Thursday, September 18, 2008

Ethics and financial crisis

With stock markets plummeting, financial institutions going belly-up, and governments on both sides of the Atlantic stepping in to bail out failing companies, the prospects for investors, the financial community, and even tax payers do not look good. And with the likely knock on effects for employment in other sectors almost certain to result in job losses, the fall-out from the current market turmoil is going to be widely felt.

For us business ethics professors, however, the picture is somewhat mixed. On the one hand, issues of social responsibility tend to be higher on the agenda when times are good. On the other, when greed and corruption contribute to downturns (such as in the post Enron wake of the early 2000s), significantly more attention can shift to issues of integrity and governance in business. Its no coincidence that the 2000s have witnessed perhaps the most sustained growth yet in the corporate responsibility 'industry' and in courses, books, conferences, and workshops on the subject.

Today's financial crisis clearly has at least some of its roots in corporate iresponsibility around the subprime mortgage market in the US. If 'responsible lending' practices had been observed (or if tighter regulatory oversight had been imposed), we might not all be in this position right now. Certainly, the financial industries of other countries appeared to be more attuned to the problem than in the US, such as in the UK, where the British Banking Association has in place a code on responsible lending:

Responsible lending is providing credit, based on background checks and professional judgement, to people who can accommodate regular repayments without getting into financial difficulty.
But although the sub-prime problem was the rockfall that got the financial landslide going, there are a number of structural issues that also need to be considered. And here we need to perhaps look at deeper institutional issues rather than the ethics of individual people or companies. As with Enron, the fault lines for disaster run through the system of risk management, regulation, transparency, business interdependence, and reward systems, not simply rogue traders crossing the ethical boundaries.

There are ethical issues here too of course, but they are at a different level to the ones that most people think of when they think about corporate responsibility. Here, we are talking about the ethics embedded in business systems and institutions, and how ethics and the law intersect to ensure that markets work effectively, fairly, and ultimately securely. Sure, a lot of our current problems with the financial crisis can be put down to individual greed, mismanagement, and bad decisions, but ultimately it goes deeper than that. Whether this means that the current crisis will be a boon to business ethics however depends on how well us ethical experts manage to get to grips with these deeper level problems.

For further reading on this, check out our paper on challenges to the business ethics curriculum, published in an early version available free online and later in the Journal of Business Ethics.


  1. Crane and Matten,

    Unfortunately, there is a natural tendency to put the blame for financial crisis's such as these down to individual behavior, whilst ignoring the systematic issues which may be part of the underlying causes of such events.

    To be sure, there has been some poor behavior by individuals as well as individual institutions. In addition, American taxpayers have every right to feel a sense of anger and frustration over the fact that they have had to finance huge bailouts whilst CEOs of the institutions concerned leave with very large lump sum payments.

    But, underlying systematic issues need to be addressed also. A good example is the French bank which recently lost considerable sums due to the misbehavior of a single trader (I'm sorry - the name escapes me at the moment). Yes, the individual was at fault, but the risk management system should have detected and/or prevented such misbehavior.

  2. Question: how is it that sometimes it is responsible to lend money only to people who "can who can accommodate regular repayments without getting into financial difficulty" and sometimes it is responsible to extend credit to other people as well (see microcredit)?

  3. Some good points and questions here. Andrew, well put. We agree about the need to look at the systematic issues. We blogged earlier on the French trader Jérôme Kerviel at Société Générale (check out the labels on the right). Caminadella - yes it is a difficult balance to get right between ensuring access to essential financial services, but also ensuring that poorer consumers are not exploited, and banks manage their risk appropriately. Good mortgage lenders should be like good microcredit providers - i.e. working with their less advantaged clients to develop their income generating capacities and hone their financial management skills.


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