Integrity revisited

I had touched upon integrity and ethics in financial services a post or two ago; I believe it bears emphasizing. I may end up boring people by this – even so, I will repeat. It is important.

The rather cursory treatment of ethics in business in the MBA course I did 12 years ago disappointed me; I had expected a little more than a list of ethical positions, beginning with a constructed caveman ethic and ending, via a whole range of different positions including utilitarianism, with a variant on Kant. This took all of 15 minutes to go through (well, maybe half an hour). Quite a condensation of 20,000 years of ethical thought and practice.

The rest of the programme in ethical business shifted to a treatment of organisations like Body Shop, essentially looking at what now gets called “corporate social responsibility”. Don’t get me wrong, these are good and useful initiatives. But they miss the point: ethics at its most essential is how people deal with people. Business, a part of society and a nexus of human interaction, is a part of that. Ethics in business is therefore no different to ethics anywhere else in life.

Thus I would have wanted to see a discussion of the sort of decision making that goes into the way employers treat employees, for example. Similarly, the way employees behave towards their employers. A vast number of other situations will undoubtedly spring to mind. This would fall under the general class of practical ethics – and really would not seek to impart hard and fast rules but the ability to work through the issues, reach a decision and, especially if it turns out to be the wrong one, to learn from that mistake and do better next time round.

Talking to friends still involved in providing business education, including an MBA programme, I recently found that the situation has not really changed much. Hence I was very pleasantly surprised to find myself meeting a man who runs a programme to help people develop integrity.

The organisation is the UK’s Chartered Institute for Securities & Investment (you can find them at, with their Integrity Matters. Simon Culhane, their CEO, was in Malta to introduce the Integrity Matters programme to Maltese practitioners. He set out a few difficult situations, then got his audience to discuss the options. Finally, he asked participants, in groups of two, to reach a decision and vote jointly.

This is the sort of education/training that really can help people move towards a more ethical pattern of behaviour, one that involves thought, commitment and the exercise of choice.

I was unfortunately unable to attend myself. However, friends of mine did go – too few, sadly. The reaction of those that made it was very good: this was, they told me, a very useful (and enjoyable) exercise.


Divisive stuff

Malta is in the throes of a debate on divorce. None too soon, one may note. This is one of the last countries in the world to tackle the issue.
I’m not sure, however, that the terms of discussion are correct. The “No to divorce” campaign seems to be under the impression that a civil marriage is exactly the same thing as a Church marriage.
It is most emphatically not. Civil marriage has no connection to the Church, or indeed to any religion whatsoever. That is its point. Remember, the Catholic Church is not co-extensive with the people of Malta. It is a subset of the total – albeit a dominant one. The introduction of divorce for civil marriage does not impose it upon Church marriages. To put it bluntly, the fact that divorce is allowed for civil marriages does not mean that someone who has married in the Church as well will be forced to get a divorce at some time in his or her life. Permission is not an injunction.
This applies even if his or her partner spouse applies for and gets a divorce; the other partner, if divorce remains contrary to his beliefs, need simply take it as a legal separation.
Essentially, the introduction of divorce for civil marriages has no effect whatsoever on Church marriages. That is not to say that there will be no embarrassment for the Church: a number of supposedly solid Catholic church-goers who opt for divorce may be surprising.
That, however, is part of the point. If the belief and commitment in the principles espoused by the Church are strong enough, no Maltese Catholic will use the divorce law. So are the Maltese really commited to these beliefs?
Note that if they are, then there is no need for the Church to oppose a law allowing divorce.
Take now another strand of argument. The availability of divorce in Malta will damage the institution of the family. What we need, this argument goes, are provisions and actions to strengthen family values, not to allow them to be dissolved.
There are too many objections to the valiudity of this argument to list here. Let’s just take two: one emoirical, the other theoretical.
Mariages in Malta are breaking down at an ever increasing rate, even in the abscence of divorce. More and more children are being born out of wedlock: 30%, according to official statistics for last year. Clearly, something is happening. The Maltese family structure is changing, at the very least. The laws that govern the land need to recognise this, and take it into account.
Whether the Church needs to do so as well is open to debate, but not relevant. Divorce relates, as we all know, to civil marriage. The Church has no interest in it.
The fact that the shape of the family, the sort of communal units people are actually putting together to function as a family, is in flux is however of momentus importance to society. It becomes worrying when the gut reaction of so many people is to invoke family values in an attempt to stop this development.
This sort of change cannot be controlled through the law. The transformation has unboutedly many roots, from the sort of economic pressure placed on couples to the strains imposed by expectations of academic achievement. None of these forces, and others besides, are going to go away. And people are not going to stop looking for structures that work for them.
Banning divorce will not change that. At most, what it can do is make it difficult for people to achieve their goals. In the long run, by refusing to accept that marriages on the hitherto accepted format are breaking down in ever increasing numbers, trapping people in a no-mans-land of undefined arrangements, it can contribute to a deep and lasting decay in family values, to say nothing of the suffering of any children caught up in the process.
Herin lies the conundrum. In opposing divorce, the “No” campaigners thing they are protecting the family. However, in reality, they are trying to stop its natural evolution. In so doing, they are undermining family values far more than they fear divorce will.
More ironically, by granting the space needed for the ethical, social and political conversation needed for the heathy evolution of family structures, allowing divorce actually works to strengthen family values.

The regulation puzzle

If nothing else, the financial travails of the past couple of years have demonstrated the central necessity of effective regulation – that is, regulation that encourages integrity in business. Nowhere is this more important than in financial services!

If nothing else, the financial travails of the past couple of years have demonstrated the central necessity of effective regulation – that is, regulation that encourages integrity in business. Nowhere is this more important than in financial services!

The world’s governments have reacted fast to this message, without a doubt. Both in the US and in Europe, new regulations followed hard on the heels of massive bank rescues. All in all, what started as the fall out from imprudent bankers’ and mortgage lenders’ bad practices managed to depress the world economy to a devastating extent.

It could be argued that even the European debt crisis is a result of this. The debt crisis is at its worst in Greece, though Ireland and now Portugal are suffering as well; the national finances in Greece were shaky, admittedly, but it could be argued that the problems with credit and the costs of rescuing the international financial industry are what finally pushed it over the edge.

The cost has been enormous. Europe has come together to protect its own, a good thing. This does mean, however, that the costs are that much more widely spread and the potential damage even wider. More than ever before, it has become clear that no country is an island (even little ones like Malta, a real, physical island which has contributed its fair share to the rescue pot).

So what has the response been? New regulation – needed, beyond a doubt. It became clear that deregulation had gone too far. Worse, it had left space for a very dangerous misalignment of incentives masquerading (ironically) as a reduction in risk. As Joseph Steiglitz (in Freefall) and others have pointed out, some of the multilayered securitization of mis-sold mortgages actually managed to amplify risk.

Clearly, this needed to be put right. I have only a vague idea of the way the US went about this, but in Europe the drive was relentless. The first thing the EU did was propose, discuss, agree and put into place a new, multi-level regulatory structure. First, a layer of three pan-European bodies which oversee and coordinate the actions of the national regulators. Second, a top layer that watches out for emerging systemic risk.

This approach is definitely a step in the right direction. As financial services become more internationalized, more complex and more intertwined, the risk that emerging problems may get lost in the cracks between different national regulators becomes ever larger. This new structure addresses that.

The EU has taken action in other areas as well. Revised capital requirement rules for banks (under Basle III) are one; the new Alternative Investment Fund Managers (AIFM) Directive is another. On the face of it, there is nothing to disagree with in this. Looking at the detail, you may begin to have misgivings.

I will not go into the day-to-day issues of specific national interests, though there could be a lot of intriguing stories there. No, what I do begin to worry about is the general picture that emerges. Start by asking yourself: what is it we need from regulation? Foremost, quite clearly, is the protection of clients from unethical practices by financial services providers. This means we need regulation to encourage integrity, to incentivize ethical behaviour if you will.

Note this is the opposite of what happened in the years up to 2008. The gut reaction has been to reduce the freedom of action enjoyed by a variety of actors in the financial field. The question to be asked here is: will this incentivize ethical behaviour? Will this foster integrity?

My fear is that it will not. Ethical behaviour is a result of a value judgement translated into a choice, which is then put into action – the experience of which then feed back to the value judgement/choice nexus and develops integrity and a strong ethical sense. Restrict the scope of action too far, and you remove the possibility of choice; in so doing, the entire cycle is short circuited and paradoxically, the basis of ethics disappears.

This is worrying. The only long-term protection against abuse in a changing environment is a sense of integrity. This may sound like a boast, but I’ll say it anyway: Malta’s banks sailed through the crisis almost unscathed, because they stuck to prudent core banking principles despite the temptation to go after the same skewed profits that sent so many banks into a tailspin.

Note that this is not an argument against regulation. It is an argument for the right sort of regulation.This means regulations that encourage ethical choices. I do not believe that proscriptive regulation will manage to achieve this.

Yes, there are dangers in this approach. Inevitably, this will lead to a number of wrong choices being made, some inadvertently and others willfully. The issues need not  always be clear-cut, and there will always be room for debate about which course of action was the correct one; the answer may at times be “none, absolutely”. But at least, the process of ethical thought was there, leading to a stronger base of integrity which will protect customers and the economy (and society) so much better.

The Arab Spring

The Arabs are now, in 2011, reclaiming their public sphere. This should come as no surprise: Arab culture shares the roots of European civilisation.

The most surprising thing about the Arab Spring of 2011 is not that, at long last and pushed to the limit, Arabs across the Middle East have had enough of inept, authoritarian rulers. Nor is it that they took so long to get there: Islamophobes in particular should note that quite obviously, the Arabs are a rather peaceable people. They are not all Muslims, either, and even those that are, come in a variety of flavours.

No, what is surprising is that so many of us in Europe and the Americas were surprised.

We had no reason to be. First, look at the history of Western thought and follow the trail back through the philosophers and political thinkers we look to for direction. While we assume that the particular development path that led up to contemporary European culture and society started with the ancient Greeks, there is no direct trajectory. It is a path mediated pretty comprehensively through Arab thinkers – and not just Arabs, but Muslims.

Scientific and intellectual leadership may have eluded the Arabs for a while now, but in seeking to understand the roots of the uprisings of 2011 it is good to remember that the basis of Arab civilisation is in many ways identical to the underpinnings of Western society.

There is nothing in the Arab world view that runs counter to the ideal of democracy; there is no aspect of Arab culture that requires Arabs to want no part in an open debate on the shape and direction their societies will be taking. On the contrary, the instances where this aspiration to public engagement and freedom is thwarted are in fact aberrations and not the norm.

Look if you will at the great Arab Caliphates of the early Muslim world. We are going back a thousand years, but the Ottoman Empire (Turkish, this time, not Arab) continued the trend. These hugely diverse, multi-racial, multi-cultural states were a beacon of tolerance, particularly by the standards of their day. They were also enormously fertile cultures, producing groundbreaking developments in science, in medicine and of course in the arts and philosophical thought.

So now that the Arabs have decided to tell their rulers that enough is enough, that it is now time for them to reclaim their shattered public spheres, we should not be surprised.