Ethics without regulation won’t cut it

By J Saft
January 30, 2009

– James Saft is a Reuters columnist. The opinions expressed are his own –

There has been a lot of talk in Davos about improving business ethics, and mercy knows there is certainly room for that. The past few years, like the end of most booms, have included plenty of fraud, self-dealing, and general all-purpose unethical behaviour.

James Saft Great Debate

I think it’s fantastic that business should seek to raise ethical standards. It’s good business, and not before time. I do understand that a lot of what happened was a social phenomenon, and that a change in mores can only help.

But frankly, a new emphasis on ethics is a sideshow, and among some who propose it, a diversionary tactic.

While I agree that mankind is perfectible, as an investor, a citizen and hopefully some day a retiree, I am not willing to bet my future or the future of my children on it.

I want some guarantees.

I want some better safeguards.

And that means no schemes of ethical codes and self-regulation, but schemes of tighter regulation, greater oversight and dire consequences for those who breach them.

The problem is not (just) that people were greedy or self-interested. Greed and self-interest seem to occur pretty regularly, in my experience. It is true that they got a bit more reinforcement in the past decade then usual, and so might have grown,  but I really do think we are on a hiding to nothing if we try to solve the problems in the financial markets and economics and avoid future bubbles by more emphasis on ethics. The problem was that the rules under which everyone operated did not do enough to limit and channel greed and self-interest.

I want to make clear too that I’m not singling out bankers here, there was a lot of unseemly behaviour among consumers, house buyers and retail investors too.

But I do think that the financial sector needs to be very careful about how they pitch a new emphasis on ethics. If the intention is to try to minimize regulation, it won’t work and will only exacerbate the backlash they are already facing.

But why do I think I have the right to demand safeguards and guarantees? Well, I, like you, am a taxpayer and a voter and we are ultimately the bag holders for the misadventures of the financial sector. That sector enjoys a government guarantee which has been growing and growing.

Regulation means less leverage, less socialization of risk and privitisation of reward. And yes, I do understand that more regulation and less leverage imply lower growth, but also lower volatility in growth, which we can all agree is expensive.

And among the rewards that the private sector can earn there needs to be a better balance between how those rewards are parcelled out between employees and shareholders.  I don’t so much want a much bigger role of the state in deciding who makes what, but I’d like to see better a balance of power between shareholders and employees.

Take for example the trader at a AAA-rated bank (remember them?) who used that rating to borrow cheaply and buy a structured product with a higher yield. He banked his bonus and was still in the money when the trade went bad. He was taking advantage of two groups of people. First the shareholders, who should have gotten more of the benefit of the franchise they fund and second the taxpayers, who ultimately were insuring the whole rodeo.

I don’t expect the trader to suddenly become a saint; I do expect the system to take that into account.

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Also at Davos is Maria Ramos, CEO of Transnet, who raised some important questions about the discussion of ethics and business values:

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45 comments

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What is needed is a stringent criminal code for those that destroy the lives of thousands

Posted by louis | Report as abusive

Sorry, I was just venting my frustration at the whole situation. And yes Bill, you are right that the investor is aware of the risk.

Posted by Damian Palmares | Report as abusive

We need another Cromwell a Lord protector once more
If Westminster is no longer fit for purpose it is a waste of time trying to re-introduce integrity
A gentleman wilding an axe once more on Tower Hill might
introduce some serious thinking in the corridors of power Halk a dozen should be enough

Posted by H I Manning | Report as abusive

Under the auspice of tighter regulation imposed by complex and costly organisations such as the FSA the fee earners and the bonus bandits hoodwinked the novice regulatory practitioners. The saying “big is beautiful” came true. Regulatory practices and costs forced the small operator, who mostly sold a “sincerity package” to win customer affection, out of business leaving the field clear to those who could manipulate the rules and regulation with weasel cunning. They (the big boys)had the money and the tactical advisors to do this whereas the small IFA and fund manager only had time to comply and a conscience that curbed misadventure.
The call for simplified products is paramount, maybe this way the regulators will be able to identify over extension and a feast that is only served at the end of the table. However, if you pay peanuts you only get monkeys so instead of novices overseeing the mighty would it not be a good idea to impose the duty of regulation on those that know the industry best and allow them to stand in judgement on each others investment and funding practices in much the same way OPEC controls a valuable world commodity.
Councils do work where as regulatory authorities will never be able to recruit knowledge where it matters. They at best, are amateur game-keepers. Right from the very beginning the FSA failed with the malfeasance of Michael Bright of the Inependent Insurance Co – they just don’t know what they are looking for so choose easy, small targets for self justification. My call is to put the bankers and fund managers into an ethical role and ask them to take time out to serve the poor !

Posted by Max Burgess | Report as abusive

Truly Max, maybe then they will realize what they have done is wrong and make amends to the public, who is very suspicious of the banking and financial industry, the government and our World leaders right now. What we need right now is action, something needs to be done to appease the public and give them some piece of mind. The TARP money that has “disappeared” needs to be found and people need to be held accountable, and you are right in saying that our regulators now, over the financial industry at least, are underpowered, under funded, understaffed and lack the intelligence to fight these “big boys”. Someone said their average salary is $50,000 a year. In all honesty, what do you expect with a salary like that, you wont get the top talent from business schools because they are money motivated, unfortunately, and know they can make ten times that in the financial industry with their networks and will continue to do so until we stop them.

Posted by Damian Palmares | Report as abusive