Ethics in Business and Banking

- MUZAFFER AHMAD* I appreciate the concern of the sponsors of this seminar for two reasons. First, in the age of globalisation, electronic transfer of finance and its relatively regulation free movement, the ethical issue has assumed great importance in the national and international context. A concern in this context has been voiced by the countries of Southeast Asia. Second, in our own backyard and in many other developing countries, the finance sector has come under pressure from certain actors in the game and the banking sector has been subjected to structural scrutiny while the behavioural norms of bank officials, directors and loan takers have been put under examination because banks deal with countless depositors whose interest if threatened would bring the economy to a halt. In the not so distant past, such challenges were not there, hence integrity protected by adherence to rules was enough for ethical conduct. But today not only technology of fraudulent practices has changed but also heightened aspirations of many actors make the banking system vulnerable to misconduct by the controllers at the policy levels, directors at the decision making levels, and managers at the operational level who in collusion with adventurous and influential loanees can and do threaten not only the appropriate functioning of the banking and financial institutions but also the entire economy. The problem is all the more acute in an economy like Bangladesh where demand for financial accommodation is not always subjected to professional scrutiny required in a dynamic world and where such demand by delinquents are often supported by controllers and directors of the finance sector directly through influence and indirectly through advised non-action against them and public appearance of policy makers, and political leaders with these delinquents. Such a situation makes ethical behaviour difficult and challenging but this also underscores the heightened need for promoting ethics in banking and related institutions. I am happy to note that the government has expressed its commitment in strong words to take to task the loan defaulters, to punish the offending bank officials, to free the banks from undesirable union pressures and to allow the banking sector to function professionally within a supportive legal framework. But people are still awaiting actualisation of these commitments. Unless the government enables the banking authority to take action against the smart, influential and manipulative defaulters and their collaborators the banking industry will be strangulated to death.

The author is Professor, IBA, Dhaka University. The key-note paper was presented in the Top Management Seminar organised by the Bangladesh Institute of Bank Management on March 3, 1999. The paper expresses author 's own views.

II Banks are institutions where savers put their short or long term surplus generally for transaction and precautionary purposes and the users of these surplus supplement their finance for trade and investment. In recent years investment has assumed almost equal importance as trade as banks severally and collectively respond to accelerated demands for finance for different purposes. This requires careful balancing of costs and returns at various levels to play a positive sum game prudently, but such prudence can be subjected to adventurism (e.g. Baring), questionable conduct (e.g. BCCI), and unethical practices (e.g. recent investigative report in the Daily Star and the Bhorar Kagoj about fraudulent practices by nonexistent business under the protection of a corporate house perpetrated on private bank controlled by that corporate house). In reality, properly conducted banks perform useful functions to facilitate production and exchange through a system of assisted transaction. This intermediary function remains viable so long as joint but several interests are served adequately under the binds of professional ethics, limits of law and guidance of central authority. The system must protect the interest of savers and borrowers and help optimise the returns from their involvement and also from the intermediation act of the bank. In this context professional ethics demands active neutrality in the contextual conduct and requires of the controllers and decision makers to rise above the narrow collusive interest of dominant support coalition in different spheres. The conduct of the defaulting loanee, social appearance of political leaders with wilful and significant defaulters, of the controlling and supervising authority in the ministry and central bank and of the bank officials as often reported in the media make one wonder whether the neutrality protecting professional ethics has been totally bypassed in Bangladesh in the last two decades. One may recall how a close associate of President Carter (J. Bert Lance) and son of President Bush received the public whip for nonmaintainable conduct under law with respect to their dealings with banks, and the executive distanced themselves and maintained neutrality. These should be lessons for our leaders and other actors. In Bangladesh, the banks have failed to work as a rational actor in the absence of competitive market condition and due to the dominant presence of oligarchical elite unconstrained due to non-presence of mass action as a result of which goal conflicts are being resolved through sharing of advantages by actors including unions and decision makers while the stakeholders (i.e. mass of depositors) remain at bay hoping for eventual bail out by the government (e.g. NCL, BCI, EBL). This can only be avoided by robust presence of stakeholders, transparent initiation and agenda building as well as information processing and accountable decision making. Our legal framework for banks and financial institutions do not adequately provide for this and hence dependence on the neutral body of decision makers, supervisors, monitors and controllers has become very critical. Unfortunately, the current decision makers are rarely neutral and professionals are rarely votaries of ethical conduct. This is almost parallel to a democracy where a great body of citizens do not and cannot use

their political resources (e.g. vote, dissent, right of recall, petition, etc.) and a small group of men use the political process through partisan adjustment to maximise personal gain and suboptimise achievement of collective interest. In most cases it takes the shape of disjointed incrementalism resulting in trade-offs within the elite group. This is adequately reflected in the loans and portfolios of both public and private banks and seems to surface even in the conduct of foreign private banks which optimise their organisational and their (not ours) national interest with professional devotion. The difference is our banks fail to demonstrate their endeavour to uphold collective interest of the many. In doing so our banks have not maximised returns from use of finance deposited with them in response to external market condition but have resorted to implicit bargaining process by the influential clients and decision makers and organised actors (e.g. officials, unions) within the system. This has resulted in the death of the neutral and efficiency promoting organisational ethics, compromised rationality as reflected in ad hoc decisions often taken under dictation and embedded deviational practices inhibiting professionalism. Ethical practices in Bangladesh have to be promoted by breaking such institutionally inhibiting environment through a visible politico-administrative commitment and a supervisory action promotive of professionally sound ethical conduct on the part of the bankers at all levels without fear of retribution.

III When I suggest that one should act professionally and ethically, I am not merely asking of everybody -- be he chief executive, members of the Board, officials at all levels, or supporting staff -- to act responsibly as per demands of the job with clear conscience. The responsibility does not end at the frontier of the origination of the bank but as a socially productive organisation it must meet the role expectation of the society and the country. If you think deeply you will find that the banks or for that matter any profit making business or non-profit-oriented organisation through their work respond to a structure of social relations which are a cluster of rights and duties. Hence the roles contain legal, ethical and customary elements. The legal elements are explicit but moral injunctions require to look beyond selfinterest and legal requirements. Ethical element often is defined conditionally in terms of loyalty, obedience and confidentiality. But we know that these precepts have been used to hide unethical practices here and elsewhere, in banking and in other business. One has to recognise that a job is not merely a way of making a living but that it carries with it professional competence, professional integrity, personal morality and general obligation to the society and the country. The unfortunate fact is that we have taken the job as a means for making good life and have overlooked weightier responsibilities that attend the practice of the profession. Bankers are not alone it having a moral obligation but bankers, dealing in others peoples savings and impacting on the economy broadly, carry the wider responsibility

as greatly as the law makers, teachers, doctors and so on. Bankers through their direct contact with the principal actors in the economy can collectively play the role of a whistle-blower. I am advocating that do not be limited to narrow utilitarian ethics where consequences of actions are primary but also take into consideration deontological issues as social relations matter in these sphares and such relations be thought of in the broader context of our society and our country and possibly even more broadly. I am emphasizing that higher morality matters as much if not more than the role morality. I am aware of the school of thought that holds the view that ethics has nothing to do with business and that banking being a business activity ethics is not relevant. Albert Carr as a proponent of this view asserts that role of doing business is to maximise profit for self under competitive conditions and the rules are quite different from ethical rules emphasizing concern for others, empathy, cooperation, etc. He however concedes that businessmen/bankers adhere to ethical norms in their private lives but he goes on to say competition encouraging high degree of aggression in the individuals striving for success merely requires that business deals do not transgress the limits set by rules of the game set by the law and nothing more. Even if we accept this for a moment our bankers have not always acted to remain within these limits and they have been encouraged to act deviationally by an environment that is not conducive to promotion of such adherence and by collusion with or dictation by influential lobby without consideration of the fact that sick financial sector affects all economic sectors adversely. I must add that ethics as narrowly defined by Albert Carr as a set of rules or practices for private life is not defensible. Personal morality and business morality being absolute and relative respectively lead to conflicts, and ethical relativism does not help to promote sound legal practices and sound governance. We know that some societies promote graft in the name of gift but these societies today face severe socio-political and socio-economic convulsions born out of ethical relativism and profit positivism. We must recognise that bad practices do not pay in the long run, otherwise Nazis would have conquered the world. If we allow dominant group -- majority or minority -- to determine right or wrong, we will promote unstable conflictual relation and to assert that each business should have its own set of rules for maximising advantage or returns or profit is unacceptable. Life is not a poker game, it is a serious matter. Hence law and governance of business and banking should see that their practices are evaluated not only in terms of legitimacy but also in terms of fairness, justice and collective welfare through individuals action. IV We must recognise that banking, like other business, is a social institution and not a natural thing. Early Greek ethical theory, propounded by both Plato and Aristotle, maintained that a good X is an X that fulfils its purpose. Same was applied to business and banking.

Friedman in his advocacy of free society argues that only social responsibility of business (so of banking) is to use its resources and engage in activities designed to promote maximisation of total product and total profitability within the rules of free competition without deception and fraud. Please take note of ethical positivism in private enterprise-led market system that Professor Friedman has assumed. Utilitarian approach maintains that an action, practice or system is as good as it tends to lead to good consequences. If one intends to defend a system (say, private sector), a business (say banking practices) or an institution (say, governance), the defense has to be based on the proof that it provides the greatest good for the greatest number of people. Adam Smith and Milton Friedmans defense of free competitive market is based on the argument that maximisation of profit in an ethical society is coterminous with maximum benefit of the people. In our country the proponents of free market economy wants all the rights to do anything they please and forget their obligations. This has given rise to concentration of extractive rights in the name of business without any countervailing force to check their unethical adventures. Rather, the people of influence has created cronies within the banking and financial institutions and managed their protection through financing of political organisations, arranging delays in legal actions and promoting nonprofessional acts in the financial system itself. One will not have to go very far to find substantive evidence in this regard; recent disclosures in the parliament, recent pronouncements by donors and recent reports in the media provide adequate evidence in this regard. As a result the business and banking in our country cannot be defended on the basis of classical utilitarian theory; both the visible hand of the law and invisible hand of the competitive market have failed to yield the greatest good for the common man in the country. The system has become nasty and brutish and it has become imperative for the political authority and socially active group in civil society to work towards limiting the egotistic greed of many influential businessmen and certain decision making banking officials. Utilitarian results are not brought about simply by existence of visible regulation and invisible working of competition. We need to understand the contextual situation in Bangladesh where influential businessmen and donors over emphasize the benefits of competition and the superiority of that system without creating competitive condition, and the political governance fails to demonstrate the benefits of nondiscretionary rules. The unfortunate circumstances of market-failure and governance-failure have created situation where people get the worst of both the systems. One should remember that banking as a social institution does not provide only private goods but in developing country like Bangladesh it is required to make provision for social goods as well and an imperfect market like ours fails to create appropriate balance in the absence of proper ethical moorings. As a result, the oligopolistic nature of the banning and asymmetric influence of the few have led to negative diseconomies (e.g. wilful loan default) that are hurting the growth of the country as a whole and growth with justice in particular. The experience of most

developing and developed countries shows that the banking and finance sector is rarely competitive and hence rights of doing business based on property rights and laws of contract need to be tempered with maximal social responsibility. It need be recognised that property ownership cannot be an absolute right and this need be subjected to certain social constraints as both business and banking are social institutions, they benefit from the society and their empowerment is a gift of the society that need be used for maximal social benefit which in turn opens up greater opportunity for them in the long run. I am aware of the fact that free market proponents raise issues such as who should define social needs, whether involvement of business (including banking) disturbs true social priorities and how the relation between ethics and business can be made realistic. William Frankena has analysed obligation of business (banking) into three components of (a) avoiding negative impact on the society, (b) preventing such harm and (c) positively promoting social good. Following Frankena, it is imperative that our banking sector avoids such practices that cause harm to the depositors, the financial system and the economy. That is not enough; the banking system must work to prevent harm to them. In addition, in an economy like Bangladesh, the sector must promote positive impact and externalities above and beyond the call of duty. This is so because following such course of action ensures justice, fairplay and conforms to affirmative duties which have roots in common law and equity jurisprudence. The negative injunctions of avoiding and preventing harm are not enough as that constitutes moral minimum. The social obligation of business and banking requires positive steps to promote social good as it exercises power over people by making fairness visible, by removing external or internal coercion in decision making, by reducing discretion and by being willing to make disclosures voluntarily to the stakeholdes. V I would like to assert that unless banks and business houses adhere to norms of justice, equity and fairness, the practices of fraud, bribery, stealing, hiding facts and lying will creep on. I recall Immanuel kants categorical imperatives which can be presented as below: (1) Act only according to that maxim by which you can, at the some that it should be universally followed. (2) Act so as never to treat another human being merely as a means to an end. time, will

The first formulation urges consistency and focus on treating one as they would like to be treated. This is a rule against discrimination and high discretion. Much of the malaise in the banking sector is due to discretion and discrimination not only in making advances and loans but also in all spheres of management, particularly in personnel management. Morality is not merely a matter of treating others as you would like them to treat you but it also a matter of

not treating others in ways that you would not like to be treated. The basic malaise in our business and banking has been caused by non-adherence to this golden rule of consistency which makes no scope for making exception even unto oneself. Some of the clearest cases of unethical behaviour involve people making exception to friends, influential people and may be unto themselves. A banking executive, like all business executives, must not engage in unfair activities on his own or under pressure. Deceptive/inequitable practices, besides being inconsistent and unfair, are self-defeating because its universalisation, undermines the system and social relations on which its own survival rests. This is the case in our banking industry and also in the ailing finance sector in many developing countries. This is not to say that the golden rule is not violated in the developed countries. This is recognised by corporate practices in the west who denounce shady practices. In our country such practices that have multiplied over the last two decades but have not been denounced adequately by business associations, policy makers, academics and controllers. Business in general and banking in particular rest on trust and inconsistent and discriminatory relation strike at the root of this trust. Kenneth Boulding, a noted economist and social philosopher made this point when he said, every exchange, even in its primitive form, involves trust and credibility. Our business and banking system seem to have ignored this basic precept of Kantian ethical theory. Kant does not accept any limit to morality of any station and its duties and according to him universal morality supersedes role-morality which our executives in business and banking as well as in executive, legislative and judicial arms of the government seem to forget at their convenience. The inconsistency, through our loan default culture, has given rise to a class of freeloaders who are extracting benefits without meeting their obligations. The second principle of Kantian ethics is equal respect for all persons who have unconditional value and do not treat persons for their instrumental value. This not only means that human labour should not be treated as a commodity but also means that stakeholders rights are supreme. Thus it is organisational requirement to make all employees as autonomous agent endowed with moral values supported by practices that provide him/her with self respect, dignity, rights and responsibility which are universalized. Only in an organisational environment of this nature ethics becomes central to all its dealings. The failure of ethical conduct in our business and banking is rooted in the failure of treating persons as individuals with unconditional value and promoting such value through fair practices. Our banking executives like our business executives feel that they are treated as instruments and not as persons. This has given rise to a culture of deception and absence of public openness. Our banking and business must cease and desist in its discrimination accepting natural differences among people and disadvantages for which the individual is responsible. Thus, recruitment, career planning, and incentives in all the services including banking require fairness and justice to promote consistency, accountability, respect and responsibility.

VI The role of a manager to uphold ethics is most important. But in upholding considerations of justice and fairness, avoiding harm on the basis of ethical considerations, he runs into a conflictual situation with vested interest groups often protected by decision makers. The manager is an agent of the owner and it is his duty to obey all legitimate directions of the owner to conduct the business within the limits of law and ethical custom. Unfortunately some of our enterprising owners want to jump the law as well as ethical custom. The conflict is real. Further, as an agent the manager has to perform the duty of confidentiality, and duty of loyalty. The duty of confidentiality with respect to intellectual property is defensible but confidentiality about unfair practices that militates against the society and corporate interest is not defensible even under the rule of law. The duty of loyalty is basically related to avoidance of conflicts of interest (e.g. providing consultancy services while working in the Investment Bank) but loyalty should not and cannot stifle ones conscience. One has a duty to be loyal only if the object of loyalty is one that is morally appropriate. An employee has a responsibility to inform the public of thing internal if he acts on moral motive after exhausting all internal channels for redress. An employee has no obligation to become an accomplice in morally indefensible and socially harmful acts of owners. The legal framework today is not adequate to protect such employees from harassment. One should not forget that besides depositors, the community is a stakeholder. Recently freedom of owners of business or banks have been successfully challenged in the courts of the west for violating public interest. The case in point is a challange to establishing or funding pollutant business endeavours in many western countries. VII It is pertinent to discuss how to promote ethical behaviour in business and banning. The three promoters are strong will, fear of punishment and societal pressure exerted through peers. In the current environment it appears that instead of strong will, we are confronted by weakness of will, in case of fear of punishment one often finds legal process too cumbersome to make discounted present value of benefits from unethical practice high compared to punishment and the social pressure seems to be in a disarray. One of the most effective ways of developing ethical principles in banking and business is by developing code of ethics and setting the rules that are to be followed. The codes of ethics, developed by chambers, business associations and bank professional are useful devices to assist individuals to behave ethically. Our chambers cry hoarse about malpractices in banks but only bank officials cannot be corrupt unless working in collusion with business people. I strongly urge the chambers to develop codes of ethics for its members, particularly with respect to dealings with financial institutions and in the stock market, and monitor it effectively. Similarly, I urge the bankers association to develop codes of ethics for its professionals and monitor them in a transparent

manner. If there is no market for malpractice, it will die a natural death. I would advocate that such codes should take into account their social responsibilities in an explicit manner. I am aware of the fact that enforcibility of the codes of conduct is a problem but having it and publicising the delinquents are likely to have visible impact, because with agreed code of ethics the parties concerned will take it seriously. Despite the fact that government regulation with respect to malpractices by business and banks exist and that the government has taken measures to update the rules and regulation, enforcibility in a transparent way in time seems to have remained a problem. Despite the talks of least governance, business and banks for their operation, presuppose the existence of an effective government. The government does not seem to be as effective as the majority law abiding citizens of the country wish it to be. It is the duty of the government to enforce the moral minimum through its legislative and executive arm and to interpret the code of conduct as enunciated in the law or regulation through the judicial process. The government has moved very slowly to provide the required legal frame and judicial apparatuses to deal with unethical practices in business and the banks. Government must protect the broad public interest and promote ethical business practices. It is important that business community and the banking professionals own such regulations. The universally recognised authority of a democratic government must formulate socially enlightened regulatory instruments and promote socially conscious business practices through fair interpretation of rules and prompt delivery of justice. The business and the banks have to understand that it pays to be moral and that good ethics is good business. It is argued that demands for socially responsive ethical behaviour may be in conflict with demands dictated by self-interest as it seems to be the case with business and banks in Bangladesh; but the leaders in the government, business, banks, bureaucracy, academia and the society must recognise that even if ethical code is not of equal interest to all its systemic value is evident when the act of governance and actions of civil society make it clear that the citizens have given the business and banks special rights, powers, privileges, protection and benefits on the understanding that they will continue to promote social interest, at least not harm it and this social contract must be protected by their code of conduct. Let me conclude by saying that today it is absurd to regard business and banking Simply as enterprises established for the sole purpose of profit making. The business and banks can exist in the long run only if they benefit the society and the economy and thus they must serve public purpose and be mindful of social good. They have a duty as the government and controlling authority to create and sustain an operational environment that is creative and promotive of ethical standards. In recent history the most notable failure to achieve common welfare has been the failure of regulators, allocators and users of resources to develop ethical standards of decisions. The standard needs the following conditions: (a) it must be general and not situation or person-specific, (b) it must be known to all and be part of

general practice, (c) it must be understandable, (d) it must not be made self-contradictory through use of discretion, (e) it must be within the consensual norms respected by the citizens, (f) it must not be time-specific i.e. be stable through time, (g) its evolution should not be contrary to basic universalism i.e. relativism should not form any part of the standards, and (h) the actual administration must act to uphold it and make no compromise about it. These conditions enunciated in terms of ethical basis of law equally applies to the conduct of all transactions including business and banking. I urge upon all concerned to rise upto these standards when we are struggling to achieve discipline, development, equity, justice and fair play in our public endeavours to achieve competitiveness and efficiency by the end of this century and the beginning of the next millennium.

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