– 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.
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:
This is a multi level issue
There is a way to avoid unethical / criminal behaviour in the broad business community including the financial sector which is riddled with sharp practice. The regulators must banish any scheme where the underlying rules and costs are not completely transparent and fail to conform to prescribed set guidelines.
Banish the use of small print in insurance contracts, investment products, consumer sales contracts, etc, and create a situation where what you see is exactly what you get. The words "Conditions Apply" should be discontinued in all advertising. Simplicity must be paramount because most of the people being hurt by these practices are unsophisticated and very easily misled.
At the same time the regulators must look at the more sophisticated "products" like derivatives, ETFs, options,futures, etc, and gauge to what extent they have contributed to the current crisis. If it is felt that abuse of these products is a factor then they should be banned if they cannot be properly controlled. Regulators must ignore the wails of protest from vested interests. Rather allow unscrupulous financial practioners to lose their jobs than create more misery amongst the unwary
While the rules of the game are being changed, there should be global campaign which warns the man in the street and investors to stay away from products and shemes which they do not fully understand.
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I agree with your analysis and thoughts but lets not forget that the people likley to develop all of the safeguards the average coinsumer/investor requires are also teh same pople that were also complicent in the massive collapse of the global finacial system. Just the mere fact that money has been dirt cheap for years (a gift from the governement and Mr. Greenspan)and every adminstration going back to Bush senior have been pushing for more people to own homes also contributed to the mess we are in right now.
So yes more rules and market transparency are required but not only inteh private sector.
Thanks and good article.
AGreed James, but the existance of Laws is no guaranty of obiedence to them and from that perspective it appears the US SEC has become a legal debating team and is missing out important pre-madoff level large examples that can be made for the market place. Of course as our new Legal Debating Team, debates, the victims pile up and continue to suffer. The best cure for the neuvo-insider VC-dealing is jail but that just doesn’t happen to the big-guys since Boesky. With every Bull Market there is old-school ‘dirty business’ and we certainly should not be cheering it like we are Eric Schmidt and his You Tube Scam. I think the realtionship with Schmidt is the biggest mistake Obama has made and it obviously gives schmidt a feeling of being ‘untouchable’. So when his company has to pay, he takes his ‘dear sweet time’ cause he knows he’s never going to go to jail for the crime.
Sure doesn’t set a Law and Order standard to the world that knows. Time to fire the guy and make sure that if he appears on CNBS again its in a mug shot. Schmidt is the Milken of our generation who obviously has no remorse or consideration for my family, which we all know he destroyed with INTENT.
Everyone knows and that’s why Schmidt in the news makes the US look so bad around the world. It’s the internet era, we all know who the bad-guys are and his dirt stinks up the whole global room.
I have worked around the world and can offer some real insight on the ethics debate. The simple fact is this: there are only two things that will guarantee a better outcome: the government needs to use the proceeds of taxation effectively and to never allow the economy to outsize the actual back-up wealth (gold bars etc.), and you only get better behaviour from better people. Far too many people going into business have never served in the military, or done anything remotely close to character-building. They start out as greedy, self-serving people, and they go into business like that. As a society, we need better people and only through a draft will we get it.
Steve, it’s not only a Republican situation. Chris Dodd and Barney Frank are democRats. The democRats have had as much to do with this as the Republicans. Both parties are shills for the corporations.
I think it’s great to have regulation and law enforcement. And if you want to say ethics is not enough, that’s fine. We need oversight, rules about disclosure, prosecution of fraud, and perhaps judicious use of the death penalty. Billionaire crooks who don’t care about anything else might wake up if they were haunted by the thought of the smell of their own flesh burning in the electric chair. Zzzzzt.
But regulation and law enforcement aren’t enough either.
There is something missing ever since conservative business schools started teaching that ethics and morality were something invented by the communists.
And that is Shame. Shame.
It’s nice if a CEO is proud when his company does well. When it does wrong, when it defrauds its investors or physically harms its customers or is part of the destruction of the environment, the CEO should feel shame. He shouldn’t be able to sleep at night until he fixes the problem.
Overseeing a corporation is a privilege. If he doesn’t feel bound by the rules of civilization, why should protesters?
http://www.youtube.com/watch?v=0tvSyoDTH aQ
http://www.youtube.com/watch?v=iVPBdp74K xo
The Repulican’s have been preaching non stop about eliminating government and allow the markets to operate without regulation. We were all duped in believing this is the very best way to run U.S. Business and really the global economy. We’ve gone from the Technology bubble, to the housing bubble, to the speculation on petroleum in hedge funds etc. How many more people are going to have to have their life savings wiped out before we realize these Wall Street executives (human garbage) will stop at nothing to get rich. If that means employing sophisticated schemes to deflate you’re IRA’s and 401K’s, and brokerage accounts - they’ll do it plain and simple. The Republicans could care less and from what I can tell, they welcome manipulation, greed, and fraud provided it’s carried out by the right people. Take a can of soda from a gas station and you’ll have the cops bashing you over the head and slapping on a pair of hand cuffs. But create a sophisticated ponzzi scheme and make the right connections in Washington and/or Wall Street, and it’s smooth sailing - nothing to worry about. Mean while, the U.S. consumer is running up credit card debt, spending all their savings on techno junk, and getting in over their head in mortgages they should never have had to begin with. What’s wrong with this picture? We should be trying to save our industries and put these Wall Street criminals behind bars - Oh! but wait, they haven’t broke any laws because a deal is a deal they say. Well the laws are influneced by who? The very same people who are getting the huge bonuses that are bankrupting the nation. The American public is stupid for tolerating this, but we voted George Bush in twice - how idiotic is that? No! the solution is simple - since our government won’t protect us against these finaincal preditors, we need to act ourselves. We need to organize citizen groups nation wide that specialize in finding these financial preditors and destroy their lives. Burn their houses down in the middle of the night! Set their cars on fire in front of their offices, and kill them in public! How else are we going to send a message to these crimminals and our corrupt government that we need to get back to order! No major shift has ever take place without violence - Bloodshed is that answer unfortuntely.
We need some highly ethical and responsible watcher watchers (Is that us the voters?) ! Our constitution tells us that it is up to Congress to regulate commerce, coin our money, and declare war. Just think of all the ethics and responsibility one needs to have to hold true to those duties. The President swears an oath to preserve, protect and defend the constitution. And just look at what our presidents and congressmen/women choose to do with just those few examples. Good thread and good people here. Maybe some of you guys should run for office! It all starts with responsible people. Responsible people have a great shot at being responsible leaders.
“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.”
This is of course true. At least in this respect trickle down has worked: The ethics - or lack thereof - and the pursuit of greed did trickle down indeed. However, the wealth did not.
It is criminality on a massive global scale, and that’s what I meant Peter, not only underfunded and understaffed but they are not equipped either to deal with the levels of fraud, I think it will be addressed though.
“The Fed missed spotting the risk because many of its field examiners lacked the needed sophistication, training and measurement tools. While the bets being placed by regulated banks grew in size and complexity, Fed examiners were ill-equipped to adequately measure, monitor and report on these risks.”
“Fed examiners need to show a strong aptitude and understanding of the risk-taking activities which now drive bank earnings. The Fed should hire from the very institutions it regulates. In the last decade, the flow of hiring has been primarily from the Fed to such banks, which has further eroded the strength of the national examination force. In addition, adequate incentive systems need to be put in place to minimize the brain drain and insure that the best examiners have financial incentives to stay.”
Those quotes are from this article:
http://blogs.reuters.com/great-debate/20 09/01/30/is-the-fed-up-to-examining-your -trillion-dollar-bet/
Another good debate. Hopefully we will gain the knowledge and expertise to move in the right direction and gain the trust back of the people who are supporting these bailouts and stimulus plans.
“there is valid reason to raise a point regarding ethics when the amount of unethical behavior is such a proportionate amount and is having such a drastic effect on the global economy, not just the U.S. It starts from the top and works its way down, if you are an unethical CEO how can you expect your employees to be ethical?”
My point. Sure there are ethical people in business, myself included.
Just not enough ethical people… And I think we would all agree that the primary cause of the present situation is massive criminality.
Better to spend more on regulation and know where my money is then to have no regulations and THINK I know where my money is. Trust everyone but verify everything. Also making the argument we had regulations in place to catch some of this unethical behavior would be valid if we adequetly funded the agencies responsible for eneforecement.
You’re right Jason, mine don’t go out the window when money is on the table either, however I think that the unprecedented levels of unethical behavior across the board from CEO’s to lawyers to politicians to bankers and on and on play a major role in regards to the value ethics has on society and the economy. In fact, there are probably more ethical corporations and CEO’s than there are unethical ones but there is valid reason to raise a point regarding ethics when the amount of unethical behavior is such a proportionate amount and is having such a drastic effect on the global economy, not just the U.S. It starts from the top and works its way down, if you are an unethical CEO how can you expect your employees to be ethical?
Swearing an oath or following a specific code of conduct pursuant to ethics doesn’t necessarily mean you will follow your code of conduct. I think enforcing ethical behavior will be the only solution, which we are starting to see, lets just hope it’s not too late. I also think that more CEO’s and corporations that are doing the right thing should be given more praise and looked to as a role model in our society, if only for the younger generations to learn and emulate.
Mine doesn’t either Jason, there are ethical businesses and businessmen out there, in fact probably more than non-ethical but when they are not receiving praise for being ethical, it’s hard for the public to realize that; when there is so much unethical behavior happening on unprecedented levels across the board, from government to lawyers to brokers to CEO’s and on and on…but the issue of ethics also really needs to be addressed, because it is what has brought this country to our knees, and the global economy on it’s way down, or the lack thereof. Holding someone to ethical behavior and having a clear ethical and moral vision will not be enough, our leaders need to practice what they preach and lead by example. It starts at the top and works its way down, if you run an unethical business, how can you expect your employees to be ethical.
Ethics alone would cut it just fine. Responsible and honest people are out there. Just perhaps not in our federal government or wall street but they’re out there. I must say that I strongly disagree with the statements that there are no ethics in business. Your morality may go out the window when money is on the table but mine does not. And I know quite a few others personally as well that are quite responsible and ethical business people. Sure I know some real hawks as well but once again… not ALL business is unethical.
I agree RFL…there are no ethics in business whatsoever when you actually think about it.
There are no ethics in business. That’s why such emphasis is placed on “ethics” for public consumption.
When money is on the table morality goes out the window.
What it is is what is is.
I fully agree with you, the idea of corporate execs, CEO’s, managers, brokers, fund managers, portfolio managers and others should be bound and held to the highest ethical standard, because they are controlling other people’s money whether it be individually, a pension fund, IRA, shareholders, etc.. but as we can see ethics is only a word that a lot of these people have used very lightly, if at all, in the past and the repercussion from not taking ethics seriously has caused a very serious economic situation globally. If they say we will become ethical, how are we just supposed to believe that after all the carnage that has been done in the recent years? The only way to stop it and force them to be ethical, unfortunately is to hold them responsible with regulatory agencies that actually regulate instead of turn their shoulder.