DISCUSSION A crisis of ethics caused the financial crisis: discuss

Tomorrow’s Company had the great delight and honour of hosting Sir David Walker providing our first Tomorrow’s Good Governance Forum lecture.

The commitment to annual election of Company Chairmen was perhaps the headline recommendation – for example this coverage from the Daily Telegraph

The Times has since reported on anticipated recommendations from the FRC, suggesting that the proposal for annual elections is likely to be carried forwards (together with calling for more diversity in the boardroom)

In a wide ranging ‘tour de force’ it was though the comment made by Sir David as part of the discussion with the audience that really struck me – that it was behaviours that were at fault, and not ethics.

Tomorrow’s Company strongly agrees that ‘leadership, behaviours and culture’ – the title of one of the workstreams of the Forum – played an absolutely central role: we have set out this argument in our report Tomorrow’s Innovation, Risk and Culture

But does it then follow that ethics did not?  I ask feeling especially interested, having had an article published in the Guardian saying that, in the right circumstances, there is much to commend the proposal for the Hippocractic Oath for ‘bankers’ being made by a cross-party commission

Little did I expect in so doing that I might be on the other side of the argument from Sir David – heartened perhaps by his comments that he had initially been sceptical of the work of behavioural analysts, I want to make the case for ethics taking centre stage.

To summarise the argument that follows: behaviours are outcomes, but expecting people to behave better without understanding the drivers of ‘better’ behaviour is not going to be effective – an understanding of ethics is essential to having some leverage on what goes ‘inside and between’ people, and how to build the capacity of people to see the need to behave differently.

In this context let me also quote from the quite wonderful short paper written by James Featherby – the White Swan Formula  – in what is a very ‘Tomorrow’s Company’ comment:

“You should remember that a business has no real existence.  A company is only a construct of convenience of creative imaginations and legal propositions.  In reality there are only human beings, trading with each other, albeit at a distance.”

The reminder that tomorrow’s company is a living, breathing construct of human beings underlines the importance of human behaviour.  But it does not tell us how to try to change those behaviours.

In making the case that ethics matter – a lot – I am in the fortunate position of being able to share the views of, and learn from, a number of people who are thinking deeply about these issues for a long time.

It is also both reassuring and actually not a little inspiring to find that there are powerful voices also making this argument – the Lord Mayor of the City of London in a speech on 30th March 2010 arguing that:

“The UK’s financial services sector can reposition itself so that ethics and effective corporate governance are at its heart – ensuring that there are workable sanctions to enforce good behaviour. In other words, we need to extend governance beyond its usual meaning, ‘giving effective direction’ to include its other meaning, ‘ensuring fast feedback’, too”

Defining terms – morality and ethics

So first let’s be clear about our terms – Michael Smith of Caux Initiatives for Business defines morality and ethics as follows:

Morality is the adherence to moral principles (or cardinal virtues) in personal and public life, often but certainly not exclusively underpinned by religious belief. Morality involves the behaviour and commitment of the person or the individual.

Ethics are similar in referring to an agreed moral code of practice or behaviour but refer to publicly accepted norms at the organisational rather than the individual level.

Roger Steare, author of the excellent ethicability, then adds to this with the following ‘academic’ definitions:

1. Ethics is the study of moral philosophy.

2. In current usage, “ethics” tends to be used in professional life; “morals” in our personal life. However, this distinction is also part of the problem.

3. In terms of Mike’s proposition, moral values are by definition “virtues”, which are mature, internal drivers of decisions and behaviours such as courage, humility and love. In “ethicability”, we call this our Principled Conscience. Philosophers call this “virtue ethics” and the sum of all our virtues is what we call “Integrity”.

A focus on fair outcomes for all is called “teleology”, “consequentialism” or “utilitarianism”.

A focus on absolute principles or “rules” philosophers call “deontology”.

Our research is consistent with other contemporary psychologists, which strongly suggests that humans use each of these perspectives to make ethical or moral decisions, but that the development of virtue takes time and maturity.

Rule compliance is the moral infancy of the child who cannot be trusted (yet) to make judgements based on internal moral virtues, or indeed on a clear understanding of what fairness for all means.

4. In summary, ethics or moral philosophy, is based on 3 perspectives: We obey the Rules. We do what’s Fair for all. We act with Integrity.

So what does all of this mean for ethics and the financial crisis?
Mike comments that is that the behavioural failures of people to take their oversight and regulatory roles seriously enough – and I would add, the failures to challenge decisions on for example complex products or risk profiles on board when people did not understand or felt profoundly uneasy – is “a failure of responsibility” and that this is in itself a moral and ethical issue:

Roger goes on that ethics fundamentally challenges the “discredited and unfounded world-view” that human beings are rational beings seeking personal self-interest and only constrained by the rule of law. He points out that we would not limit our view of human beings in this way in our personal life, family and friendships, “so why do people believe this is an ethos that can help sustain human beings and communities in business?”

Roger adds this following and fascinating insight:

I often refer to Jim Collins’ research in both “Good to Great” and “How the Mighty Fall”. In the first, his research demonstrates that the moral values of personal humility, courage, self-discipline (NOT rules!) and passion (love) are the root values of business greatness. In the second, he demonstrates that the opposite moral vices of ego, fear, greed and apathy are the primary drivers for corporate destruction.

Roger concludes by saying that alongside a “new” politics, we need a “new” business and economic philosophy

We have also posted his ‘2008 Moral DNA’ Report . See the evidence provided, particularly in the early exposition of Rule Compliance, Social Conscience and Principled Conscience. See also the data on Occupations.

Ethics in the Age of Sustainability: the importance of stewardship
Thinking aloud, I wonder if there is a parallel between how we used to think about CSR and how Tomorrow’s Company thinks about business as a ‘force for good’.  Central to this is our view of value and value creation, and the link between value and values.

Within the triple context our argument that business success and recognising social and environmental drivers as well as economic imperatives is mutually reinforcing: it is not about doing good or being good, it is about the enlightened self interest that recognises that success is rooted in ‘expanding the space’ of economic activity, beyond the short term and the boundaries of the corporation.

So too for ethics, perhaps?

We have long argued that key actors and institutions now need to understand their responsibility to the systems of which they are part and on which they depend – and that the failure of for example Ratings Agencies and many others was not simply an ethical failure in the sense already described, but was also a failure of ‘stewardship’: yes, it was unethical in the sense that Michael mentions, and failed to meet norms of business behaviour; but in so doing, this contributed to a dynamic systems failure – ethics in the twenty first century is about understanding the butterfly effect, and not throwing the stone that may lead to the avalanche.

But if this is correct, what do we do about it?
Peter Lewis calls for Moral Philosophy and Ethical Decision Making to be an essential part of any Board Induction – “Character begets Judgement which determines Behaviours, so it is no good talking about improving behaviour if you don’t look at what underpins it”, he argues.

There is a jigsaw of techniques and practices that need to be put in place to create a new and reinforcing self reinforcing ‘system’ which encourages key actors to embed an ethical dimension in what they do and how they do it – I am continually struck by Jane Anderson, of Forum Member YSC’s remark that there are many known and evidenced techniques for improving individual and team performance and decision making, but their use stops short of the no-go zone of the Boardroom

These techniques and practices – which we called for in our recent report  include:

The question then is – it seems to me – that these are necessary but not sufficient: do we need to go beyond such techniques and practices, important though these are?  Do we also need to also explore:

The importance of stewardship in the context of key actors and institutions working in financial services is that there is clear and compelling evidence that individual needs to take account of not only their firm but also their customer/client, their sector and beyond that the broader system of which they are part: who would once have thought that a few bad calls and dodgy deals might end up triggering the most far reaching intervention by the President of the United States and Congress in establishing a new regulatory framework for financial insitutions

As the Good Governance Forum considers its future programme of work and what in practice we will look at under the theme of ‘leadership, behaviours and culture’, it will be fascinating to see what Forum members determine will need to be considered in detail – and what the Forum as a whole agrees it will need to consider in mapping out all the regulatory, behavioural and ‘behavioural plus’ issues that need to be worked through in order to map the agenda for good corporate governance in the future which is effective and enduring, by being practical whilst also rising to the challenge of being holistic and systemic in the solutions it offers.

Postscript:  Beliefs and Values vs Ethics
I mentioned earlier the wonderful White Swan written by James Featherby.  My blog prompted the following, generous, comment which is well worth sharing.  In particular James suggests that the focus on ethics comes across as too judgemental and ‘moralising’ – and that instead we would do better to focus on foundational beliefs and values:

1    Foundational beliefs are the inner core.  Foundational beliefs focus on two questions: who am I (basically am I loved and therefore am I safe) and why am I here (is there a bigger story I am part of or is life pointless).

It’s tough to tackle foundational beliefs (I guess unless one is a priest or a physiologist!).  I find, however, that a good way to encourage more worthwhile values is to inspire with the big story – i.e by describing the kind of society (or business) that we wish to see.