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Ten Recommendations for the Ethical Rearmament of Banking



The image of banks has deteriorated. They urgently need to improve their image and regain people’s trust. It will be good for them and society. It’s true that some banks were more responsible than others for the tarnished ethical reputation most people now have of financial institutions. And although banks are not the only parties responsible, a very significant list of ethically questionable practices has been attributed to banks or, more specifically, to some senior bank executives.

The Eccles Building, headquarters of the Federal Reserve System. Author: Dan Smith
The Eccles Building, headquarters of the Federal Reserve System. Author: Dan Smith

Here are some examples: deceit in the placement of preferred shares; holding and selling financial products with hidden “toxic” assets; mortgages with abusive clauses; questionable million-dollar remunerations, ironclad clauses and pensions for senior bankers; helping create a real estate bubble by granting loans based more on greed than prudence; performing operations involving excess risk; foreclosing mortgages with very little social awareness or interest in finding alternatives; showing a lack of initiative in providing loans to feasible companies; aiding and abetting clients place assets in tax havens; and professional incompetence as board members (as in the case of many savings banks). Some cases even involve manipulating massive amounts of data, as in the case of the LIBOR scandal.

Why Laws Were Unable to Prevent This Behavior?

Many people wonder why the laws in different countries were unable to prevent this unethical behavior. It seems to me that there are at least two reasons. The first goes like this: every law has its loophole. When there is no ethical safety net, there are many ways of getting around the law . The second is that life is more complex than rules. Scandals happen first and laws are passed later. We therefore need something else besides a set of rules to control the behavior of people and institutions: we need to understand and pursue ethical values.

A branch of the Northern Rock with Virgin Money branding on Briggate in Leeds. Author: Michael Taylor
A branch of the Northern Rock with Virgin Money branding on Briggate in Leeds. Author: Michael Taylor

There is a clear need for an ethical rearmament in the banking industry. But how can this be done? It would be simplistic to try to solve complex situations without delving into the specific details of the topic. But there are some basic recommendations that are easy to understand and that can help contribute to that much-needed ethical rearmament. Some of them are now covered by laws, while others aren’t. Regardless, ethics are not in the law itself, but in the justice that justifies them. These are the recommendations we propose:

  1. Creating a responsible corporate culture where the key should not be the mentality of maximizing profits at all cost, but the banking industry’s ethical-social function with reasonable economic profits and social benefits. Banks comply with their social function by prudently moving the assets deposited by savers  and facilitating the loans that families and businesses need to be able to grow, generate employment and, therefore, generate wealth. When banks and financial institutions started with excessive risk and questionable practices, they stopped performing this function, which is necessary for society’s economic development. This social function is what justified bailing out the banking industry. It may not have been a popular decision, but if the financial system had not been bailed out and had failed, it would have had devastating effects  not only on specific banks, but also on economic activity in general, resulting in the paralysis of society as a whole.
  2. Acting with transparency and explaining relevant information, even more than is required by law. The effect of holding toxic assets and placing preferred shares with deficient information was devastating  and it is important to show that the lesson has been learned. Neither mortgage securitization nor holding toxic preferred shares is intrinsically wrong, but each must be explained clearly and these shares should not be offered to anyone who cannot easily understand them.
  3. Administering funds with prudence and transparency. Some banks went bankrupt due to imprudence or negligence in the administration of funds, often accompanied by a complete lack of transparency. For example, the banking industry saw real estate as a gold mine where large amounts were handled, because banking becomes profitable when large amounts are involved. But the money available to the bank is not the sole property of the board of directors. They often only own a small percentage. Thousands of small shareholders and savers were negatively affected.
  4. Granting loans with a sense of ethical-social responsibility by considering the activity the money will be used for and its social value. Bank managers are not responsible for just profitability and solvency. There is also an ethical and social responsibility that involves considering the contribution the loan makes to creating employment and generating wealth ethically. The responsibility of granting loans also makes it necessary to deny them when they are earmarked for activities and sectors where there is a lack of ethics (e.g., industries that do not comply with basic human rights or do not prevent pollution, or that work in pornography).
  5. Not using their situation of power to abuse the needy. Having power can mean having more information or greater negotiating power. Imposing abusive clauses in mortgages and taking advantage of savers’ ignorance are two examples of the abuse of power in banking.
  6. Failing to provide incentives and applying extreme pressure when making investment decisions. Clients often receive advice from bank employees because clients think bank employees can be trusted. A corporate policy pushed by senior banking managers who put pressure on their employees without any precautions can lead them to sell financial products without offering clients full, clear information, or without recommending that they buy other products that are more suitable to their investor profile. It is true that many of these employees are not investment consultants, but they may be considered as such by clients with savings who have little knowledge of finance, especially if these employees actually make recommendations. It is necessary to avoid situations in which the trust placed in these employees is abused.
  7. Acting with moral imagination and social sensitivity. Moral imagination causes us to find creative solutions that are ethically better than the solutions most commonly made. One of the harshest criticisms of banks involved asking them why they were so socially insensitive when it came to mortgage repayments and the resulting foreclosures. Is dation in payment really not possible in many cases? The lack of determination when trying to solve a problem that directly affects the basic needs of thousands of families indicates a lack of social sensitivity. The banks’ protocols may not have included indications on how to act and some people may have even felt it was not the banks’ problem. But the problem was real and, in many cases, the financial institutions were too slow and inflexible to take action and also lacked imagination.
  8. Not cooperating with the questionable behavior of others. This includes everything from collaborating with money laundering to providing technical assistance to aid in fraudulent tax evasion in tax havens. Tax havens are known to have no taxes or very low taxes. They are also known for keeping their clients’ secrets. Banks should not be accomplices to their clients’ questionable activity, even if those clients are very important people.
  9. Acting with a sense of corporate citizenship. This means that banks should act and be seen as social agents that are concerned about social problems , even when these problems are not directly included in the bank’s mission statement. Many banks set aside part of their profits for social causes that would otherwise go uncovered. This should naturally not be used to cover up questionable practices, but should be praised. These actions are not just a way for banks to give back to society part of what society helped them earn, not including taxes. They are also a way for the bank to be community-minded, which society generally views highly.
  10. Ensuring compliance by focusing on integrity. Having well-established and suitably applied codes of conduct and other means of self-regulation can help, but the focus should be on a shared mentality of integrity that goes beyond mere compliance. This will prevent the common attitude of saying one thing (“We comply”) and doing another based on a lack of ethical integrity.

At IESE, we aim to help companies and banks work well (with a professional and ethical base), provide a good service in noble competition and, as a result, be profitable and contribute to progress and the humanization of society. But you may wonder if that is even possible. How can being competitive be compatible with being ethical? It’s a challenge that calls for imagination and hard work, but honesty and integrity, along with the resulting trust, are also important competitive elements.

Some IESE lecturers give thought to this matter and even organize international conferences like the one to be held shortly in Barcelona from June 30 to July 1, 2014. Experts from all over the world will come to discuss this topic and try to continue making progress.

Dr. Domènec Melé is a professor of Business Ethics and holds the Chair of Business at IESE.
He has  a Ph.D. in Industrial Engineering, from the Universitat Politècnica de Catalunya; a Ph. D. in Theology from the University of Navarra, Spain; and a Master’s degree in Science, from the Universitat de Barcelona.


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How much does it cost to be ethical? What is the cost of corruption?




The opposite day, my 10 year-old son requested me how a lot it prices to be moral.  Not likely a shocking query for the son of an ethics professor, however one which has no straightforward reply. So, how can we measure the impression of doing the correct factor?

Contributing to the welfare of others and your individual is frankly, a priori, a broad query.  If I had been to reply my son’s query in a easy manner, I’d attempt to flip the query round and as a substitute ask, what occurs if I don’t do the correct factor? What’s the price of corruption?

Stop Corruption, by kmillard92.
Cease Corruption, by kmillard92.

On the one hand, anybody can communicate freely about variations in notion, and there are research in regards to the notion of corruption.  But once we attempt to apply statistics and actual numbers to this phenomenon, its very nature impedes us from accessing these numerical values; its obscurity and lack of transparency leaves no path to comply with, typically because of the varied and inventive means corruption has of additional selling different corrupt practices past the financial (presents, journeys, particular favors, and many others.).

So what prices does corruption incur?  The price of corruption is far more than monetary; it’s also social, political, environmental and human:

  • Monetary: Corruption has a direct impression on the wealth of countries, diverting funds to “non-public” functions, as a substitute of to the frequent good.  It additionally generates an underground economic system, dissuading overseas funding (in accordance with Transparency Worldwide, dropping one index level results in dropping the equal of 0.5% of GDP in overseas funding) and inspiring capital flight.
  • Social: It additionally corrodes belief, not solely in establishments, but additionally in individuals.  It generates frustration, apathy, discourages the entrepreneurial spirit, accentuates social inequities and promotes organized crime.
  • Political: Corruption is likely one of the biggest obstacles to democracy and the rule of legislation.
  • Environmental:  Unacceptable practices in developed international locations are additionally carried out in creating international locations, along with the overall pillaging of pure sources.
  • Human: It damages human nature and creates a rift between human beings and their final objective.

If we focus simply on the monetary value, within the Nineties Enterprise Week printed the outcomes of a College of California examine that exposed the precise value of corruption.  For instance, accepting a bribe or giving in to extortion to hurry up licensing procedures or to acquire a public contract led to a 3 to 10 % improve in charges.  In the long run, the products and companies topic to corruption had been 20 -100% dearer.

In 2003, the U.N. signed the primary worldwide anti-corruption treaty.  At the moment the Related Press gathered quotes that illustrated the extent and gravity of corruption in lots of international locations:

Corruption … has ruined our colleges and hospitals [..] It has destroyed our agriculture and industries. It has ‘eaten up’ our roads and jobs. … It has destroyed our society.”  Justice Minister, Kenya.

Anthony Value, The U.N.’s prime anti-crime official, made the next observations:

“Zaire and Nigeria, two of Africa’s hardest-hit states, have misplaced some $5 billion every in the previous couple of years to graft, most of it spirited out of these international locations.”

“In Pakistan, an estimated 30 % of the value of all public works initiatives goes to kickbacks and bribes.”

“In Bangladesh, corruption eats up a whopping 50 % of overseas funding.”

In 2004, Daniel Kaufmann, the World Financial institution Institute International Governance Director, revealed that all through the world multiple trillion U.S. {dollars} ($1,000,000,000,000) had been paid yearly in bribes, not together with misappropriation of public funds or embezzlement.  This determine estimates bribes paid each in wealthy international locations and creating international locations.

Did You Say "Bribe"?, by Chris Potter (
Did You Say “Bribe”?, by Chris Potter (

Kaufmann noticed that the whole financial sum of corrupt transactions was only one a part of the whole value of corruption, which in and of itself is a serious obstacle to the discount of poverty, inequality and toddler mortality in rising economies.  Different insights that got here out of this examine included how in the long term the nationwide incomes of nations that battle corruption and enhance the rule of legislation can improve as much as 4 occasions. On the identical time, the examine discovered that such efforts would result in a 75% lower in toddler mortality.

In 2009, Transparency Worldwide printed a report that discovered that corruption in Eire value the state three billion kilos.  In the meantime, in Italy the Court docket of Auditors confirmed that authorities corruption value 60 million euros per 12 months.  Within the U.Okay., the Nationwide Fraud Authority quantified fraud at 73 billion GBP in 2012.  On the European degree, in 2013 the E.U. estimates that corruption all through the 27 member states prices 120 billion euros per 12 months. In Spain, a current examine positioned the social value of corruption at 40 billion euros.

Whereas it’s troublesome to understand corruption’s monetary impression, these numbers do assist to make clear the gravity of the phenomenon.  Fascinated about the price of corruption in relative phrases can also be enlightening.  For instance, if we refer again to the determine cited by Kaufmann – $ 1 trillion USD – and we evaluate it with the $150 million USD in worldwide assist provided for catastrophe aid following the current storm within the Philippines, the pressing have to fight corruption is kind of evident.

Going again to my son’s query, and with out dropping sight of the bigger and better motives past the financial that justify working in direction of good, the figures cited earlier do certainly assist me to reply his query: Many good issues rely on our doing good.  By making brave and trustworthy selections, we are able to rework actuality and create not only a extra simply world, but additionally a happier one.

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General Management Standing its Ground




IESE Business SchoolOne of the most valuable legacies that the founders of IESE created is the institution’s general management focus, both for teaching and other business activities.  Long before, Chester Barnard, a prominent pioneer in the field of management who brought together executive experience and humanistic training, alluded to a similar focus, emphasizing that in the management process “the sensing of the organization as a whole and the total situation relevant to it,” is indispensable.

The general management perspective views an organization as a whole, integrating strategy , finance, operations, and marketing in addition to all the other functions of a company.  This approach requires stepping away from narrow perspectives centered solely upon one area – whether strategy, finance or marketing – and the factors characteristic to each.  The result is running the risk of overlooking the company as a whole.

Within this perspective, business ethics, as I discussed in Business Ethics in Action, views the general manager’s role as that of someone managing a community of people who provide products, create wealth and serve society, doing so fairly and justly.  Promoting human excellence and efficiency as an approach to organize, act and interact with others, business ethics, above all, guides senior management, encouraging it to always seek the common good in business and society through all of its actions.

This general management and business ethics perspective is not unique to IESE.  However, opposing tendencies have been prevalent in the international realm for some time, especially in business schools, particularly “Strategic Management courses displacing “General Management” courses.

General Dwight D. Eisenhower addresses American paratroopers prior to D-Day.

Inspired by military lingo, the notion of “strategy” was introduced into business schools more than 50 years ago.  Later it gelled into courses on “Strategic Management” and in the creation of the corresponding academic departments.  The argument that justified the resulting exclusion of “General Management” courses and departments (which had formerly incorporated strategy) was that strategic management was at the core of general management, or at least it was its main function.  In some business schools the process took place merely to mirror what some prestigious U.S. institutions had done.

Although there are diverse emphases and definitions, generally, strategic management refers to all of the aspects that affect the company, taking the competitive context in which the organization exists into consideration.  The approach attempts to adapt the business organization to its surroundings, seeking opportunities and confronting competitors and possible competitive threats.  Strategic management, then, tends to be the compass for all of senior management’s and the entire organization’s activityThis tendency places businesses at risk of reducing general management to one of its components, and in this way, substituting the whole with one of its parts.

The problem is that strategy is always a means; it is a strategy “to achieve” an ends, generally financial.  What is important is to be successful in attaining the particular objective that the strategy is targeting.  Often there is a tendency to step back from other business elements.  For example, there are strategy books that examine the strategy Madonna implemented to achieve success or how companies like Wal-Mart have succeeded.  For some strategic management professors, Sun Tzu’s The Art of War makes the top of the reading list, characterizing competitors as the enemies to defeat.  Others may not go to this extreme, yet they do see strategy as the essence to achieve financial gain wherever it may be.  Fortunately, there are still plenty of reasonable people – here at IESE amongst them – who know that strategy has a place within a larger context , and in practice, they maintain their general management bearings.

Does ethics have a place within strategic management?

With some good will, indeed, but as an add-on.  It can be included, ethically evaluating the ultimate purpose of the strategy or resolving ethical dilemmas that its implementation presents.  But it can also easily be omitted, perhaps leaving ethics to the business ethics course alone, saving the discussion about strategy from scrutiny.

Ricardo Currás (Dia) at IESE
Ricardo Currás (DIA)

Fortunately, today there are plenty of leaders who understand strategy’s role within a broader contextRicardo Currás, Executive Director of DIA, a Spanish company that began as a family-run shop and today is a multinational with 44,000 employees, is one of them.  In his November 15 visit to IESE he declared that he “didn’t believe in strategy” and that, “strategy is a word that has become a bit stale because it confines you to a straitjacket. Today you can’t predict the impact you will have on your company’s future. I do, however, believe in direction, in the path that may be the best to take. In addition to sketching strategic plans, we need to continually remind ourselves where we are and where we are going.”

Another great executive, Bill George, CEO of the successful high-tech medical company Medtronic based in Minnesota, defined his company as “a mission-driven company, a values-centered organization and an adaptable business strategy.”

This, I believe, should once again become the general management perspective.  Certainly we should not forget strategy.  Instead, we should emphasize a well thought-out mission centered on enduring values that can solidify over time .  Strategy should support this endeavor, not hold general management back.

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Machiavellian Management Ethics: 500 years of “The Prince”




What is more important for business success: behaving ethically or earning a good reputation?  What then is the role of ethics in the context of business management?

For quite some time “business is business” was en vogue.  Yet the financial crisis and other scandals led us to a situation where social responsibility, sustainability and good reputation are appealing and part of any successful business. But this new trend does not give by itself an answer to our question. The point —some will say— is what we understand by success. And the answer to that takes us back to Renaissance Italy.

Until the Italian cinquecento the common assumption in Christian Europe was that eternal salvation was way more important than earthly success (power, money, pleasure). So no one dared to give a clear answer in public to our question, although almost everybody knew the unpleasant truth.

Niccolò Machiavelli, Business Ethics IESE Blog
Niccolò Machiavelli

Niccoló Machiavelli, a Florentine diplomat, gave his own response in The Prince —a little treaty written five hundred years ago and published posthumously in 1532. Antony Jay translated it into contemporary business management language in his acclaimed book Management and Machiavelli (1967).

The Prince is popularly known as an apology of fraud and manipulation in political action. But we should read it carefully. Carl Schmitt, a well know follower of Machiavelli’s political realism, once wrote: “Machiavelli, had he been a Machiavellian, would sooner have written an edifying book rather than his ill-reputed Prince.”

For sure, Machiavelli always thought religion and morals were crucial for political life. But he broke with the moral teachings of Christian tradition, stating that leaders had to learn (unlearn) how to violate morals to obtain good political results. He thus cut the link between political prudence and ethics, considering politics the science of power. This was not a mere apology of immorality, but something needed for the greater or basic good of peaceful social life: “The ends justify the means.

Weber rationalized this moral approach as the politician’s “ethics of responsibility,” opposed to the saint’s “ethics of conviction.” This has some features in common with what English philosophy called utilitarianism (closely linked to economic logics); Americans later labeled as consequentialism (so many times invoked in security and defense issues); and Germans significantly call Erfolgsethik (ethics of success).

Leo Strauss, a remarkable and original interpreter of Machiavelli, wrote “Economism is Machiavellianism come to age.”  At the end of the day the paradigm of individuals as maximizers of utility is based on the self-interest centered man of Machiavelli .

Cover page of 1550 edition of Machiavelli's Il Principe
Cover page of 1550 edition of Machiavelli’s Il Principe

But Machiavelli was aware of the importance of moral reputation. He thought that a leader should be believed as morally trustworthy if he wanted to gain and preserve power. Moreover, he fought against corruption and in favor of civic virtue. But this ancient virtue was for him only the shell of Christian virtues: He viewed the strength of the lion and the astuteness of the fox as models to be followed.

So in fact an immoral business culture is not Machiavellian at all. The current lack of trust and widespread corruption is even less Machiavellian than we think . On the contrary, social responsibility, sustainability and reputation are a perfectly Machiavellian response to the crisis. This is actually Machiavellianism at its best: successful.

So The Prince is not to be read as a handbook for political maneuvering, or as a mere defense of arbitrariness. That approach would make us incapable of understanding the lasting and deep impact of Machiavellianism in contemporary politics, and by the way, in the practice of Business Management.

Summing up, there are three elements of Machiavellianism in our current ethical landscape:

  • The stress on reputation, with no real care for actual moral behaviour
  • The centrality of success as practical criterion, and the utility of strength and astuteness for achieving that goal.
  • The narrow materialistic approach to human action (economism).

What is more important for business success: behaving ethically or earning a good reputation? What then is the role of ethics in the context of business management?

Image courtesy of Nutdanai Apikhomboonwaroot /
Image courtesy of Nutdanai Apikhomboonwaroot /

Machiavelli was right in many senses. The mere appearance of virtue is enough for achieving certain goals by taking advantage of necessitá (opportunities) and weathering the unforeseeable random factors of Fortuna. Aquinas himself knew that, and warned against the moral danger of corrupted forms of prudence (fraud, astuteness, deceit, etc.) precisely because they were compatible with apparent success. And classical wisdom reminds us, “Caesar’s wife must be above suspicion,” since good reputation is a moral good and even a right of the person.

So the answer to our original question depends on our definition of success. In the first instance, ethics is about defining success.

Make no mistake: We still live within a Machiavellian framework . For many of us business success is the material, measurable, earthly outcome that requires certain management abilities and the adequate administration of social legitimacy. For that reason Business Ethics should focus on re-defining success , placing management and business activity in the broader context of individual, corporate and social life considered as a whole.

Otherwise we will be assuming the Machiavellian definition of success. And that will limit the role of Ethics to an extrinsic moralizing code that has nothing to do with practice.



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