Finance, Ethics and Trust

September 201414th Responsible Leadership CSR Open Class – Shanghai ChinaIn partnership with China Business News, JiaoTong University Press

Summary

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Economics is possibly the most turbulent spin off of philosophy

Ethics is a condition to economic stability

Ethics and financial economics have received surprising little interest

Finance is trust and there is no trust without “lived and shared” ethics

Financial economics has emerged as a distinct branch of economics

Presentation

• Economics : humanity or exact science ?

• Financial economics and ethics

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Fan LiJi Ran

Economy relates to the art of government in ancient China,and is a philosophical matter in ancient Greece

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Comments :

• Guan Zhong: “let merchants livetogether […] investigate the price andstock of goods”

• Shan Mo Gong: “if your people losemoney (after a devaluation), they willleave and threaten your dominance”

• Fang Li: “regulating prices is good forthe market and to lever tax”

• Aristotle: without the framework ofvirtue, prosperity leads to vulgar pleasure

Aristotle

715 - 645 BC ~520 BC 322 BC

Shan MoGongGuan Zhong

Philosopher

Politicaladvisors

Market Money Stability

Virtue andProsperity

436 - 448 BC

Economy as a moral science gradually distanced itself fromhumanities to join the exact science league

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Comments :

• Economy as we know it today wasborn in the 19th century

• Three factors contributed to thedecline of the moral component

− The emergence offormalization (Maths)

− Positivism

− Moral was seen as preaching(religious)

AdamSmith1

Aristotle322 BC

Natural sciences

Moral Sciences

EconomicsMaths

Psychology, Geography …

Justice, equity,religion

18th century(mercantilism)

13th centuryScholastic economics

20th century(positivism)

Finance

1. The publishing of the « Wealth of Nations » in 1776 is often considered the date of birth of modern economics.

… to David Ricardo (1772-1823)From Adam Smith (1723-1790)

“the great objects of the political economy of every country, is to increase theriches [ How to ? Ricardo ] and power of that country” [ Smith ]

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A shift occurs with Ricardo, [finance] economics emerges outof the moral framework with a focus on wealth and power

-« it is not the province of thePolitical Economist to advise:-- he isto tell you how to become rich, buthe is not to advise you to preferriches to indolence, or indolence toriches »

-« [ Economics ] is a strict sciencelike mathematics »

- Condemned Malthus for introducing« moral effects » into technical issue

-« that to feel much for others andlittle for ourselves, that to restrainour selfishness, and indulge ourbenevolent affections, constitutesthe perfection of human nature »

- « Every man, as long as he doesnot violate the laws of justice is leftperfectly free to pursue his owninterest in his own way»

“Economy is a moral Science” [ Sen, Nobel 1998 ]

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The real shift between general economy and finance isbased on the obsession of shareholder wealth maximization

Smith1790

Ricardo1823

Jevons1882

Moral

Science

Politics

Keynes1946

Marx1883

« stability »

« development »

SenNobel 1998

Power

Ethics

Maths

Moral - Science Science - Politics

Presentation

• Economics : humanity or exact science ?

• Financial economics and ethics

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As financial economics was poised to serve generaleconomics, there was seemingly no real concern for ethics

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• Finance encompasses two main areas: asset pricing and corporate finance• Focus on decision on uncertain environment and policy implications

Economics helps tounderstand merchantrelationships betweenagents

Money appears on both side ofthe trade, on different places atdifferent time

Finance concentrate on themonetary activites of economics

Understand the development ofexchange, the preferences ofagents and the maximization oftheir satisfaction on the market

Integrity (ethics), uncertainty (risk)

Economics

Finance

However, finance self-incubates a very rich ecosystem ofinnovative and fair practices way beyond finance circles

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Financial economy

State or NGO level

• Responsible finance (Fight usury)

• New markets (Carbon quota market)

• Tax (Ecotax)

Corporate or NGO level

• Ethical accounting (eco, social liabilities)

• Market practices (fair trade)

Individual level

• Micro finance (Grameen Bank)

• Code of conduct

“No one should ever sacrifice their integrity for a personal gain or a perceivedbusiness benefit” [ Jamie Dimon, CEO JP Morgan Chase ]

The study of finance ethics in general have receivedsurprisingly more attention from lawyers than scholars1

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Over 225 years, greed, hedonism (including incompetence) and gambling havebeen identified as the key ethical challenges of economics and finance

Gambling

Hedonism

GreedThe servants of great joint stock company,such as the East India company wereconcerned only about their own fortune

Draconian methods for dealing with thepopular implementation of this passion

Lower people are excessively attentive to“the passion between the sexes”

Unwisdom of gambling with the aid ofdiminishing returns

Smith1790

Malthus1834

Mill1873

Marshall1924

Keynes1946

Financial markets are seen as casinos orbeauty contests

1. John R. Boatright, The Raymond C. Baumhart, S.J. Professor of Business Ethics, GSB Loyola University Chicago

No finance without ethicsHow new is finance ethics ?

Compliance to clear ethical standards is needed to develop trust both onfinancial markets, and for the emergence of IFCs

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With about half a century of history, despite market crashand scandals, finance ethics is a relatively new study field

• The MPT is generally dated in the 1950sonly: Finance could not exist without ethics

• Ethical issues are often considered as sideconstraints, externalities or market failures,fairness is a notoriously complex concept (lackof bias, equitable outcome)

• People may lobby sometimes aggressively onnew regulations without realizing that they areaddressing ethical matters

• The collapse in 2008, of a construction made ofderivatives and opaque securitized products,does backfire to growth, risk and … ethics

• From the very beginning people have raisedfundamental concerns about:

− What is fair in markets (opposite ismanipulation and fraud) ?

− What are the rights and duties of theparticipants in the markets ?

• Finance ethics is quite new as an academic fieldbut ethical issues in finance do have a long andrich history

• The ubiquity of law and regulation (code ofconduct) have obscured the role of ethics as anindependent factor

Concluding words

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Finance is ethically charged, even ifmoney has once been seen has a veil1

• Regulations and codes are necessary to financialeconomics but given the unlimited creativity ofagents, individual and collective ethics must begenuinely promoted by corporations

• Lack of integrity and ethics simply bars the wayto building IFCs and destroys trust betweenagents

• The absence of trust in a financial system is amajor threat to economic stability

1"money is a veil behind which the action of real economic forces is concealed" (Pigou, 1949)

Olivier CoispeauMaverlinn, Founding Partner

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