Is there a place for morals in finance?
July 1st, 2010
Photograph by DTR
If we believe Plutarch, Solo abolished debt or reduced debt interests in Athens in the 6th century BC, but having informed three friends of his project, he had the discontent to find out that those friends had borrowed to purchase vast amounts of land shortly before the new law was enacted. Insider trading, fraud in finance, dissymmetry of information, lack of transparency have probably always been components of money dealings. They did not emerge in 2008, and ethics has never formed the golden rule of finance; nor has immorality, since finance is what human beings make it.
What emerged in 2008 is that the greed of a relatively small number of individuals could bring about a massive, sudden and global economic crisis. That was new, even if we compare it with the Great Depression, caused by a long-lasting and global speculation on all financial markets. It is now clear that greed has to leave the driver’s seat that it used to have in several institutions, and that the markets have to be protected from those institutions which would still be badly managed.
Curbing greed goes beyond promoting longer term corporate strategies. For sure it entails longer term components in compensation, but it also requires managers to make it clear to their teams that financial success will never be considered an excuse for lack of ethics. Whistle blowing also has to be used to fight excessive risk taking or financial fraud.
Better regulation is also needed, to introduce in the markets the checks and warning signals that were missing one year ago. Without even diving into the technicalities of what is currently discussed on capital requirements or trading of derivatives, we can only observe that discussion is still going on in many countries whereas action would be needed.
The right question is probably not whether there is a place for morals in finance, but whether there is a place for a new global crisis after all the public commitments from various governments or international bodies. Populations would then seriously question, not only the ethics of their corporations, but the one of their political leaders, everywhere in the world, with consequences difficult to predict. If there is to be a place for morals in finance, it has to be ensured by global political will.