Abstract
The paper develops a responsibility-based account of professional ethics in banking. From this perspective, bankers have duties not only toward clients—the traditional focus of professional ethics—but also regarding the prevention of systemic harms to whole societies. When trying to fulfill these duties, bankers have to meet three challenges: epistemic challenges, motivational challenges, and a coordination challenge. These challenges can best be met by a combination of regulation and ethics that aligns responsibilities, recognition, and incentives and creates what Parsons has called “integrated situations”. Professional associations play an important role for this purpose, especially as spaces in which peer recognition is earned. But financial incentives equally need to be brought in line, for example, through deferred bonuses or claw backs. Such measures can create a new culture of accountability in banking.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
In business ethics, there has been some debate about professional ethics in banking. Many commentators argued that banking lacks essential features of a profession, for example, because its tasks are too diverse and the profit motive is too strong (e.g. Boatright 2013, 2014; de Bruin 2014). Some therefore reject the idea of strengthening professionalism and professional ethics in banking (e.g. UK Parliament 2013–14). Others, in contrast, have suggested that doing so is crucial for rebuilding trust in banking (e.g. Jaffer et al. 2014a; O’Neill 2014). But these proposals have remained unspecific with regard to the challenges that professional ethics in banking should respond to and the structures that would have to be created for developing a credible and reliable professional ethics among bankers.
In general, responsibilities of groups other than companies are rarely discussed. One exception is Wempe’s (2009) article that discusses the responsibility of “limited organized collectives” such as sectors. A discussion of industry associations is provided by Noll (2008); his account, however, focuses on problems internal to associations. An argument for companies being partly responsible for developments in their industry is developed in Herzog (2015).
My account is normative and functional, in the sense that I ask what functions professional associations should play. For that reason, I put aside other explanations sociologists have provided for professionalization, such as status seeking or attempts to create monopolies (cf. e.g. Abbott 1983).
This proposal is in line with the call for “industry-led response[s] in key areas” (Group of Thirty 2015, p. 6, see also 56).
For an “ethics of expertise,” see also Hardwig (1994).
Cf., for example, the steps taken by the UK’s Financial Conduct Authority with regard to the fair treatment of customers, see https://www.fca.org.uk/firms/fair-treatment-customers (last accessed May 9, 2017).
The term “systemic harms” is also used by Armour and Gordon (2014) in a discussion of how shareholder value maximization imposes harm on others. Their line of argument is to internalize these costs as far as possible. Their focus is on corporate governance, while mine is on professional associations (for reasons discussed below), but the approaches are similar in spirit and complementary in practice.
One can distinguish a “narrow” from a “broad” notion of systemic harm. The “narrow” notion focusses on the prevention of harm compared to the status quo; the “broad” notion also includes failures to make positive contributions. I here focus on a “narrow” notion of harm, but the argument becomes even stronger if one uses a broad notion of systemic harm. The latter is also more controversial, however, because it presupposes positive in addition to negative duties. While I think such positive professional duties can be defended, this is a task for another paper.
I here bracket the problem of whether growth would have helped those in direst need; to do so, redistributive measures would probably also have been needed.
Systemic harms are thus more likely to occur in investment banking than in retail or wholesale banking. But the activities of retail and wholesale bankers can both form links in the causal chains that lead to systemic harms. In what follows, I focus on functions of banking rather than on the forms of companies; hence, the group of bankers working in specific fields is the relevant unit of analysis.
Commentators have also discussed whether regulators might be at a disadvantage because banks can attract the brightest employees with high wages, whereas regulating authorities can only pay civil service wages (see e.g. Luyendijk 2013, entry of May 10, 2012). If this is the case, it makes this problem even more intricate.
Even if one does not think that the imposition of systemic harms amounts to a form of structural injustice, however, one can take over Young’s notion of forward-looking responsibility—as long as one thinks that there is some kind of moral imperative to prevent such harms. A duty to prevent such harm can be justified from the perspective of different moral theories. It can be captured by a consequentialist perspective, but also by Kantian (Scharding 2015) or contractualist (Baradaran 2014; Claassen 2015) perspectives. Hence, from all these perspectives one also has to ask how this duty could be fulfilled in practice. It is here that an ethics of responsibility comes in.
This does not mean that these are the only addressees of responsibility according to Young. In the conclusion, I briefly mention how other bearers of responsibility can be identified.
See also Young 2011, chap. 3 on the distinction between guilt and political responsibility.
For an approach that also combines Young and Collins, in the context of the fight against global poverty, see Kahn 2016.
It might be said that ethics reduces the operating risks of banks; therefore, if ethics were strengthened, there might be less need for the proposal to create “integrated situations” (I thank an anonymous reviewer for raising this point). But for the reasons given above, systemic harms present specific challenges, and it is therefore crucial to find the right form of ethics for reducing operating risks. In an ideal scenario, establishing “integrated situations” will strengthen ethics and thereby reduce risk, and with reduced risk, it becomes easier to create “integrated situations”—a positive, self-reinforcing cycle.
I focus on associations that have individuals rather than companies as members (the latter is the case, for example, for the American Bankers Association (ABA)). The latter kind of associations may, however, sometimes play an analogous role as spaces of social recognition; they would then also be relevant for creating “integrated situations”.
The CFA Institute has over 135,000 members worldwide (see https://en.wikipedia.org/wiki/CFA_Institute, last accessed May 9, 2017). There is a plethora of other institutions; for example, the European Association of Financial Analyst Societies has 27 member societies with more than 14,000 members (see https://en.wikipedia.org/wiki/European_Federation_of_Financial_Analysts_Societies, last accessed May 9, 2017). For the US, Ragatz and Dutzka (2010) list (without a claim to completeness): the American Academy of Actuaries, the Institute of Certified Bankers, the American Institute of Certified Public Accountants, the CFA, the Financial Planning Association, the Million Dollar Roundtable, the National Association of Insurance and Financial Advisors, the American College Code of Ethics, the National Association of Personal Financial Advisers, and the Society of Financial Service Professionals.
Historically, the professions often had extensive responsibilities; see e.g. Abbott (1983, 860f.), referring especially to pre-revolutionary France and the Prussian system of professions. As he argues, modern individualism has led to a downgrading of collective responsibilities among professionals.
Such a structure would provide a response to the point, raised by some commentators, that banking, in contrast to traditional professions, includes many different kinds of activities and therefore lacks a clear focus (e.g. Boatright 2011, p. 483; Boatright 2013; p. 154 de Bruin 2014, p. 270; Cowton 2010, p. 326). This means that there cannot be a single professional ethics in banking; rather, one needs a number of different professional ethics.
As Awrey and Kershaw (2014, 283f.) report, the CFA Institute had 2.42 suspensions and 0.92 expulsions per year from 2000–2011, for tens of thousands of members. This suggests that enforcement mechanisms have not been very strong in the past.
This is a worry sometimes raised with regard to professional associations. Professional associations have, after all, been described as “successful conspiracy[ies] against society” (Cowton 2009, 187). But the best response, I take is, is not to completely reject the idea of professional associations, but to carefully delineate the space they should occupy, including its legal dimensions, and the tasks they should take on. Pragmatically speaking, personal networks between bankers working in the same fields exist anyway—so the best way to prevent misconduct is not to wish them away, but to formalize them and to hold individuals accountable for them. Professional ethics and its organization in professional associations have to take place in complete transparency to, and collaboration with, regulating authorities. The model to be followed should not be one in which external regulation would be replaced by self-regulation, but one in which professional associations take on a role in “co-regulation” (see e.g. Gunningham and Rees 1997, quoted in Jaffer et al. 2014b).
Professionalization as a response to the vulnerability of clients can be understood as a solution to the collective action problem of creating binding standards for how customers should be treated. It would be difficult, and maybe even impossible, for individual professionals to create such standards on their own and to credibly commit to them. But professional associations can develop, monitor, and sanction such standards, thereby making the commitment credible.
Cf. similarly, in the contexts of accountants, Gill (2009, p. 118).
In part, this is already happening. For example, Sagato (2015) reports on repo markets in Europe, on which information is provided by the International Capital Market Association (ICMA).
Associations could also organize the dialogue with other parts of society: they could invite speakers from other professions, from NGOs, or from public organizations in order to get a better sense of how financial processes interact with other social processes. De Bruin (2014) suggests using “deliberative polling®” (Fishkin 1988); this could also be done in professional associations.
One might object that the liability of individuals is not large enough to cover the harm done by an event such as a major financial crisis (cf. similarly on corporations Coffee 1981). But for liability to have an effect on behavior, it need to be as high as the harm that can be done.
For reflections on such “process oriented” regulation, see also Awrey et al. (2013).
They would also constitute a partial return to a “liability” model of responsibility, in the sense that Young contrasts to the understanding of responsibility as forward-looking. But here, the same point applies: responsibility as liability and forward-looking responsibility should not be understood as mutually exclusive.
Some banking associations have indeed started ethics initiatives and are in dialogue with regulators about new forms of training. For example, the German Association of Investment Professionals (DVFA), together with academics working on ethics in finance, has developed a paper on the virtues needed in finance and aims at implementing it through training and awareness raising. Empirical research on such initiatives would be very helpful to throw further light on professional ethics in banking.
References
Abbott, A. (1983). Professional ethics. American Journal of Sociology, 88(5), 855–885.
Admati, A., & Hellwig, M. (2013). The bankers’ new clothes: What’s wrong with banking and what do about it. Princeton and Oxford: Princeton University Press.
Angeli, M., & Gitay, S. (2015). Bonus regulation: aligning reward with risk in the banking sector. Quarterly Bulletin, Q4, 322–333.
Armour, J., & Gordon, J. N. (2014). Capital failure. rebuilding trust in financial services. In N. Morris & D. Vines (Eds.), Systemic harms and the limits of shareholder value (pp. 234–252). Oxford: Oxford University Press.
Awrey, D., Blair, W., & Kershaw, D. (2013). Between law and the market: Is there a role for culture and ethics in financial regulation? Delaware Journal of Corporate Law, 38(1), 191–246.
Awrey, D., & Kershaw, D. (2014). Toward a more ethical culture in finance. Regulatory and governance strategies. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 277–304). Oxford: Oxford University Press.
Baradaran, M. (2014). Banking and the social contract. Notre Dame Law Review, 89, 1283–1342.
Bazerman, M. H., & Tenbrunsel, A. E. (2011). Blind spots. Why we fail to do what’s right and what to do about it. Princeton/Oxford: Princeton University Press.
Bitner, R. (2008). Confessions of a subprime lender: An insider’s tale of greed, fraud, and ignorance. Hoboken, NJ: Wiley.
Boatright, J. R. (2011). Trust and integrity in banking. Ethical Perspectives, 18(4), 473–489.
Boatright, J. R. (2013). Swearing to be virtuous: The prospect of a banker’s oath. Review of Social Economy, 71(2), 140–165.
Boatright, J. R. (2014). Ethics in finance (3rd ed.). Chichester: Wiley Blackwell.
Brenkert, G. G. (2009). Whistle-blowing, moral integrity, and organizational ethics. In T. Beauch & G. G. Brenkert (Eds.), The Oxford handbook of business ethics (pp. 563–601). Oxford: Oxford University Press.
Brennan, G., & Pettit, P. (2004). The economy of esteem: An essay on civil and political society. Oxford: Oxford University Press.
Burton, E., & Shah, S. N. (2013). Behavioral finance: Understanding the social, cognitive, and economic debates. Hoboken, NJ: Wiley.
Claassen, R. (2015). Financial crisis and the ethics of moral hazard. Social Theory and Practice, 41(3), 527–551.
Coffee, J. C., Jr. (1981). “No soul to damn: no body to kick”: An unscandalized inquiry into the problem of corporate punishment. Michigan Law Review, 79(3), 386–459.
Cohan, W. D. (2015). Can bankers behave? The Atlantic. Available at https://www.theatlantic.com/magazine/archive/2015/05/can-bankers-behave/389558/. Accessed 9 May 2017.
Cohn, A., Fehr, E., & Maréchal, M. A. (2014). Business culture and dishonesty in the banking industry. Nature, 516(4), 86–89.
Collins, S. (2013). Collectives’ duties and collectivization duties. Australasian Journal of Philosophy, 91(2), 231–248.
Cowton, C. J. (2009). Accounting and the ethics challenge: re-membering the professional body. Accounting and Business Research, 39(3), 177–189.
Cowton, C. J. (2010). Banking. In J. R. Boatright (Ed.), Financial ethics: Critical issues in theory and practice (pp. 325–337). Hoboken, NJ: Wiley.
de Bruin, B. (2014). Ethics management in banking and finance. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 255–275). Oxford: Oxford University Press.
de Bruin, B. (2015). Ethics and the global financial crisis. Why incompetence is worse than greed. Cambridge: Cambridge University Press.
Eriksen, A. (2015). The authority of professional roles. Journal of Social Philosophy, 46(3), 373–391.
Fishkin, J. S. (1988). Washington: The case for a national caucus. Atlantic Monthly, 8, 16–17.
Foodwatch. (2014). 75 per cent of stock exchange practitioners think speculation does influence food prices. 03-07-2014, http://www.foodwatch.org/en/what-we-do/news/75-per-cent-of-stock-exchange-practitioners-think-speculation-does-influence-food-prices/. Accessed 9 May 2017.
Franssen, M., Lokhorst, G.-J., van de Poel, I. 2013. “Philosophy of Technology”, The Stanford Encyclopedia of Philosophy (Winter 2013 Edition), Edward N. Zalta (ed.), URL = <http://plato.stanford.edu/archives/win2013/entries/technology/>.
Frey, B. (1997). Not just for the money. An economic theory of personal motivation. Cheltenham: Edward Elgar.
Getzler, J. (2014). Financial crisis and the decline of fiduciary law. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 193–208). Oxford: Oxford University Press.
Gill, M. (2009). Accountants’ truth. Knowledge and ethics in the financial world. Oxford: Oxford University Press.
Gold, N. (2014). Trustworthiness and motivation. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 129–153). Oxford: Oxford University Press.
Group of Thirty. (2015). Banking conduct and culture. A call for sustained and comprehensive reform. Washington. http://group30.org/images/uploads/publications/G30_BankingConductandCulture.pdf. Accessed 9 May 2017.
Gunningham, N., & Rees, J. (1997). Industry self-regulation: An institutional perspective. Law & Policy, 19(4), 365–414.
Hardwig, J. (1994). Toward an ethics of expertise. In D. Wueste (Ed.), Professional ethics and social responsibility (pp. 83–101). London: Rowman & Littlefield.
Herzog, L. (2015). No company is an island. Industry-related responsibilities as elements of corporate social responsibility. Journal of Business Ethics. doi:10.1007/s10551-015-2923-7
Hughes, E. C. (1988). Professions. In J. C. Callahan (Ed.), Ethical issues in professional life (pp. 31–34). New York and Oxford: Oxford University Press.
Jaffer, S., Morris, N., & Vines, D. (2014a). Why trustworthiness is important. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 3–31). Oxford: Oxford University Press.
Jaffer, S., Morris, N., & Vines, D. (2014b). Restoring trust. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 350–386). Oxford: Oxford University Press.
Jones, T. M. (1991). Ethical decision-making by individuals in organizations: An issue-contingent model. Academy of Management Review, 16(2), 366–395.
Kahn, E. (2016). Poverty, injustice and obligations to take political action. In H. P. Gaisbauer, G. Schweiger, & C. Sedmak (Eds.), Ethical issues in poverty alleviation (pp. 209–224). Cham: Springer International Publishing Switzerland.
Kleymenova, A., & Tuna, I. (2016). Regulation of compensation. The University of Chicago Booth School of Business Working Paper No. 16-07. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2755621. Accessed 9 May 2017.
Kutz, C. (2005). Complicity. Ethics and law for a collective age. Cambridge: Cambridge University Press.
Lounsbury, M. (2002). Institutional transformation and status mobility: The professionalization of the field of finance. Academy of Management Journal, 45(1), 255–266.
Luyendijk, J. (2013). The banking blog. http://www.theguardian.com/commentisfree/joris-luyendijk-banking-blog. Accesssed 9 May 2017.
MacIntyre, A. (1984). After virtue. A study in moral theory (2nd ed.). Notre Dame: Notre Dame University Press.
May, L. (1996). The socially responsible self. Social theory and professional ethics. Chicago and London: The University of Chicago Press.
Miller, S. (2010). The moral foundations of social institutions. A philosophical study. New York: Cambridge University Press.
Noe, T., & Peyton Young, H. (2014). The limits to compensation in the financial sector. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 65–78). Oxford: Oxford University Press.
Noll, B. (2008). Verbändeethik im Spannungsfeld von Individual-, Unternehmens- und Ordnungsethik. In L. Heidbrink & A. Hirsch (Eds.), Verantwortung als marktwirtschaftliches Prinzip. Zum Verhältnis von Moral und Ökonomie (pp. 231–259). Frankfurt/New York: Campus.
Oakley, J., & Cocking, D. (2001). Virtue ethics and professional roles. Cambridge: Cambridge University Press.
O’Neill, O. (2014). Trust, trustworthiness, and accountability. In N. Morris & D. Vines (Eds.), Capital failure. Rebuilding trust in financial services (pp. 173–190). Oxford: Oxford University Press.
Parsons, T. (1939). The professions and social structure (pp. 34–49)., Reprinted in: Essays in sociological theory New York: The Free Press.
Ragatz, J. A., & Dutzka, R. F. (2010). Financial codes of ethics. In J. R. Boatright (Ed.), Financial ethics: Critical issues in theory and practice (pp. 297–323). Hoboken, NJ: Wiley.
Reichert, W.-G. (2009). Das Ethos des Investmentbanking. Implikationen für eine prudentielle Regulierung. Ethik und Gesellschaft 2/2009: 1–25.
Reichert, W. G. 2010. “Das Berufsethos des Investmentbanking und seine Bedeutung für die Finanzmarktregulierung.“Frankfurter Arbeitspapiere zur gesellschaftsethischen und sozialwissenschaftlichen Forschung 58.
Rose, D. C. (2011). The moral foundation of economic behavior. New York: Oxford University Press.
Sagato, P. 2015. “The liquidity dilemma and the repo market: A two-step policy option to address the regulatory void.” LSE Law, Society and Economy Working Papers 21/2015. http://ssrn.com/abstract=2692288.
Santoro, M. A., & Strauss, R. J. (2013). Wall street values. Business ethics and the global financial crisis. Cambridge: Cambridge University Press.
Scharding, T. K. (2015). Imprudence and immorality: A kantian approach to the ethics of financial risk. Business Ethics Quarterly, 25(2), 243–265.
Small, D. A., & Loewenstein, G. (2003). Helping a victim or helping the victim: Altruism and identifiability. Journal of Risk and Uncertainty, 26(1), 5–16.
Turner, A. (2016). Between debt and the devil. Money, credit, and fixing global finance. Princeton and Oxford: Princeton University Press.
UK Parliament. 2013–14. Changing banking for good. Report of the Parliamentary Commission on Banking. Volume I: Summary, and Conclusions and recommendations. London: The Stationery Office.
van de Ven, B. (2011). Banking after the crisis. Towards an understanding of banking as a professional practice. Ethical Perspectives, 18(4), 541–568.
von Weltzien Hoivik, H. (2002). Professional ethics—a managerial opportunity in emerging organizations. Journal of Business Ethics, 39, 3–11.
Wempe, J. (2009). Industry and chain responsibilities and integrative social contracts theory. Journal of Business Ethics, 88, 751–764.
Wilensky, H. L. (1964). The professionalization of everyone? American Journal of Sociology, 70(2), 137–158.
Young, I. M. (2011). Responsibility for justice. Oxford: Oxford University Press.
Acknowledgements
I would like to thank audiences at the Ausschuss "Wirtschaftswissenschaften und Ethik" of the Verein für Socialpolitik and at two workshops at Goethe University Frankfurt, as well as friends and colleagues in personal conversations, and last but not least several reviewers for their helpful comments and suggestions.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Herzog, L. Professional Ethics in Banking and the Logic of “Integrated Situations”: Aligning Responsibilities, Recognition, and Incentives. J Bus Ethics 156, 531–543 (2019). https://doi.org/10.1007/s10551-017-3562-y
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-017-3562-y