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Ethics and retail banking

by Simon Longstaff

It would be too crude to suggest that bankers have been hated for centuries simply because they do something which makes people uncomfortable, and wrong to argue that the hatred has been either uniform or unwavering. Yet loan-sharks who today charge excessive rates of interest are not fundamentally different from banks. Money-lending is the banks' central function and the critique of it seems protean - witness the way it runs across the political spectrum. Except in bad times, the risks and costs that interest charges defray are intangible, so bankers seem to get something for nothing. Until they can show society otherwise, they will go on wondering, in their very own Purgatory, why they are so unloved.

The Economist, December 1993.

Introduction

... do you want fancy dressing or a bank you can trust?

So reads part of an advertisement that caught my eye as I was browsing through a recent issue of The Economist.

Appealing to notions of trust is a clever way of advertising banking services. Instead of attempting to 'manufacture' an issue of relevance to banking, in this case the copy writers have identified a fundamental aspect of popular engagement with the world of banking. At the bottom line is an issue of trust.

To talk of trust is to move into the area of ethics.

What is ethics all about?

Ethics is about answering Socrates' question “What ought one to do?”. This is a practical question ... what do I do here and now? ... what should anyone do in my situation? It is a question that it is almost impossible to avoid.

The ethical dimension is an area of ‘greys’ rather than ‘blacks and whites”:

• one always encounters the genuine ethical dilemma
• it is sometimes a matter of choosing the least bad alternative

Ethics is about relationships. The ultimate test of our ethics arises in circumstances when we have to weigh the interests of ourselves and others.

The ethical dimension is not susceptible to 'quick fix' solutions.

We live in a time characterised by:

• a concern about the effects of constant change
• governments (and other institutions) that are relatively interventionist
• a profound desire for certainty
• a belief that 'technology' will solve all of our problems

The concern for systems and processes has enjoyed a natural 'home' within the world of banking (back office vs front office).

The place of a company code of ethics

A code of ethics is very different to a code of practice or conduct. Yet a number of organisations fall into the 'trap' of trying to develop 'hybrid' documents that are in part a code of ethics and in part a code of conduct.

The difference between the two alternatives is relatively easy to describe. A code of ethics expresses fundamental principles that provide guidance in cases where no specific rule is in place or where matters are genuinely unclear. A well drafted code of conduct will be consistent with the primary code of ethics; however, it will provide much more specific guidance. In comparison to a code of conduct, a code of ethics will tend to:

• be more general
• contain fewer principles
• be expressed in terms of 'ought' or 'should' (and not 'must')
• be directed to all persons affected (and not just to 'employees')
• provide general guidance in those cases where a Code of Conduct is silent, ambiguous or unclear

Bearing this in mind, a code of ethics might include provisions such as:

• That our actions should be based on a recognition of the essential dignity of each and every person
• That we should have an active concern for the wellbeing of the community and the environment
• That we should provide a challenging and safe workplace in which people can flourish

... and so on. Naturally enough the principles need to be amended to take into account the distinctive ends that an organisation might seek to achieve.

On the other hand, a Code of Conduct will have a number of discreet headings which cover specific instructions. For example:

Gifts & benefits

Employees must:

• not demand or accept any unauthorised gifts, rewards or benefits because of the employee's status
• disclose to their manager any gift, reward or benefit offered or suggested to them in connection with their duties

Conflicts of interest

Employees must:

• ensure that there is no actual or apparent conflict between their personal interests and the performance of their duties
• identify, and fully disclose in writing to their manager, possible conflicts of personal or financial interests

At first glance, it may seem that far more use can be made of a code of conduct. After all, such a code provides clear and unambiguous direction about appropriate standards of behaviour. However, further examination of the issue reveals that the far more general code of ethics is the more significant document.

Despite (or some would say because of) its 'fuzzy' form, a code of ethics is the better vehicle for ensuring long-term commitment to important values. This is because a code of ethics demands something more than mere compliance.

Instead, such a code calls forth an exercise in understanding that is linked to a requirement that people exercise judgement and accept personal responsibility for the decisions that they make. As a North American manager observed to Fortune:

Today life is fired at us point-blank. People don't have time to refer to the Bible or to the company handbook. You've got to have all that internalized.

A code of ethics should be a document that expresses an organisation's underlying values. It is therefore essential that the document ring true for those to whom it applies. And this means that codes of ethics need to be devised in consultation with the people most directly affected by its application. In other words:

Everyone who's going to have to live with the statement should get a chance to put his or her two cents in.

Codes of ethics and codes of conduct are not 'magic bullets' that solve an organisation's problems. And the fact that an organisation has a written Code will not guarantee that its personnel are especially ethical. But good managers will realise that, if approached with the proper degree of care and sophistication, the very process of developing these Codes can have a profoundly positive effect on the culture of an enterprise.

Ethics and the link to public relations

Those who try to 'fake' ethics, as part of an image building campaign, are destined to fail. Not only will the individual's image be tarnished - so will that of all of its industry.

The image of bankers is not good at present:

Time Magazine ethics honesty rating:

Greatest fall in image has been that of bankers, down 24% in ten years ... just ahead of lawyers!

If a bank's concern about ethics is going to be something more than mere 'window-dressing", then account will need to be taken of Hugh Mackay's research into the community's attitude to corporate ethics.

Hugh Mackay has found that members of the community tend to think that people in business regard ethics as an "optional extra". He has found that the level of scepticism about the ethics of business is so high that people automatically 'discount' public claims made about the importance of values to a corporation.

Instead of being swayed by images dreamed up by advertising executives, or by glossy codes of conduct, people apply a simple two-part test when trying to assess the ethics of an organisation.

• The first question to be asked is by a person is: How do members of this organisation treat me?
  Am I treated as if I really matter? Is trouble taken to assess my individual needs and preferences? Or, am I treated according to some sort of stereotype? Am I looked upon as nothing more than an account number or a convenient source of fees?
• The second question to be asked is by a person is: How do members of this organisation treat each other?
  Do they treat each other with courtesy? Is there an air of mutual respect? Do people seem to be happy in their place of work? Or, is there evidence of low morale, of strained relationships and so on?

Hugh Mackay has shown that the quality of relationships lies at the heart of perceptions about the ethics of organisations. Because we live at a time when there is increasing emphasis on the importance of customer service, the first, fairly obvious test is being addressed. Surprisingly, few managers understand the importance of the second test. Beyond being a foundation for sound management practice and harmonious relationship in the workplace, a climate of respect for one's colleagues will be noted by one's customers and help to reassure them that the bank is really serious about its commitment to an ethical approach.

Underlying these findings is a fundamental ethical principle that still seems to inform majority opinion. It might not be expressed in these terms, but I believe that Australians are still in tune with the notion of respect for persons. More specifically, Australians have a history of identifying with two important virtues; namely those of benevolence and justice. In Australia, these virtues achieve a distinctive expression as the ideas of 'mateship' and giving the other person ‘a fair go’. While I would be the first to admit that these concepts are frequently abused and that they have lost some of their force, I would argue that the residue of their original meaning still has an effect. What is more, I believe that these concepts offer Australians a distinctive 'handle' on which to hang an indigenous response to the problem of navigating across a difficult and uncertain ethical landscape.

If one combines the various threads outlined above, then it is possible to see the outline of an answer to the question about how bankers can engender a vital sense of their trustworthiness.

Bankers will need to treat all of the people with whom they have dealings as if they really matter in themselves and not just as means to a profitable end. There is nothing wrong with wanting to be profitable - providing only that it is not at the cost of reducing people to the status of cogs in a financial machine. This will invariably mean that bankers will have to show that they actually care about the projects and problems of their customers. In this respect, it was just the other day that someone recalled in conversation how the bank manager had been a respected member of the community, and even someone who was connected to the fortunes of one's family. This might all seem to be far too nostalgic - especially in times when the personal presence of the bank is disappearing from communities. However, the idea of the bank as being an institution that helps to build a community resonates with the idea of mateship, at least as it was once understood.

Bankers will also need to find a way to convince the community that they are interested in giving people ‘a fair go’. It's admittedly difficult to know what this phrase is supposed to mean. But most people have a sense that relationships ought to be fair. And by this they mean (at a minimal level) that where people are unequal, then the more powerful party should not take advantage of the weaker. For example, my guess is that most people would render grudging acceptance of the 'user pays' principle, providing only that it is applied across the board. They feel a little uneasy when they hear stories of how large corporate clients manage to strike a bargain where their bank fees are waived - despite their making particularly heavy use of the bank's services. In a similar vein, there is suspicion that the spread between the actual costs of borrowing and lending to small retail customers (where most loans are secured) are greater than the margins allowed in dealings with the powerful corporate sector. These two issues combine in the minds of many who question having to pay an occasional fee in order to gain access to their own funds - especially when the bank has enjoyed the use of these funds while acting as a 'custodian". It may be that these popular perceptions are unfounded. Bankers will certainly be well rehearsed in the arguments that answer popular criticism and concern. Yet such concerns persist and need to be addressed if trust is to be restored.

Ethics and the competitive edge

To write sensibly about the topic of business ethics is to be confronted by something of a dilemma. There is, for the sake of easy argument, a temptation to put matters in a way that lends support to the claim that "good ethics is good business". The trouble is that this popular point of view suffers from two major failings. Firstly, it is too simplistic. Secondly, and more importantly, it fails to do justice to the fact that a commitment to ethical behaviour implies a preparedness to act ethically - even if there is a cost in doing so.

Having said this, I believe that there are good grounds for believing that good ethics is good business. And hence the dilemma. How do you point out the advantages of acting ethically without falling into the trap of saying that the only reason for acting ethically is that it leads to an improvement in the 'bottom line'?

But is good ethics good business? There have been some attempts to answer this challenge. One of the most compelling pieces of evidence has come from James Burke, former head of Johnson & Johnson. He sought to discover if there was some kind of 'objective' indicator of a positive contribution by good ethics to business. Going straight to the heart of the matter, Burke reasoned that the most persuasive evidence would be found in an examination of relative performance on the Dow Jones Industrial Index. Burke compared the performance of several companies, selected because of their demonstrated commitment to implementing programmes to strengthen a corporate climate of best ethical practice, with the performance of all other stocks. His time of comparison stretched over a 40 year period. Where the general improvement in the value of the 'control' group of company stocks during that period was an average increase of 6.2%, that of those selected for study was 11.3%.

One can, of course, criticise the evidence. Yet, I believe that the core of Burke's findings can be supported (but not in the amount of space available here). A potential critic will also need to take account of similar evidence, especially that derived from an examination of the performance of ethical investment funds. For example, the Herald International Tribune reported, at the end of February of this year, that:

In the 8 years prior to Jan 10, 1993, the Friends Provident Stewardship managed pension fund turned in the best performance of all British equity managed pension funds, providing an annualized return of 20.2 percent...In the year leading to Feb 1, 1994, the same fund returned 31.3 percent...And the Friends Provident Stewardship income fund, also ethically managed, returned 41.3 percent in the year to Feb 1.

That is a fairly impressive indication that something interesting is going on. The Herald International Tribune quotes the Investment Director of Friends Provident, Peter Silvester, as saying that "Companies which are well-managed enough to deal with the environmental responsibly, treat their employees fairly, and address the concerns of their communities are good places to go trawling in the first place".

All of this makes sense if you take into account an old piece of wisdom left to us by the distinguished Australian company director, the late Sir John Dunlop who observed:

I put it to you that the directors are responsible to the shareholders for profit in perpetuity; and that this general expression of a principle permits, indeed requires (my highlighting), directors to pay full regard to their employees, to labour relations generally, to the community, to the country, in all their decisions for and on behalf of shareholders.

So, there are the bones of an argument to show that there is something to be said in favour of the contention that "good ethics is good business". Yet, the matter cannot be left there. This is because the daily experience of people in business and the professions is all about the costs of being ethical. They are regularly confronted by questions such as:

• Can we afford the cost of making this product safe?
• Can we afford to admit negligence even though we know that we did the wrong thing?
• Can we afford to let the company's accounts show the real value of our assets?
• Can we afford to refuse to carry out a client's instructions even when, in all good conscience, we believe to follow them would harm the community?
• Can we afford to resist paying bribes in order to secure a contract in a difficult overseas market?
• Can we afford to resist taking advantage of an unintended loop-hole in the law or a contract?

If the only reason for being ethical is that it will be good for business, then it is a pretty safe bet that you will surrender your standards once you learn how to fake ethics. The temptation will be to pursue profits at any cost. Sacrificing integrity, you will distort relationships and take unfair advantage of others. There will be a day of reckoning. But by that time you may have killed the golden goose and retired to a condition of comfortable indifference. But is that really what living a worthwhile life is all about?

Let me be quite clear, ethical issues rarely arise in the form of stark choices between absolute right and absolute wrong. The ethical landscape is not a place of blacks and whites - rather, it is often found to be painted in shades of grey. Like it or not (and most people do not like it!), a degree of uncertainty is part of the human condition. Yet, this still leaves room for each of us to take a fundamental decision in favour of at least trying to do what is right. This would be to recognise that our lives (including our work lives) possess an inescapable ethical dimension.

Perhaps the answer to my opening dilemma is that we ought to accept that collateral benefits may reasonably be expected to flow to those who consistently act ethically. Providing only that we act according to right motives, then we should accept any rewards that might come from choosing the right and the good just as we should accept any unpleasant consequences that might flow from choosing the wrong and the bad.

There is a kind of natural heroism displayed by those who choose to live a good life. We recognise their courage because we know how easy it would be to do otherwise. Courage of this type can be displayed in every forum of human endeavour - no less in the world of commerce!

Conclusion

In the current social environment there are many who would argue that a genuine commitment to ethics is an unrealisable ideal. Many think that sound ethical principles are fine in theory but that they can't really be applied in practice. To try to do so is to be nostalgic. They say that to promote virtue is to be old fashioned, to hark back to ideas only useful in a different era. They ask us to be 'realistic' and to embrace the 'modern' way of doing things. This plea is often nothing more than an ill disguised call to allow for the survival of the fittest.

Perhaps such people are right. Perhaps a dog-eat-dog world will be the most efficient. And perhaps efficiency is the only value that we need to embrace in the search for a worthwhile life. Or perhaps efficiency is only one of a number of important values that we must learn to juggle across an unpredictable landscape.

Those of us who are serious about the need to make ethical considerations an explicit concern in our daily lives must face up to this challenge. After all, what if our critics in the market place are right? What if the prime (and exclusive) aim in life really is to maximise our satisfaction of wants (and not just needs)? What if the liberty of the individual (important as it is) transcends all other considerations? What if it is through competition alone that we find the ultimate expression of our humanity?

Most people have a fairly good feel for what it means to live in a ‘society’. But what about an ‘enterprise association’? John Casey has tried to describe the latter:

We might imagine a city founded purely as a trading post. The laws of the city will reflect its original purpose, and have to be understood in relation to this purpose. Contracts will be vigorously enforced however unreasonable or unjust, because it is of the highest importance to retain the confidence of those with whom the city trades. Indeed, the notion of a contract being 'unjust' will have no meaning. All education will be subordinated to the need to produce an ‘enterprise culture’, and no subject will be studied as an end in itself. The rulers of the city will regard themselves essentially as the managers of the enterprise. Their tasks will be to maximise wealth and promote trade.

Is this so very far away from what we now experience? Some may say that this is an accurate and even attractive picture of the type of world in which we live. But does such a view of our relationships miss something of vital importance? For example, do we exist simply to "facilitate the exchange of commodities" or is there something more? Is there, for example, a need to value friendships, to realise that other people can make a claim on us? Is living in a society only possible when we recognise that each person is bound to others within a network of formal and informal relationships?

The challenge facing us today is to make a choice about which alternative we want. Do we want a society of citizens in which something like the virtues of justice and benevolence make sense? Or do we want the enterprise association in which each of us is little more than a purveyor or consumer of commodities? The latter consigns us to a place where the exercise of virtue will seem an unattainable luxury, where no person can afford to display moral courage.

I began with a line taken from an advertisement in The Economist. It pointed to the importance of trust as the foundation for banking.

My own view is that banks have a great capacity to do good while making a legitimate profit. They hold the keys to a bridge across which so many of us must pass if our dreams and aspirations are to become a reality. But few of us will cross a structure in which trust is wanting. In such circumstances banks and society suffer alike. That is one good reason for taking seriously the need to eschew fancy dressing in favour of the simple habit of trust.

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