Editorial

Article Type: Editorial From: Journal of Financial Crime, Volume 20, Issue 3

Responsible business

There must be many here in the UK and elsewhere in the world, who are frustrated to hear repeated discussions, post-financial crisis, that revolve around “responsible business”, as if it were a new concept that is “so twenty-first century”. Does this mean “business” has been irresponsible until now? Looking at the endless revelations of mismanagement, mis-selling,manipulation, not to mention outright fraud and other criminality, in the financial sector, one is forgiven for thinking that may well have been the case. Indeed, in the realm of business education, “responsible business” is now hotly debated.

And it is in this context that the oft-quoted words of late professor Milton Friedman are used as a basis for debating for or against the pursuit of one single bottom line for business – profit making. The economics Nobel laureate stated, in his book Capitalism and Freedom (1962), “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”. Those who are against the pursuit of any other bottom line, such as the “triple bottom line” advocated in corporate social responsibility (CSR) that enlists, in addition to “profit”, “people” and “planet”,stop the quote here.

However, it is to be noted that professor Friedman went on to state in the same paragraph: “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”. It is this final part, “without deception and fraud”, which is conveniently forgotten in many current debates that we encounter. It is clear that professor Friedman, while being wary of the rise of socialism at the time and fiercely defending capitalism and free market economy, did not advocate the kind of business conduct that has been highlighted, post-financial crisis,steeped in “deception and fraud”.

It is worthy of note that professor Friedman also posed the following question in an article in The New York Times Magazine (September 13, 1970):“What does it mean to say that “business” has responsibilities?Only people can have responsibilities. A corporation is an artificial person […]”. Of course, in the era of the proliferation of corporate offences in different spheres of life, such as environment and anti-corruption to name a few, it is easily argued that this statement is flawed. Nevertheless, put in the current context, his observation highlights the fact that with the growth of corporations and multinationals in particular, we may be losing sight of the fact that there are individuals who are, or should be, responsible for the conduct of these “artificial persons”. Indeed, legal scholars are acutely aware of this given the way judges, if cases ever reach them, have striven to find ways to make individuals accountable for their conducts, however much they may have been done hidden behind the façade of corporations.

However, in modern “business science” where organisations are more often the subject of study than the individuals within, it is feared that attention to individuals and their responsibilities within these organisations are being neglected or sidelined, only to be picked up by those few scholars who engage in the study of “economic/financial crime” – i.e. the dark side of business. Indeed, any label that has “crime” attached to it, while attracting, particularly in the current spate of financial sector scandals, much demand from journalists for comments and quotes, is not favoured in the realm of “business science”. It is more palatable to discuss“business ethics” or “responsible business”, but this does not allow us to overcome the difficulty of debating how to get individuals within these organisations to engage in profit making “without deception or fraud”, as per professor Friedman.

Of course, post-crisis, there has been a noticeable move by banks to revise their codes of conduct, and some have significantly beefed up the content and have emphasised their focus on individual employees’ responsibility. There has also been much discussion of the importance of “corporate culture”and “tone at/from the top”. However, on closer examination, while many codes require individual employees to act with integrity (another buzz word), and emphasise their responsibility to their customers, there appears to be a lacuna in regard to those individuals in senior management positions who are ultimately responsible for their organisations. Indeed, some codes almost create the impression that individual employees are the subjects of “scapegoating”on the part of organisations and their senior management.

Many reports have been published after the financial crisis, probing into the causes, and many reviews have been carried out including those of financial institution. One such report, commissioned by Barclays Bank and authored by a lawyer, costing £17 million to shareholders (a subject of a separate debate), headlined the news as “High pay fed ethical ‘vacuum’at Barclays Bank” (Financial Times, 4 April 2013). The report observes: “A few investment bankers seemed to lose a sense of proportion and reality […] Some bankers have appeared to be oblivious to reality”,reminiscent of scenes from a film depicting the royal family at Palais de Versailles as the Revolution was brewing.

Many criticisms have been levelled at corporate governance in banks. However, as many will be aware, the dominant theory of corporate governance, focusing solely on the agency relationship between management and shareholders, will not be of assistance, and if anything may exacerbate the situation. Aligning the interests of the management and shareholders – much advocated in corporate governance, introduced executive share option schemes, which not only fuelled short-termism but also lead to “back dating scandals” – a subject of much debate, particularly in the USA.

It is, therefore, not only the level of remuneration but also the structure– i.e. incentive mechanisms, in the financial sector are under review. Bonus capping, agreed amongst the EU states, aside, other reports have revealed skewed incentive mechanisms fuelling short-termism, such as the Kay Report in regard to the UK investment management sector. Talking of distorted incentive mechanisms, no sector is immune. An article on business school education,“Research? Most People Cannot Understand It” (Financial Times,7 April 2013), poses the question: “Should business school students be made to foot the bill for academic research that no one reads?”, to which a US business school professor answers, “Not any more”. Nevertheless,because research currently forms an important component of business school rankings, “it has created the value system by which academics are rewarded”,in terms of their promotion and remuneration.

The same professor, emphasising the importance of being a good teacher and communicator, also states: “Business, after all, is about getting partial information, filling in the blanks you don’t know and making good judgments”. This takes us to another point – the current reliance on numbers and statistics in our attempt to be scientific, have taken away our rights and ability to exercise our own judgment and be accountable to it. Political and business leaders are hiding behind numbers and key performance indicators (KPIs)in order to justify their decisions. Students are taught and guided by various KPIs. So where has “human judgment” gone? One area where it is alive and well is the realm of law and justice. However, even lawyers do not seem to be able to stop the tide of empirical evidence dominating opinions and thought leadership. It is, of course, important to seek as much evidence as possible in order to make an “informed” decision, but that decision is based on one’s judgment. And yet, it seems that we are made to be wary of exercising our own judgment as it is seen as too subjective, and in order to reduce this subjectivity, we are forever required to justify our decisions on the basis of KPIs, best practice and others, which are supposedly objective, therefore acceptable. Nevertheless, lest forget, this pursuit of objectivity has also lead us to the dehumanisation of decisions and has lead individuals to engaging in irresponsible conduct that can be justified when benchmarked against “objective”standards.

Chizu Nakajima