Ethics in general is concerned with human behavior that is acceptable or “right” and that is not acceptable 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 cooperative efforts to deal with common issues are, for example, aspects of social behavior that contribute to social stability.
The research and studies of the social responsibilities and ethical challenges facing the financial services industry.
1) Self-interest sometimes morphs into greed and selfishness, which is unchecked self-interest at the expense of someone else. This greed becomes a kind of accumulation fever. “If you accumulate for the sake of accumulation, accumulation becomes the end, and if accumulation is the end, there’s no place to stop,” he said. The focus shifts from the long-term to the short-term, with a big emphasis on profit maximization.
For example, swaps (where two communication companies agree to exchange the right to use excess bandwidth on their networks) fall into this category. Each company recognizes the income generated in the quarter earned and defers the expenses through capitalizing them as an asset and logging the cost as a recognized expense over time, resulting in an inflated bottom line. This is what happened at Qwest during the first three quarters of 2001, when the company was selling $870 million of capacity, while at the same time buying $868 million of capacity.
2) Some people suffer from stunted moral development: “I think this happens in three areas: the failure to be taught, the failure to look beyond one’s own perspective, and the lack of proper mentoring,”.
Business schools, too often reduce everything to an economic entity. “They do this by saying the fundamental purpose of a business is to make money, maximize profit, or the really jazzy words ‘maximize shareholder value,’ or something like that. And it never gets questioned,” he said. “Now if the fundamental purpose never gets questioned, the ethics never get questioned, because the fundamental purpose of something gives you the reason for its existence. It tells you whether you’re doing it well or not. It’s the ultimate ethical question: What’s your purpose?”
3) Some people equate moral behavior with legal behavior, disregarding the fact that even though an action may not be illegal, it still may not be moral. “You ought to remember that the reason for all laws is that the moral agreement begins to break down, and the way to get other people in line is to legislate so that we can stipulate punishments,”. Yet some people contend that the only requirement is to obey the law. They tend to ignore the spirit of the law in only following the letter of the law.
For example, IRS regulations repeatedly single out actions with “no legitimate business purpose” (like swaps.) “If you are doing things with no legitimate business purpose in order to avoid taxation, what are you doing? You’re violating the spirit, are you not? You’re staying within the letter, but there’s no purpose there except to get you around the law,”.
4) Professional duty can conflict with company demands. For example, a faulty reward system can induce unethical behavior. “A purely self-interested agent would choose that course of action which contains the highest returns to himself or herself,”.
For example, consider the misguided practice of selling indexed annuities to the elderly. If a company is paying a high commission for that product, say 15 percent, versus a lower commission for a more appropriate product, say 3 percent, a salesperson may disregard the needs of the client and/or assume that the company supports this product and its applicability by its willingness to pay five fold the compensation. “Sooner or later, people are going to give in to that temptation. The purely self-interested agent is just responding to the reward system that is in place,”. “You need to take a look at what you are rewarding.” In general, organizations get exactly what they reward. They just don’t realize that their rewards structures are encouraging dysfunctional or counter-productive behavior or turn a blind eye to the outcome.