Pinpointing the Ethical Problems in Finance

The Seven Pillars Institute recently published an interview with Joris Luyendijk, the author of the book Swimming With Sharks: My Journey into the World of the Bankers. The author draws on 200 interviews with people from financial institutions in the city of London.

I liked some of the ideas expressed in the interview:

• Bankers are not monsters—they are human beings.
• Most care about ethics in their private lives, but leave that behind when they step into the bank. They think banks should make as much profit as possible within the law, since otherwise it would be immoral. Therefore, ethics is dictated by what the law says. If this is how bankers think, it’s no wonder they get such bad press.
• There are cartels that divide up the market and use part of their excess profits to maintain their privileges. If this is true, then competition policies should be reconsidered.
• Finance is an honorable activity; the problem is with the way it has grown, and the perverse incentives and conflicts of interest that have been created. This will not improve by itself, because no one is going to cut off the branch they are sitting on, as Luyendijk skillfully explains.
• The biggest issue, he says, are the perverse incentives. “If you are rewarded for undesirable behavior and punished for good behavior, then you can have all the ethics promises you want but people will act on those temptations.”
• For example, he suggests that bankers in line for a bonus should also be in line for a malus, with a large vested interest in their business (i.e., big reward for good results, and punishment for bad results), and feeling personal liability when things go wrong for them.

This is all very familiar, at least to those of us working in the field. We have to realize that there are problems related to ideas, institutions, behavior within organizations and, therefore, the rules of the game, such as incentives, and other factors that directly affect people.

In short, there are three areas to address:

1. What’s the deal with finance (and business), what’s it all about, how do you play…
2. How should people behave in order to be good managers or employees, and why.
3. What should the rules, codes, cultures, structures, missions and behaviors be like so the company doesn’t turn into a snake pit.