Ethics In Business

16 July 2012


I was once told that financial services institutions really offer one product. Not deposits, repos, mortgages, bonds or anything else, but CONFIDENCE. In light of recent misgivings unearthed among Barclays et al, I feel compelled to depart from my typical product-focused spiel. These almost seem to be happening in cyclical waves, as Sarbanes-Oxley was thought to have eased the tendency for firms to engage in ‘creative’ accounting nearly ten years ago. However, that is but one way in which ethics can be breached.

The excerpt below even shows just how there can be contagion effects of diminished trust.

Bloomberg: July 6th 2012

London risks losing its status as the world’s top financial centre as the $360 trillion interest-rate fixing probe follows a series of market abuses by banks that eroded trust in a city already shrinking faster than rivals.

JPMorgan Chase & Co. (JPM)’s trading loss of at least $2 billion, the alleged $2.3 billion fraud at UBS AG (UBSN) and the investigation of at least a dozen banks including Barclays Plc (BARC) for rigging global interest rates all happened in London in the last year. The effect is taking a toll on the capital of a country enduring its first double-dip recession since the 1970s, which fired more financial-services workers than any other country in 2011 and again this year.

Governments, corporations and individuals all struggle with moral dilemmas. While our failings may not be as glaring as $360 trillion we should still ask: what are the financial costs and benefits of ethical soundness?

Ethics is no longer a pie in the sky concept, and substantial research into corporate social responsibility (CSR) highlights the tangible effects of applying best practices inside AND outside the firm. On the cost side, significant legal fees, reduced market share due to reputational damage are all factors to consider.  The Bloomberg generated charts below show how the market has priced in a company’s breach of ethics if you will. The chart depicting UBS’ stock performance may not tell the full story, since there was significant volatility at that time.

Knowing the costs of not being ethical is one thing, but you may ask: how do I benefit from doing the right thing? And: should I benefit just for doing the right thing? Both are very valid questions, to which I’m sure the answers will vary greatly from the cynical to the philanthropic. In some ways, when it comes to ethical practices, sometimes no news is good news. Conversely, there are in fact ways in which firms can benefit from their ‘good deeds.’

While there are different ways to frame the benefits because they are interrelated, they generally include the following:

  • stronger financial performance and profitability through operational efficiency gains
  • improved relations with the investment community and better access to capital
  • enhanced employee relations that yield better results respecting recruitment, motivation, retention, learning and innovation, and productivity
  • stronger relationships with communities and enhanced licence to operate
  • improved reputation and branding

From the perspective of the business as a community member, good business decisions are those rooted in principles at the foundational level, such as respect for human dignity and service to the common. Practically applying these ideals allows for the firm to consistently:

  • produce goods and services that meet genuine human needs while taking responsibility for the social and environmental costs of production, of the supply chain and distribution chain
  • organising productive and meaningful work recognising the human dignity of employees and their right and duty to flourish in their work
  • using resources wisely to create both profit and well-being, to produce sustainable wealth and to distribute it justly (a just wage for employees, just prices for customers and suppliers, just taxes for the community, and just returns for owners).

The cases of CL Financial and Allen Stanford can fuel an endless diatribe throughout the region, but I for one can now appreciate why ethics is such a crucial and mandatory area in curricula across universities and even independent professional bodies such as the CFA. The question that should remain with you is not ‘whether to be ethical or not but rather ‘how best to harmonize ethics and the profit motive’.

You can trust in Gerard. Contact him at gerard.stephens@nullfirstlinesecurities.com or call him at 622-1346.

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