Banking on Morality
While the merits of free markets and the fallout from the financial crisis have been globally debated by world leaders, a litany of pejoratives linked to ‘banks’, ‘bankers bonuses’, ‘tax havens’, ’tax avoidance’, and ‘tax evasion’ continues to feature in the rhetoric of what has become, a political ‘moral high ground’.9 April 2010
While the merits of free markets and the fallout from the financial crisis have been globally debated by world leaders, a litany of pejoratives linked to ‘banks’, ‘bankers bonuses’, ‘tax havens’, ’tax avoidance’, and ‘tax evasion’ continues to feature in the rhetoric of what has become, a political ‘moral high ground’.
Gordon Brown has called for Europe and the US to lead the world out of the financial crisis, but some commentators observe that the key political figures have turned the process into a moral beauty parade, where pragmatic solutions are secondary to competition for the intellectual superiority and the popular vote. And with Brown facing an election whilst Obama and Sarkozy wrestle with flagging opinion polls, it is not surprising that populist oratory is the order of the day.
So what place does morality have in finance?
The dictionary clarifies the term but does not shed too much light on the subject:
“Concerned with principles of right and wrong or conforming to standards of behaviour and character based on those principles.”
It is here, right at the outset, that we encounter real definitional difficulties in applying a comprehensive moral code for finance on a global basis. Whose morality should we use?
Should we turn to faith groups, political parties or ideological systems to define our ethical compass? The difficulty with this approach is that no individual philosophy has a framework of universally accepted principles that are backed by the force of law, or provide the certainty that business needs to succeed. For example, if banks lend to companies or individuals but cannot recover payments as the borrower decides there is no ‘moral’ case to repay on whatever grounds, be it the charging of interest or the reasonableness of fees, then business cannot function.
Over the last two years we have seen a sense of moral outrage building as the impact of the financial crisis has fed through to the real economy and impacted on earnings, jobs and security. The belief that banks have broken the social contract with society has taken hold. But moral judgement without a transcending benchmark is simply a matter of opinion, and opinion fuelled by anger is rarely rational.
The only code a business can realistically adopt with any hope of consistent application is that imposed by its shareholders and required by law and regulation. Business has become global, and the rule of national and international law is the primary framework for business behaviour in an uncertain world. This is not to discount the corporate responsibility owed to those from whom a business derives its value, but value judgements in this area vary enormously and such commitments need to be determined by the business owners, in conjunction with relevant stakeholders; they should not be changed at the whim of special interest lobby groups or short term populist opinion.
If the law doesn’t produce the result society desires, then surely the answer is to change the law? This requires thought, democratic process and an evaluation of unintended consequences.
During the financial crisis companies, including banks, have been accused of aggressive and immoral activity in the field of tax. However, utilising your tax free savings allowances, paying into a pension or trading a few shares within your capital gains tax allowance, are activities that many millions of people undertake in the UK. They are tax planning; which means to say that without taking those planning measures, those people would pay more tax.
To accuse banks, companies or individuals of illicit, or immoral behaviour because they plan their international affairs in perfectly legal and sensible ways simply raises the spectre of wrongdoing in a misleading and mischievous manner. Moral judgement placed on international finance centres or ‘tax havens’ as complicit in this activity without a proper understanding of the activity being judged, in this case the conflation of tax planning with tax evasion, is just plain illogical.
The truth, however unpalatable, is that the crisis had its roots anchored firmly in debt taken on in the major western deficit economies. This had everything to do with central bank interest rate policy and a lack of effective financial supervision, and nothing whatever to do with International Finance Centres.
So when special interest groups, tax hobbyists or political figures capture the public mood to propagate their own particular brand of morality or ‘truth’ we move into difficult and dangerous waters.
Are we condemned then to navigate with out a moral compass , confined to a sterile world of legal certainty with excess punished by ever more strident regulation? Surely this cannot be the complete answer.
The banks that were at the source of the crisis were amongst the largest and most heavily regulated in the world. It was a failure of leadership and oversight that allowed them to lower their guard and some of their employees to push the commercial envelope much too far.
Boards and particularly CEOs set the cultural tone in organisations and the parameters for ‘how we do things around here’, they need to be strong enough to deliver fair value for the shareholder and strong enough to resist the clamour of the analysts for ever higher, ever faster returns. When that clamour drives the organisation to unsustainable growth trajectories with all of the errant behaviour which goes with them, it is only a matter of time before things go wrong.
The introduction of integrity and ethics committees into board structures, incorporation of fair tax policies into corporate and social responsibility objectives , and the implementation of sustainability checks and balances into remuneration systems would all serve to ensure that not only are the actions of employees legal, but that they are ‘right’. Right for the long term future of the company, right for the shareholder in delivering sustainable returns and right for the community who benefit from the services they provide, and from whom profit is ultimately derived.
The crisis has lead to calls from NGOs and the tax hobbyists to exclude niche international finance centres from the global financial markets, blaming them for what has happened. The reality is such centres compete for international business in exactly the same way as do many OECD and G20 nations; on a mix of financial expertise, lower costs, attractive tax regimes, political and social stability, and robust, flexible, laws and regulation. As with all things in life there are good and bad, but the top tier of centres, which according to the IMF includes Jersey, number some of the highest performers globally in their commitment to meeting and exceeding international standards of transparency and sound regulation.
In Jersey we believe in fair play and respect for others; we still Filter-In-Turn at roundabouts, recognising the other driver has just as much right to be on the road and get to where he is going, safely, as we do. We get on with fulfilling our place as a leading, stable and trust-worthy international finance centre.
We stand ready to continue to play our role as a conduit of international mobile capital around the world, increasing economic and activity and creating jobs, whilst respecting others and playing fair. We believe in opportunity for all and protection for all, in good governance, transparency and sound regulation – these values are our principles of right and wrong, which we believe correspond to universally accepted standards of behaviour which meet any test of morality.