Ethics law needs to set the tone for standards in public office

Nuala Haughey: Issues of ethics in public office are enjoying a rare moment in the spotlight with the ongoing discussion over US President-elect Donald Trump’s handling of his private business affairs as he prepares to take up his new post.

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

@islandtotheleft

The next 100 days: thinking about risk, trust and ethics

Slí Eile: “the citizens of this country are understandably angry about the state of the banks. They are bitterly disappointed by the failure of our regulatory system. They are appalled by the details of the reprehensible behaviour of some in the financial system and in the property sector in whom they placed their trust and they are also angry with the Government. Many ask why we are putting money into the banks while they endure the brunt of the difficult budgetary decisions which we must take. There is now unfortunately a breakdown of trust in the entire system.” (Minister for Finance, Dáil Eireann, 16 September 2009).

…. a ‘breakdown of trust’ …. ‘in the entire system’

Lets mull over that especially as it is said by the elected representative with responsibility for spending close to one half of GDP, overseeing the banks, NAMA, macro-economic policy and all those major choices and ‘hard decisions’ pending in the next 100 days.

How did we arrive at this point? Why? If trust is like a pane of glass shattered in an instant or over many instants – how can it ever be rebuilt again? We are all only too familiar with the story of betrayed trust from residential institutions for children to banks to politicians and many other organs of respectable society.

Trust
A surprising feature of any economic system is trust. Trust is to the operation of markets as oxygen is to life. A collapse in market ‘sentiment’ – read ‘feeling’, ‘mood’, ‘instinct’, ‘perception’, ‘belief’ – can be dramatic, sudden and stampede-like.
That soft, touchy-feely, hard to quantify, hard to legislate for thing is known as trust. At its core, trust is what people expect others to do or not do. It is an expectation founded on experience or something else related to human evolution and experience over many generations.

Trust is predicated on the basis of perceived or acknowledged risk – where I risk some good or resource on the assumed or perceived good will of others to act honourably. I trust you to reciprocate a favour or service at some future date; you trust another to reciprocate a favour done to you; I trust that person and that person trusts me on the basis of his/her trust in you. Generalised inter-personal trust is the result of a countless number of exchanges over time.

But ….. trust among various social groups and between various political, legal and corporate institutions is the agent which sustains economic progress. For all its warts and limitations, social partnership between 1987 and 2008 helped us to emerge from where we were to a position of relative economic strength. It was built – to some degree on cooperation and trust – the idea that give and take can yield gains for everyone in the medium-term that are would not be possible if each economic interest seeks to maximise its interests without regards to others.

Clearly, trust has been shattered ‘in the entire system’ and this is as serious as it gets. Rebuilding it will require radically different policy responses and joined up thinking. If some form of social and economic partnership is to emerge from this current impasses it will have to take a very different form to what went before. It may even have to take a much more emphatic cross-border and transnational dimension where, increasingly, the only way to deal with global issues such as the race-to-the-bottom, climate change and market instability is through combined global cooperation allied to local initiative.

Risk
NAMA, Post-Lisbon, Sovereign debt defaults, Social Cohesion, Global Warming, future pension liabilities, terrorism, poverty….. or loss of employment and income, break-up of relationships, ill-health – the list is endless. Risk – like power – is everywhere. But, is it such a bad thing?
Have we too much of the wrong type like cholesterol? How do we manage risk – personally, corporately, at the level of society?

If we as parents, community, society do not invest in our young children what are the risks for them and everyone else? Everything has consequences and sometimes we have to make difficult choices with different types of risks. If only we could calculate the risk mathematically and feed it into a risk model to give us the optimum response strategy! But, life is of course not that simple.

In strictly market terms, ‘risk’ denotes that which is associated with effort or capital (any type including physical, human, community, ethical) where the ‘return’ or the outcomes are uncertain. The uncertainty of return provides a justification for a premium ‘payment’ to the one who undertake the risk. Underlying any risky venture whether in terms of economic production, medical intervention or venture sport … there is a time element. One decides to chose one option or course of action over another on the basis of rational, moral or instinctive grounds. The result of such a choice may not be apparent for a long time. The ‘payback’ or secondary impacts (on others as well as oneself) takes time to yield.

How does risk apply to trade in goods, services and finance capital? Since the world is far from the deterministic machine image used by some 19th century social engineers and theorists, the impact of any investment or consumption strategy is unknown. All we have to go on is (i) past experience and data (of which we have more than ever), (ii) some theory or set of theories about the way people, markets, institutions work and (iii) preferences with regard to which things matter most in life.

In many ways the financial swinger market party of the last two decades gave a huge outlet for indulgence in ‘risky’ behaviour. Ironically, a lot of the party goers got infected and now very few will party anymore for fear of contracting more bad assets. Put another way, banks stop lending to each other and nobody trusts anyone else or what the value of anything will be in a year’s time. Short-termism which drove us to where we are now becomes even more dominant. And so we have an extraordinarily short-termist approach to correcting the fiscal deficit while people just assume that one or both of the following will happen: property values will recover by a sufficient amount as to pay for NAMA in the coming decade and international recovery will, eventually, lift us out of the slump in demand and consumer/investor confidence.

Ethics
Greed has been cited as a key ingredient in the current crash. We had a relentless, ego-driven, empire-building, look at my stash mentality. Compete, grow, conquer, excel …. It gave full vent to primitive instincts. That amazing book ‘Lord of the Flies’ by William Golding tells a story about school boys stranded on an isolated island where chaos breaks out as they divide into competing groups. I often wonder how thin a veneer civilisation is over an underground of very destructive forces…..check out Dick Fuld who drove Lehman to collapse. But, we would be very wrong to think that the sum of greed on the part of many individuals was the only factor that brought us to where we are. The very institutions, cultural norms, societal structures and assumptions that underpinned our ‘entire system’ were based on a view of how things worked and how things should work.

Just when many in Government, economics and finance thought that a bit regulation and fiscal smoothening would see off any repetition of the Great Depression we got the Great Recession. If people just looked at the recent experiences of Japan, Sweden, Finland and many other places and thought through the possible sequence of triggers set off by one big banking collapse in the US economy they would have realised that a massive and systemic collapse in confidence, trust and coordinated market response is possible. People can act like rational beings in a way that wrecks the larger polity and market. It is a type of Prisoners’ dilemma so beloved by game theorists.

The next 100 days will tell a lot. A courageous Government in Ireland would:

* acknowledge the full truth of how we got to where we are now
* give example and take the lead by applying its own medicine to itself
* engage all those charged with economic recovery in an open dialogue based on facts and values leading to practical solutions and policy adjustments painful as they will inevitably be
* take charge of the seriously ill banking system in a way that is just, workable and effective from the point of view of restoring economic confidence in the medium-term (none of which I think NAMA meets)
* afflict the comfortable and comfort the afflicted.

I am afraid that on this very last point, we are witnessing more the exact converse.

Markets and morality

Paul Sweeney: Markets and morality is an interesting subject. It should be on every economics course, but is probably absent under the narrow regime of the neo-classical economics which dominates Irish universities (to our cost).

On BBC 4, Michael Sandel, Harvard Professor of Government, delivers four lectures about the prospects of a new politics of the common good. The series is presented and chaired by Sue Lawley. He is critical of economists and economic commentators.
He reviews three decades of market triumphalism, and argues that it is not sufficient to curb greed and set up new regulations. He argues that markets are not mere mechanisms, but have moral impacts. Market incentives can crowd out other norms, he says.

He says the incentive payment of $2 to read a book for US children in some schools has other impacts. He argues strongly against the marketisation of migration policy by influential right wing economist, Gary Becker. Becker advocates that US citizenship should be sold for $50,000 and this will bring in the best of foreigners – those who are skilled and ambition.

In the first lecture, given on Tuesday 9th June 2009, Sandel considers the expansion of markets and how we determine their moral limits. Should immigrants, for example, pay for citizenship? Should we pay schoolchildren for good test results, or even to read a book? He calls for a more robust public debate about such questions, as part of a 'new citizenship'.
In Sandel’s latest book, The Case against Perfection, Ethics in the Age of Genetic Engineering (2007) he argues against the use of genetic engineering to create designer children, and suggests that the genetic revolution will force spiritual questions back onto the political agenda. His new book, Justice: What We Owe One Another as Citizens, will be published in the autumn. He is also the author of Liberalism and the Limits of Justice (1997), Democracy's Discontent (1996), Public Philosophy: Essays on Morality in Politics (2005.

The lecture is 45 minutes long, is not taxing at all and is worth a listen.

'We've screwed up - that's the truth'

Sli Eile: ‘We’ve screwed up – that’s the truth’ – so writes Professor Ray Kinsella of the UCD Smurfit Graduate Business School in the Irish Times on 23 April. This is a declaration one would search in vain to find on the lips of Economists or Government or Banks or Political Parties or Churches even if President Obama recently acknowledged that ‘I screwed up’ on the Daschle appointment to Government.

It is refreshing if at least one economist is prepared to use the ‘we’ word in describing a collective, societal and shared failure to ensure a fair and sustainable economic and social order. The analysis offered by Ray Kinsella is enticing even if the solutions and programmatic way forward is much less clear (but then who is offering a clear-cut and well thought out exodus from this present impasse?) Kinsella has been following Alasdair MacIntyre in arguing for a new ethic in politics. MacIntyre’s website says that it is committed to ‘provide a forum within which contemporary Aristotelians, Thomists, Marxists and others can explore the grounds for a common project’. It aims to do this ‘in a spirit of friendship and communal dialogue, whilst also engaging in dialogue with rival traditions.’

In an earlier piece in the Irish Times on 5 March, Kinsella argued that:

The sense of “right” and “wrong” at the heart of ethics, resonates the public’s perception of an intrinsic “unfairness” with various aspects of the economic crisis and its consequences. Regulation, to take one example, is a necessary but not sufficient condition, for a restoration of financial stability. Individuals, no less than corporates or countries, cannot be regulated to do the “right” or “moral” thing. Ethics is, by its nature “obedience to the unenforceable” and the ultimate guarantor of trust. This fact is at the heart of the seeming dichotomy. “It may be legal, but surely it can’t be right . . . ”

Kinsella’s analysis of 23 April may be boiled down to the following:

1 ‘There is a quiet desperation among individuals and families and businesses’

2 ‘We are looking at a fracturing and realignment of political institutions which do not speak to the sensibilities of a young generation they have beggared’

3 ‘The roots of this latent political crisis are – like those of the global financial crisis – starkly ethical in nature.’

What ethical issues arise then? Kinsella suggests the following inherent problems:

• ‘The defining characteristics of the system as a whole is a culture of power instead of service to the person’

• Systemic lack of political, values-led leadership (and vision)

• Politics should be about service to the people and to their common good (the res publica of civic republicanism)

His solution? More cuts in public spending and wages across all sectors? More public asset-striping? More bail-outs? Not a word in this article, anyway. Instead, Kinsella calls for this:

We need a realignment of politics in Ireland – we need democratic choices that mean something to contemporary society. We need a sense of right and wrong. We need a whole new political ethic premised on values-based leadership.We need to engage individuals who have little interest in power as such, who have a commitment as well as a widely acknowledged expertise that is capable of restoring trust, confidence and a sense of direction.

Tellingly, Ray Kinsella comments (in the context of the pending Taxation Commission Report) that ‘the Government will commission external agencies to prepare detailed reports when all the knowledge necessary is already within their own departments. There is an acute lack of confidence in our own expertise and in our own resources.’ A less benign interpretation is that Government is well aware of these resources but does not want to use them effectively or listen to advice it does not want to hear.

Finally, in a piece that could have come straight from CORI, ICTU or the INTO:

We are spending undreamt of sums of money – which we do not have – to support utilities which are skewed in favour of shareholders (and that is the supreme irony, since their interests have been entirely subverted by a malign business model) – while we continue to have a fragmented, unfair and multi-tiered healthcare system.

I think that it is possible – from a progressive standpoint – to agree with much if not most of what Ray Kinsella is saying. The problems he identifies are part personal/spiritual, part structural/societal and part ethical/legal in nature. An inclusive analysis and, therefore, an inclusive solution needs to take account of the complex layers. Hence, responses along the lines that all we need is just a clean sweep of the tops of financial institutions as well as a new set of faces, names and parties in Government will utterly fail unless there is, also, fundamental change in the content and ethics of public policy and leadership. Calls for the resignation of such and such a Minister miss the point. The health system is the way it is because ‘we screwed up’ by investing in a fragmented three-tier health system where people could buy their way to skip the queue. At the same time, unelected groups along with vested interests in the health service benefited from the status quo. Beginning with Noel Browne’s reforms in the 1940s/1950s, every attempt to make health a public good and right over a commodity or private sphere has met with opposition from the predictable sources, backed by political (and, in the 1950s, religious) ideology.

‘We cannot build a new capitalism on old politics’ says Kinsella. Indeed. Perhaps a New Deal economically and internationally calls for a New Deal politically. In the 1930s, the New Political Deal found expressions in ‘Popular Front Governments’ among a small number of democratic nations (France and Spain). Is it now time for a new political dispensation along the lines of ‘Progressive Alliance’ Governments in as many EU Member States as possible to shift the tide? Iceland led the way in terms of European economic meltdown. They seem to be leading the way, now, in terms of political re-building. Such a new alliance would focus in immediate order of priority on:

• Effective action to address climate change;

• Cooperation to address the causes of world poverty and oppression;

• Measures to defend and advance public services;

• Measures to redistribute income, wealth and political power in favour of disadvantaged individuals and communities

• Reforms of democracy and public institutions to make them more accountable and to encourage the widest possible participation.

What about the state of the public finances and competitiveness on global markets? The best way to tackle that is to build a fair society where talent is liberated and a sense of social solidarity is promoted. We should never waste a crisis. This could be our unique market selling point. Economics needs to get political, and politics needs a new economics.