FINANCIAL CRISIS OR VALUES CRISIS

You may well ask what is a priest doing addressing such a question? There is a story of where bank notes go when they are retired out of circulation. They were reflecting on their contribution to society. The $100 note said he was involved in many important transactions including property deals and a few drug transactions, but, overall had made a very positive contribution. The $20 note said he went to the supermarket a lot and helped to feed families. Then they looked at the $5 note and he said – well I went to Church a lot.

From my university days when I studied Economics, it always concerned me that values and ethics were completely ignored. In business and finance all ask – Is it profitable, most ask is it legal, few ask is it right or wrong, good or bad. Economics was, and still is, mainly a values free zone. It is for this reason I spent 15 years working with the St James Ethics Centre to implement the ethical dimension into Corporate Governance and University Business Education.

I want in the short time we have to focus on the Global Financial Crisis and explore the deeper issues involved.

Before the 1980’s, Investment Banks were small operations made up of wealthy partners who were careful where they placed their money. These institutions exploded in the 1980’s with the financial deregulation, and eventually began paying people high bonuses for risking not their own, but other peoples’ money. Others in the Building and Loan Societies , like Freddie Mac and Fannie May, paid people for how much business they brought in with no real risk assessment and no responsibility. These sub-prime mortgages needed a deposit of only 1% and were then sold to investment banks and put into Collateralized Debt Obligations and were given triple A ratings which made them look as safe as government securities. What this meant was loans were given to people who could not repay them, and as anyone could get a mortgage, housing prices boomed.

Into this ticking time bomb you also had insurance schemes where people insured against default on these loans giving rise to Credit Default Swaps and added to this toxic mix, was the speculation in Derivatives. The ratio between loans and capital in this out of control industry was 33 to 1.

Institutions like Goldman Sacks were selling securities they believed to be worthless because at the same time they were betting against them.

Rating agencies made a fortune giving these financial products and institutions high ratings. At the same time, these people were paying themselves billions in bonuses. C.E.O’S pay rose to 325 times that of their average employees, whereas in 1970, CEO’s were paid 30 times that of the average employees.

As a result of all this, in the United States, the debt has been taken over by the Government with the exception of Lehmann Bros. The U.S. economy has declined with 20 million people out of work, and for the first time in history the current generation of Americans are less prosperous and will have less education than their parents. The reforms brought in in 2010 are weak, and the people who created these problems are still involved.

The effects of all of this are –

  1. A loss of household wealth leading to a decline in consumption and, therefore, a decline in GDP or national wealth.

  2. The rise in risk has increased the cost of capital decreasing private investment and shrinking the economy further.

  3. In such an environment, householders have increased their level of savings due to the risky future and this further contracts the economy and wealth creation.

In Europe, the problems are caused by Governments spending beyond their means and the Eurozone making it impossible for those in trouble to devalue their currency.

What I now want to address is what lies behind all this. Was it simply the result of deregulation or is there something more involved.

Regulation is only part of the answer. In the words of Martin Luther King – “ Regulations may not change the heart, but they can restrain the heartless.” Regulations involve costs that always fall onto the consumer, so what is required is sensible regulation.

A key issue here that is not often addressed is the money culture. In 1990, Warren Buffett said to a sub-committee of Congress:

“Huge markets attract people who measure themselves by money. It is not the only type of people they attract, but there is a special attraction of markets. If somebody goes through life and measures themselves solely by how much they have or how much they earned last year, then sooner or later they are going to get into trouble.”

Markets are not corrupt but they can be corrupting. They work reasonably well in allocating the scarce resource of capital and better than any known alternative. But problems arise when they lack an ethical dimension. Adam Smith, the great proponent of capitalism in The Wealth of Nations with his concept of the invisible hand of the market was himself a moral philosopher and always assumed a strong ethical environment for Capitalism to work, and he strongly opposed anti-competitive practices.

Charles Handy says markets are a mechanism for sorting out the efficient from the in-efficient, they are not a substitute for responsibility. Or as Pope John Paul II wrote in Centesimus Annus, the market economy cannot be conducted in an institutional, juridical or political vacuum. What this means is the economy is part of the fabric of society and is there to serve it.

Clearly much more than regulation is required. What is needed is an understanding of the values on which regulations are based. Here we enter the area of values and ethics and questions of what is right or wrong or good or bad. Markets cannot operate as if they are separate or independent from the communities in which they operate. After all, business has special privileges given to them by the community such as limited liability, and business depends on the good order and infrastructure of the communities in which it operates. They, therefore, have an obligation to promote the common good, for without a strong community there will be no strong business environment.

How does business promote integrity in the workplace and in the market? There are many ways people address this, such as Corporate Social Responsibility, that is, being a good Corporate Citizen, Triple Bottom Line reporting – financial, legal and social responsibility, as well as codes of ethics and codes of conduct. All of these are useful but do not go to the heart of the matter. What I believe is needed is Virtue ethics, good leadership, good corporate culture and sound decision making processes. Let me now expand on these.

A good corporate culture is established by identifying the core values of the organization and managing them in the organization. Aristotle in developing his Virtue Ethics emphasised the key value to be a good citizen in 5th Century B.C. Athens. These he identified as Honesty, Justice, Prudence, Courage and Temperance. The reason I stress this approach to Ethics is that most ethical approaches seem to assume that provided you can work out the right course of action by applying some principle or value, that will solve the issue. The truth is it won’t. You cannot tell me that Alan Bond did not know he was doing the wrong thing when he stripped Bell Resources of its assets. What matters is who we have become by the choices we make. If it is greed that drives you, you cannot but act in that way. Clearly, this is a spiritual as well as an ethical issue. Spirituality is about who we become, ethics is about how we act and the two are intertwined.

Virtue means strength. It is a question of what strengths we have developed in order to do the right thing. You don’t just wake up in the morning and say,” I think I will be honest today!” You are or you aren’t honest because of the decisions you have made that have shaped who you have become. In this context, leadership is critical. The values of the organization are developed through the modelling of the Leader. Good leaders develop good cultures in their organizations by identifying and promoting core values, e.g. Coles and Woolworths in the early 90’s had Brian Quin and Paul Simons. You can tell very quickly in any organization what it is like - whether the morale is good, if people want to be there and if they feel valued.

Let me pull this together by addressing good decision making. Bad decisions are not just the result of not doing the right thing. They also result from not asking the right questions. You need a simple framework to bring rigour into your analysis when you face an ethical issue and are not sure what to do.

Firstly, you need to clarify the facts of the issue you face. You can do this by writing them down or talking to someone about the issue.

Having clarified the facts, you need to ask who is affected by this decision – who has a stake in it? What does it mean for customers, employees, shareholders, suppliers, the community etc.

Then you need to look at the options you have. Many people think you can either do something or you cannot, but when you break it open, you can find other ways to deal with it. At this point, leave ethics out of it and be creative. The first option is always to do nothing and get more of the same. Then apply sound ethical criteria or values to evaluate your options. Here are a few that will sort it out.

What does it do to the dignity of the people involved? (Christian Ethics key value).

Is it fair to the parties involved?

How does it affect the common good?

Choose your best option.

Give it the sunlight test.

But let me now break open a few business values.

Fairness means that individuals are not disadvantaged for irrelevant reasons such as race, gender, religion or sexual orientation. Unfair dealings destroy the morale of an organization and contribute to a climate of cynicism.

Honesty implies avoidance of deception, be it in financial reporting, marketing strategies or communication with others.

Integrity is a key business value. It means avoiding improper influences or conflicts of interest that would undermine a person’s independent or unbiased judgement.

Efficiency - which implies the careful use of resources and the responsible stewardship of the limited resources available.

Accountability - which implies the accepting of the consequences of one’s decisions.

All of these values help shape an environment and, thereby, humanizing it which divinizes it.

Here our work becomes Worship by using our gifts to develop and enhance creation and providing valuable and essential services to people.

One of the key values of faith is that it helps keep business and material wealth in proper perspective. Work, money and possessions, while important, were never meant to be at the centre of our lives. With God at the Centre relationships, family, goodness and beauty find their central place.

In conclusion, financial crisis – yes! But, more importantly, a values crisis, as it has proven how bankrupt the money culture is.


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