Halting the 'race to the bottom’ in corporate conduct: Governance reform, focus on ethics must repair the damage

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When terms like “criminal conspiracy” and “felony” appear in confessions and plea bargains, the criminal-justice system sits up and takes notice. And when the confessed felons are some of the world’s largest corporations, the private sector ought to be jolted into action, too.

The continuing shame of confessed corporate misconduct – in this case, lawbreaking conducted with such a degree of guile that the U.S. Attorney General called it “breathtaking flagrancy” and that the FBI labeled it criminality “on a massive scale” – reached a new intensity this month: Four of the world’s largest banks confessed to taking part in a five-year-long conspiracy to manipulate the world’s foreign-exchange markets.

This latest in a series of stern legal judgments has damaged the corporate reputations of some of the world’s most pivotal financial institutions – with guilty pleas, to felony charges no less, entered by Citicorp, JPMorgan Chase & Co., Barclays PLC and The Royal Bank of Scotland PLC. A separate guilty plea by UBS – along with earlier fines against Bank of America and HSBC in separate settlements in related cases – has brought the total of fines against those once-trusted, now-tarnished firms to about $6 billion.

The corporate confessions of deliberate lawbreaking, pursued with systematic and sinister stealth – at the very center of the international financial system – vividly validate the recent exhortation of Christine Lagarde of the International Monetary Fund: that corporate governance must be strengthened and that a higher standard of individual ethics must prevail, especially in the financial sector.

Lagarde wisely linked skewed incentives and a short-term profit-maximization mindset to the risk of financial instability, in an eloquent recent address to the Institute for New Economic Thinking’s conference on “Finance and Society”: “There is still work to be done to address distorted incentives in the financial system. Indeed, actions that precipitated the [global financial] crisis were – mostly – not so much fraudulent as driven by short-term profit motivation. This suggests to me that we need to build a financial system that is both more ethical and oriented more to the needs of the real economy – a financial system that serves society, and not the other way round.”

Those who champion the creative potential of the private sector (including, I imagine, the regular readers of this blog) have a particular reason – one might even say, a special responsibility – to voice their anger about the foreign-exchange-rigging scandal and other acts of lawlessness.

Idealists who esteem the private sector’s ingenuity in delivering growth and jobs sans frontières know that business' creativity will be indispensable in achieving the vital development goals of eliminating extreme poverty and promoting shared prosperity. Society thus rightly expects that the full measure of corporate energies should be focused on companies’ central mission of generating wealth that benefits all of society. Whenever any of those energies are diverted – especially toward criminal schemes that put short-term personal plunder ahead of long-term economic growth – the lawbreakers undermine public confidence (or what little remains of it, in the wake of the global financial crisis) in the fairness of the economic system.

Moreover, lawbreakers provide ammunition to critics who allege that today’s economic system is irredeemably corrupt, through-and-through – thus making it even more difficult for law-abiding companies, holding true to the values of honest business behavior, to make the case for policies that liberate private-sector dynamism.

The same logic applies to the other greed-versus-integrity abuses that are now proceeding through the criminal-justice system. The LIBOR-rigging scandal has exposed an egregious market-manipulation conspiracy that affected interest rates worldwide, via the so-called London Interbank Offered Rate. Another such scandal is the breaking-news money-and-ethics outrage that erupted this week: the arrest of seven of the 14 executives who were charged by the U.S. Department of Justice with a multimillion-dollar conspiracy involving bribery, fraud and money laundering, which has rocked FIFA, the international soccer federation.

Stronger standards of governance – and a deep “change in the ‘culture’ of the financial sector” – are surely an essential part of the remedy, as Lagarde urged in her INET speech. But regulation alone cannot fully address the rot that has clearly infected some of today’s leading global institutions.

As Lagarde asserted: “Better regulation and supervision play an important role – but so does individual accountability. . . . Whether something is right or wrong cannot be simply reduced to whether or not it is permissible under the law. What is needed is a culture that induces bankers to do the right thing – even if nobody is watching. . . . One clear solution is to set a strong tone at the top of the institution – establishing a culture where ethical behavior is rewarded and where lapses in ethical integrity are not tolerated.”

Intolerable breaches of ethics now indeed threaten to be seen as the norm rather than the exception, in all too many aspects of private-sector behavior. Without decisive action to police and punish private-sector misconduct whenever it occurs, the public's faith in honest business and sound economic policy would be further corroded – and that would not lead to a positive outcome for anyone, or for the cause of creating jobs and building shared prosperity.

Today's justified outrage over the foreign-exchange and LIBOR and FIFA abuses will have a positive result if it helps inspire a corrective change in mindsets and behaviors. Advocates of a constructive capitalism, embracing ethical ideals, should resolve to redouble their efforts to enact and enforce stronger corporate-governance standards that promote a public-spirited  “race to the top” rather than a craven “race to the bottom.”

At stake, as the scholar and journalist Will Hutton of Hertford College, Oxford writes this week in The Observer, is nothing less than the sanctity of the law and the stability of the economy.

“Great values are under assault," Hutton reminds us, in stentorian tones that reflect a righteous wrath. "Durable capitalism cannot abandon principles of integrity, fair play and awareness of the profound social and moral dimensions that its actions have on others. Indeed, the best capitalism is rooted in the recognition that it has a moral and social purpose. . . . [Cynics] think otherwise: that capitalism’s values are those of the souk or the casino. . . . It is a sacred duty to prove [them] wrong.”


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