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Ethical Challenges in the Financial Sector-I

M.S. Sundara Rajan

INDIA CAN BE A CORRUPTION-FREE COUNTRY TOO!

As a banker, I am conscious of the fact that I am living in a glass house. We do not normally throw stones at others. I have come here to learn from you. The chairperson¹ was talking about India's rating with regard to corruption. I am confident that the youngsters, who have imbibed the value-based systems, will propel India to the position of Finland in the years to come. It is possible. What is required is a strong will and determination. If all of us can say ‘I can do that’, we can definitely achieve it. Unfortunately, what is happening is that people are trapped in what the economists call ostentatious consumption or the demonstration effect.

The value-based system within us—how we are brought up during childhood, how the organization echoes the value culture and ethics in us—makes us tenacious, it makes us say that I will not yield to any temptation. I am confident that we will reach the goal of being a corruption-free country. What is required is awareness and an honest attempt from all the possible quarters. Nothing is impossible.

ETHICAL CHALLENGES IN THE FINANCIAL SECTOR

I will begin with ethical challenges in the financial sector. First, we will discuss the ethical issues in the financial sector and then what the ethical dilemmas are, what should be the steps in decision making, what are the emerging environments, how we will address this issue, and finally, I would end with the key principles of an organization towards ensuring how to bring about an ethical organization. There is a general perception that in the financial service sector, there are more unethical things than elsewhere. Is it a true perception, or is it an erroneous view? We need to evaluate. Why did this perception arise in the first place? The primary reason is that the industry operates on a huge scale. The financial industry, as pointed out by the chairperson, deals in business worth trillions of dollars. The asset value runs in trillions, the transaction values run in billions, so even a minute percentage of this transaction, when it becomes unethical, in absolute terms, becomes a huge amount. It receives attention. The business that we are talking about is really big in financial sector, so even if we are going to do this, a small portion of it becomes big and ethical lapses do occur. If I say ethical lapses do not occur in this sector, I am telling a blatant lie. Let me confess that ethical lapses do occur in the financial sector.

REASONS FOR THE ETHICAL LAPSES IN THE FINANCIAL SECTOR

Let us analyse why these ethical lapses occur. Prevention is better than cure. Now that we are analysing the reasons, I would like to place the facts before you. The first and the foremost thing is that many a time self-interest morphs into greed and selfishness. If we analyse all the cases, this is what we will observe. What happens is that if you do not check it at the initial stage itself, it will be self-interest at the expense of someone else. This greed becomes an accumulation fever. What is this accumulation fever? If you accumulate for the sake of accumulation, it becomes the end by itself and if accumulation becomes the end, there is no place to stop. So, the moral of the story is that we should never allow the self-interest turn into greed and selfishness. The best thing is to ensure that there is no self-interest at all. What we can further try to ensure is that it does not transfer itself into greed and selfishness. Once we start indulging in this, our focus shifts from the long term to short term with big emphasis on profit maximization. The individual at the cost of society tries to amass wealth. This is the major reason.

The chairperson was talking about the famous Enron case. Why did it happen? If we analyse the reason, companies were making money out of their finance departments, not from selling products, not from doing what the companies did, not from fulfilling their mission, but from playing around its asset mix. Many a time, even when we bankers go to inspect the units, we never discuss issues with the finance department. The other thing is that the finance department will always make you comfortable. A banker should never get annoyed. We always talk to the production department to find out what is the true state of affairs. We try to find out an opportunity of detaching ourselves from finance, go to production and start talking.

STUNTED MORAL DEVELOPMENT

Another reason is that some people suffer from stunted moral development. This is also one of the reasons why these things are happening. Why do we have this stunted moral development? This happens in three cases: the first case is the failure in not being taught; the next case is the failure to look beyond one's own perspective; and the third is the lack of proper mentoring. Once we address all these concerns, we should be able to put a stop to stunted moral development completely.

MORAL BEHAVIOUR DIFFERS FROM LEGAL BEHAVIOUR

Some people equate moral behaviour with legal behaviour, disregarding the fact that even though an action may not be illegal, it still may not be moral. This is also an important point to be taught. I will give you another perspective from the banking example. Now that the Securitization Act has come to us, we have to use our moral judgement. When I was about to leave for this meeting, a borrower came with his entire family without any appointment. My secretary said that they claimed to be my friends. The family comprised a husband, a wife and a son. Their property was going on sale on 20 March,² they were in tears, and pleaded that I should prevent this from happening as this is going to be a great dishonour to the family. They also promised that they would arrange for the money to pay us back. From a legal point of view, I am justified; I can go ahead and bring the property to sale. But morally speaking, can I not see that it can be stopped? After all, I am interested in recovering my money. Not that I want to bring them to book and see their tears coming. I asked them to give me some time as I had an urgent meeting and I told them that I would solve their problem by evening that day. To me, this was also an important issue.

DEALING WITH SITUATIONS OF CONFLICTS OF INTEREST

Another difficulty is that the professional duty can conflict with the demands of the company. This is especially the case with regard to the reward systems. When you announce a reward system—companies do announce a reward system—care should be taken to see that the course of action that they initiate is not in conflict with the company's demand. The next one is that the individual responsibility can wither under the demands of the client. This happens quite often. There is always a conflict of interest. Even in banking, when I deal with the clients sometimes, I do the transaction as an agent of the principal. I have to deal with a conflict of interest. In a transaction, I have to maximize my return, but not at the cost of my principal. Should I do it? There is a conflict of interest. We need to address it. Now, when is this thing ethical, when a person is put into an ethical dilemma and what are the factors you should take into account in decision making?

THE STORY OF SATYADAS AND HOW MONEY CORRUPTS BEHAVIOUR

Being students, you may be interested in stories. These stories bring the action points. I would like to narrate the story of Satyadas. Some of you must have heard it even earlier. It was written by Bimalkar. There is a character called Raghunath. He ran a small shop in a small town. He was content with his earning and with his frugal living. He was religious in outlook and compassionate towards others. One afternoon, when it was raining, a poor old vendor of his named Satyadas came to his shop. He was running high temperature. Raghunath provided him with food and shelter. In the morning also, the visitor was provided with hospitality. He then left for another destination, leaving behind—advertently or inadvertently—a pouch containing six gold coins and a ring studded with gems. Raghunath waited for him for several months to return and then on persuasion of his wife Jamuna, he sold the contents of the pouch one by one. He set up a big shop and built a big house to live in. He started to live with dignity in society. But one fine day, Satyadas came back. Raghunath was shocked. He was not as hospitable now as he was before. On the contrary, he thought that the devil had turned up and wished he left at the earliest. As Satyadas was about to leave, conscientious Raghunath asked him, ‘Did you leave behind something when you came last time?’ Satyadas said, ‘I do not know, God knows everything.’ The story ends here, leaving Raghunath with a deep sense of guilt and remorse. The sense of guilt is one interpretation. Rag-hunath, Satyadas, Jamuna are three purely imaginary characters created by the author: three conflicting aspects of a single mind—morality, guilt and greed. Another interpretation is why did not Raghunath have the courage to practice transparency and tell Satyadas that during his previous visit, he had left behind a few gold coins and a ring; and that he waited for him for a long time to return. Only then, he sold them to invest in his business and build his new house. Now he wanted to repay him. They could work out a repayment schedule. Feeling of guilt and remorse is psychologically paralytic. This drives home the point that when a person was simple and led a contented life, he was more honest. Once he started getting money, tasted it, tasted its power, he became corrupt. This is a story of how the possession of riches can corrupt a person. Many a time, possessions do corrupt people. Now, the basic ethical question is how to address this problem.

THE IMPORTANCE OF VALUES IN GOVERNANCE

In the emerging environment, two things become important; one is the aspect of better corporate governance and the second is innovativeness and developing competitive edge through imagination. There is a book that many of you would have had an opportunity to go through. The book is Power of Ethical Management by Norman Vincent Peale and Kenneth Blanchard. The authors say there is a three-way test to decide whether your action is ethical or not. The first test is, is it legal? If the decision taken is not legal, it is not ethical. The second test is, is it fair? Being fair means providing equal advantages and disadvantages to all concerned parties. If it favours any particular party to an extent, it is not fair, and, therefore, it is not ethical. The third test is what is called the ‘Eleventh Commandment test’. There are Ten Commandments in the Bible, but there is also the eleventh commandment—’Thou shalt not be caught’. You can violate all the Ten Commandments as long as you are not found out. So, the third test is if the decision taken is known publicly in the media, will you be ashamed? This is the basic test for propriety so that when we take the decisions in the banking sector, in the financial sector, we ensure that the decision taken is ethical. The significance of ethics in the context of competitiveness has been highlighted by many successful managers.

THREE VALUABLE EXAMPLES

I would like to bring to your attention three examples. The first one is Jack Welch, the management icon of the twentieth century. He says excellence and competitiveness are totally compatible with honesty and integrity. The best student, the four minute miler, the high jump record holder, all strong winners can achieve those results without resorting to cheating. People who cheat are simply weak. A professor gave a hypothetical case to his B-school students. He said, ‘If you are running a business for a large company and were about to get a $50 billion order, but to do so if you had to deposit $1 billion in Swiss bank account to an agent, would you do it?’ Approximately 40–50 per cent of his students said they would. The professor was shocked! He told the students, someone else was teaching you wrong things; this was not one of those cases where you had to interpret the law. This was a simple bribery case. In the end, your integrity is all you have got. Another is a case of Shri Narayana Murthy of Infosys, who underlined the principle of Infosys, while addressing students at the Wharton School of Business. It is worth noting:

The Infosys value system can be captured in one line. The softest pillow is a clear conscience. A company's value system is a guiding light in its hours of darkness. It builds confidence, peace of mind and enhances enthusiasm during tough times. The importance you attach to the value system is reflected in the cost you are willing to incur for your beliefs and convictions. At Infosys we have stood for it, whenever our value system was tested, we knew that taking shortcuts that compromise our values would be detrimental. One of my strongest beliefs is that corporations have an important duty to contribute to the society. No corporation can sustain its progress unless it makes a difference to its context.

The third one is Shri Azim Premji of Wipro, who has built a world class institution. He said, ‘In the building of a world class institution, five factors are important. These are vision, values, innovation, leadership and social commitment.’

We, therefore, find that successful managers face competitions but do not give up on the ethical and the value dimensions. Corporate governance only emphasizes these aspects.

VALUES ARE WHAT YOU MAKE THEM TO BE

When talking of the ethical challenges in the financial sector, what happens is, just as we are doing the Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis of our borrowers, of our customers, they also do the SWOT analysis of the various executives in the financial system. They try to find out your strength and weakness. They try to exploit your weakness. Once a person has got a conviction that he will not subdue to any sort of pressure, he will definitely continue to be of high ethical standard and of high moral character.