Ethics in Finance 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 e!ample, aspects of social behavior that contribute to social stability. "n the process of social evolution, we have developed not only an instinct to care for ourselves but also a conscience to care for others. There may arise situations in which the need to care for ourselves runs into conflict with the need to care for others. "n such situations, ethical norms are needed to guide our behavior. #s $emsey %&'''( puts it) "Ethics represents the attempt to resolve the conflict between selfishness and selflessness* between our material needs and our conscience." Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the conceptual framewor+ of modern financial,economic theory and the widespread use of a principal,agent model of relationship in financial transactions. The financial, economic theory that underlies the modern capitalist system is based on the rational, ma!imi-er paradigm, which holds that individuals are self,see+ing %egoistic( and that they behave rationally when they see+ to ma!imi-e their own interests. The principal, agent model of relationships refers to an arrangement whereby one party, acting as an agent for another, carries out certain functions on behalf of that other. .uch arrangements are an integral part of the modern economic and financial system, and it is difficult to imagine it functioning without them. The behavioral assumption of the modern financial,economic theory runs counter to the ideas of trustworthiness, loyalty, fidelity, stewardship, and concern for others that underlie the traditional principal,agent relationship. The traditional concept of agency is based on moral values. /ut if human beings are rational ma!imi-ers, then agency on behalf of others in the traditional sense is impossible. #s $us+a %&''0( e!plains it) "To do something for another in a system geared to ma!imi-e self,interest is foolish. .uch an answer, though, points out an inconsistency at the heart of the system, for a system that has rules re1uiring agents to loo+ out for others while encouraging individuals to loo+ out only for themselves, destroys the practice of loo+ing out for others" %p. 2&(. The ethical dilemma presented by the problem of conflicting interests has been addressed in some areas of finance, such as corporate governance, by converting the agency relationship into a purely contractual relationship that uses a carrot,and,stic+ approach to ensure ethical behavior by agents. "n corporate governance, the problem of conflict between management %agent( and stoc+holders %principal( is described as an agency problem. Economists have developed an agency theory to deal with this

problem. The agency theory assumes that both the agent and the principal are self, interested and aim to ma!imi-e their gain in their relationship. # simple e!ample would be the case of a store manager acting as an agent for the owner of the store. The store manager wants as much pay as possible for as little wor+ as possible, and the store owner wants as much wor+ from the manager for as little pay as possible. This theory is value,free because it does not pass judgment on whether the ma!imi-ation behavior is good or bad and is not concerned with what a just pay for the manager might be. "t drops the ideas of honesty and loyalty from the agency relationship because of their incompatibility with the fundamental assumption of rational ma!imi-ation. "The job of agency theory is to help devise techni1ues for describing the conflict inherent in the principal,agent relationship and controlling the situations so that the agent, acting from self,interest, does as little harm as possible to the principal s interest" %$eGeorge, &''0(. The agency theory turns the traditional concept of agency relationship into a structured %contractual( relationship in which the principal can influence the actions of agents through incentives, motivations, and punishment schemes. The principal essentially uses monetary rewards, punishments, and the agency laws to command loyalty from the agent. 3ost of our needs for financial services4 management of retirement savings, stoc+ and bond investing, and protection against unfore,seen events, to name a few4are such that they are better entrusted to others because we have neither the ability nor the time to carry them out effectively. The corporate device of contractuali-ation of the agency relationship is, however, too difficult to apply to the multitude of financial dealings between individuals and institutions that ta+e place in the financial mar+et every day. "ndividuals are not as well organi-ed as stoc+holders, and they are often unaware of the agency problem. 5ac+ of information also limits their ability to monitor an agent s behavior. Therefore, what we have in our comple! modern economic system is a parado!ical situation) the ever,increasing need for getting things done by others on the one hand, and the description of human nature that emphasi-es selfish behavior on the other. This parado!ical situation, or the inconsistency in the foundation of the modern capitalist system, can e!plain most of the ethical problems and declining morality in the modern business and finance arena. Ethical 6iolations The most fre1uently occurring ethical violations in finance relate to insider trading, sta+eholder interest versus stoc+holder interest, investment management, and campaign financing. /usiness in general and financial mar+ets in particular are replete with e!amples of violations of trust and loyalty in both public and private dealings. Fraudulent financial dealings, influence peddling and corruption in governments, bro+ers not maintaining proper records of customer trading, cheating customers of their trading profits, unauthori-ed transactions, insider trading, misuse of customer funds for personal gain, mispricing customer trades, and corruption and larceny in ban+ing have become common occurrences.

"nsider trading is perhaps one of the most publici-ed unethical behaviors by traders. "nsider trading refers to trading in the securities of a company to ta+e advantage of material "inside" information about the company that is not available to the public. .uch a trade is motivated by the possibility of generating e!traordinary gain with the help of nonpublic information %information not yet made public(. "t gives the trader an unfair advantage over other traders in the same security. "nsider trading was legal in some European countries until recently. "n the 7nited .tates, the &'89 Trading .anctions #ct made it illegal to trade in a security while in the possession of material nonpublic information. The law applies to both the insiders, who have access to nonpublic information, and the people with whom they share such information. :ampaign financing in the 7nited .tates has been a major source of concern to the public because it raises the issue of conflict of interest for elected officials in relation to the people or lobbying groups that have financed their campaigns. The 7nited .tates has a long history of campaign finance reform. The Federal Election :ommission %FE:( administers and enforces the federal campaign finance statutes enacted by the :ongress from time to time. 3any states have also passed lobbying and campaign finance laws and established ethics commissions to enforce these statutes. Ethical :odes #pproaches to dealing with ethical problems in finance range from establishing ethical codes for financial professionals to efforts to replace the rational,ma!imi-er %egoistic( paradigm that underlies the modern capitalist system by one in which individuals are assumed to be altruistic, honest, and basically virtuous. "t is not uncommon to find established ethical codes and ethical offices in #merican corporations and in financial mar+ets. Ethical codes for financial mar+ets are established by the official regulatory agencies and self,regulating organi-ations to ensure ethically responsible behavior on the part of the operatives in the financial mar+ets. ;ne of the most important and powerful official regulatory agencies for the securities industry in the 7nited .tates is the .ecurities and E!change :ommission %.E:(. "t is in charge of implementing federal securities laws, and, as such, it sets up rules and regulations for the proper conduct of professionals operating within its regulatory jurisdiction. 3any professionals play a role within the securities industry, among the most important of which are accountants, bro+er,dealers, investment advisers, and investment companies. #ny improper or unethical conduct on the part of these professionals is of great concern to the .E:, whose primary responsibility is to protect investor interests and maintain the integrity of the securities mar+et. The .E: can censure, suspend, or bar professionals who practice within its regulatory domain for lac+ of re1uisite 1ualifications or unethical and improper conduct. The .E: also oversees self,regulatory organi-ations %.R;s(, which include stoc+ e!changes, the <ational #ssociation of .ecurity $ealers %<#.$(, the 3unicipal .ecurities Rulema+ing /oard %3.R/(, clearing agencies, transfer agents, and securities information

processors. #n .R; is a membership organi-ation that ma+es and enforces rules for its members based on the federal securities laws. The .E: has the responsibility of reviewing and approving the rules made by .R;s. ;ther rule,ma+ing agencies include the Federal Reserve .ystem, the Federal $eposit "nsurance :orporation %F$":(, and state finance authorities. :ongress has entrusted to the Federal Reserve /oard the responsibility of implementing laws pertaining to a wide range of ban+ing and financial activities, a tas+ that it carries out through its regulations. ;ne such regulation has to do with unfair or deceptive acts or practices. The F$": has its own rules and regulations for the ban+ing industry, and it also draws its power to regulate from various ban+ing laws passed by :ongress. "n addition to federal and state regulatory agencies, various professional associations set their own rules of good conduct for their members. The #merican "nstitute of :ertified =ublic #ccountants %#":=#(, the #merican "nstitute of :ertified =lanners %#":=(, the "nvestment :ompany "nstitute %":"(, the #merican .ociety of :hartered 5ife 7nderwriters %#.:57(, the "nstitute of :hartered Financial #nalysts %":F#(, the <ational #ssociation of /an+ 5oan and :redit ;fficers %also +nown as Robert 3orris #ssociates(, and the #ssociation for "nvestment 3anagement and Research %#"3R( are some of the professional associations that have well,publici-ed codes of ethics. Toward a =aradigm .hift There has been an effort to address the ethical problems in business and finance by ree!amining the conceptual foundation of the modern capitalist system and changing it to one that is consistent with the traditional model of agency relationship. The proponents of a paradigm shift 1uestion the rational,ma!imi-er assumption that underlies the modern financial,economic theory and reject the idea that all human actions are motivated by self,interest. They embrace an alternative assumption4that human beings are to some degree ethical and altruistic4and emphasi-e the role of the traditional principal,agent relationship based on honesty, loyalty, and trust. $us+a %&''0( argues) ":learly, there is an e!tent to which >#dam? .mith and the economists are right. @uman beings are self,interested and will not always loo+ out for the interest of others. /ut there are times they will set aside their interests to act on behalf of others. #gency situations were presumably set up to guarantee those times." The idea that human beings can be honest and altruistic is an empirically valid assumption* it is not hard to find e!amples of honesty and altruism in both private and public dealings. There is no reason this idea should not be embraced and nurtured. #s /owie %&''&( points out) "5oo+ing out for oneself is a natural, powerful motive that needs little, if any, social reinforcement. . . . #ltruistic motives, even if they too are natural, are not as powerful) they need to be socially reinforced and nurtured" %p. &'(. "f the financial,economic theory accepts the fact that behavioral motivations other than that of wealth ma!imi-ation are both realistic and desirable, then the agency problem that economists try to deal with will be a nonproblem. For $obson %&''A(, the true role of ethics in finance is to be found in the acceptance of "internal good" %"good" in the

sense of "right" rather than in the sense of "physical product"(, which, he adds, is what classical philosophers describe as "virtue"4that is, the internal good toward which all human endeavor should strive. @e contends) ""f the attainment of internal goods were to become generally accepted as the ultimate objective of all human endeavor, both personal and professional, then financial mar+ets would become truly ethical" %p. 2B(. /ibliography /owie, <orman E. %&''&(. ":hallenging the Egoistic =aradigm." Business Ethics Quarterly. &. &,9. /owie, <orman E., and Freeman, Edward R., eds. %&''0(. Ethics and Agency Theory: An Introduction. <ew Cor+) ;!ford 7niversity =ress. $eGeorge, Richard T. %&''0( "#gency Theory and the Ethics of #gency." "n <orman E. /owie and Edward R. Freeman, eds. Ethics and Agency Theory: An Introduction . <ew Cor+) ;!ford 7niversity =ress. $empsey, 3i+e. %&'''(. "#n #genda for Dindow,$ressing or for Radical :hangeE" http)FFpanopticon.csustan.eduFcpa''FhtmlFdempsy.html. $obson, Gohn. %&''A(. "The Role of Ethics in Finance." Financial Analysis Journal. <ovember,$ecember) HI,2&. $us+a, Ronald R. %&''0(. "Dhy /e a 5oyal #gentE # .ystematic Ethical #nalysis." "n Ethics and Agency Theory: An Introduction . <orman E. /owie and Edward R. Freeman, eds., <ew Cor+) ;!ford 7niversity =ress. Frowen, ..F. and 3c@ugh, F.=., eds. %&''H(. ed. Financial Decision-Making and Moral Responsi ility. <ew Cor+) 3acmillan. Goodpaster, Jenneth E. %&''&(. "/usiness Ethics and .ta+e,holder #nalysis." Business Ethics Quarterly. &. HA,I&. <adler, =aul .. %&'8'(. "Ethics and the Financial :ommunity." !ecured "ender. Ganuary,February. RBIGovernor, Dr Subbarao gives another superb speech on ethics. He covers ethics in finance, ethics in economics, ethics in crisis and ethics at RBI. On finance he says: As I said earlier, the question is, is the financial sector different from other fields by way of ethical dimensions? Is there a greater opportunity or larger temptation to deviate from the straight and narrow path? Is the power of context more forceful here? Conversely, is it people of

looser ethical standards and values who succeed in the field of finance? Again, this is a debate that defies clear cut resolution At one extreme are people who claim that the financial system, at its heart, is about trust. Nowhere is this more true than in ban ing. !he word credit derives from the "atin word credere, meaning to believe. #illions, indeed trillions of financial transactions ta e place everyday, and all of these are based on trust. $ithout broad based trust and presumption of honest behaviour, it would not have been possible for the financial sector to grow to its present si%e and importance. At the other extreme are people who say ethics and finance are poles apart. !hey contend that at a fundamental level, finance is all about ma ing money, never mind how it is made. &tatus and recognition are accorded by how much profit is made regardless of how it is made. It is argued that even as the millions of foot soldiers may be innocent, people who rise to positions of top management and leadership in the financial sector could not have done so without compromising on scruples. According to people given to this persuasion, there is a book called The Complete Book of Wall Street Ethics which is fat and bound and in which all pages are blank. urther he says financia! sector needs to be more responsib!e as it has mora! ha"ard attached to it !he crisis has also exposed an issue of moral ha%ard in the ban ing system ' something that has come to be called privati%ation of profit and sociali%ation of costs. #an s en(oy an implicit guarantee of government bail out. !his is true regardless of whether a large segment of the ban ing sector is owned by the government as in our country, or whether the ban s are privately owned as is the case in most countries. )overnments, regardless of their political affiliations, can hardly afford to have large institutions fail. !his *too big to fail+ syndrome enables financial institutions to ta e ris s that, say a soap manufacturer, cannot ta e. If as a result ban s ma e huge profits, they can reward themselves with generous pay pac ets and bonuses. And if loans sour and the balance sheets crash, no worry since the ban will be bailed out at tax payers expense. !he difference between the financial sector and other businesses is therefore quite clear. If say, a soap manufacturing company is an astounding success, who benefits? !he shareholders and the management. And if it fails, who loses? #oth of the above. #ut in the case of a ban , the story is different. If the ban is a success, who benefits? !he shareholders and the management. And if it fails, who loses? Not the shareholders and the management, but the public at whose expense the ban is bailed out. !he ripple effect is less pronounced but similar in the case of all institutions in the financial sector even if they are not ban s. !hat crucial difference, I believe, underscores the special ethical dimension of the financial sector in contrast to other businesses. #an s and financial institutions have a greater responsibility of being conscious of the obligation they have of not (eopardi%ing the larger public interest. $hat ,ahatma )andhi said, that businesses hold public money in trust, is more true of the financial sector than others.

On #thics in #conomics, he has this e$ce!!ent point %hich sums it a!!: -eople often forget that the godfather of modern capitalism, and often called the first economist ' Adam &mith ' was not an economist, but rather a professor of moral philosophy. &mith had a profound understanding of the ethical foundations of mar ets and was deeply suspicious of the *merchant class+ and their tendency to arrange affairs to suit their private interests at public expense. In his boo , .A !heory of ,oral &entiments/, &mith argues that a stable society is based on sympathy, a moral duty to have regard for one+s fellow human beings. In short, &mith emphasi%ed the ethical content of economics, something that got eroded over the centuries as economics tried to move from being a value based social science to a value free exact science. #thics and inance: &ime for introspection Ritu 'ain (onday )ovember *+, ,--., -/:*0 1( In the %a2e of the %orst financia! crisis since the Great Depression and %ith the %or!d3s financia! order in a state of f!u$, the future of capita!ism is being 4uestioned. Is it the best system by %hich to create %ea!th that %i!! benefit the !argest number of peop!e5 #ver since it first emerged, capita!ism has been accused by its detractors of encouraging greed and se!fishness. Its defenders have responded either that this is not so, or that se!fish behaviour is redeemed by its socia!!y beneficia! effects of greater economic gro%th.

It %as Susan Strange, 1rofessor of Internationa! re!ations at the 6ondon Schoo! of #conomics %ho first coined the phrase, 3casino capita!ism3. She %arned in the *./-s ho% the speed at %hich mar2ets %or2, combined %ith their near7universa! reach, and cou!d resu!t in !eve!s of g!oba! vo!ati!ity that had never been seen before. In a %or!d %here the vast bu!2 of mar2et trading has no direct re!ation to any rea! business re4uirement, %hat concerned her %as ho% the instabi!ity of active mar2ets cou!d !ead to the co!!apse of nationa! and regiona! economies.

)ear!y thirty years on, %e have seen e$act!y ho%, at their %orst, financia! mar2ets can be engines of unprecedented destructive e$cess. &he cata!ogue of errors that %e have seen is !ong. It inc!udes the appetite for higher !everage8 the over7re!iance on %ho!esa!e funding 8 over7 confidence in ris2 mode!!ing techni4ues8 and the misa!ignment of incentives. &he past t%o years have cha!!enged in a fundamenta! %ay the argument that the mar2et a!%ays 2no%s best.

&he financia! crisis has triggered sou!7searching about our economic system. Surprising!y perhaps, the 4uestioning has come from capita!ism3s most committed practitioners: ban2ers. Stephen Green, HSB9 chairman, has %ritten a boo2 about mora!ity and money. :en 9osta, 6a"ard Internationa! chairman, %rites: ;<e are doomed to repeat our mista2es if %e do not restore sound ethics to economic behaviour.;

HSB9 Group 9hairman Stephen Green, in his recent boo2 ;Good Value - Reflections on money, morality and an uncertain world; ref!ects on ho% the human desires for e$p!oration and e$change have !ed us into a g!oba!ised, urban %or!d, and considers %hy it is that capita!ism is the best system by %hich to improve materia! human %ea!th. =s the %or!d3s financia! order is in a state of f!u$, ho% do %e a!ign these drives, and capita!ism, %ith our spiritua! and psycho!ogica! needs5 =nd ho% shou!d the financia! sector respond not on!y to the current crisis but to the %ider needs of the peop!e it serves. Do businesses 7 and ban2s in particu!ar 7 have a duty to society that goes beyond the creation of profit5 Does open mar2et capita!ism remain our best hope for creating %ea!th that benefits a!! of society5 #ncompassing history, po!itics, re!igion and economics, ;Good >a!ue; offers ne% perspectives on ho% %e can !ive in a richer, more dynamic %or!d

Green emphasi"es introspection by the !eaders in financia! sector7;One common under!ying theme !in2s the prob!ems %hich %ere deve!oping at many financia! services companies in the !ead up to the crisis. Simp!y put, it %as a greedy focus on the short7term. = cu!ture had begun to pervade many institutions that it %as fine to pursue short7term returns %ithout any concern for the !onger7term conse4uences, or the rightness of %hat %as done. &he mantra had become one of 3if the mar2et %i!! bear it, if there is a contract, then I don3t need to as2 any further 4uestions.3 ;6eaders in the ban2ing sector, perhaps more than most, need to demonstrate that they recognise the mora! dimension of %hat %as happening in the years !eading up to the financia! crisis. &his %as not ?ust a fai!ure of prudentia! oversight, or of ris2 management, or of scenario p!anning, or indeed of common sense 7 a!though it certain!y %as a!! of those things. Of course, %e cannot address the sub?ect of mora!ity in business %ith a ru!e boo2 or a tic27bo$ menta!ity. &here are no easy ans%ers and there is no 3one si"e fits a!!3 approach. @et %hat is stri2ing is ?ust ho% %idespread a consensus there is about %hat constitutes ethica! business. <e shou!d not forget that, at its simp!est !eve!, it is about integrity: doing business %ith trust and honesty, and treating peop!e as ends, not ?ust means.

Stephen Green, has some interesting and insightfu! observations to ma2e7;&he cha!!enge %e face 7 as practitioners, po!icyma2ers, and regu!ators 7 is to find the de!icate ba!ance that %i!! encourage mar2ets to de!iver prosperity, %hi!e 2eeping in chec2 those activities that fai! the tests of usefu!ness, transparency and sustainabi!ity. It is no% c!ear that effective government oversight, regu!ation and even intervention, in times of stress, are a!! essentia!. &he mar2ets cannot po!ice themse!ves. =s %e search for this ba!ance at a time %hen much of the %or!d is sti!! traumatised by the crisis, !et us 2eep in mind t%o things. irst, one of the star2 !essons of the t%entieth century is that there is no acceptab!e a!ternative to a mar2et7based approach to deve!opment. Second, strong financia! mar2ets are at the heart of every successfu! economy, !ubricating the engine of economic gro%th and prosperity;.

Ethics and Finance

by .ir Gohn .tuttard

The Financial CrisisWhose Fault Was It?

This article #as $irst pu lished in Quantu% %aga&ine' "n his recent informative play The (o#er o$ )es, the /ritish playwright $avid @are is broadly correct when he says that politicians, regulators, economists, and commentators, as well as individual borrowers and ban+ers, are all to blame for the current financial crisis. @is is one of the few voices of common sense and clarity in this debate. .ome say that bribery and corruption, money laundering, ta! evasion, lac+ of transparency, ine!plicably high bonuses, mindless ris+,ta+ing, personal greed, and4even4global capitalism are responsible. /ut the majority view, encouraged by politicians and the media, is that it is all the fault of the ban+ers. #nd, having started from this premise, they have hit upon an e1ually ill, judged solution4a return to Kethics and moralsL in the financial sector. European :ommission =resident GosM 3anuel /aroso has said that Kwe need ethics bac+ in the financial system,L while /ritish =rime 3inister Gordon /rown has argued that mar+ets need morals. #nd the G8 has tal+ed of reforms of international economic and financial systems to promote Kappropriate levels of transparency, strengthening regulatory and supervisory systems, better protecting investors, and strengthening business ethics.L There is, as yet, little attempt to define what is meant by strengthening business ethics. /ut more and more politicians are calling for economic freedom to be balanced by respect for fundamental norms of integrity and propriety and a strengthening of business ethics and investor protection as well as transparency. The =erils of #ttributing the :risis to 3oral Failure This strategy for preventing a future crisis is confusing and not helpful when see+ing to find real remedies for the problems facing the global financial sector. "ndeed, there are

parallels between what is happening today and the response of the 7. :ongress to the Enron and Dorld:om scandals. The resulting .arbanesN;!ley %0BB0( legislation focused on the reliability and accuracy of financial information, which meant that the 7. government failed, at that time, to fi! the real problem, which was a serious shortcoming in corporate governance. There is a real danger that the worldOs political leaders will ma+e a mista+e on a similar scale if they become obsessed with the need to impose global business ethics. "t is true that some4though not all4ban+s were to blame. @owever, to point the finger at business ethics and other unacceptable practices such as bribery, corruption, and ta! evasion misses the point. These last few problems occur mainly in emerging mar+ets. Dhile there are occasional instances in developed mar+ets, the recent financial crisis was caused as much by governments celebrating continuing economic growth which, with hindsight, we +now was based on e!cess li1uidity. This massive credit bubble must have been apparent to public sector economists. "t was also caused by a catastrophic failure of regulation, particularly in the 7nited .tates and the 7nited Jingdom. .o, in my view, governments in the developed countries were primarily to blame. <ot so :hina or @ong Jong, where stronger regulation prevented the difficulties e!perienced in the Dest. Dhen it comes to the ban+s, one should also bear in mind that it was poor management judgment and poor corporate governance that was responsible for much of the problem, and not business ethics per se. "n the 7nited Jingdom major shortcomings stemmed from the ban+s seemingly paying, albeit with hindsight, too much for ac1uisitions4for e!ample, the Royal /an+ of .cotlandOs ac1uisition of #/< #3R; and 5loydsO ac1uisition of @/;.. "n the case of <orthern Roc+, it was the boardOs decision to pursue a strategy based on funding activities via the wholesale money mar+et that proved to be too ris+y. This was compounded by the granting of mortgage loans by some ban+s %which formerly had been prudent building societies( in e!cess of the value of the property. R/.Os strategy to e!tend business into the ris+ier areas of credit default swaps and other derivatives, together with reliance on wholesale mar+ets, proved its undoing when one major 7. ban+, 5ehman /rothers, was allowed by the 7. government to fold.

#s to the issues of alleged corruption and lac+ of integrity or propriety, there are a few celebrated cases li+e /ernie 3adoff and R. #llen .tanford, but while these affected a few, typically wealthy, individuals, they are not germane to the real issue of the calamitous mismanagement of the mar+et economy. Dhere $oes Ethics :ome "nE /an+s have indeed changed over the last 0B years. The ban+ manager has for the most part been replaced by a sales manager. "nvestors and stoc+ mar+ets are now driving the performance of ban+ e!ecutives, who have, indeed, been rewarded with large bonuses and golden handsha+es4for failure as well as for success. /an+ e!ecutives have in fact behaved perfectly ethically when see+ing to enhance profitability. "t is the job of ban+ boards to act in the interest of their shareholders, and that means ma!imi-ing profits. # clear understanding and pursuit of ethical behavior is at the heart of professional training in the :ity of 5ondon. For e!ample, the "nstitute of :hartered #ccountants in England and Dales says that ethical behavior is vital in ensuring public trust in financial reporting and business practices and upholding the reputation of the accountancy profession. This approach is echoed by the .ecurities P "nvestment "nstitute with its leading publication Integrity at *ork in Financial !er+ices and its :ode of :onduct for practitioners, updated in 0BBI with the help of the late 5ord KEddieL George, former governor of the /an+ of England. ;ther 7J professional bodies have a similar approach 4the "nstitute of Financial =lanning with its :ode of Ethics and =rofessional =ractice* and the "nstitute of /an+ers, now the ifs .chool of Finance, with its courses which include ethical subjects. /usiness ethics also forms part of the curriculum at business schools, but perhaps more could be done to include the teaching of ethics in university undergraduate courses dealing with economics, business management, and financial education. #s .tephen Green, chairman of @./: and an ordained minister, says in his boo+ ,ood -alue: Re$lections on Money. Morality. and an /ncertain *orld ) K#s a matter of fact the ethics of the mar+etplace are almost by definition universalQ Everyone +nows about the importance of truth and honesty for a sustainable business.L

/ut Ethics #re <ot Enough <o, the solution to the problems of the financial sector discussed by the G8 is not to place a disproportionate emphasis solely on ethics. /y and large ban+ers score more highly on this measure than politicians. "t is about the management of the economy and the regulation and governance of business strategies, ris+s, and business practices4 and these, of course, include remuneration structures. "t is for governments to improve their economic management and set up regulatory structures that match the changing demands of the businesses that need to be regulated, while it is for ban+ers %and ban+ boards( to establish strategies and to manage ris+s as well as to determine appropriate levels of remuneration. Governments and regulators can of course help in specific areas by giving guidance, or even a dictat, that for e!ample mortgage loans should not e!ceed a certain percentage of a propertyOs value. They can also advise that e!ecutive employment should be for fi!ed periods of one year only. They can also give guidance that bonuses should be for long,term performance, retractable for poor performance, and insist they are made in e1uities not cash. There is a desperate need to improve corporate governance across the world because practices are as varied as those of national regulators. Governments, regulators, and businesses need to develop and implement global standards of best practice. /ut, so far as ethics are concerned, the onus has to be on ban+s to devise practices that governments, regulators, and the public find acceptable, if not attractive. .tephen Green can have the final say. #s the chairman of, arguably, the worldOs most successful corporate and retail global ban+, our self,1uestioning ban+er puts it in a nutshell) K#ny business which values its brand has to be able to as+ and give a satisfactory answer to the 1uestion) how does the business contribute to the common goodEL