Business Ethics After the Global Financial Crisis

Lessons from The Crash

Christopher Cowton, James Dempsey, Tom Sorell, Christopher Cowton, James Dempsey, Tom Sorell

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429825880
• Edition: 1
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

The global financial crisis (GFC) that began in 2007 concentrated attention on the morality of banking and financial activities. Just as mainstream businesses became increasingly defined by their financial performance, banks, it seemed, got themselves – and everyone else – into trouble through an over-emphasis on themselves as commercial enterprises that need pay little attention to traditional banking virtues or ethics. While the GFC had many causes, criticism was legitimately levelled at banks over the ethics of mortgage creation, excessive securitisation, executive remuneration, and high-pressure customer sales tactics, amongst other things. These criticisms mirror those that have been levelled at the business more generally, particular in the last decade, although the backdrop provided by the GFC is more dramatic, and the outcomes of supposed wrongdoing more severe.

This book focuses on business ethics after the GFC; not on the crisis itself, but how we should respond to it. The GFC has focused minds on the proper role of ethics in the understanding and conduct of business activity, but it is essential to look beyond the crisis to address the deeper challenges that it highlights.

The aim of this volume is to present examples of the latest philosophically-informed thinking across a range of ethical issues that relate to business activity, using the banks and the GFC – the consequences of which continue to reverberate – as a point of departure. The book will be of great value to researchers, academics, practitioners, and students interested in business, ethics in general, and business ethics in particular.

1
Introduction

Christopher Cowton, James Dempsey and Tom Sorell

The global financial crisis (GFC) that began in 2007 concentrated attention on the morality of banking and financial activities in general. Just as mainstream businesses became increasingly defined by their financial performance, so banks, it seemed, had got themselves—and everyone else—into trouble through an over-emphasis on themselves as commercial enterprises. Such financialisation meant that little attention was paid to traditional banking virtues or ethics.

The GFC is not the first banking crisis in history, and almost certainly it will not be the last, but its scale and geographic spread were such that not only did it provide a profound shock to the system itself and cause a great deal of economic and social pain, but it also prompted an outpouring of critical explanation and commentary (e.g., Cable, 2009; Davies, 2010; Mason, 2009; Tett, 2010). It is no surprise that opinions about causes, consequences and cures abound, but one of the themes that came through in the commentary was a lack of ethics in the financial system and its principal institutions. The GFC demonstrated that finance could not be considered an amoral, purely technical, feature of modern life. Although the pursuit of profit is, and will continue to be, important, ethical responsibility needs to be part of the picture, not that bank profitability—despite its apparent prioritisation—has been impressive over the past couple of decades anyway once the GFC is taken into account.

Greed tends to figure prominently in criticisms of banks and bankers (e.g., Mason, 2009; Tett, 2010; cf. de Bruin, 2015), but as this volume shows, the ethical shortcomings involved in the GFC and the appropriate solutions for the future are more complex than a focus on eradicating or curtailing greed would imply. Ethical analysis of causes and criticism lead naturally to attributions of blame (e.g., Davies, 2010), but to be clear, this is a book primarily on business ethics after the GFC, not on the financial crisis itself. The GFC has focused minds on the proper role of ethics in the understanding and conduct of banking and other business activity. Several contributors to this volume give their own brief accounts of the GFC and its causes, where this is important for appreciating their subsequent analysis, but we must look beyond the crisis and its causes if we are to avoid simply reacting to a special set of circumstances that will not be repeated and instead address the deeper, more general challenges that it highlights. Attributions of blame for past actions can help point towards future solutions, but they can also blind us to other possibilities. What is needed is an imaginative and well-thought-through response, or set of responses, acknowledging that the banking sector is dynamic and unpredictable. The chapters in this volume pursue that agenda.

The assessment of ethical criticisms and the development of reasoned responses is the remit of business ethics as a normative enterprise. Yet it can be argued that, at the time the GFC ‘storm’ struck, there did not exist a well-developed body of knowledge about the ethics of banking or of financial ethics. Moreover, although there have been some promising policy developments (as well as some dubious ones), the debate around the GFC seems to us to betray, in the main, a lack of sophisticated thinking. The modern practice of banking is a highly sophisticated endeavour, yet beyond its important technical features, much of the discussion about—rather than in—banking can be surprisingly jejune. The full range of possible thought about banking does not spring directly from its practices (successful or otherwise), which means that other conceptual resources have to be sought and brought to bear. Philosophy provides one such set of resources. However, although some encouraging progress has been made in recent years (e.g., de Bruin, 2015; Dempsey and Sorell, 2018, to pick examples connected to this volume), the complexity and importance of the issues involved mean that there is still plenty of scope for further high-quality, philosophically informed writing that responds to the GFC and charts appropriate responses that might be helpful to those who work for, or have an interest in, the banks. We hope this volume makes a significant contribution.

In case it is thought that philosophy is a strange place to look for guidance or inspiration, it should be remembered that many of the terms that have been conspicuous in the aftermath of the GFC have long philosophical pedigrees. Several are to be found in this book, along with other terms that are probably less familiar. Even when a term seems familiar, in the hands of our authors, they can be used with a precision or for a purpose that goes beyond the familiar, everyday usage, thus providing new and deeper insights. Blame, restitution, responsibility, accountability, desert, exploitation, professional culture and virtue are just some of the terms that are put to work in the following chapters.

The range of concepts utilised in this volume means that a rich variety of insights is provided. Further variety is evident in the international institutional environments mentioned, although such details are provided essentially for illustrative purposes, as the authors explain their arguments. And although they tend not to focus on just one, there is variety, too, in the levels of analysis with which the authors are concerned.

The next five chapters might be seen to place emphasis primarily on system-level concerns. In Chapter 2, Sison and Ferrero examine the damage done by excessive financialisation, which loses its way because of the motivation that drives its agents. The authors show how financialisation displays the characteristic features of a vice from the perspectives of Aristotelian and MacIntyrean ethics as well as Catholic Social Teaching (CST). This characterisation of the problematic nature of banking in the lead-up to the GFC adds to the traditional criticisms from similar sources, which Walsh terms the ‘exploitation’ tradition. In Chapter 3, he explains how developments in banking mean that attention needs to be paid to the harms that can be done to the economic system itself, not just to individuals. He therefore outlines a conceptual framework for understanding the relationship between financial incentives and moral concerns, distinguishing amongst different kinds of profit motivational sets. Donaldson picks up a similar theme in Chapter 4. Identifying three troublesome ethical patterns that emerged in the context of the GFC, he argues that ‘savvy’, responsible banks should pursue broad strategies that he terms ‘Pelican Gambits’, by which is meant strategies that help manage risk not only to the firm but also to the industry and society.

Of course, the soundness of the banking sector and the quality of its contribution to the economy and society are supposed to be ensured by regulation, but it often fails or disappoints, for example, because of unanticipated consequences or subsequent regulatory capture. Nevertheless it has an important role to play and greater attention should be paid to what good regulation looks like. In Chapter 5, responding to Cicero’s assessment ‘more law, less justice’, Duska and Radin propose a four-pronged test that laws and regulations should pass. Some of the regulations passed since the GFC have ostensibly been in the interests of consumers, but as de Bruin and Endörfer argue in Chapter 6, new regulations have sometimes prevented consumers from buying complex products, the availability of which would enhance their choice and freedom. However, freedom has been known to be taken advantage of, and so the authors address the issue of how the desired increase in the understanding of a complex product might be brought about, considering the regulation of information, epistemic virtues and interlucent communication.

Subsequent chapters then explore issues more at the level of the organ-isation and of the individual, often in interconnected ways.

Drawing on Aristotelian virtue ethics, Megone argues in Chapter 7 that more is needed of individuals than simply conforming to local culture or following rules, and banks (and other businesses) need to aspire to provide a culture that enables employees to live an examined life. Professionalism, at its best, also helps develop such employees. In Chapter 8, Cowton explains that professionalism entails both competence and ethics, both of which were in short supply in the GFC. He explores the potential for both banking and other professional bodies to engender a stronger sense of responsibility in the banking sector in the future and briefly examines the UK’s Senior Managers Regime (SMR), which might either help or hinder such developments, depending on how it works in practice. With his particular interests, Dempsey sees considerable merit in the SMR. In Chapter 9 he offers a sophisticated account of how individual liability or blame might be derived via an understanding of the way values are carried by culture. However, as seen in the GFC, leaders of banks (and other businesses) have often been reluctant to take responsibility for harms associated with their organisations; apologies, when they come, appear to be half-hearted. One theory—Susan Wolf’s—suggests that there is a failure in cases like these to exercise a ‘nameless virtue’ related to generosity. In Chapter 10, Sorell argues that in the few cases in which bankers have displayed the nameless virtue, its operation has sometimes obscured a failure to satisfy the requirements of justice. Sorell examines, in particular, the case of James Crosby who, like other senior bankers, was highly remunerated—an issue that has caused widespread criticism and resentment, given the damage wrought by the GFC. Some commentators have sought to characterise remuneration as a purely economic matter, but in Chapter 11 Andersson and Sandberg develop an argument regarding economic desert that explains and justifies the retention of moralising intuitions.

To conclude, the chapters in this book may be seen as attempts to explore and explain how ethics can be thought about and promoted in banking. We are not claiming that ethics is the only focus of attention that matters; regulation and competence, to mention just two, matter too—perhaps more so. However, good ethics ‘on its own’ would make a contribution to better banking. Moreover, all the other elements that might go towards providing a solution of how to do banking and business better than before the GFC are likely to be more effective with good ethics. For example, referring back to the two elements just mentioned, regulation that has a sound ethical basis possesses greater legitimacy, and the possession of competence can be seen as an ethical obligation.

We don’t claim that this volume covers all the ethical issues and possible solutions (how could it?), but as it focuses more on the business ethics of banks than on more technical ethical issues with, say, particular financial products or practices, it should be of interest in connection with other businesses too. We offer this collection in the hope that it provides a set of useful perspectives that will stimulate better thinking (and hence practice) about banking and business ethics after the GFC. Each chapter can stand alone as a valuable contribution in its own right, but we believe that the volume is more than the sum of its parts. A few of the stimulating and productive links between the chapters have already been alluded to in the brief synopses of the chapters above, but we confidently hope that many more will become apparent as the reader reads on.

References

Cable, V. (2009). The storm: The world economic crisis and what it means. London: Atlantic Books.

Davies, H. (2010). The financial crisis: Who is to blame? London: Polity.

de Bruin, B. (2015). Ethics and the global financial crisis: Why incompetence is worse than greed. Cambridge: Cambridge University Press.

Dempsey, J., & Sorell, T. (Eds.). (2018). Moral responsibility and the financial crisis. Midwest Studies in Philosophy, 42 (1).

Mason, P. (2009). Meltdown: The end of the age of greed. London: Verso.

Tett, G. (2010). Fool’s gold: How unrestrained greed corrupted a dream, shattered global markets and unleashed catastrophe. London: Abacus.

2
Is Financialisation a Vice? Perspectives From Virtue Ethics and Catholic Social Teaching

Alejo José G. Sison and Ignacio Ferrero

Introduction: Financialisation and Its Enabling Conditions

Perhaps the simplest definition of ‘financialisation’ can be found in a Catholic Social Teaching (CST) document, which describes it as ‘the shift in the capitalist economy from production to finance’ (Pontifical Council for Justice and Peace, 2012, p. 9). Certainly, this does not refer so much to abandoning production for finance as in the greater weight now given to finance instead of production. However, earlier, more technical definitions can be gleaned from Epstein (2002, p. 3), ‘the increasing importance of financial markets, financial motives, financial institutions and financial elites in the operation of the economy and its governing institutions, both at the national and international levels’; Stockhammer (2004, p. 720), ‘the increased activity of non-financial businesses on financial markets’; Krippner (2005, p. 174), ‘a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production’; and Palley (2007, p. 2), ‘a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes’. We gather from this that financialisation takes place only within the context of capitalism and that it refers primarily to the gains of finance in terms of importance, influence, activity and profits relative to the other sectors of the economy, such as production.

Despite being closely linked, it is helpful to distinguish the ‘enabling conditions’ from financialisation itself. The former are circumstances without which the latter would not occur; they are necessary, although insufficient by themselves to bring about financialisation as we understand it. To a large extent, the enabling conditions are identical to those of contemporary globalisation, such as the end of the ideological ‘cold war’ signalling the triumph of liberal democracy and capitalism over socialism and communism; the ascendancy of the Washington Consensus (the US government, the World Bank and the International Monetary Fund [IMF]) with its policies of deregulation, liberalisation and privatisation; and last but not least, the development of ‘net-technologies’ in transport, communication and information whose utility increases almost exponentially with the addition of every unique user. (The internet is the best example: how useful is the internet if there is only one user? 0. If there are two people with access, we could represent its utility with the cardinal number 2. If we add a third user, its utility would be 6. For a fourth user, it would be 12, etc.) In finance, particularly, the combination of these factors made new entities (venture capital, private equity firms and hedge funds), regulatory institutions, products and services possible, significantly altering the nature of sectorial transactions.

Several indicators have been suggested to measure the degree of financialisation in an economy in accordance with the previous definitions. Stockhammer (2004) makes use of the ‘rentier’s income’ (interests and dividends) of non-financial firms, and Krippner (2005), the portfolio income of non-financial firms and a comparison of their profits with those of financial firms. Freeman (2010) examines the financial sector’s share of profits in the financial sector (financial intermediation, real estate, and renting and business activities), its ratio with respect to the wages and salaries of private-sector workers, and the proportion of financial assets divided by gross domestic product (GDP). In a study on the Organisation for Economic Co-operation and Development (OECD), Assa (2012) proposes two indicators: the value added in finance as a percentage of total value added and employment in finance as a percentage of total employment. However, probably the most widely used measure is that of Kedrosky and Stangler (2011), consisting of the size of the financial sector as a percentage of GDP.

The rest of the chapter continues as follows. After this brief introduction in which we cite several definitions of financialisation and identify it...

Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Contents
• List of Contributors
• Acknowledgements
• 1 Introduction
• 2 Is Financialisation a Vice? Perspectives From Virtue Ethics and Catholic Social Teaching
• 3 On the Morality of Banking, the Exploitation Tradition and the New Challenges of the Global Financial Crisis
• 4 How Competition Harmed Banking: The Need for a Pelican Gambit
• 5 Contemporary Laws and Regulation: An Argument for Less Law, More Justice
• 6 Freedom in Finance: The Importance of Epistemic Virtues and Interlucent Communication
• 7 Aristotelian Lessons After the Global Financial Crisis: Banking, Responsibility, Culture and Professional Bodies
• 8 Professional Responsibility and the Banks
• 9 Liability for Corporate Wrongdoing
• 10 The Bankers and the ‘Nameless Virtue’
• 11 Moralising Economic Desert
• Index