Ethics Of Finance
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Business Ethics THE ETHICS OF FINANCE Presented by: Mohammad Bilal Raza Ayoub Syed RIzwan Ali Zohair Ahmed Sariyo 1
Salient Features
Introduction (THE ROLE OF FINANCE)
Investment Ethics
Corporate Corruption & Governance
Individual Financial Corruption
Conflict of Interests Fraud & Theft Insider Trading
The Two Islamic Perspectives 2
Investment Ethics
Capitalist order has a conception of what is good
Capitalism is concerned with the maximization of freedom
Freedom for Kantians is liberty
For utilitarians it is welfare
“Good life” can be achieved through rationality and reason
Aristotelians argue that there is a social cost and sacrifice of virtue
3
Investment Ethics (Cont…) Enron violated the “principle of the best interests of the corporation”.
Enron’s executives were cheating its shareholders and the corporation is an instrument for the maximization of shareholder’s value.
That is why the corporations are need to be governed and regulated by the capitalist state through law.
4
Investment Ethics (Cont…)
Investors within capitalist order behave ethically when: o
They seek the maximization of long run profit for the corporation in which they invest.
o
Take appropriate account of social, environmental consequences likely to impact on the long term profitability of the corporation.
o
Obey laws established by the capitalist state. 5
Corporate Corruption
Corporations behave unethically when they seek the maximization of their profits in violation of the rules that legitimately constrain profit maximizing behavior within the capitalist order.
It is extremely difficult to avoid ‘unfair’ market manipulation and ‘unethical’ price fixing in practice for the ‘true’ fair price is unknowable.
The immorality of price fixing is an unavoidable ‘sin’ in mature capitalist order. 6
Corporate Corruption (Cont…)
It has been argued that corporation do not have the responsibility of maximizing the general welfare within capitalist order, it is the responsibility of the capitalist state.
Therefore, corporation cannot be said to be acting unethically if it employs child labor in a country such as Pakistan, where it is legal to do so.
If corporations decide not to employ child labor than it will only be ethical if it contributes to the maximization of profits. 7
Corporate Laws
The laws corporations should follow: o They must respect human rights even when capitalist governments violate them and noncapitalist governments legislate against them. o They are not ethically obliged to practice/provide welfare rights when a capitalist government does not require them to do so.
Therefore, corporate corruption may thus be defined as either violation of human right and/or violation of laws sanctioned by capitalist states.
8
Corporate Ethics
As the corporation is singularly self-interested, it is ethical for the CEO to: o o o
Put others at risk and manipulate them. Avoid social responsibility. Present an exaggeratedly appealing image of themselves and of their products (marketing).
All of these are traits of a human psychopath.
Downsizing is unethical not because it causes anguish to those being dismissed, but because it may leave the firm with few technicians to ensure safety of the corporation.
9
Corporate Corruption (Cont…)
Regulations tend to reduce profits, therefore corporations have started giving ‘donations’ to political parties.
‘We are dangerously close to the co-option of government by corporations” (Deitz).
Charters of major corporations are never revoked, only small and weak corporations suffer this fate.
10
Corporate Governance
After the revelation of serious scandals in leading multinational companies, attention was focused on the need of strengthened “corporate governance”.
However, it had to settle with liberalization, privatization, and de-regulation.
“Regulation is an unnecessary barrier to trade in services.” (WTO)
11
Individual Financial Corruption
Business Ethics basic focus is to promote Corporations
Corporate Crimes
An employee & the Corporation
An Example (Financial Managers) Ethics & Legal Status
12
Conflict of Interest
Bad Faith: “When an employee has a self-interest in the outcome of a task that he is performing for the long run profit of the Corporation”
An employee’s power to indulge in the acts of ‘bad faith’ is significantly dependent upon the type of job and the financial access the employ has in the Corporation.
These acts of ‘Bad Faith are definitely unethical (irrespective of being legal or otherwise). 13
Conflicts of Interests
These acts of ‘Bad Faith’ are often tackled by Rules & Regulations
These Rules & Regulations prohibit the employees to:
Maximize Self-interest at the cost of the Corporation’s Interest Bribe Disallow acceptance of gifts (in fear that it may lead to unethical behavior) 14
Conflicts of Interests
Why & Where do these acts of ‘Bad Faith’ take place?
The feel of the job being unimportant The struggle for the maximization of self-interest The Bureaucratic Organizations
What are the measures taken by the organizations to stop such acts?
Promotions Empowerment of Role Models Special Incentives
15
Fraud & Theft
Fraud: “Act of deception which intentionally imposes material injury on a specific victim.”
Who commits fraud?
Fraud can only be committed by a person who has a right or authority to certain assets of the Corporation.
16
Fraud & Theft
How are frauds controlled then?
Internalization Motivating the employees in the higher authority Audit & Risk Management Systems Special Incentives Punishments
Do these measures bring frauds to a complete halt?
Almost Yes!! But there is very little that can be done for the negatively motivated ones. 17
Fraud & Theft
Theft: “Stealing or misuse of property – in this case the Capitalist or the Corporation’s property”
What is treated as property?
Funds Equipment Machinery Fuel etc. & The Information 18
Fraud & Theft
Why Information is treated as the Corporation’s property & does not share it? “Corporations prefer not to share information because it has produced information itself”
How is the information kept safe?
Patents Copyrights
Sharing this information & giving out the strategic plans & records with other corporations is considered unethical. 19
Insider Trading
Insider Trading: “It is the trading of information (about a corporation) that is not available to the general public.” Example: Managing Director as an Inside trader
This mode of trading is extremely unethical & illegal.
Why is it unethical & illegal? “This is considered unethical & illegal because it violates the property rights and conceals information form the general public (who is the one suffering the greatest losses) and since the insider is not the owner of the information so he has not rights to sell it out. 20
Insider Trading
What are the Disadvantages that Insider Trading brings?
It reduces the liquidity of the stock market i.e. the shares that do not increase in terms of price are not traded frequently.
Risk & costs become different for various stakeholders on the basis of Insider information.
21
Insider Trading
Could it be curtailed? “Yes, it could be curtailed through strict vigilance, Laws & State Policy but it can not be completely eliminated since it is very difficult to find out the inside trader and to punish him.”
Example: The KSE Crisis of March 2005 22
The Islamic Perspectives
The Orthodox Approach
Does not consider the capitalist system at all acceptable. It rejects both Interest & Speculation as they are the main ingredients of Capitalism & Accumulation. Rejects the Capitalist Property form completely. Promotes ideas such as Fuqr, Ghina, Sabar, Shukar etc. Restricts a person not to choose professions based on Interest & Brokerage. Encourage to spend the least possible time in the marketplace. Greatly discourages Competition & Acquisitiveness. Promotes Charity in the Way of God.
In a nut shell “It completely rejects Capitalism.”
23
The Islamic Perspectives
The Revisionist Approach
Partly accepts the Capitalism as natural & rational. Support Islamic legitimacy of holdings such as shares, bonds & banking. Provides ‘Islamic Banking’ as an alternative for the Conventional Banking (with a little or almost negligible difference) Provides with alternatives for Interest earnings with ‘murabaha’.
On the whole “Islamic Banking is rising & Revisionists are becoming more & more liberal.” 24
Queries & Confusions
25
Thank You
26
Salient Features
Introduction (THE ROLE OF FINANCE)
Investment Ethics
Corporate Corruption & Governance
Individual Financial Corruption
Conflict of Interests Fraud & Theft Insider Trading
The Two Islamic Perspectives 2
Investment Ethics
Capitalist order has a conception of what is good
Capitalism is concerned with the maximization of freedom
Freedom for Kantians is liberty
For utilitarians it is welfare
“Good life” can be achieved through rationality and reason
Aristotelians argue that there is a social cost and sacrifice of virtue
3
Investment Ethics (Cont…) Enron violated the “principle of the best interests of the corporation”.
Enron’s executives were cheating its shareholders and the corporation is an instrument for the maximization of shareholder’s value.
That is why the corporations are need to be governed and regulated by the capitalist state through law.
4
Investment Ethics (Cont…)
Investors within capitalist order behave ethically when: o
They seek the maximization of long run profit for the corporation in which they invest.
o
Take appropriate account of social, environmental consequences likely to impact on the long term profitability of the corporation.
o
Obey laws established by the capitalist state. 5
Corporate Corruption
Corporations behave unethically when they seek the maximization of their profits in violation of the rules that legitimately constrain profit maximizing behavior within the capitalist order.
It is extremely difficult to avoid ‘unfair’ market manipulation and ‘unethical’ price fixing in practice for the ‘true’ fair price is unknowable.
The immorality of price fixing is an unavoidable ‘sin’ in mature capitalist order. 6
Corporate Corruption (Cont…)
It has been argued that corporation do not have the responsibility of maximizing the general welfare within capitalist order, it is the responsibility of the capitalist state.
Therefore, corporation cannot be said to be acting unethically if it employs child labor in a country such as Pakistan, where it is legal to do so.
If corporations decide not to employ child labor than it will only be ethical if it contributes to the maximization of profits. 7
Corporate Laws
The laws corporations should follow: o They must respect human rights even when capitalist governments violate them and noncapitalist governments legislate against them. o They are not ethically obliged to practice/provide welfare rights when a capitalist government does not require them to do so.
Therefore, corporate corruption may thus be defined as either violation of human right and/or violation of laws sanctioned by capitalist states.
8
Corporate Ethics
As the corporation is singularly self-interested, it is ethical for the CEO to: o o o
Put others at risk and manipulate them. Avoid social responsibility. Present an exaggeratedly appealing image of themselves and of their products (marketing).
All of these are traits of a human psychopath.
Downsizing is unethical not because it causes anguish to those being dismissed, but because it may leave the firm with few technicians to ensure safety of the corporation.
9
Corporate Corruption (Cont…)
Regulations tend to reduce profits, therefore corporations have started giving ‘donations’ to political parties.
‘We are dangerously close to the co-option of government by corporations” (Deitz).
Charters of major corporations are never revoked, only small and weak corporations suffer this fate.
10
Corporate Governance
After the revelation of serious scandals in leading multinational companies, attention was focused on the need of strengthened “corporate governance”.
However, it had to settle with liberalization, privatization, and de-regulation.
“Regulation is an unnecessary barrier to trade in services.” (WTO)
11
Individual Financial Corruption
Business Ethics basic focus is to promote Corporations
Corporate Crimes
An employee & the Corporation
An Example (Financial Managers) Ethics & Legal Status
12
Conflict of Interest
Bad Faith: “When an employee has a self-interest in the outcome of a task that he is performing for the long run profit of the Corporation”
An employee’s power to indulge in the acts of ‘bad faith’ is significantly dependent upon the type of job and the financial access the employ has in the Corporation.
These acts of ‘Bad Faith are definitely unethical (irrespective of being legal or otherwise). 13
Conflicts of Interests
These acts of ‘Bad Faith’ are often tackled by Rules & Regulations
These Rules & Regulations prohibit the employees to:
Maximize Self-interest at the cost of the Corporation’s Interest Bribe Disallow acceptance of gifts (in fear that it may lead to unethical behavior) 14
Conflicts of Interests
Why & Where do these acts of ‘Bad Faith’ take place?
The feel of the job being unimportant The struggle for the maximization of self-interest The Bureaucratic Organizations
What are the measures taken by the organizations to stop such acts?
Promotions Empowerment of Role Models Special Incentives
15
Fraud & Theft
Fraud: “Act of deception which intentionally imposes material injury on a specific victim.”
Who commits fraud?
Fraud can only be committed by a person who has a right or authority to certain assets of the Corporation.
16
Fraud & Theft
How are frauds controlled then?
Internalization Motivating the employees in the higher authority Audit & Risk Management Systems Special Incentives Punishments
Do these measures bring frauds to a complete halt?
Almost Yes!! But there is very little that can be done for the negatively motivated ones. 17
Fraud & Theft
Theft: “Stealing or misuse of property – in this case the Capitalist or the Corporation’s property”
What is treated as property?
Funds Equipment Machinery Fuel etc. & The Information 18
Fraud & Theft
Why Information is treated as the Corporation’s property & does not share it? “Corporations prefer not to share information because it has produced information itself”
How is the information kept safe?
Patents Copyrights
Sharing this information & giving out the strategic plans & records with other corporations is considered unethical. 19
Insider Trading
Insider Trading: “It is the trading of information (about a corporation) that is not available to the general public.” Example: Managing Director as an Inside trader
This mode of trading is extremely unethical & illegal.
Why is it unethical & illegal? “This is considered unethical & illegal because it violates the property rights and conceals information form the general public (who is the one suffering the greatest losses) and since the insider is not the owner of the information so he has not rights to sell it out. 20
Insider Trading
What are the Disadvantages that Insider Trading brings?
It reduces the liquidity of the stock market i.e. the shares that do not increase in terms of price are not traded frequently.
Risk & costs become different for various stakeholders on the basis of Insider information.
21
Insider Trading
Could it be curtailed? “Yes, it could be curtailed through strict vigilance, Laws & State Policy but it can not be completely eliminated since it is very difficult to find out the inside trader and to punish him.”
Example: The KSE Crisis of March 2005 22
The Islamic Perspectives
The Orthodox Approach
Does not consider the capitalist system at all acceptable. It rejects both Interest & Speculation as they are the main ingredients of Capitalism & Accumulation. Rejects the Capitalist Property form completely. Promotes ideas such as Fuqr, Ghina, Sabar, Shukar etc. Restricts a person not to choose professions based on Interest & Brokerage. Encourage to spend the least possible time in the marketplace. Greatly discourages Competition & Acquisitiveness. Promotes Charity in the Way of God.
In a nut shell “It completely rejects Capitalism.”
23
The Islamic Perspectives
The Revisionist Approach
Partly accepts the Capitalism as natural & rational. Support Islamic legitimacy of holdings such as shares, bonds & banking. Provides ‘Islamic Banking’ as an alternative for the Conventional Banking (with a little or almost negligible difference) Provides with alternatives for Interest earnings with ‘murabaha’.
On the whole “Islamic Banking is rising & Revisionists are becoming more & more liberal.” 24
Queries & Confusions
25
Thank You
26
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