Essay: Corporate Ethics after the Financial Crisis of 2008
Corporate Ethics refer to the acceptable moral practices in business. It includes moral principles, values and codes of conduct that determines the behavior of group of individuals in satisfying their customers’ needs. It also entails honesty, straight forwardness, trust, fairness and other core values that surround decision making business transactions or deals. Corporate or business ethics consider other business stakeholders’ interests during various business transactions. Corporate ethics and business success are therefore inseparable.
Upholding corporate ethics is one of the best ways by which companies can ensure their maximum benefits. Managements should not give higher priorities to their personal interests and ignore their company’s code of conduct. Therefore, managers must make decisions based on totality of the criteria which guide such actions. Legal justification of any decision a manager makes must be based on principles of formal justice. Well founded legal financial corporation’s norms lead to right decision-making on issues at hand.
Financial institutions are very delicate and their managers must handle them with a lot of care. Failure to give first priority to corporate ethics paves way for disastrous implications. This will derail the entire economy of a country or even the whole world. In its early stages, companies and stakeholders involved may not detect a financial crisis. However, it advances faster and soon engulfs the whole economy. This interferes with smooth operations of other sectors of the economy.
The 2008 financial crisis began in the United States and spread fast to the rest of the world. It is worth noting that this crisis started showing its signs by 2007. Serious neglect of corporate moral practices by the financial institutions is one of the key building blocks of this crisis. Too much leverage, poor risk management and exaggerated hopes that housing prices would sky-rocket seems to be the immediate causes of this crisis. Many economists believe that this crisis is a result of careless and unethical financial moves by banking institutions.
This financial crisis actually began building up from as early as August, 2007. The corporate firms started engaging into some unjustified deals with their customers. These practices involved not only most of the American firms but also foreign corporate firms. This led to disappearance of integrity and fiduciary responsibility to the industry’s customers. These ethical failures emanated from various factors within and outside the financial industry. Some of the factors that led to ethical erosion revolved around mortgage facilities, securities market and government sponsored organizations’ greedy motives among others.
Ethical failures in near-prime lending began with banks’ involvement of mortgage brokers in finding borrowers. The banks paid brokers based on the quantity of clients they could bring on board. Moreover, they did not carry the paper on their own balance sheets. They also did not bother to evaluate the credit worthiness of their clients before engaging them into such transactions. The banks remunerated the brokers as soon as the customer’s mortgage application was approved. After this, the brokers cut down communications with their clients and did not do any follow-ups.
Similarly, the banks approved those applications without kin interest onto the paper. They rushed into building leverage and getting the paper off the balance sheet as fast as time could permit. This declined and eventually diminished the underwriting standards. The banks’ shoddiness and carelessness led to their lending money to credit unworthy customers. These corporate firms put their commercial interests first and never bothered about the investors who bought their papers. Contrary to the banks’ perception, those investors were their long-term and loyal customers who never deserved such treatments. Again, the rating agencies’ results were marred with inaccurate statistics hence gave false information to the general public. One would question as to whether these agencies were actually architects of the financial firms. It actually appeared as if the rating agencies bided with financial corporations and thus, favored the highest bidders.
The mortgage issue did not only affect the investors alone. Banks also felt the pinch. They paid mortgage brokers big commissions so as to lure unsuspecting customers into the scheme. They also did not use thorough analysis of their potential clients’ collateral details and credit worthiness. This practice ended up tarnishing the name of lending industry. For instance, Countrywide et al intensively involved itself into subprime lending to significant personnel such as senators, judges and former cabinet officers.
The sale of Auction Rates Securities also did not stand the test of corporation ethics. It involved the issuance of tax-free bonds that would attract an interest rate on a weekly or monthly basis. In other words, the bonds would have long dated maturity but with interest rates that are charged or calculated in short term rates. These rates are applicable to the sort-term papers only. Individuals, institutions, municipalities and nonprofit organizations greedily rushed for this package. Banks therefore, organized and structured these bonds on their clients’ behalf and sold them to the investors.
The banks facilitated the sale of these bonds by chipping in when there were no sufficient bidders. This eliminated the doubts and risks involved in the transactions. In case of any problems, the banks would abandon their clients. In the background, however, they hoped and worked hard for the failure of these bonds. They then put the insurers at task to compensate them for the losses incurred which they also seriously exaggerated. The banks would then freeze up the investors and the insurers’ funds as they were long term customers to the banks and always maintained accounts with them.
Government Sponsored Entities (GSEs) which are formed by the federal government also fall short of corporate ethics. These corporations are owned by the shareholders and their shares are floated in the public market. However, the government gives them financial backing. This backing enables them to borrow cheaply in the markets, buy, scrutinize and sell loans to investors. These institutions decided to withhold mortgages worth billions of dollars. They were actually expecting the credit challenged borrowers, house prices among other factors to raise the value of mortgage paper. However, they never achieved this since their revenue and balance sheets collapsed. That is how they also ended up collapsing.
In essence, the GSEs appeared to be ‘get rich schemes’ rather than government corporations. Therefore, the greedy executives shamelessly embezzled public kitty claiming that they are making housing affordable. This scheme has denied thousands their homes and the tax payers are being eyed at to come for their rescue. They were driven by their greediness and actually became rich by conning the innocent public.
This financial crisis exposed the consequences of ethical malpractice among financial corporations in USA and across the world. Many corporate institutions had to go back to the drawing board and revisit their code of ethics. The days that followed this crisis were characterized by financial honesty and adherence to business laws and code of conduct. Many institutions are rushing to restore their customers’ trust. Corporate managers have to engage in financial deals that can stand the test of business ethics.
Post crisis ethical reformation in the corporate sectors can take three dimensions. These are personal, corporate and social dimensions. First, personal ethics must be given an upper hand in this discussion. As I mentioned earlier, the 2008 financial crisis was spearheaded the selfish and uncontrollable desire for more money than the economy could warrant. This is a personal drive that culminated from corporate managers. People’s undesirable pursue of wealth, social recognition and success in general is in essence loss of personal virtues.
These trampled virtues in turn hinder good professional conduct and managers tend to avoid making decisions regarding their career. These behaviors are also coupled with arrogance and pride among these rogue financiers, government and economists. They look at their knowledge and skills as superior and highly advanced in the field of finance and banking. They end up not considering other key players in their decision making. Such people should always be reminded that behind the pride comes a very big fall.
However how hard it may seem, bankers must uphold prudent rationality. This is a virtue that is not easy to adhere to in environments of high growth with low interest rates, high leverages and poor risk management strategies. Lack of these virtues creates very volatile conditions in the financial market. This volatility then spreads very fast to other markets resulting into panic.
Financial brokers have no choices other than to provide their potential clients with thorough financial guidance before their commitment. This will ensure that customers have the best understanding terms and conditions of such financial transactions before putting ink to paper. The brokers should put their personal exaggerated gain behind and focus on their customers’ safety first. These financial intermediaries should approach their job professionally since their moves are of greatest importance of safeguarding the future existence of their clients. This implies that their reckless behaviors can deny them opportunities to carry out such activities in the future.
This summarizes the perception that bad ethical behavior must be eliminated amongst financial managers. It is also worth noting that these vices are ever present in our midst. It is only that they take various forms and therefore may be difficult to identify by individuals who are not kin enough. When these vices exceed the threshold, a lot of instability crops in. Changes in society’s values and ethics in general induce greed among the financial practitioners. This then encourages provision of incentives to greedy behaviors hence making it difficult to pay attention to desirable behaviors.
Secondly, organizational ethics revolves around leadership and governance of financial corporations. These cuts across governance of commercial and investment banks, rating agencies, monoclines, supervisory bodies, hedge funds and governments. Inexperienced professionals should not be entrusted by their employers make crucial asset analysis, valuation, selling and buying decisions. Major financial corporate took excess risks that they could not manage. This was attributed to by their optimistic assumptions that catastrophic events were unreal and could be easily. (Patrick O'Sullivan, Mark Smith and Mark Esposito, 2012)
Managers relied on historical stability of markets that existed for many decades. They also looked at risks as independent of each other. These assumptions created false impression that risks had been completely done away with by these institutions. The assumptions mislead the corporate officers that they never realized risk re-introduce itself through other avenues. The corporations mainly looked at local risks without paying attention to systemic risk. Moreover, they killed different mechanism organizations had put into place to monitor the effects of systemic risks in the finance industry.
Another form of ethical malpractices is the chief Executive officers’ doctored financial statements. Financial institutions are required by the corporate law to publicly disclose their financial status. However, the corporations’ CEOs issues false information so as to lure shareholders. In real sense, these firms were suffering from financial crisis. For instance, Jamie Dimon of JP Morgan Chase told his shareholders that their worst credit crisis was 75-80 percent over. However, this was not the real figure. How could they manage that during such hard times? The question remains unanswered.
Uncontrolled use of incentives by financial institutions has far reaching adverse consequences to the firm involved in it. Generally, incentives are used by organizations to boost certain behaviors that lead to good results. However, poorly designed incentives are detrimental to the achievement of such goals. Unethical organizations design bad quality incentives that are short term in nature. For instance, they reward short-term increase in share prices instead of a long-term achievement of its goals. This leads to conflict of interest between the firm and other related agencies such as rating agencies. They therefore, do the ratings based on how their elbows have been greased by their clients rather than clearly examined points and statistical parameters. (Ferrell, Fraedrich and Linda, 2010)
Another aspect of financial ethics inadequacy is pegged on lack of transparency regarding provision of information to the customers, shareholders and regulators. Failure to distinguish between financial activity and investment led to poor regulation and control mechanism. This resulted from the annulment of the US Glass-Steagal Act of 1933 which provided clear differences between financial activities and investment.
The third scope of corporate ethical reformation is social ethics. Some social behaviors catapulted the unethical practices in the corporate sectors. Some array of failures witnessed by the financial corporate firms was catalyzed by their own customers, entrepreneurs and other stakeholders such as the management who did not act rationally. Unsustainable policies such as advancing loan facilitates to poor people, poor supervision and regulation of corporate financial activities.
The Western society’s political projects seemed to have met their ultimate goals such as freedom, equality and development. This, therefore, called for creativity and innovation as well as competition. Uncontrolled creativity and innovation later ushered in the financial crisis. There is need for conscious involvement into business creativity to ensure safety of everyone. Moreover, financial corporations should embrace only healthy competition full of ethically inspired motives. (Roland, 2011)
The most important step here is attitude change. Public ethics is being overtaken by private rights. The citizens cling to these private rights claiming that they are unavoidable in their self-realization. In this way, they lose their ethical support. The ethical values become unclear in the public scene and their existence is rejected as fundamentalism.
Again, in a multicultural society, plurality of values is unavoidable. However, unstable system of values may result into two major severe political consequences. First, it will lead to disillusionment since listening to everybody’s expression leads to cacophony and people may feel that they personal demands are not met. This leads to political volatility and ambiguity. Secondly, political unions or parties based on personal interests under disguise of generality emerge. They then enter the societal moral agenda only to end up establishing luxurious democracy. This confuses the citizens about the financial crisis. The citizens then start complaining about increased unemployment, widespread uncertainty fluctuating job security among other factors. They are not aware that they are the cause of their own problems
Financial corporations have to stick to their ethical obligations as stipulated in their constitutions rather than greed and short-term gains. They must realize and work from the fact that ‘customer is king’ in any business and thus, treat them with high integrity and conscientiousness. The financial corporations should also put their customers’ interest far much beyond their compensation demands of their management.
The financial industry needs a complete overhaul. It should be reconstructed based on the principles under which it was founded. The change of face must also ensure that the old guards are replaced by people of high integrity and moral consciousness. The worst betrayers of corporate ethics such as James Cayne of Bear Stearns must not be allowed to go free. Their firms have no grounds to stand on and should exit the financial industry. Such people were driven by greed, hopelessness, and they ended up reaping from where they did not sow anything.
However, there many ended up into this crisis as victims of circumstances. The hardworking people, who devoted their time and resources to save their firms from this mess, only ended up losing their lifetime savings. They are now jobless and hopeless. Greedy and selfish Chief Executive Officers and chief Financial Officers lured innocent and unsuspecting investors into fake deals. The officers convinced the public that they could acquire affordable housing.
In conclusion, ethics is unavoidable in all sectors of the economy. It defines life that one lives in this world. It must be noted that there are no different ethical behaviors as per the various sectors of the economy. Economics provide the corporate firms with goals while ethics governs the means through which these firms achieve them. Market stability is dependent on legal and regulatory system that will ensure their good and proper management. Presence of ethics in our societies is not a guarantee their full practice by financiers. At times, they simply decide to ignore them. Ethics develop from actions and therefore corporate firms should not put more emphasis on their outcome. The ultimate goal should be that which people learn something through them.
Ethics is the weighing machine for individuals, corporate firms and the societies at large. Therefore, ethic based on laws and regulations cannot stand may not guide people well. Good ethical behavior demands for action. Agents should have proper explanations on how their actions can worsen their career. Actually, good practice of corporate ethics should take three dimensions: personal, institutional or organizational and social. People, organizations and the society at large should behave ethically.
References
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O. C. Ferrell, John Fraedrich, Linda Ferrell. (2010). Business Ethics: Ethical Decision Making and Cases. Wasington DC: Cengage Learning.
Patrick O'Sullivan, Mark Smith, Mark Esposito. (2012). Business Ethics: A Critical Approach: Integrating Ethics Across the Business World. New York: Routledge.
