If you want to practice law in California, and in much of the United States, you must go to law school, you must pass the bar examination, and you must be of good moral character, part of the background check administered by the State Bar before it will allow you to work in the legal profession. Explaining the standards for this test, the Bar informs readers that:
…the Committee considers evidence of candor and honesty, respect for the law and the rights of others, fiscal responsibility, and records of fidelity and trustworthiness in other professions for which he or she is licensed.
Few professions in the United States have such a conduct test, a bar to professional practice if you cannot meet basic ethical standards. Many professions claim to value ethics, and members of professional organizations may need to agree to abide by ethical codes, but they do not need to belong to such organizations to work, and thus don’t have to follow their ethics if they don’t want to. The penalties for ethics violations can also vary considerably; organizations may be able to censure, for example, but they can lack the power to strip people of professional certifications on the grounds that they are clearly ethically unfit to practice, which the California Bar can do, and does, on occasion.
One of the recurrent issues within the financial industry is a complete lack of ethical standards, let alone adherence to any sort of consistent ethical guidelines. For some financial professions it may be necessary to pass licensing exams to work; brokers, for example, need to take the Series 7, which does include questions about ethics in addition to questions designed to test knowledge and competency with financial markets. Many executives, however, do not need specific licenses to practice, and do not need to agree to abide by moral or ethical codes in order to work. They are on a sort of ‘Scout’s Honour’ system, which clearly does not work.
If it did work, the current financial problems would not be nearly as severe. If members of the financial industry had high ethical standards, stuck to them, and had a mechanism for enforcement, many of the derivative products they created might not have passed muster. Certainly some of their financial activities would have been cause for a raised eyebrow. Things like pushing mortgages on people who were clearly not qualified for them, providing false and misleading information, helping people get no documentation loans, would be ethics violations. Should be. Are, for people like attorneys who are not allowed to lead their clients into bad decisions, or for brokers who have a fiduciary duty to their clients and cannot recommend bad stock purchases or unwise financial moves.
Executives, though, are only legally responsible to shareholders. As long as a company profits, as long as activities benefit a parent company, this is all that matters. Executives do not need to be accountable to society in general because their goal is to make more money for their companies. Not just their goal, but their legal obligation; executives can be removed and penalised if they engage in activities that will harm the financial wellbeing of their employers. Which means that there is a clear incentive to engage in inethical behaviour, if it will get your company ahead in the market, will improve your position, will increase the size of the next dividend. If the right ethical decision would harm your company, you cannot make it, because it would be a breach of legal duty.
Some organisations have promoted voluntary ethics standards for executives, pledges for financial industry professionals who will agree to maintain ethical standards because they think it is a good idea. Self regulating ethics certainly sound nice, and it seems like the hearts of the organisers are in the right place, but what they seem to forget is that large amounts of money and power are at stake. Given that, it is impossible to expect people to adhere to ethics that seem easy when they’re in business school and think that it will be relatively simple to do the right thing. The slopes get much slipperier in the real world, and it becomes much easier to slip away from ethical standards, to do it once because it’s a special case, and then again, and again, and again, until your back is against the wall.
I’m not quite sure what ethics standards and enforcement would look like for executives, but it is clear that we cannot leave a fox to mind a hen coop. As long as the financial industry is allowed to largely regulate itself, it is going to continue creating a cycle of boom and bust bubbles, from which a handful of people profit rather a lot while the rest of us flouder. This cycle is not going to stop because some earnest b-school students think it should. It’s only going to stop if we create and enforce regulations to mandate more ethical behaviour on the part of executives, people in positions of power, the people developing and selling new financial products to an unwary market.
Some amount of moral conduct screening undoubtedly occurs when companies select executives, especially those who will be prominent public faces at the company. But, again, self regulation is not enough, and perhaps it is time to consider an equivalent of the Bar for financial industry professionals, to set and enforce clear ethical guidelines for the profession and to create real consequences for ethics violations. When you can be punished for insider trading, but not perfectly legal though obviously misleading, and intended to be so, advertisements, we clearly have a problem when it comes to the development of ethical guidelines.