by Tony Manwaring
To avoid another credit crunch we cannot rely on regulation alone.
The proposal from a cross-party commission for a Hippocratic oath for bankers - which would “require bankers to take into account the impact of their activities on the wider economy and on society, rather than focusing on making a short-term profit” - goes to the heart of the challenge and necessity of reconciling values and value creation (Guardian, 19th April 2010).
It is perhaps hardly surprising that this has met with a sceptical response, but it is a suggestion which nevertheless merits serious consideration. Tomorrow’s Company proposed such an oath in our report ‘Restoring Trust’ in June 2004. We called for an overarching ‘statement of principles’ to cover all aspects of the financial services industry, to which all parties could commit. More recently, a group of the Class of 2009 Graduates of Harvard Business School have similarly initiated ‘the oath’ - a voluntary pledge for MBAs to “create value responsibly and ethically.” The Lord Major of the City of London, no less, argues “we need to think about how to put ethics at the heart of the City, and how to ensure it is more than nice words and good intentions” (30th March 2010): the ground is shifting. Stephen Green, Chairman of HSBC, is moreover quoted as saying: “It is as if, too often, people had given up asking whether something was the right thing to do, and focused only whether it was legal and complied with the rules". However, the statement that “bankers could be forced to pledge to behave ethically” underlines the difficulty of doing it in practice. Trust cannot be forced and such an initiative won’t work in isolation. It will also challenge the role of accountants and other professional bodies: auditing ethics and auditing finances is rather different! We linked our proposal to the creation of a forum for self-regulation, at which leaders from all parts of the investment system would meet to address those issues key to the building of public trust - now more urgent than ever - linked to an industry-wide ‘seal of approval’ to support the statement of principles and provide a visible and marketable endorsement. Values cannot be compelled; they have to be led and lived from within. Green again: “"No banking business can afford to do without 'board-led' senior-management supported ethical approach to behaviour.” Regulation all too often forces attention on the regulator; not the customer or citizen and wider society. A subtler, more nuanced approach is needed which goes beyond either/or simplicities and the demonisation of institutions and the people who work for them. There are many examples of effective ‘regulation’ rooted in self-regulation, led by business leaders responding to and working with leaders in civil society and government - from the 'Equator Principles' to endangered species, and standards for the use of natural resources such as timber. What these have in common is the recognition that self interest requires a change in approach, creating new opportunities, because old ways of doing business are no longer fit for purpose, whilst reinforcing those who do act with integrity. To be sure outside pressures - above all, the voice of civil society - can require the change, but these cannot deliver the change required.
Kate Smurthwaite may well speak for many when she argues: “The people with the least scruples make the most money already and would just find new ways to get round the rules." What she is saying ironically highlights the limits of relying on reglation alone. To ignore the behavioural dimension, is merely to reproduce the conditions which led to the credit crunch in the first place. Rather, we need to recognize the power of an ethical approach as one important piece in the jigsaw that needs to be put in place if we are to avoid future debacles.
Ironically, one of the challenges raised by the article underlines the importance of ethics. The article comments “It is not clear how ‘unethical’ banking practices – such as short selling of a company – would be treated by a code.” But the point is rather that it is an ethical framework which would better enable individuals to determine, whether, and under what circumstances, such practices can be justified. Many would argue that the critical issue is transparency and therefore disclosure, rather than short selling in and of itself - is it not after all as unethical for directors and investors to support a share price that they know is overvalued?
Similarly, the juxtaposition of ‘international standards on setting risk’ and ethics, made by the British Bankers' Association, is a false choice. In our report, Tomorrow’s Innovation, Risk and Governance, we set out the clear link between leadership, behaviours and culture in the boardroom and beyond, in determining the ability to manage different kinds of risk.
Managing strategic risk cannot be reduced to a compliance issue, but is determined by the capability of a board to tackle tough issues and reach hard judgments, effectively leveraging different perspectives. The credit crunch is littered with examples of boardrooms which failed to sufficiently understand and challenge ever more complex financial products, or question the nature of the debts being taken on, and stress-test their business models.
What this boils down to is whether individuals exercised good judgment and acted with integrity. An ethical framework is arguably the most resilient bulwark to the failure to manage risk so evident throughout the credit crunch.
In our increasingly connected and complex world, we must all be stewards of the systems in which we work, for which we depend on our lives and prosperity: the devil is in the detail in creating the clear line of sight between what we do day to day, and the unintended consequences that this may have over the years to come.
If the Commission can root the proposals for a statement of ethics, within a process - at national, regional and international levels – that changes this calculation of self-interest, and incentivises self-regulation and new behaviours, it can make an invaluable contribution: one which could help renew the City’s ‘licence to operate’ for the twenty-first century.
Tony Manwaring is Chief Executive of the ‘think and do' tank, Tomorrow’s Company tony@tomorrowscompany.comAn abridged version of this article was first published in The Guardian on the 5th May 2010 and can be found here.
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