Business ethics and social norms the same?

KUALA LUMPUR: That the present financial crisis was in part caused by a failure in ethics will come as no surprise to anyone.

The lack of due diligence that led to unrealistic credit ratings and the failure of banks to properly warn customers of the risk profile of dodgy assets such as minibonds, among others, are all, in some fashion or other, attributable to an ethical lapse on the part of regulators, investment bankers and even consumers.

Even the actions of governments, such as the move to bail out so-called “too-big-to-fail” companies with taxpayer money is deserving of scrutiny. Another example is the current debate over the so-called Tobin Tax, which is a proposal to tax certain financial transactions to build up a fund that will be used to bail out companies should the need arise.

There are arguments from critics of the proposal that ethics — broadly translated into doing the morally right thing — is not always applicable to the business world.

Indeed, in a capitalistic system where self-interested behaviour is the norm rather than an exception, there is often a sharp distinction between the broad sense of ethics and business ethics.

“A call for more ethics is all well and good but its effect will be limited unless self-interest in financial markets runs with the grain of the interests of society,” wrote Phillip Booth, the editorial director of the Institute of Economic Affairs, recently in the Financial Times.

A free-market hawk, Booth believes that a truly free economy makes for a better watchdog than the sudden infusion of greater ethical behaviour.

However, there was at least one voice at the recently held Emerging Markets Programme 2009 hosted by the Securities Commission who argued that there should be a greater role for ethics to play in financial markets regulation and that ethics should be no different in the business world than it is in the sandbox.

“It is the same thing. When you and I were brought up as kids, we had certain social norms — you don’t cheat, you don’t steal, you should treat people better than they treat you, and I think that it is no different from what should be in the financial services ind
Kwan: Market regulators need to go out and talk about what’s right and what’s wrong. Photo by Mohd Izwan Mohd Nazam
ustry,” said Angelina Kwan, the chief operating officer and managing director of Cantor Fitzgerald’s Asia Pacific region.

Ethical behaviour in the business world, she added, meant not only working in the best interest of the client, but in the best interest of the markets as well.

Kwan occupies a unique perspective because of her past offices as supervision and enforcement director for the Hong Kong Securities and Futures Commission.

Her transition from a regulatory position to a private concern was initially difficult, she said, but it had offered her a unique perspective of how private corporations ought to be run.

Commenting on the subprime issue originating from the US, Kwan described the entire ordeal as being brought on by a “lapse of ethics, laziness and incompetence”, which stresses the point that the crisis itself was a people problem, rather than a problem inherent to the regulatory structure.

“It’s the job of a regulator to set out a framework and in Hong Kong, we call it the fit-and-proper criterion,” she said.

“That’s the minimum standard and from that is imbued the ethics portion. So, the regulator can then say this is the standard. Then there is the enforcement element where it becomes incumbent on the regulator to walk the beat, and where there is an infraction of the rules and principles, it is their job to enforce the rule.”

Kwan said she believed there would however be regulatory reform, nonetheless. There was a greater need for regulators to go out to the market place and actively educate participants about business ethics.

“You’re going to see enforcement and supervision where the regulators go out and talk to the market, where they go out and do inspections of market participants,” she said.

“Market regulators need to go out and talk about what’s right and what’s wrong. Regulatory reform is about tweaking a system that is already functioning, not a major overhaul.”

She acknowledged there were some systemic issues such as the ones leading to the sale of Lehman minibonds to “little old ladies” in Hong Kong, but those cases were rare even in this particular scenario.

But moving forward, Kwan said the market practices were going to change, which is a perspective that is not universally agreed upon by all market observers.

“The financial markets are going to be different. There will be more disclosure. More in terms of trying to move from over-the-counter trading (OTC) to exchange trading. It’s not going to be overnight, so there will be a gradual push towards more transparency,” she said.