The Importance of Ethics in Business in Light of the Recent Global Financial Crisisadmin / December 31, 2018
Ethical behavior has always been assumed to be the foundation of a productive and well functional society. Despite this, business ethics have not been given much consideration and businesses have been subjected to little criticism for their ethical behaviour so long as they did not break the law.
Ethics can loosely be defined as a system of moral principles by which social conduct is judged as either “right” or “wrong”. In business terms, ethics are moral principles which dictate what legitimate behavior is in varied business dealings (Chryssides & Kaler 1993, p.3).
While the public and government previously demonstrated little concern for business ethics, the financial meltdown of 2008 that resulted in the near-crash of the global economy has called for a more critical look at business ethics. This action has to a large extent been catalyzed by the widely held perception that ethically unsound practices by the financial industry were responsible for the financial crises.
This paper shall argue that sound ethics in business are paramount for the stability and continued prosperity of the global economy. To reinforce this assertion, this paper shall demonstrate that the recent global financial crisis was caused by unethical behaviour in the finance industry and as such, could have been avoided by ethical behaviour.
Ethics and the Global Financial Crises
An interesting concept when dealing with ethics is that there does not exist a standardized approach to dealing with ethical issues as they all spring from very unique legal, political, social and economic backgrounds. As such, there are no “uniform” ethical practices though there may be those practices that are generally accepted by the society.
This vague interpretation of the word ethics is what makes ethical issues in business dealings especially hard to determine. Coelho, McClure and Spry (2003) therefore suggest that the operative words in ethics are “without deception or fraud”.
One of the factors that led to the financial meltdown of 2008 was the overemphasis on profits at the expense of all else. This practice was against the utilitarian ethical theory which stated that the collective welfare of the people overrides the individual.
The lack of concern for the overall good of the society stemmed from the increase in equity-based compensation to top executives which resulted in the declaration that “the paramount duty of management and board is to the shareholder and not to other stakeholders” (Holmstron & Kaplan 2003, p.11).
Bearing in mind that corporate governance and management has a direct influence as to the running of an enterprise and therefore its ethical practices, the shift in their allegiance to primarily protecting the interests of shareholders led to unethical practices.
While the aim of all businesses is to make a profit, it is reasonably assumed that this profit is within limits of the investments that the business owners make. It is therefore perceived to be unethical for a business to hope to achieve profits that far transcend the investments made.
When a business endeavors to reap more benefits that can be expected from their investment, the business can be labeled as being greedy. Weitzner and Darroch (2009, p.9) define greed as “occurring in situations where an individual seeks an economic return of greater value than what her input should reasonably earn and in so doing imposes costs upon others”.
Greed by financial lenders which led to a lack of prudence and ethics was responsible for the 2008 financial meltdown. Lewis et al (2010, p.79) explicitly accuses bankers and managers of manipulating the market so as to gain short tern benefits such as enormous bonuses with total disregard for the long-term consequences of their actions.
Transparency is one of the virtues that any ethically sound society upholds. In a business environment, this virtue dictates that business dealings be carried out with honesty as much disclosure as is possible. Wade (2008, p.27) states that sound financial practices required firms to reduce the value of loans that were likely to be defaulted and to alert the market of this high risk.
This was not the case as financial institutes withheld this information from both their shareholders and other relevant parties. Risks were also concealed by packaging up the “risky loans with less risky loans in a way that made it look attractive” (Wade 2008, p.31).
Potocan and Mulej (2007, p.134) theorize that ethics together with knowledge result in businesses co-existing in an environment of trust rather than confrontation. Individualistic competitiveness is therefore to be downplayed and in its place interdependence which will ensure future economic prosperity practiced.
These are ethical values which were lacking in the build up to the financial crisis of 2008. Clarke (2010, p.12) confirms that at the precipice of the financial crisis, “banks refused to lend to each other because of increased counter-party risk that other banks might default”.
This individualistic approach led to the solvency crises that the big banks faced eventually leading to a financial meltdown. It can be reasonably assumed that had financial institutes had trust and interdependency, the financial collapse would have been avoided altogether or at the least its severity blunted.
One of the most contentious ethical issues at the wake of the 2008 financial crisis is the Issue of CEOs and upper management continuing to enjoy large pay and bonuses even as the rest of the world suffers from the global recession.
While Bergstresse and Philippon (2005) argue that this practice is in a bid to ensure that “upper management incentives are aligned with the interests of shareholders”, many people are skeptic especially since top executives are blamed for financial collapse.
Clarke (2010, p.30) questions the ethical soundness of financial institutes returning to self-interested strategies such as big bonuses for top management soon after being rescued by public funds.
Personal contribution to the ethical problem
My first recommendation to you is to ensure that you develop an ethics and/or or codes of conduct program. Considering that your organization is dedicated to a guiding principle of reasonable transactions and veracity in the conduct of its business, such a program will ensure that employees conduct organizational transactions in an honest, just and legal manner.
In addition, employees should be notified that conformity to the program applies equally to all management staff and employees, including temporary workers, representatives, and contractual employees who work for the organization. In this regard, I can help develop the program considering my experience in this field.
In addition, all members of staff are expected to abide by all laws and regulations which pertain to the endeavors they partake for and on behalf of the organization. Infringement of the law or unscrupulous business dealing by members of staff will not go unpunished. Failure to comply may lead to termination of employment and or initiation of civil or criminal proceedings in a court of law.
Similarly, I can help in this area. To promote corporation, I shall ensure that employees understand that conformity to the program is a term and condition of employment and that this must also be reflected in all employment contracts provided by the organization.
In addition, I shall ensure that copies of the Code are made available to all the departments, and that the managers of each department take it upon themselves the task of implementing reasonable measures to ensure that all employees identify with its contents.
The importance of ethics and good conduct cannot be understated. Given the chance, I shall ensure that I allocate adequate resources to ensure that both the new and current employees get the necessary training to adapt and maintain the desired standards of conducts and ethics.
To do so, I shall liaison with all managers to ensure that they organize seminars that offer different lessons in employee behavior, their roles and obligations, guidelines on how things ought to be done and most importantly; customer care. On the same note, various professionals in business ethics shall be invited on a monthly basis to offer advice and training concerning business ethics and conduct. All employees are expected to attend the lectures without fail.
Also, assessments in form of questionnaires shall be distributed to the employees at the end of each month in order to evaluate their knowledge and understanding of the designed code of ethics and conducts. This accompanied by my knowledge on risk management shall help this organization avert any ethical hurdle.
Unethical business practices can result in great loses for the society and even the entire collapse of our financial systems. This presentation set out to demonstrate that lack of ethics was responsible for the recent global financial crises and that sound business ethics could have prevented this.
From the discussions presented herein, it is clear that the establishment of business ethics is necessary to avoid future failure of an organization’s financial system.
While government involvement in the financial industry can bring about desirable change with regard to financial practices, it is only by instilling ethical values to all business players that the prosperity of the society and their businesses can be guaranteed.
Chryssides, D & Kaler, H 1993, An Introduction to Business Ethics. Cengage Learning EMEA, New York.
Clarke, T 2010, Recurring Crises in Anglo-American Corporate Governance, Oxford University Press, London.
Coelho, R McClure, J & Spry, A 2003, The Social Responsibility of Corporate Management: A Classical Critique, American Journal of Business. Spring 2003: Vol.18. No. 1.
Holmstron, B & Kaplan, N 2003, The State of U.S. Corporate Governance: What’s Right and What’s Wrong? Viewed 28 September, 2010
Lewis, V et al 2010, ‘Was the 2008 Financial Crisis Caused by a lack of Corporate Ethics?’ Global Journal of Business Research, Volume4, No. 2, p. 79.
Potocan, V & Mulej, M 2007, Ethics of a Sustained Enterprise – and the Need for it, Springer Science, New York.
Wade, R 2008, ‘The First-World Debt Crisis of 2007-2010 in Global Perspective’, Challenge, vol. 51, no. 4, pp. 23–54.
Weitzner, D & Darroch, J 2009, ‘Why Moral Failures Precede Financial Crises’, Critical Perspectives on International Business Vol. 5 No. 1/2, pp. 6-13.