Are financial institutions unconscious of ‘unethical’ behaviour?

It was recently reported that a US business tycoon, Cary M. Maguire, Chairman and President of the Maguire Oil Company, and Maguire Resources Company of Dallas, Texas, had donated $2.5 million dollars to the American College, a leading Financial
Services educator in the US, which has as its mission “…to increase the awareness of ethics issues and raise the level of ethical behaviour in the Financial Services industry”. Commenting on the large sum donated, Larry Barton, CEO and President of The American College stated: “The foundation of the relationship between financial professionals and their clients rests on building and maintaining trust…financial professionals must be equipped to make well-informed decisions and take appropriate responsible actions”. Post the GFC, calls for greater ethical practices in the FS sector particularly, is common place across global economiesand suggests the
clear need for ethical reform.

The work of Harvard ethicists Banaji, Bazerman and Chugh show that because people want to see themselves in a positive light there is an unconscious psychological tendency in almost everyone to dramatically overestimate how ethical their behaviour actually is. Take this comment from a financial services professional: “We help companies to grow by helping them to raise capital. Companies that grow  create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle… I know I could slit my wrists and people would cheer but I am doing God’s work.”

Such comments provide insight into the ethical mindset of some in positions of power. Indeed, in an article entitled “The Current Subprime Financial Crisis: Ethics Issues and Potential Reforms”, Richard P. Neilson, attacking the existence of such mindsets in the FS sector, argues that it “…is the purpose of financial services to create wealth, but in such a way that it makes the manager (or banker) a better person, and the world a better place”. The focus for lasting reform therefore ought to start with the human person…

In order to make lasting reform, it is important that those in Leadership are initially conscious of unethical behaviour – but certain psychological processes could be causing blind-spots even in their own perception of what is occurring. Financial Services companies have a duty to maximise returns for shareholders. However, research shows that a focus on the financial element causes people to unconsciously blur and fade the ethical dimensions of their decisions.

A 1999 study by Tenbrunsel and Messick asked Master’s degree students to play the role of a manufacturer in an industry known for emitting toxic gas. In the scenario, they were told that having come under pressure from environmentalists, their industry had reached an agreement to voluntarily use costly equipment to reduce the pollution. Some students were told they would face a modest fine if they broke the agreement, whilst others were told there would be no fine. Curiously, the participants in the study who faced a fine were more likely to cheat, not less. By introducing the fine, the students considered the decision a financial one – “economically it was worth taking a risk of getting caught and paying a modest fine in light of the high cost of running the equipment”. Ethics seemed not to play a significant role. But without the fine,abiding by the agreement was solely an ethical decision, and students were more likely to and follow their conscience. By introducing the financial element, the ethical element of the decision was blurred or faded.

The on-going financial crisis and the collapse of world respected financial institutions such as Lehman Brothers, etc. – is likely to have increased the focus of Financial Services companies over the last few years on ensuring their sustainable financial health. Indeed, there is evidence which suggests that the focus on profiteering remains rife, such that is difficult for other factors to be considered. It is very unlikely people are  choosing to be unethical – ethics just doesn’t come into play at all.  

There is a compelling reason for Financial Services Leadership to understand these processes and make the structural changes necessary to reduce the harmful effects of human psychological and ethical limitations; otherwise more FS companies, in the light of previous experiences, could slide down the slippery slope, and share the fate of Enron and Arthur Andersen, all the while being unable to understand where exactly they went wrong.

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