholders.

Conflicts of interest Conflicts of interest at the forefront of the economic (and sometimes political) stage have an insidious, latent impact on individuals and institutions that find themselves torn between clashing loyalties, motivations or interests. Such situations mainly arise (though not always) when there is considerable asymmetry of information, or understanding, between the parties involved in a transaction. In societies where two thirds of national income comes from services and is generated by the manipulation Ethics and the Economy 39 of information, if not knowledge, there is a constant need for experts or proxies. Whether they be bankers, lawyers, car mechanics, accountants or physicians, experts tend to prescribe things – especially their own services. Conflicts of motivation between their clients’ wishes and concern for their own turnover are as old as the professions that are most at risk. That is why traditional professional associations drew up such strict codes of ethics and closely scrutinised the characters of new recruits before admitting them to their ranks. There is no equivalent in the managerial and financial professions that now account for most economic activity. Is that because these professions are not liable to conflicts of interest – or because, on the contrary, such conflicts are a key source of income?

Those who advocate strict ethics of business see conflicts of interest as something that can only be eradicated by competition, smoothly running markets and circulation of information – in other words, the problem is technical rather than ethical. But those who, like Ricoeur, believe that all human behaviour follows the same principles do not agree. As they see it, the situations of conflicts of interest cannot be eradicated, but they can be controlled. This means that the players most at risk must be made aware of their ethical responsibility to act in their patients’ or clients’ best interests – a responsibility they must assume even, and perhaps most of all, when they feel tempted by the markets.

Ricoeur’s definition of ethics covers both the individual and the social dimension of every act. Thus aiming to foster just institutions is as much part of the pursuit of ethics as aiming to live a good life. In this sense, any action marginally helps either to validate and consolidate, or else to destabilise and reorient, the institutions within which it takes place. Thus each act is meant to improve the justness of institutions, which are imperfect because by definition they are not good.

Those who advocate the ethics of business are less concerned about improving the institutional context. To them, the institutional framework is merely the legal context for the rules that must be followed if the 40 Trust and Ethics in Finance market is to function smoothly. However, this is a formal requirement – the market will function if everyone follows the same rules – rather than a substantial requirement that the rules must be intrinsically just.

Beyond schizophrenia The coexistence of two irreconcilable ethical cultures – and the resulting schizophrenia – is very deeply rooted in Western economic and managerial practice and theory. Since it is deemed normal, and hence natural, it is accepted as a fact of life and arouses little protest. Yet it is fundamentally unhealthy, for two reasons. First, it traps many economic players in an ethical inconsistency that they find very hard to break free from by their own efforts, from within. Second, it is a source of division that may yet lead to a confrontation between the fragmented individuals who have embraced the legacy and ethical fatalism of homo oeconomicus and the integrated ones who reject this.

Today’s crisis is replete with scandal, in the profound sense of the term, and the public has repeatedly waxed indignant not just at some people’s behaviour, but also at the excuses provided for it. Current calls for more ethics and a more moral capitalism may also reflect a wish that the economy should once more be governed by the standards that apply to other aspects of society and individual life. The crisis could thus provide an opportunity to end the exemption from ethics that the economy has enjoyed for upwards of two centuries. However, if this revolution is to take place, we must take a fresh look not only at economic practice, but also – and perhaps above all – at the body of supposedly scientific literature that has served to justify this exemption.

In 1948, in a booklet in France’s famous popularising Que sais-je?

series, François Perroux warned that capitalism is incomplete, held together by a sense of ethics that is external to it: “For varying lengths of time, an earlier, uncapitalist mentality sustains the frameworks within which the capitalist economy operates; yet the latter’s very expansion Ethics and the Economy 41 and success… undermine the traditional institutions and mental structures without which there can be no social order. Capitalism erodes and corrupts, devouring the vital juices whose rise it cannot control”.

From Leo XIII to Benedict XVI, via Calvin and his modern-day followers, Christians have always claimed that the freedom of the market is invaluable as long as politics protects the economy and the financial sector from their self-corruption and they are firmly controlled by a set of shared moral values that transcend the economy. It is above all from without (through ethics and politics) rather than from within that capitalism can be made more moral. Perroux was well aware of what was at stake when he wrote: “If [the degeneration of capitalism] is to be detected and controlled in time, political leaders will need to be unusually clear-headed in diagnosing it and exceptionally vigorous in treating it”.

At the end of this brief discussion, the question of whether capitalism can be made more moral comes to the fore once again. Four years after the crisis first erupted, most of the remedies that are now prescribed are either purely technical (such as equity ratios, regulation of over-thecounter trading and capping of remunerations) or else deontological (more codes of conduct, greater compliance by financial institutions, control of conflicts of interest and so on). Even if some of these measures are ethically inspired, they are still clearly based on the ethics of business approach. Their obvious limitations can be summed up by a question that was asked in ancient Rome and remains unanswered to this day: Quis custodiet ipsos custodes? (Who will watch the watchmen?) Ethics in business offers a path that, however steep and arduous, may solve this problem by explicitly resorting to action beyond the realm of purely economic practice and theory. But this will depend on a willingness – political and otherwise – to confine the efficiency ethos to strictly economic activities.

42 Trust and Ethics in Finance


Christoph Stückelberger

Globethics.net is honoured and proud to publish this stimulating collection of articles of the Robin Cosgrove prize on Ethics in Finance.

Economic ethics (or business ethics) is a key theme for our global ethics network in the global online library and its special collections, in the network with its global Directory of Business Ethics Experts, in international research workgroups such as on a new global currency regime, and in our Global Ethics Forums on the value of values in business. Ethics of financial markets is a key topic within economic ethics since capital markets are the fuel of economies and whole societies.

Financial ethics,1 or better ethics in finance, is one of the most important challenges in overcoming the current economic crises. It is at the same time a problem that is as old as money itself. Lending capital has led and leads again and again to an increase in the gap between poor and rich. This two thousand years experience led to the interdiction of interest and with Calvin in the Reformation to a very careful, socially responsible way of limiting and strongly regulating financial markets and interest rates.2 And the magic powerful attraction of money that makes us greedy and leads to speculation, overspending and indebtedness is equally old. All world religions in their holy scriptures warn against See McCosh, Andrew M., Financial Ethics, Edinburgh 1999.

See Stückelberger, Christoph, “No Interest from the Poor. Calvin’s Economic and Banking Ethics”, in: Stückelberger, Christoph/ Bernhardt, Reinhold (eds.), Calvin Global. How Faith Influences Societies, Globethics.net Series No. 3, Geneva 2009.

44 Trust and Ethics in Finance greed as the taproot of injustice, oppression, exploitation, corruption, mistrust, conflicts and war. They all show ways to overcome greed and find ways of sharing, trust, fairness and mutual benefit in trade and economic interactions.

Each generation therefore has to develop spiritual strength and find voluntary rules and legally binding regulations to transform money from a malediction to a benediction, from an addiction to a liberating service.

Ethics in finance covers all topics of financial activities: banking ethics, stock market ethics, insurance ethics, ethics of gambling, debt management, microfinance, speculation, black markets, money laundering, etc. Even though the vital importance of the financial markets is recognised, the number of publications on ethics in finance is very limited compared to the huge number of publications on bioethics, medical ethics or homosexuality. This is one reason why the Robin Cosgrove Prize for Ethics in Finance is so important and innovative because it stimulates and supports this redirection of financial markets.

The financial crisis was and is also a crisis of trust in the banking system, in leading banking professionals, in political control mechanisms and in the rationality of consumers and investors. Trust is a basic condition of economic transactions. Economy in a market or a plan system cannot work without trust on all levels. And what builds trust? Not opportunism, not selfishness, not short-termism, not personal or institutionalised greed, but long-term planning and strategies, faithfulness to values and convictions are the ground for trust. Credo (the belief, the convictions, the ethical values of a person, group or institution) leads to credibility. And credibility leads to credit-relations between creditor and debtor where – built on trust and control – credit is given and taken for

responsible investments and economic development. Therefore, the simple formula for trust and ethics in finance is:


Thielemann, Ulrich/ Ulrich, Peter: Brennpunkt Bankenethik, Bern 2003.





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