Wednesday, 15 May 2013

Ethics and regulation: complements, not alternatives

Last week former Taoiseach and President of IFSC Ireland, John Bruton, said that the banking industry needed "to focus on ethics rather than regulation". As someone who strongly supports the idea of ethical codes and a more central role for ethics in business, I found this remark and the casual way it was accepted unhelpful on many levels. Ethics are not an alternative to regulation; rather regulation is needed to support ethical behaviour. 

First, what do we mean by ethics in business?  There are many approaches; to illustrate why ethics are not an alternative to regulation, consider just three. 

You can take a deontological approach, like that that of most religions, and impose an absolute moral code.  Something is either right or it is wrong, no exceptions. You can see aspects of this in some corporate codes of conduct: some things such as fraud, insider trading or forced labour are simply prohibited, regardless of the consequences at the time. These things are unethical – everything else is OK. Because of the inflexibility of prohibiting an action, the list tends to be a short one, and not very useful for complex “grey area” situations. 

In contrast, a utilitarian or consequentialist approach hinges on the idea that the morality of any action is completely determined by its consequences.  So in its purest form, faced with a decision, you could weigh up the impact on all parties and choose the course of action that minimises harm or maximises good. So while stealing might be “wrong” under a deontological approach, utilitarian ethics might allow it under some circumstances, such as the theft of food from a profitable business to save the life of a starving child. This is pragmatic and useful, but depends on the person making the decision having been really well trained; unless business schools and professional institutes put serious weight behind teaching the process of ethical decision-making, it is unreasonable to expect individual employees to respond in the best possible way when making snap decisions in a fast-moving and high-pressure environment.   

As a final example, a virtue-based approach to ethics comes from Aristotle’s ideas of how to be, rather than what to do.  A decision on a particular situation could be reached by asking, “Am I the sort of person who would ...?” or, “Are we the sort of organisation that ..?” This can work really well for individuals, but won’t work in business unless everyone in the organisation is aware of and supports the sorts of virtues or values that the firm as a whole espouses.  Since these values are not based on rules, they must be embodied by the leaders within the organisation – a kind of ethical role-modelling which be either positive or negative, depending on who’s in charge and how they behave. 

Now the question is: which of these approaches, bearing in mind that they are only three of a myriad of ways of describing and understanding business ethics, could credibly act as an alternative to regulation in an industry as cut-throat and prone to moral hazard as banking? 

The absolute moral code of deontological ethics is barely compatible with capitalism, and would be either limited or diluted by its application to profit-seeking financial innovation. The utilitarian approach is pragmatic but time-consuming, and depends heavily on training. Virtue-based ethics comes close to a personal ideal, but depends on individuals to an unsustainable degree.   

They are all good to have in an industry, but will never work alone.
The trouble with ethics in isolation is that unless they seem coherent with the overall climate in which an individual is working, he or she will lack the confidence to “do the right thing” even where the “right thing” is clear.  I might know that stealing is wrong, for example, but if all of my peers are routinely cleaning out the stationery cupboard and falsifying expense claims, then my personal belief is constantly challenged by the daily experience. This is where regulation – clear rules of law with penalties and consequences for non-compliance – will support ethical standards, reinforcing rather than replacing them.  

Of course regulation also has the happy advantage of being effective even for people who would never embrace an ethical code. Even sociopaths fear the law. In that sense, regulation has a wider impact than business ethics, and is a baseline if we are to expect better corporate behaviour. Without punishments, some people will never obey rules.  But most employees are not sociopaths, so training in ethical decision-making will also have a useful effect, enhancing the impact of regulation, and ensuring that it is implemented in spirit as well as in statute. 

What the industry needs is not "to focus on ethics rather than regulation," but to enforce regulation and resource ethical training. Then we might see the change we need. 

Sheila Killian

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