Analysis of: Crisis of Culture: Valuing Ethics and Knowledge in Financial Services
On November 19, JPMorgan Chase agreed to a $13-billion settlement with the U.S. government over selling faulty mortgage investments. The nation's largest bank admitted to knowingly selling the toxic securities that helped lead to the housing bubble and the worst financial meltdown since the Great Depression. The settlement is the largest made by any single American company in history.
California, slammed by 1 million foreclosures during the mortgage meltdown, will be a major beneficiary of the deal. The agreement includes $4 billion to help homeowners in the Golden State and across the nation who were foreclosed on or who are struggling with their loans. California pension funds, which were big investors in mortgage securities, will receive nearly $300 million in damages to cover losses to the retirement accounts of state employees and teachers.
This ends a long period of time during which the Justice Department’s pursued JPMorgan and may quiet the critics that have chastised the government for not doing enough to hold banks accountable for financial fraud that helped trigger a global recession.
JPMorgan has long contended that the government's case against it was unfair because many of the problem mortgage securities came from investment bank Bear Stearns and thrift institution Washington Mutual. JPMorgan purchased those crippled institutions at the depths of the financial crisis at the urging of the federal government. Still, it’s hard to believe JP Morgan knew nothing about what was going on in these institutions.
In light of the JP Morgan settlement that exposed the dangers of unethical behavior in the banking industry, I was intrigued by a new study that looks at whether Wall Street has learned its lesson.
The survey of 382 executives is part of a report by The Economist Intelligence Unit, sponsored by the CFA Institute, entitled A Crisis of Culture: Valuing Ethics and Knowledge in Financial Services.
The main findings of the study with respect to ethics include:
- 91% of financial executives support the notion that aspiring to a globally recognized set of ethical standards would make the financial services industry more resilient
- 67% of firms have raised awareness of the importance of ethical conduct by all employees
- 53% of financial services executives say strictly adhering to ethical standards inhibits career progression at their firm
While ethical standards are clearly recognized as important and helpful by the financial services executives surveyed, there's a lot of doubt as to whether acting ethically can really be all that profitable.
The bottom line is that a great deal of interest was expressed in acting ethically, but when it comes to putting ethics into practice, many of those surveyed believed that a rigid adherence to ethical behavior could hamper individual employees' ability to move up the ladder. Fifty-three percent of those surveyed said that career progression would be difficult without being flexible on ethical standards, and only 37 percent said they thought their firm's financials would improve based on increased attention to ethical behavior.
At the same time, 67 percent of respondents say their firms have raised the issue of ethical conduct over the last three years, and 63 percent have strengthened their formal code of conduct. Just more than 40 percent of those surveyed said that their firms have begun offering incentives for adherence to ethical standards.
"There seems to be evidence that they are trying to do the right thing," says John Bowman, managing director and co-leader of education at the CFA Institute. "That said, there doesn't seem to be much impact. The culture has not shifted; they are they not putting their money where their mouth is. The most concerning thing is the idea that profits will be deterred or compromised with higher ethical standards."
This brings me back to the question I have raised before: Should businesses act ethically because somehow it improves the bottom line, or should they act ethically in order to meet stakeholder interests and simply to do the right thing? In other words, is ethics the raison d'etre of the business’ existence or is to produce profits at any cost; to increase share value; and to maximize executive compensation.
Don’t get me wrong, a company can do all of those things. However, when push comes to shove it is the ethical values that should drive decision making even if it means less profits, maintaining share price; and not getting exorbitant pay packages.
Blog posted by Steven Mintz, aka Ethics Sage, on December 3, 2013