On the same day I read the investment bank JPMorgan & Co. was in discussions with regulators to bring an end to criminal and civil charges by paying an $11 billion penalty, I also discovered the US Federal Reserve had begun investigating claims that some traders were privy to the information ahead of the official release time and had exploited it the milliseconds before it went public.
How tiny indiscretions can grow into large sins, without provoking any feelings of culpability or shame, is the subject of my final article on corporate cultural change and behavioural ethics. The gradual erosion of moral standards often begins with a very small act, like taking a pen home from the office. It continues with a padded travel expense claim and then an incomplete income tax declaration. From there, insurance fraud is just a short step away. And if that doesn’t weigh too heavily on one’s moral self-perception, why beat oneself up over the occasional ‘bonus’ of an escort girl, or an evening of dwarf-throwing? It is not as if it is illegal or anything.
After the questionable ac, it is a simple matter to justify and relativize it: the loss of a pen will not blow a hole in the company’s balance sheet; a little extra from the expenses claim is merely compensation for all of that unpaid overtime; and isn’t it the duty of all right-minded citizens to hold back some taxes from a wasteful and corrupt government? No, one does not have to be a bad or dishonest person to engage in unethical behaviour, one simply needs a good enough reason to deviate from the wider social norms. Sometimes the prevalence of a less demanding company or group norm can absolve individuals of any feelings of deviancy altogether.
One does not need to be schizophrenic to be able to hold apparently contradictory attitudes to ethical behaviour. This is because we do not evaluate ‘good’ or ‘bad’ in absolute terms, but in relative terms. This means that people perceive ethical standards in relation to a reference point: we are honourable if we are better than others, and vice versa. It also means that depending on the reference point in any given situation, the absolute morality of a given individual can vary widely. The same person who gives generously to support a charitable initiative in a developing country could also cheat on her taxes. The same father who treats his children with respect and understanding at home could still dismiss coldly a subordinate back in the office.
This perception of morality is also subject to diminishing marginal returns on the positive as well as on the negative side. It is the first act of shoplifting that weighs the most heavily on the conscience; each subsequent act burdens our self-image to a lesser degree. Similarly, the sense of a satisfaction that comes from helping out at the soup kitchen for the homeless shrinks with each act of selflessness. Whether good or bad, repeated behaviour ultimately becomes the new personal norm.
Ethics become the subject of discussion primarily when losses occur, i.e., when somebody’s behaviour is shown to be below the standard desired by the social norm. However to avoid such situations it is important to recognise that the simple presence of rules and regulations is not sufficient to ensure compliance. We must also recognise that there is no absolute morality and no absolutely ethical people. Situational factors, like local reference points and norms, as well as the simple passage of time, have the power to corrupt us all.
My previous post discussed the hopes for a shift in corporate cultures – in particular, in investment banking – and concluded with an introduction to behavioural ethics, a new discipline that among other things should help us all to make more ethical decisions. This is sorely needed because practically every enterprise today bases its ethical guidelines and codes of conduct on normative ethics, i.e., on an idealised model of how people are supposed to evaluate ethical dilemmas.
The underbelly of the financial sector has shown itself to be far less than pristine since the outbreak of the global financial crisis. With fraud, manipulation and insider trading to its discredit, it seems as no manner of dirty dealing was beyond the scope of some bankers. However, the shame does not reside only at the top
Sidetracked, a new book by Harvard professor Francesca Gino, got me thinking about my recent holiday in Venice. I can hardly imagine there is anywhere else in Europe where tourists are offered so many counterfeit handbags. Whether it is a fake Louis Vuitton, Chanel, Prada or Gucci, it is there in varying degrees of reproduction fidelity.
An in-house discussion about the Seven Deadly Sins threw up some amusing parallels between these famed lapses of virtue and behavioural finance. It was remarkably easy to associate common errors in investment decision-making with the seven classical sins. Sloth, in particular, played a recurring role: in business decision-making, as in one’s private life, it can be fatal.
One can hardly blame governments around the world for going after tax evaders. Across Europe, finance ministers are battling to reduce budget deficits while at the same time trying to find resources for stimulus measures, and anti-capitalist upstarts are snapping at the electoral heels of the established parties. Sometimes the word ‘fairness’ slips into the discussion, but political leaders can hardly pretend that morality is the motivation for the siege on tax-havens. If that was the case, they would have acted long ago.
Some see it as an act of desperation. Following the tax evasion scandal involving his former Budget Minister, Jerome Cahuzac, French President Francois Hollande had to do something. Demanding that all ministers make public details of their financial assets is, if nothing else, something.
When the financial website “Business Insider” proposed a solution to the euro crisis I was all ears. But when the saviour turned out to be none other than the Saviour, one could forgive me for being a sceptical. Although I agree the euro mess could do with a little divine intervention, a transcript of a speech by Deutsche Bank’s head of FX strategy, Bilal Hafeez, was the last place I expected an appeal for it. The euro area, like any teenager needs a father figure to accompany it through its present pubescent throes and to guide it to adulthood. Its birth parents, Germany and France, are not up to the job, so a respected, sinless, external figure is necessary – Jesus.
Hardly a week goes by it seems without some new banking scandal in the headlines: tax evasion; LIBOR manipulation; mis-selling of derivative products and insurance; embargo dodging; money laundering, etc. Some of the obvious victims have included private investors and municipalities, but there are also innumerable faceless individuals and firms, taxpayers and savers who have suffered indirectly as a result of the apparent lack of integrity.
Although High-Street bank Santander has taken the unprecedented step of suspending 800 of its UK retail investment advisors and sending them off to intensive re-training, angry bank customers are not appeased. Online comments continue to slate the bank’s management for pressuring these ‘advisors’ into heavy-handedly selling products that suit the seller more than the buyer. However, if Santander is ever to achieve anything positive on this front, this is certainly the way to do it.
It is almost as is war had finally declared against unfair and anti-social tax avoidance in Europe. Germany policymakers, for example, have recently refused to sign a bi-lateral tax agreement with Switzerland because the new rules are not aggressive enough to curtail private tax dodging. In the UK, the heat has been turned up on multi-national firms like Google and Starbucks, who reduce their tax liability by cleverly shifting profits in low-tax jurisdictions. France’s taxmen have already demanded a €252 million back payment from Amazon related to this kind of ‘profit shifting’.
The clash of money and morality holds a particular fascination for me. Although it is seemingly everywhere, and we read daily tales of fraud, insider-dealing, income inequality, conflicts of interest, payday lending, etc., it almost never fails to surprise us. When embarking on a simple and purely economic activity, we rarely think that it might one day collide with our own or others’ sense of morality.
It is obvious why people seem to enjoy seeing a hero fall: it is all about changing the reference point. For example, when a beacon of morality – a sporting hero, an outspoken priest, a clean-cut politician, a decorated general – is dragged into the mire of sleaze and shame, it lowers the bar for our own patchy integrity. Without having to do anything, we are instantly able to see ourselves as more honest. Quite why anyone would like to see someone’s tainted image redeemed is perhaps counter-intuitive, but we like that too.
I was so impressed by a lecture on the fascinating subject of ‘Economics and Ethics’ by Julian Nida-Rümelin, a former German culture minister and currently professor of philosophy and political theory at the Ludwig-Maximillian University in Munich, I literally ran out and bought the book. Nida-Rümelin’s newest publication, entitled The Optimisation Trap, deals with the philosophy of a human economy.
The conviction of Rajat Gupta, (the former head of McKinsey and ex-board member of Goldman Sachs and Procter & Gamble) is being seen as a milestone in the long crackdown on insider trading by US prosecutors. Gupta was found guilty even though he did not personally benefit from the crime and the conviction was secured largely on the basis of circumstantial evidence. By setting the bar lower than the usual standard for conviction, the prosecutors hope to establish an effective deterrent for would-be insider traders. It could be working: the UK’s financial market regulator, the FSA, has revealed that there has been a dramatic decrease in unusual trading ahead of the London-listed M&As. Among other things, it attributes the decline to the much-debated Rajat Gupta trial.
“There was a period of remorse and apology for banks; that period needs to be over,” implored Barclay’s boss Bob Diamond before a parliamentary committee in January 2011. Well nobody seems to have been listening because, a year later, banker-bashing persists. Mr Diamond seems determined to remain the lightning rod for public fury but he is far from alone. In the last few weeks Stephen Hester, the head of the state-owned Royal Bank of Scotland has been publicly badgered into giving up a one-million-pound bonus. The figure seems large, but it is modest by bankers’ standards. Also RBS’s former CEO, Fred Goodwin, the man who presided over the bank’s collapse, was stripped of his knighthood. To put that into context, the last person to be so unceremoniously defrocked was the Zimbabwean dictator Robert Mugabe.
Have you lied yet today? According to some studies we lie about three times in every ten minutes of conversation[i], which means that unless you just woke up you have already let a few lies slip. Perhaps you told your neighbour how good she looks this morning, even if that wasn’t strictly the case.
At a church in Frankfurt I recently had the opportunity to listen to a debate between Professor Paul Kirchhof, a former Federal Constitutional Court judge, and the former chairman of the Evangelical Church in Germany (EKD), Professor Wolfgang Huber. The topic was the gradual destruction of church and state and the eventual end of institutions. Almost inevitably, the conversation turned to the ‘crisis’ – nowadays, an empty catchphrase for all social problems.
The subject of yesterday’s blog post prompted more discussion and opinion in our office than actually made it into words. Debates about morality have a tendency to do that. If anything, the news that the Swiss central bank president, Philipp Hildebrand, had stepped down as a result of a currency trading scandal, further polarised opinions. As the post concluded, each person has their own personal moral benchmark – an idiosyncratic reference point – so the perception of any moral deviation will therefore be different depending on who observes it.
Should the President of Germany borrow money from millionaire friends and holiday at their expense? Should the wife of the Swiss central bank president make speculative investments in the currency under her husband’s responsibility?
Oh dear. Once again the morality of our elected officials is provoking public ire.
I know exactly what lies in that elegantly embossed box on the middle shelf of the fridge in the office kitchen: the luxury chocolates belonging to my esteemed boss. If I lifted one of those tiny hand-made delights from the tray and popped it into my mouth, he might not even miss it. I could almost taste it. But then I remembered a study by an economist who was constantly annoyed because his drinks kept disappearing from the common refrigerator at his faculty.
I caught the highlights of the WBO Cruiserweight title bout between Marco Huck and Rogelio Rossi on TV last Sunday. I’m not really a boxing fan, but I was transfixed by this particular combat. Rossi, the Argentinian challenger, took a real pounding and was eventually stopped in the sixth round by total knockout. He lay for a while unconscious on the canvas surrounded by his corner team and a doctor. Earlier he had ‘survived’ three standing counts by the referee – something that, on its own, is not particularly noteworthy. The first of these, however, followed a late, but serious punch delivered by Huck after the bell at the end of the fourth round.
It is hard to recall a time when the (alleged) unethical behaviour of leading individuals has made so many headlines as now: the IMF President Strauss-Kahn has been accused of rape; a bribery scandal has rocked the FIFA; ex-Governor Schwarzenegger is under criminal investigation, former presidential candidate, John Edwards, too; Congressman Weiner has literally been exposed on Twitter; UK soccer hero Ryan Giggs also had a run-in with the micro-blogging network;
Even those who are not fans of CNBC’s Jim Cramer cannot argue with his latest tip. If given a choice between making money and avoiding jail-time, argued the ‘Mad Money’ host, it is best to try and stay out of jail. His reflection was in response to the conviction of insider trader Raj Rajaratnam on 14 counts of conspiracy and securities fraud. Ex-post, it looks like the former hedge fund manager, who is now staring at 19 years in federal prison, made the wrong choice. However, ex-ante, this is not the choice insider traders face.
The Fukushima disaster was upgraded to Level 5 today, in other words, a ‘nuclear accident with wider consequences’. The news sent me scurrying to dig up an e-mail I received on Monday morning from InTrade, the spread-betting website. They had just opened a betting market on the Japanese accident, and were already quoting prices for the probability of further explosions as well as the probabilities of future upgrades to Levels 5, 6 and 7.
Germany’s Navy has been disparaged following the unfortunate death of a 25-year old female cadet early last November. The trainee died in a 100-foot fall from the rigging of a tall ship, the Gorch Fock, and a leaked report by the parliamentary liaison to the German military revealed a culture of revelry and hazing widely perceived as unbecoming of an officer.
Bankers, mortgage brokers and rating agencies have borne the brunt of public wrath over the financial crisis. But a documentary released late last year entitled ‘Inside Job’ reserved much of its scorn for academic economists. The movie implies that huge consulting fees have hijacked the independence of some of America’s most-admired economists.
‘Do the right thing’ may become a quaint historical slogan as the US housing market edges toward a double-dip downturn. The Fed already reckons that 20 percent of borrowers owe more than their houses are worth.