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Hy Even Good People Are Likely to Do Bad Things in Finance? 102 WWhy even good people are likely to do bad things in finance – it’s not the people that are flawed, it’s the culture Ethics in Finance, Robin Cosgrove Prize Global edition 2012-2013 Finalist Krzysztof Osesik This paper analyses the current dards. The third part analyses the Poland state of ethics in finance, and espe- ethical shortcomings of the finan- Associate, PwC*audit cially banking institutions. The focus cial corporate culture, and the paper department, Warsaw will be on identifying the factors that concludes with some final remarks. are conducive to unethical practices. I will argue that, although financial What is ethics and scandals are ultimately triggered by why is it important? individuals, these should not bear the entire blame – for the prevai- Ethics is basically the science of ling work culture at many financial what is right and wrong. However, institutions is flawed, and directly there is no generally accepted de- encourages and rewards unethical finition of the term. When asked, behaviour and practices. This means people tend to confuse ethics with that the system will face even more their own feelings, religions, legal turmoil before long. principles or social norms (Andre & The paper begins by discussing Velasquez, 2013). For the purpose of this analysis, I will define ethical be- * The views expressed the definition and importance of herein are those of ethics in business relations. It then haviour in finance as ‘acting in a way the author and do not explains why ethical behaviour can- that promotes and strengthens trust necessarily reflect those not be ensured by more financial and confidence in mutual relations’. of the Organization he is Ethical behaviour is all about hones- affiliated to. regulation, and how too many rules can actually undermine ethical stan- ty and integrity. Its main objective is FINANCE & THE COMMON GOOD/ BIEN COMMUN noPrix GB2.indd 102 16/10/2013 16:10:43 103 to promote the common good within has argued that there is an optimum society. In business, it means stri- amount of regulation for every or- ving for ‘win-win situations’. Ethical ganization. Beyond that point, extra standards do not allow abuse of per- regulation will only be damaging, as Le texte se concentre sur les institutions ban- sonal privilege through such things more effort is put into abiding by the caires et en particulier as asymmetrical information, strong rules at the expense of operational sur l’identification des bargaining power or legal loopholes. effectiveness and ethical behaviour. facteurs propices aux Ethical principles are of funda- In a recent paper written for pratiques non éthiques. mental importance in finance. This central bankers, Bank of England Il s’agit d’expliquer is because the financial sector is un- pourquoi le comporte- executive director Andrew Haldane ment éthique ne peut typical. First, unlike many other in- said ‘Modern finance is complex, pas être garanti par dustries, it offers intangible, highly perhaps too complex. Regulation plus de règlementation complex products whose quality of modern finance is complex, al- financière et comment cannot be immediately verified by most certainly too complex ... As plus de procedures customers. Second, many financial you do not fight fire with fire, you et règles nuisent aux services are by their very nature do not fight complexity with com- normes d’éthique. provided over a long period of time. plexity ... [C]omplexity ... requires Some government bonds or mortga- a regulatory response grounded in ge loans have maturities of 20 years simplicity’ (Haldane & Madouros, or more. Both factors mean greater 2012). He proved his point by com- uncertainty for the parties involved. paring the size of various pieces of The most efficient risk-mitigating legislation designed to overhaul the Dans le cadre de cette factor is thus mutual trust, which in system. The 1933 Glass-Steagall Act, analyse, le terme de turn must be rooted in high ethical adopted in response to the Great De- comportement éthique, standards. As the next section will pression, ran to a mere 37 pages, but dans un contexte show, in the absence of compliance financier, peut être secured overall financial stability for défini comme une with ethical principles, more regula- seventy years. In contrast, the 2010 action qui encourage tion can do little to boost confidence Dodd-Frank Act, intended as a legis- et renforce la confiance in financial markets. lative countermeasure to the current dans les relations crisis, occupies no fewer than 850 mutuelles. Tout repose A jigsaw puzzle of ethics pages, with some 400 more to come sur l’intégrité et l’hon- and legal compliance in the form of implementing guide- nêteté, l’objectif étant lines. The Basel I agreement, signed le bien commun au Today’s financial regulators seem sein de la société, soit to believe that systemic stability can in 1988, was only 30 pages long. By une situation win-win only be achieved by more regula- the time Basel II was signed in 2004 en affaires. tion. The fact that market confiden- the volume had increased tenfold, to ce can also be boosted by promoting more than 300 pages. The most re- ethical values appears to have been cent agreement, Basel III, signed in overlooked. The prevailing ideolo- 2010, runs to over 600 pages, almost gy is more – and ever more detailed twice the size of its predecessor. It – regulation. Yet this may actually is not just the length of these docu- make things worse. Kaptein (2012) ments that is cumbersome, but also WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? noPrix GB2.indd 103 16/10/2013 16:10:44 104 their detail. As Haldane says, ‘this They simply accept the measures Les principes éthiques degree of complexity also raises se- and procedures imposed on them sont fondamentaux rious questions about the robustness (Katz-Navon, T. et al., 2005). Too dans la finance. La of the regulatory framework, given many rules will undermine ethical qualité des produits, its degree of over-parameterization’ standards, as people consult legisla- souvent très com- plexes, ne peut pas être (Haldane & Madouros, 2012). tion rather than their own conscien- immédiatement vérifiée ces when judging what is right and par les clients, tout Preliminary remarks wrong. comme les services on ethics in finance On the other hand, the solution fournis pendant de In this connection it is also im- is not to get rid of the entire regula- une longue période tory framework. Lack of regulations de temps. Il en résulte portant to realize that ethical prin- une grande incertitude, ciples cannot be enforced by legisla- and supervisory mechanisms can la confiance mutuelle tion. ‘Fencing organizations in with indeed have destabilizing effects, as devenant le facteur de procedures, systems and structures the sudden rise and fall of the deri- diminution des risques provides no guarantee that people vatives market has made clear. Ins- le plus éfficace. will do the right thing’ (Kaptein, tead, it is a matter of striking the 2012). Ethical standards stem from right balance between too little and Le fait que la confiance values and incentives that are fos- too much. Regulation is an impor- du marché puisse tered at the workplace. Many com- tant stabilizing factor, but should be être stimulée par la kept to the necessary minimum. Re- promotion de valeurs panies confuse acting ethically with éthiques a été negli- legal compliance – which are not the gulation can hardly promote ethical gée. Dans tout sytème, same thing. To understand this, take standards; but too much regulation trop de regulation, the simple question of whether sla- will certainly undermine them. au delà de la quan- very or racial segregation were ethi- The following part of the paper tité optimale, devient cal even when they were legal. discusses whether people are inhe- préjuduciable. Il ne rently good or bad. This is a crucial faut pas combattre la Today, because of the bloated issue, as different measures will be complexité avec de regulatory framework, companies la complexité. Une pay far more attention to being legal needed to ensure compliance with réponse réglementaire than they do to being ethical. Banks’ ethical standards depending on fondée sur la simplicité compliance departments employ whether people are naturally good est nécessaire. hundreds of lawyers, but hardly any or bad. The paper will then examine banks have hired ethical advisors. whether only ‘bad people’ in the fi- And extra regulation is counterpro- nance industry were responsible for Les principes éthiques the recent wave of scandal and fraud. ne peuvent pas être ductive for two other reasons. First, imposés par la legis- it can never be complete, for there Are people inherently lation. Les standards will always be gaps, grey areas and éthiques proviennent loopholes that can be exploited by good or bad? des valeurs et incita- those who are aware of them. Se- According to classic economic tions encouragés sur cond, as numerous research results theory and its homo oeconomicus mo- le lieu du travail. De have shown, more regulation actua- del, individuals derive their utility nombreuses enterprises lly reduces people’s ability to think from consumption of material goods. confondent action critically about their own actions. They are driven by rational expec- FINANCE & THE COMMON GOOD/ BIEN COMMUN noPrix GB2.indd 104 16/10/2013 16:10:44 105 éthique et conformité tations and self-interest. The hap- were naturally good; unlike Hobbes, légale. Une réglemen- piness of a nation can then simply he blamed violence and conflicts tation complémentaire be measured by adding up people’s on the corrupting influence of the est contre-productive individual utilities. This theory ig- external environment, rather than car elle n’est jamais people’s egoism and self-interest.
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