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Ethical behavior: the standard society aspires to or the one it accepts?


The press and plaintiff’s bar delight in reporting that pervasive ethical problems plague financial services companies. The most recent example to hit the press is a Deutsche Bank settlement for altering its valuation methodology as market conditions deteriorated in 2008 so that a portfolio of leveraged derivatives was overvalued. Sadly, in the face of recurring settlements by major banks, the public has little reason to question that a problem exists. A recent survey by whistleblower law firm Labaton Sucharow appears to add credence to the concerns.

This growing public distrust will have implications for all business leaders, who will be required, for the foreseeable future, to reconsider whether firm activities meet ethical standards. In doing so, they must recognize that market assumptions about what is ethical are evolving. Astute leaders will understand the shifts before they occur. We discuss the role of leaders below. But first, let’s look at the Labaton survey of 1223 financial industry professionals.

The survey concludes that:

  • 51% of those earning $500,000 or more per year believe that their competitors likely engaged in unethical or illegal activity in order to gain an edge in the market.

  • 34% of those earning over $500,000 claim to have witnessed or have first-hand knowledge of workplace wrongdoing.

  • Overall, 25% of the professionals said that they would likely use non-public information to make $10 million if there was no chance of getting arrested for insider trading. This figure rose to 32% of the individuals in the UK and 32% of employees with less than 10 years’ experience.

  • Questions as to whether a company would “look the other way” or report a crime by a high-producer indicated that a significant minority thought senior management would look the other way.

Labaton notes, "Our evidence reveals a large number of individuals in the midst of—and losing—an ethical battle of the highest order.”

We don’t believe this conclusion is necessarily correct. Nonetheless, given the popular perception, the challenge for senior management in this environment will be to instill confidence in stakeholders and staff (particularly younger staff, if the Labaton survey is credible) that their organization operates ethically. Letting perceptions of widespread unethical behavior exist within an organization or an industry can only compound future incidents.

Changing perceptions takes a concerted leadership effort. Senior management will have to clearly demonstrate that ethics matter—even at the expense of profits. Without this effort coming from the top, many on the staff will assume that ethics are not a high priority in the organization.

But ethics do matter. As Bill Moyers has noted, “Our very lives depend on the ethics of strangers, and most of us are always strangers to other people.” This is especially true for our financial markets, which function for the purpose of allowing strangers to interact. Market participants need to trust that these interactions are fairly undertaken.


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