A selection of interesting articles we found recently on the ethics of finance professionals.
Was the GFC the fault of finance professionals’ values?
André van Hoorn gives us a wake up call with this article.
The idea that the ethical values of professionals in finance (PIFs) (e.g., stockbrokers and fund managers) have played a role in the global financial crisis (GFC) is widespread. The crisis-of-ethics debate is important, concerning one of the main policy challenges of our times, but is based on popular lore and anecdotes rather than systematic evidence.
He analyses the self-enhancement and self-transcendence values of PIFs vis-à-vis the general population and tests for patterns of variation that are consistent with the idea of a crisis of values, meaning patterns of variation that would implicate PIFs’ values in the GFC. Employing pre-crisis data allows for an unbiased assessment. Results reveal only minor differences in values between PIFs and the general population, too small to support the idea of a crisis of ethical values by objective standards. Extensive robustness checks confirm these findings, sometimes actually revealing values differences counter to the crisis of ethical values idea.
André van Hoorn concludes that the financial system would not have fared better had we had a different breed of PIFs. Rather, situational forces can induce severe disregard for the welfare of others, also in people with ordinary, decent values. Hence, if anything, the GFC shows that the financial services industry has been providing an environment highly conducive to unethical behaviour. The practical implication is that fixes to the financial system can only come from improved regulatory design.
Read more in: André van Hoorn. 2015. The Global Financial Crisis and the Values of Professionals in Finance: An Empirical Analysis.
Journal of Business Ethics, 130(2), 253-269.
How did the stigma over the finance industry come about?
The concept of organizational stigma has received significant attention in recent years. The theoretical literature suggests that for a stigma to emerge over a category of organizations, a “critical mass” of actors sharing the same beliefs should be reached. Scholars have yet to empirically examine the techniques used to diffuse this negative judgment.
This study is aimed at bridging this gap by investigating Goffman’s notion of “stigma-theory”: how do stigmatizing actors rationalize and emotionalize their beliefs to convince their audience? Thomas Roulet answers this question by studying the stigma over the finance industry since 2007. After the subprime crisis, a succession of events put the industry under greater scrutiny, and the behaviours and values observed within this field began to be publicly questioned. As an empirical strategy, he collected opinion articles and editorials that specifically targeted the finance industry. Building on rhetorical analysis and other mixed methods of media content analysis, he explains how the stigmatizing rhetoric targets the origins of deviant organizational behaviors in the finance industry, that is, the shareholder value maximization logic.
Thomas Roulet bridges the gap between rhetorical strategies applied to discredit organizations and ones used to delegitimize institutional logics by drawing a parallel between these two literatures. Taking an abductive approach, he argues that institutional contradiction between field and societal-level logics is sufficient, but not necessary to generate organizational stigma.
Read more in: Thomas Roulet. 2015. “What Good is Wall Street?” Institutional Contradiction and the Diffusion of the Stigma over the Finance Industry.
Journal of Business Ethics, 130(2), 389-402.
Do business students lack compassion?
Business students appear predisposed to select disciplines consistent with pre-existing worldviews. These disciplines (e.g., economics) then further reinforce the worldviews which may not always be adaptive. For example, high levels of Social Dominance Orientation (SDO) is a trait often found in business school students (Sidanius et al., Political Psychol 12(4):691–721, 1991). SDO is a competitive and hierarchical worldview and belief-system that ascribes people to higher or lower social rankings.
While research suggests that high levels of SDO may be linked to lower levels of empathy, research has not established the potential relationship between another related adaptive trait in the workplace, compassion. Compassion facilitates workplace performance by lowering levels of litigation, easing stress, and facilitating cooperation. Accordingly, the following study aimed to examine the relationship between SDO and compassion while hypothesizing Economic Systems Justification (ESJ) would mediate this relationship. Because of the importance of compassion in the workplace, the prevalence of SDO in the business academic community (Sidanius et al. 1991) and the topicality of ESJ, the study was conducted with business school students. Results confirmed all but one hypothesis.
Read more in: Daniel Martin, Emma Seppala, Yotam Heineberg, Tim Rossomando, James Doty, Philip Zimbardo, Ting-Ting Shiue, Rony Berger and YanYan Zhou. 2015. Multiple Facets of Compassion: The Impact of Social Dominance Orientation and Economic Systems Justification.
Journal of Business Ethics, 129(1), 237-249.
Or are things just too complex for CEOs?
Hermann Ndofor, Curtis Wesley and Richard Priem argue that opportunities for financial reporting fraud arise because of information asymmetries—often labeled “lack of transparency”—between top managers and their diverse shareholders. They evaluate the relative contributions of information asymmetries arising from industry-level and firm-level complexities to the likelihood of top managers committing financial reporting fraud.
Using a sample of 453 matched pairs of firms that have and have not been identified as having committed financial reporting fraud, these researchers found that information asymmetries arising from industry- and firm-level complexities increase the likelihood of financial fraud. Moreover, more CEO stock options increase the likelihood of fraud when industry complexity is high, while aggressive monitoring by the audit committee reduces the likelihood of reporting fraud when firm-level complexity is high.
More detais are available at: Hermann Achidi Ndofor, Curtis Wesley and Richard L. Priem. 2015. Providing CEOs With Opportunities to Cheat: The Effects of Complexity-Based Information Asymmetries on Financial Reporting Fraud.
Journal of Management, 41(6), 1774-1797.