ETHICS IN FINANCE

CONTENTS

INTRODUCTION ..................................................................... 4

ETHICS IN FINANCE ............................................................. 5

ROLE OF ETHICS IN FINANCE............................................ 5

TRUST .......................................................................................... 6

Aristotelian virtuous ethics......................................................... 7

CODE OF ETHICS ................................................................... 7

ETHICAL BEHAVIOR .............................................................. 8

CODE OF ETHICS IN FINANCE AND ETHICAL

BEHAVIOR................................................................................... 8

ETHICS IN FINANCE IN DIFFERENT FIELDS ................... 8

NEED OF ETHICS IN FINANCIAL MARKET, SERVICE INDUSTRY AND PEOPLE IN ORGANIZATON:
......................................................................................................... 9

SOCIALLY RESPONSIBLE INVESTMENT ....................................................................................................... 10

ETHICS V/S FINANCE .............................................................. 10

IS FINACE ETHICALLY NEUTRAL ...................................... 11

CORPORATE SOCIAL RESPONSIBILITY ............................11

CONCLUSION.............................................................................. 11

ETHICS IN FINANCE
"We can count, but we are rapidly forgetting how to say what is worth counting and why.”
-JOSEPH WEIZENBAUM

Introduction-
ETHICS-
Ethics is the study of human behavior which is right or wrong. In general, ethics means doing right things to others, being honest to others, being fair and justice to others.
Ethics is a requirement for human life. It is our means of deciding a course of action. Without it, our actions would be random and aimless. There would be no way to work towards a goal because there would be no way to pick between a limitless numbers of goals. Even with an ethical standard, we may be unable to pursue our goals with the possibility of success. To the degree which a rational ethical standard is taken, we are able to correctly organize our goals and actions to accomplish our most important values. Any flaw in our ethics will reduce our ability to be successful in our endeavours.
FINANCE-
Finance is the set of activities that deals with the management of various resources like money, investments, assets, securities, etc. Decisions like acquisition of a company, selling of a company, knowing the financial status of a company in present, past or future, etc is possible only because of finance. Hence it is also called as soul of our economic activities. Finance is an art of raising money and using money at a right time, in a right place which therefore help in wealth maximization. But wealth maximization by causing heavy loss to other individual or a society is incorrect. Hence ethics in finance comes in picture.

ETHICS IN FINANCE-
Finance and… ethics. As you see these two words next to each other, you may feel some tension, or even a slight discomfort. Or you may even smile coyly, thinking they do not belong together. You may spontaneously remember the global financial crisis and shake your head in disbelief thinking of the damages that are still felt across nations and organisations. Or you may belong to a large portion of the population that does not trust institutions, corporations, politics, business people and finance professionals. In this paper, I attempt to convey that what I’ve just described are only symptoms of a much deeper issue. We built a global framework of scientific, industrial, financial, economic, and informational systems. Yet we lost meaning, value, and ethics in the process.

Ethics in finance is maintaining a right conduct while doing finance which may lead to upliftment of the country as a whole in term of wealth and social life. It is applicable to all types of companies/ businesses. It may vary from one industry to other but everyone has to work at utmost good faith. Ethics in finance includes financial activities like banking ethics, insurance ethics, stock market ethics, debt management, microfinance, ethics of gambling, black markets, speculation, money laundering, etc

ROLE OF ETHICS IN FINANCE-
As once Warren Buffett, chairman of Salomon Brothers Inc, stated, “If I hear of an employee losing the company money, I’ll be understanding. However, if I hear of any employee losing Salomon one shred of reputation, I’ll be ruthless!” This message says it all. He kept reputation above profits.
Thus firm maintain reputation in order to increase wealth in future. Therefore if reputation of a firm goes down then firm starts losing its money. Ethics of financial markets is a key topic within economic ethics since capital markets are the fuel of economies and whole societies. A question was asked by an employee of a Wall Street that, what if being unethical (dishonest) increases firm’s value or reputation? Answer- it may increase firm value or reputation but in future it may lead to loss of confidence in financial markets, which will therefore damage the firm’s future earnings potential.
Financial- economic theory- By definition of ethics, motivation should be a primary concern. It should not act as a constraint on achieving some materialistic objective. Whether an individual is ethical or not is not decided by observing his/ her actions but by his/ her motivation for those actions. If an individual act in a trustworthy manner for wealth maximization then that individual is not ethical. Therefore Plato and Aristotle made a point that hedonistic individual by financial- economic theory is unethical.
Plato said that if our objective is materialistic, then we tend to cheat, lie, steal, etc and action will be materialistic better off. Aristotle hence stated to attend the state of eudemonia- where goal to a man is to achieve happiness, blessedness, prosperity.
The whole point of ethics is to enable man to reach at his true end from his present. True end is defined as “internal good” which in turn leads to social well being.
Macintyre, a Scottish philosopher and Robert Frank distinguished between “internal and external goods”. External goods- is achieving individual’s property or possession. Internal goods- is satisfaction, happiness that you get from doing right things, whatever the result may be, whether you lose or win. “Satisfaction from doing the right thing must not be premised on the fact that material gains may follow, rather it must be intrinsic to the act itself”. Wealth maximization is important motto of financial markets, but not as the ultimate objective of all human endeavours. Internal goods should be the ultimate objective for both personal and professional which will then make financial market truly ethical.
Ethics in finance is one of the most important challenges in overcoming the economic crises. The financial crisis was and is also a crisis of trust in the banking system, political system, consumers and investors. Trust is a basic element of economic transactions. Trust cannot be built by opportunism, selfishness, short-termism, personal or institutionalised greed, but by long term planning, faithfulness to values and convictions.

TRUST-
There is a positive correlation between degree of trust in the country and its private investment sector and thus in the growth rate. Trust is an important element of all financial transactions. In order to achieve beneficial result for both the parties, they should not only agree to the terms and conditions of the contract but also trust each other. If one breaks the trust, the other draw’s up the contract by breaking a promise. In 2008 crisis, customers were persuaded to accept loans without understanding the risk involved and then they found themselves unable to pay the loan due to a lack of liquid funds. Once the level of trust diminishes, not only the financial system is affected but also social well being and economic growth gets affected.
To achieve the financial position is still possible but to sustain it in the long term is a challenging task. I m convinced that in order to maintain the overall growth of the country, the best solution will be that the financial system and economy must act on an ethical basis. This implies doing things that are out of self interest and analysing its effect not only on those who are close to us but also society and the environment.

Aristotelian virtuous ethics-
Aristotelian virtuous ethics states that happiness is the ultimate goal of human action. According to Aristotle certain virtues should be exercised to meet the ultimate goal. Financial market should be judge depending upon teleological ethics which focuses on doing ‘right’ means irrespective of whether the ends will be profitable or not. This will bring stability in the market. Teleological ethics will make financial market perform correctly and efficiently and also will decrease the increasing gap rich people and poor people.

CODE OF ETHICS IN FINANCE-
1. Act with honesty and integrity, avoiding real or clear conflicts of interest in personal and professional relationships.
2. To provide information which is full, fair, accurate, complete, objective, relevant, timely and understandable, including in and for reports and documents that the Company files with, or submits to, the other public communications made by the Company.
3. Act in accordance with all applicable laws, rules and regulations of governments, and other appropriate private and public regulatory agencies.
4. Act in good faith, responsibly, with due care, competence and carefulness, without misrepresenting material facts or allowing my independent judgment to be subordinated.
5. Respect the confidentiality of information acquired in the course of business except when authorized or otherwise legally obligated to disclose the information. It should not be used for personal advantage.
6. To promote ethical behavior among our associates.
7. Adhere to and promote this Code of Ethics.

ETHICAL BEHAVIOR-
Ethical behavior may change from person to person, from one company to other. Hence the institute should specify the behavior from ethical point of view that is expected from their employees. Ethical behavior can be conveyed via mission of the institute or specified into codes of ethics.

CODE OF ETHICS IN FINANCE AND ETHICAL BEHAVIOR-
There is a still huge gap between what is said (code of ethics) and what is done (ethical behavior). A good decision making is important to avoid this problem. For example, a company needs to make a decision of whether to investment in, let’s say, X project. For that a company needs to observe the criteria used for the allocation of resources which meets the growth target of the company and also not contradicting the ethics of the business. This is very complex task- to meet both the needs at a same time but can be possible by using an internal procedure called as Analysis for Decision Making with Multiple Criteria (MCDA).

ETHICS IN FINANCE IN DIFFERENT FIELDS-
People trained in finance may enter in to different fields and in different line of work in which they will identify different ethical values followed in different line of work. These eight general values remain the same but there will be a small variation in ethical dilemmas. The situation of a stockbroker is different from that of a mutual fund manager, a market regulator or a corporate financial officer. People in finance involved in lot of activities which depend not only in handling of financial asset but also involved in using of those asset and taking care of it. Everyday billions of financial transaction takes place with a high level of integrity. However, there are several opportunities in finance for some people to gain at others’ expenses. Finance simply concern with other people’s money and other people’s money invites misconduct. Some of the professionals in the financial service whom are bound to serve their clients are as follows they are stockbrokers, bankers, financial advisers, mutual fund, pension manager and insurance agents. Financial manager in corporations, government, and other organizations have to take care of their employers and manage their asset as well. In finance everyone is trusted to carry certain duties from financial analyst to market regulators. Ethics in finance is not only a concerned for an individual in a particular occupation or profession but also for financial market and financial institution. Finance is a main function of every business enterprises and many non-profit organizations and governmental units. Corporate financial manager are responsible for making a decision like invest capital to the planning of merger and acquisitions. While in other hand Public finance is concerned mostly with raising and disbursing fund for governmental purposes.

NEED OF ETHICS IN FINANCIAL MARKET, SERVICE INDUSTRY AND PEOPLE IN ORGANIZATON:
Despite the diversity of financial roles and activities, there are three major areas where there is need of ethics are as follows:
Need of ethics in finance market-
In financial market there are some barrier which includes unequal information, bargaining power, and resources. Finally, market transactions between two parties often have third-party effects. These are the few things which affect ethics in financial market.
Need of ethics in financial service industry–
This financial service industry will affect most people directly. This industry has a duty to develop the product according to people’s need and market them in correct manner. But this kind of financial service industry normally deals with client and try to gain clients confidence on them and finally do the duties which will satisfy their clients and not to people’s. Their main aim is to stay competitive with others. Need of ethics for financial people in organization–
Huge number of people in finance is employee of an organization. This include person who approve some project which should not be approved, they approve in order to gain money in the term of bribe. Most of the unethical activities like giving wrong report and wrong data to the company in order to get more money start from here which pushes whole financial market and financial service industry down because all most in all organization there are lot a number of people who are held in finance roles and activities. Socially Responsible Investment (SRI)-
The investment sector plays important role in promoting ethical practices throughout the economy. Over 3 trillion dollars invested in SRI worldwide, has demonstrable impact on investment practices. SRI investors utilise various methods like social screening of investment which result in positive social impact with greater access to financing. Social screenings of investments have potential to assimilate social impact factors into quantitative portfolio management technique which is based on risk and return.
Investors avoid investing the companies that manufacture products like tobacco, alcoholic beverages, gambling, weapons and controversial media. As companies become larger and more global it becomes difficult to draw the line from an SRI perspective. For example, a large printing company which makes labels for alcoholic beverages or cigarette will be excluded even if very less percentage of profit is derived from such products. In last 20th century, social impact rating was introduced which enabled comparison of companies on the basis of their social impact. SRI research firms evaluate on the basis of non financial criteria (social impact rating) like environmental sustainability, labour relation practices, community involvement and corporate governance. The ratings helps in positive screening that overcome the identification problem encountered with ethical exclusion.
For example, the social impact rating of cigarette manufacturing company will incur huge loss whereas company which transports that product will suffer only marginal loss.

Ethics v/s Finance-
Now let understand the origins, problems and future of both. The financial crisis, occurred in 2007- 09 had lead to recession, unemployment, bankruptcy, poverty, loss of trust, greater inequality and a breakdown in social cohesion. The main reason for this was disconnect between ethics and finance to a large extent. Introducing ethics into both theory and practise will help finance to contribute in a sustainable way to the common good (i.e the good of mankind and the objectives of all men). Therefore humanisation of finance at the individual and institutional level is needed.
The separation of ethics and finance occurred in 3 stages-
First, where both were united- today it is wrongly believed that Adam Smith, father of modern economics, in late 18th century, removed ethics from finance. For Smith it was superfluous to write about ethics in business as ethics was already implicit in business. If you read his book “Inquiry into the Nature and Causes of the Wealth of Nations (1776)” there is a practical application of ethics.
Second, where both were rubbing shoulders- Alfred Marshall, in the end of 19th century, separated ethics from finance when he spoke about ‘economics’ rather than ‘political economy’. He tried to avoid the behavioural questions linked to political science. But then he recognised that economy is independent science but ethics still played vital role in practical applications.
Third, brought total separation- in middle of 20th century, neo classicists, Friedman and Stigler preached that all value judgement should be taken out of the economics if it started becoming predictive science. It made no sense for them to distance oneself from logical –mathematical rigour and discuss ethical values.

Is finance ethically neutral?
Ethics is linked to free action, either good or evil performed by human being and such action is man’s ultimate goal. Action in the financial sector stems from human activity which can be wrong or right. Hence in finance if action which has moral judgement, then it cannot be ethically neutral.
Today’s finance acts as if they were exempt from moral interference. Financial system does financial analysis by predicting future price, how will it affect the real economy, common good, etc. Dysfunction in the financial sector leads to first moral crisis and then real crises. Market cannot be predicted only on the basis of mechanical or technical aspect but needs overall view regarding the impact of our actions on the common good. The financial process (loans, investments, savings, etc) should be guided by ethics.
Ethics must be cornerstone of finance and not the other way round. It must be based on 2 pillars: respect for human dignity and the moral standards of the natural order. There are training programmes in business ethics, CSR, ethical investment funds, etc. But that doesn’t mean it is applicable for only those people who has acquired certificate. For the growth and development of the economy, all players in the financial sector should follow ethics in finance.

CORPORATE SOCIAL RESPONSIBILITY-
As far as for-profit financial companies are concerned, corporate social responsibility (CSR) is one of the most sophisticated mechanisms accepted by the market as an instrument to serve the common good. The International Labour Organisation (ILO) defines CSR as a set of actions agreed by companies so that their activities will have a positive impact on society. Through CSR these companies demonstrate the principles and values that govern them, both in their own internal methods and in their relations with other players. CSR is a voluntary initiative that implies commitment to all its stakeholders in the economic, social and environmental fields and demonstrates a respect for ethical values in building the common good.

CONCLUSION:
“GOD MADE MAN; MAN MADE MONEY, MONEY MADE MAN MAD.” Before money came into existence, human life was simple and the only aim in their life was to live happily and peacefully together and complete the daily chores. When people started feeling the need for different commodities is when barter system came into existence. But then barter system as we all know wasn’t an efficient system. Therefore money was invented in the world so that it acts as a “means” to acquire things that are needed, to bring efficiency, smoothness in the work and made human life easy.
All the values of being ethical are already embedded in the definition of Finance, hence not specified. The meaning of “finance” is pure, but humans have not been able to somewhere understand it completely. They have just understood it partly, i.e maximizing wealth. Preference to money has increased so much that people have started acquiring it by using wrong ways. People have started looting, cheating, lying, also violence has increased. Slowly gradually the aim of human life started shifting from being happy to being money minded. MONEY no more acts as a “means” but as an “ends”. I m not denying the fact that, wealth is not an important factor of our lives but we are forgetting that we raise and use money in order to support the country as a whole, to reduce the gap between richer and poorer, to reduce the sufferings of people and to move forward together.
Ethics has been taken away from finance. Ethics without finance is like body without soul. Therefore inculcating those values back into finance, to specify the rules and regulations has become a necessity. No business and company can run without finance. It is LIFEBLOOD for all the organization. So if almost all the field in finance follows ethics in their duty almost all other process will function very well without any discrepancies.

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