Since the turn of the century we have heard continually that we would never see a return to the “greed is good” era of the 70s and 80s. Business leaders, chastened by the stock market crash of ’87 and the deep recession that followed, it was argued, stepped up to a new set of accountabilities and we saw a governance industry flourish worldwide. Enron, Worldcom and Parmalat were wake-up calls that organisational ethics and culture couldn’t be taken for granted. New legislation, such as the Sarbanes-Oxley Act, was put in place to create an ethical firewall between the consumer/investor and boards of directors and executives intent on corporate malfeasance.

So, why have so many global businesses now come under threat from the current financial crisis? Why were we all blind-sided and what could business have done to insulate themselves from the meltdown, notwithstanding that most commentators are saying this is the greatest reversal since the Great Depression?

The first thing to be clear about is that, in all probability, Australia will avoid the worst of the downturn and will not experience a meltdown at nearly the same intensity as the U.S. and, to a lesser degree, the European Community. The second is that the financial markets could have and should have seen this coming. The global economy has experienced the longest “bull” market since the abandonment of the Gold Standard in the 1920s and, while resisting pressure for regulation, former US Federal Reserve Chairman Alan Greenspan in 2005 warned that “Rapid growth in the credit derivatives markets has created considerable uncertainty about how the global financial system might react to any new economic shocks.” We now know the awful consequence of these prophetic words.

Even earlier, in 2001, John Hoefle banking columnist with Executive Intelligence Review, in a written submission to a Senate Banking Committee hearing on The Condition of the U.S. Banking System, explained the risk from derivatives in metaphorical terms:

“Picture a dog with a very bad case of fleas, the dog representing the productive sector of the U.S. and the fleas representing the worst elements on Wall Street. During the 1970s and 1980s, the fleas built up huge trading empires, trafficking in the flesh and blood of the dog. The fleas were so successful that the once-powerful dog began to dramatically weaken, and no longer produced enough blood to allow the fleas to continue trading in the manner to which they had become accustomed. Being clever critters, the fleas came up with a solution which pleased them all: They began trading in blood futures. Since they were trading in futures rather than actual “product,” they were no longer limited by the amount of blood they could suck from the dog. The level of trading expanded dramatically, and the fleas became rich beyond their wildest expectations. Right up to the point that the dog died.

“That, in essence, is the nature of today’s derivatives markets, and the global financial system as a whole….”

So, if so many commentators could see the fall coming, why did they do little to prevent it? And why did the regulators stand by and watch until it was almost too late? The simple answer is a confluence of circumstance; the more complex explanation is that the financial markets were allowed to operate in an ethical vacuum where ethics were mistakenly taken for granted.

Let’s take the confluence theory first. The simple explanation put forward by financial analysts is the failure of the sub-prime market in the U.S. in the same vein as the Savings and Loans failure of the early 90s – if you like, the Incredible Hulk meets Clark Kent – coupled with the excessive gearing of the major stockbroking firms and a US Government either out of its depth or with its eye off the ball. The same can’t happen in Australia because our mortgage market is different and our governments have, rightly, become fixated on surpluses while the US Government has run up record deficits to fund immoral wars.

The more complex, and arguably the more accurate, explanation is the rise of amoral management over the last 15 years. A veteran of 3 global recessions recently remarked that lessons of the past were unlikely to be learned as very few of the current breed of MBA qualified financial market managers and stockbrokers are old enough to remember the last recession in the early 90s. What they rely on is their training and education at the “millionaire factories” and business schools of the modern era and the messages and metaphors from the current crop of multi-billionaires who talk only in terms of leverage, CDOs and “golden handcuffs”.

American researchers, Conry and Nelson, recently correlated business graduates with the least developed ethical skills. Their study highlighted the worrying trend that upon graduation, ethics scores had reduced from their undergraduate level. Similar findings were supported by research undertaken by the Aspen Institute. In a 2002 report published by the Washington Post, 82% of graduates were of the opinion that shareholder primacy was the prime responsibility of business, a 14% increase from their undergraduate year.

In such a moral vacuum what we have seen is a stretching in the relationship between reward and recognition. Reward, in the shape of executive remuneration, used to be tied to profit or improving the asset backing of the enterprise; now if it is tied to anything at all, it is connected to improving the share price or market capitalisation. Both are illusory, short term and easily manipulated, as we saw in the cases of both Enron and Parmalat; neither are tied to improving the long term sustainability of the enterprise or increasing the social value of the corporation. Reward is the other side of punishment; absence of reward equals punishment. This connection has seemingly been lost in the current remuneration model, which explains the failure of US Congress to pass the rescue package at first pass. Thousands of angry constituents lobbied their representatives not to pass the legislation because there was no sense of retribution against the executives of the major banks and investment funds for their malfeasance; no sense that they would be made to pay for the excesses of the past.

What society is afraid of is that the financial sector has moved beyond its reach. What one pundit called “cry baby capitalism” is a new and disturbing trend that sees no ethical relationship between choice and consequence. Boards and managements of global financial institutions were potentially seen to get away with a flagrant disregard for those who would be adversely affected by their actions – hundreds of millions of citizens whose stocks, pensions, houses and jobs would be diminished or abolished by a small number of executives intoxicated by greed -, bailed out by a panicked central government and then free to do it all again.

So, punishment is not what society demands. It demands that the lessons be learned and that the ethical dimension of business – the need to serve the society that issues it its licence to operate – be put back into a system that operated in an ethical vacuum. It demands that clawback provisions be put into future contracts of the next generation of finance industry executives, and it demands that we start teaching future generations of managers what it means to be ethical in business.

Brian Moran is co-principal of Managing Values which specialises in workplace ethics and values.

(Published in the Edmund Rice Foundation Good Business Ethics Initiative eNewsletter October 08)

This entry was posted on Sunday, January 24th, 2010 at 10:44 pm and is filed under Business Ethics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

All data and information provided on this blog is for information purposes only. Managing Values makes no representations as to accuracy, completeness, suitability, or validity of any information on this blog and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.