Should “banksters” and other business criminals be jailed? Professor Ray Kinsella says that after the findings of two damning reports on crimes in AIB and NIB, big business is at last being forced to adopt ethical practices.
The opening years of the new millennium have seen a fundamental catharsis in the morality of business, especially among large multi-national corporates. The catalyst for this sea change was undoubtedly the collapse in 2001 of the US energy giant, Enron, followed by an implosion in Worldcom. Seemingly robust, efficient and well-regulated businesses were found by consumers, regulators, staff and investors to have gaping holes in their balance sheets and to have been kept afloat by fundamentally flawed accounting procedures and management practices.
Fraud per se is not the issue here. Fraud can be perpetrated within or without the most robust and well-managed businesses. The real point is that the short-term share holder value ‘business model’ is more likely to facilitate and/or incentivise fraudulent practice and corporate misconduct than one where individuals’ ethical autonomy is respected and whose capabilities (intellectual capital in its widest sense) are at its heart.
In the aftermath of these and subsequent corporate debacles, two realities have emerged. Firstly, some ‘High-Trust’ institutions and professions – banking as well as auditing/accounting – were found to have been complicit in, or to have facilitated, the kind of practice which led to the collapse of companies. Secondly, there is the enormous collateral damage caused by this breakdown in the governance and management of companies: pension funds wiped out by the collapse of companies who knowingly inflated their profits and engaged in illegal activities with consequent damage to staff, who are laid-off in their thousands, their lives and values subverted.
A mindset prevailed which was focused solely on maximising the profitability of the company to the exclusion of any consideration for the manner in which these profits were generated. For a period in the early and mid-1990s, this was an important dimension in mainstream corporate strategy and behaviour. It was a distortion of Nobel Prize-winning economist Milton Friedman’s principle, which promoted the idea that the business of business is business, and pretty well anything over and above that represented a form of theft of shareholders’ wealth. Stated this way, this distortion is simply wrong. But from this kind of thinking a belief emerged shared by some top management, some large institutional investors and some investment analysts (whose job it is to evaluate the financial prospects of individual companies), that the overriding objective of business strategy is about maximising returns to shareholders.
Staff were then inducted into this ‘business-model’ based on maximising the market value of the company – its value on the stock-market. This insatiable demand for higher shareholder value translated into pressure on employees to deliver (frequently) unrealistic targets. The monetary rewards for those who ‘succeeded’ in meeting targets were frequently excessive or even obscene; on the other hand, failure to meet these targets could result in job loss.
This led to a ‘dance of death’ whereby investor expectations were continually ratcheted up. It tempted individuals with salary bonuses and stock options to accept this view of business and, in some instances, to look the other way when it came to the kind of business practices involved. Cost cutting was another important dimension of generating profits. Since the shareholder value ‘business model’ crowded out any regard for morality, it lacked any basis for respecting individuals who might be caught up in any periodic ‘cull’ of the workforce.
The model was not sustainable and collapsed in on itself in a series of corporate debacles. In other cases, it led to the exposure of this culture as unacceptable. In the last two years there has been a plethora of legislation across the US, Europe and Ireland in areas such as corporate governance, prevention of a conflict of interest between accounting and consultung, new accounting/auditing standards as well as changes within companies themselves. These changes reflect the beginnings of an understanding of the importance of other stakeholders in an organisation, apart from that of the financial markets. It reflects an acknowledgement that the performance of individuals has to be seen in the context of accountability and compliance rather than simply ‘doing a deal’. It also reflects the emergence of an understanding of the importance of companies as communities with wider societal responsibilities. Work has a moral value and an ethical dimension.
In the short-term shareholder value model, ethics were subjugated to the demands of pathologically unethical behaviour – the Wall-Street ‘greed is good’ mentality. This created a tension between, on the one hand, the values by which we try to live behind our own hall doors and on the other hand, those by which we are constrained to work behind the office door. Where there is a divergence, the intrinsic moral value of work is subverted and ethical concepts of ‘right’ and ‘wrong’ are effectively hijacked by the company.
The corporate catharsis through which we are now passing is something of an ‘ethical epiphany’ within the business environment. There is now a new framework emerging in the corporate world. At one level, it is about regulation and, in particular, compliance. It is about developing a corporate culture that respects individuals. The tone as defined in a Harvard Business School study is ‘humility with fierce resolve’ – and shapes the values by which the organisation operates. Employees are empowered to contribute to what is increasingly seen as a community of individuals. In the shareholder value-model, individuals are simply a means to an end for companies seeking to meet the insatiable demands of the financial markets. By contrast, in an ethically driven model, individuals are at the very heart of its modus operandi.
At the economic level, this new ethical model acknowledges that the intellectual capital embedded in the individuals within a knowledge-based economy, are the real key to the ‘value creation’. This points to a fatal deficiency in the short-term shareholder value model, within which individuals are basically viewed as a cost and are disposable. Moreover, it ignores the intrinsic value of the individual and the moral choices they make as part of their daily work.
This ‘ethical deficit’ has its roots not only in a distorted view of Friedman’s model of what business is about but in the secularisation of society and the deification of money and power. Scripture and Pope John Paul II’s recent encyclicals on the value of the individual can provide a framework from which to develop an ethically driven model of corporate behaviour and strategy. Judaeo-Christian teachings are therefore, if anything, more relevant today than when they were first written.
This article first appeared in The Word (September 2004), a Divine Word Missionary Publication.