Managing Ethics in the Banking Sector

ManagingEthics in the Banking Sector

Ethicsin the banking sector are essential aspects that enhance theeffective performance of the financial institution. In the bankingsector, an ethical bank is considered as such based on itscontribution and concern to the environmental and social impactsthrough its financial services. Ethical banking requires thefinancial sectors to be responsible for the social and environment ofits investments. The banking sector has the responsibility ofcreating socially and environmentally conscious business practicesthat contribute to the sustainability of the economy.

Banksare financial institutions that should concern themselves with allthings related to finances the public associated banks ethics withbusiness practices because it is the banks that lend theseenterprises funds (Bowie, 1999:124). Due to changing societal demandsthe public now knows much about the ethical practices of banks basedon their lending policies. Most banks have now adopted ethicalpolicies that benefit the society and the environment in general.

Banksare now playing an intermediary role in promoting sustainabledevelopment banks are well versed with knowledge of how to weighrisks and engage in investments that will bring maximum returns andmaintain a high standard of moral concern. Some business venturesexternalize costs to the society through unworthy practices such aswaste disposal in rivers and other aspects of environmentaldegradation. In such a case, the society uses more funds to treat anddispose of the wastes. Banks could engage in promoting a safeenvironment by raising interest rates to such businesses that poserisks to the environment as a way of creating equitable cost sharingamong the clients and environment. As such, effective bank ethicsrequires involvement in business practices that improve the lives ofthe community as well as creating favorable and sustainableenvironments (Bowie, 1999:123). Such ethical initiatives involveparticipating in carbon offsets by giving customers low interestloans for low carbon emission cars in community involvement, thebanking sector exhibits its ethics by sponsoring and scholarshipeducation programs, creating affordable housing projects andsupporting community events.

Internally,banks enhance their ethics through promoting fair gender and racerepresentation in their workforce, using energy efficiency devices,using fewer papers and less electricity among others. Externally, thebanking sector promotes its ethics through assessing how theirbanking practices and products are used in order to promote goodsocial and environmental practices. In order to delineate what aregood banking ethics, an assessment of John Stuart Mills, Aristotleand Immanuel Kant could help understand this concept. Business ethicsis important in the banking sector as they directly or indirectlycreate ethical problems in other sectors of the society and theenvironment. The aim of this research paper is to apply theoreticalperspective and extensive literature review as a basis ofunderstanding how business ethics could be managed in the bankingsector.

ThematicLiterature Review

Businessethics

Businessethics refers to all aspects employed in business conduct of anorganization and its individuals within the organization. It entailsall professional and applied ethics that are used when carrying outbusiness operations. Ideally, business ethics is aimed at enhancingprofit maximization and engaging in noneconomic concerns. Majorcorporations engage in such acts as social responsibilities and ethiccodes of doing business promote their brand and interaction with thesociety. The aim of business ethics is to regulate and guide businessoperations in areas that are beyond government control (Miller,2009:123-155).These ethical regimes developed with modernization of organizationpractices that are sensitive to the needs of the society and thecommunity. Ideally, business ethics denotes the ideals of thebusiness that aims at determining the basic purpose of the company.

Inan economic perspective, business ethics is guiding‘responsibilities’ to an organization in making money while theyconform to the normative ideals of the society. As such, businessenterprises have ethical obligations that need to be followed toavoid conflict and counterproductive issues. Business ethics isreflected through companies’ relation, duties and responsibilitiesto all stakeholders suppliers, clients, employees, government,neighboring the community and its fiduciary financiers. Businessethic concerns are illustrated in the form of corporate governance,political contributions and corporate social entrepreneurship(McWilliams,2010: 117-127).

Thereare several functional areas of business ethic applications it couldbe in the management of finances, fairness in trading practices,marketing and sales practices, trading conditions, consultancyservices, auditing, tax payments, and human resources management. Inhuman resource management, a manager applies ‘soft’ approach ininfluencing employees become productive. Marketing ethics requiresbusinesses to desist from marketing harmful services/products thatmay pose environmental risks, health, financial and security risks tothe society (Miller,2009:123-155).

Inaddition, businesses should enhance customer privacy, show fairnessin advertisement and pricing of the products and the services. Inmost cases, marketing and selling involve influencing people’sperceptions about products and services as such a high degree ofethical responsibility should be applied to avoid distorting theinformation that might false fully influence the perception ofclients (Bowie, 1999:122). Businesses can make as much profits asthey wish, so long as they conform to the basic rules of social life.In order to promote, effective business ethics, corporations need toadopt policies that are aimed at promoting ethical programs in thesociety. Such policies could be aimed at guiding employees againstunethical conducts.

Inthe banking sector, bankers are slow in embracing ethical practicesas they fear issues that would interfere with the activities ofexisting and potential clients. In many banks, external ethics isviewed as more applicable than internal ethics this is because manyorganizations funded by banks have the capacity to cause greaterenvironmental and social effects, unlike internal issues. As such,banks promote effective ethics through facilitating ethical practicesby business using bank loans.

Ethicshelp to govern social relations between individuals and corporations.Business ethics helps to guide corporate behavior and culture byimposing rules that deal with internal and external problems (Bowie,1999:125). The fact that banks operate as intermediaries in thesociety through provision of financial services ethical principlesare relevant in promoting effective corporate and professionalism inthe business. In this respect, banks need to adopt and manageeffective business ethics that apply to procedures and transactionswhich will ensure effective organization relations with allstakeholders (Carroll,2006: 102).

Banksneed to stick to the following business ethics honesty,impartiality, reliability, transparency, social responsibilityrespect for environments and social benefits, fighting corruption andother financial fraud cases (Miller,2009:123-155).When relating with other organizations, banks need to observeprinciples of honesty, transparency, accountability and utmost carewhen communicating important information. In this respect, banksneeds to embrace good business ethics when exchanging informationwith other banks, promote fairness in employment, and desist frombehaviors and conducts that might cause unfair competitions. Inaddition, banks need to act honestly in accordance to laid downprocedures for operations when advertising or making announcements toeliminate chances of interfering with other banks products andservices (Carroll,2006: 91).

Inany business, customers are regarded as great stakeholders in thebusiness, as such business ethics need to be streamlined a way thatpromotes, provides and gives timely information to all clients. Inthe same line, banks should desist from sharing secrets of customerscustomer database need to be maintained with due diligence. Businessethics is reflected in service quality it is the prerogative ofbanks as business entities to ensure that the security, customercomplaints and service quality are guaranteed (Bowie, 1999:119). Thebank staffs need to embrace professional ethical principles thatexhibit fairness, confidentiality, honesty and accountability.

Businessethics exist in the form of professional and applied ethics. Theyhelp to address the problems found in the business environment aswell as guiding the employees’ behaviors in business transactions(Rowe,2005:3).These ethics exist in the form of property ethics, human resourcesmanagement ethics, sales and marketing ethics, production ethics,finance ethics and technology ethics. Absence or misuse of businessethics leads to various issues like discrimination at work place,poor work relations between the employees and employees, curtailingfreedom of employees to form Unions. In other cases, some businessesdeny employees workplace privacy through surveillance, or employeesdisclosing employers’ information (Miller,2009:123-155).

Ethicaltheories in banking

Professionaland business ethics could be traced to the great works of earlyphilosophical and economic theorists like Plato, Aristotle, ImmanuelKant, John Stuart Mills and Thomas Hobbes. According to Samuel Clarke(1675-1729), he observed that the morality is a matter ofrationality, Humes (1711-1729), added that morality was an emotionalthing. In the same scope, evolutionary ethics defined ethics as thosemoral behaviors that aid human survival. According to Mills, heenvisioned ethics as actions that result in the greatest happiness tomankind in this scope, banks would promote happiness in thecommunity by embracing good moral values. In Mills perspective, bankscould give back to the society as a way of increasing happiness(Christopher&amp Thompson, 2000: 2).In the same note, banks could desists from lending other corporationsthat engage in business practices that lowers social happiness as away of facilitating ethical practices, banks could lend to businesses that exhibit ethical concerns to the society (Kant,1994:124).

Aristotleargued that, it is through lawfulness that acts as a measure ofmorality, justice and equality any action that is undertaken inaccordance to the law is a measure of morality. Most banks dobusiness in accordance to the law. Therefore, they could seek to dobusiness with other law abiding clients. He further observed that,‘whatis just in transactions is something equitable, and what is unjust issomething inequitable&quot (Kant,1994: 84).In Aristotle’s perspective, bank transactions could be labeled aslawful or unlawful transactions. Banks need to access the nature oforganizations funded by their loans if organizations engage inunjust or inequitable behaviors like failing to pay employees, suchfirms should not be funded by the bank since it is immoral to denythe wage to workers (Christopher&amp Thompson, 2000: 2).

ImmanuelKant saw ethics as arising from human reasons that make moral demandson human beings lives. His theoretical perspectives of ethics areconsidered as a great contribution to business ethics. In hisperspectives, he was a strong proponent of ‘respect for persons.’He argued that, the greatest good was the goodwill of people actinggood is a moral duty. For instance, a businessman who earns hisbusiness deals through honest ways to get the reputation, such an actcannot be considered genuinely moral his actions would only beconsidered moral if he does so as a moral duty and no other reason.Kant elaborated ethics on the basis of categorical morals that applyreason (Bowie, 1999:123). He believed that, persons follow lawsaccording to their own choice based on reason human beings havefreedom, and it is through this freedom that individuals are able tobe moral and rational. Individuals are considered ethical if theybehave in accordance to their right intentions (Kant, 1994:124).

Kantadvocated that, ‘human beings should act on the maxim by which theycan and will that it would become a universal law.’ In short, ifhuman beings are able to act morally what would happen if the wholeuniverse acted in accordance to that principle? Kant illustrated thisperspective by arguing that, if a person desperately needed somemoney, would lying be a justifiable way of seeking financialassistance? Kant believed that, using false lies to get money on thepretence that it would be repaid was not a justified morality hisbottom-line was that, if lying concepts were universally used, itwould create incoherent in business relationships (Kant, 1994:124).

Therefore,the Kantian categorical imperative is an important test that mostbusiness managers should ask themselves when making decisionsdecisions that are applicable to all without creating contradictionsare morally permissible. In a different example, if an employeedecides to steal from an employer or customers because the managerwas angry to him, the justification of stealing does not meet themoral credence. If stealing was Universal, there would be no privateproperty, and nobody would own anything (Carroll,2006: 100).

Therefore,the necessity to steal for whatever reasons does not meet theuniversal maxim principle such justification for stealing is a selfdefeating and immoral action. In a similar manner, if it wasuniversally permitted to break business transactions contracts, notransactions contracts would exist. Therefore, any universal maximthat allows breaking of contracts would be self defeating. In simplerterms, it is universally and morally acceptable that people queue orlineup awaiting services. If line-cutting was permitted, this wouldundermine the need for lining up in the first place (Miller,2009:123-155).

AssessingKant perspective, it is true that, unless certain threshold ofmorality is attained in many institutions, issues that were notfeasible become feasible with the application of high degree ofmorality. For instance, the Russian stock exchange had problems indevelopment because they had failed to give investors accurateinformation, later after the institution adopted an honest principle,its stock market rejuvenated. As Kant observed, the principle of thecategorical imperative is relevant for the modern day businessenterprises if certain business practices does not meet theuniversal maxim, such actions are considered unethical (Christopher&amp Thompson, 2000: 2).

Moreover,Kant observed that, Stakeholders should be treated as persons humanbeings should not use other human beings to further their interests.In his categorical perspective, Kant opines that, “Always treat thehumanity in people as an end and never as a means” (Kant,1994:121) this principle underscores the need for respecting otherpersons when dealing with commercial transactions. Individuals orbusiness entities should not use other persons as means of economicexchange. This formulation could be seen as a business ethicrestraining business entities from engaging in unethical transactions(Miller,2009:123-155).

Inany interaction and transactions, individuals should not becompelled rather individuals should be left to use their moral andrational capacities. According to Kant perspective of ‘respect forpersons,’ business organizations should engage in developing themoral and rational capacities of human beings than incapacitatingtheir development. For instance, a company that engages in massivelayoffs could be considered as engaging in immoral practices andusing workers as mere means of achieving the organizations objectivesif the move was through coercion and deception (Carroll,2006: 100).

Inmany companies, there exists information asymmetry that becomes arich ground for abuse of power and deception by the management.Company management need to correct the asymmetry in informationavailable to employees to eliminate suspicion and doubt cases openbook management could be the most effective way of enhancingemployees respect, promote freedom and lessen the opportunity fordeception (Kant, 1994:134). Therefore, employers need to developmeaningful work for their employees through providing opportunitiesfor workers to exercise autonomy, provide sufficient salary toemployees, develop workers rational capacities and never interferingwith workers moral development (Bowie, 1999:123). It is the moralobligation of business managers to provide staffs with meaningfulworking environments.

Inhis third categorization of morality, Kant argued that, a businessfirm should operate as a moral community. Organizations should treatall individuals with dignity and respect they deserve. Decisions madeby the organization should reflect, incorporate and be endorsed byall subjects within the organization this is achieved through,taking into consideration the interest of all relevant stakeholders(Miller,2009:123-155).All individuals affected by the organization policies shouldparticipate in the formulation of such rules and that every businessentity must establish the procedure that governs relations amongstakeholders (Rowe,2005:3).

Likewise,corporations have a moral duty of giving back to the society thesociety and the outside environment are essential for any businessorganizations in protecting the business, providing infrastructure,skills and knowledge from employees(Sacconi, 2004: 83).Kant envisioned business organizations as a moral community in whicheach have a moral relationship with others (Kant, 1994:114). Managersare responsible for enhancing good interactions with staffs as wellas the outside community. Individuals within the organization shouldview the firm as a means through which they achieve their goals. Assuch the Kantian principle of ‘respect for persons’ should beembraced by each within the organization (Kant, 1994:114).

Inthe management of employees, a manager who employees the Kantianprinciples need also to embrace Theory Y by McGregor theory Ypresumed that, employees tend to act creatively when left on theirown. In this respect, a manager who believes in the dignity ofemployees should adopt this perspective. Therefore, individualswithin the organization should strive to create an organization wherepersons utilize their moral and rational capacities in takingresponsibility of their actions (McWilliams,2010: 117-127).Kant was also categorical in the purity of motive actions are notmoral actions if not motivated by moral values (Kant, 1994:114).Corporations engage in several acts, some which are morallyacceptable while others are not. In many cases, all stakeholders,customers and employees view business organizations on the basis ofmoral motives while some business practices have pure motives,others have ill motives that are aimed at pursuing self interests.For example, corporations that underpay their staffs or overpricetheir products to maximize profits could be said to be pursuing theirself interests which are ill motive (Miller,2009:123-155).

Kantwas also a strong believer of cosmopolitan economy. According to him,international business transactions that cut across boundariesenhance peace and promote the universality of morals. Increasedcapitalism and business across the international community promoteshonesty and trust among the different societies participating in theglobal economy. For instance, bribery is a condemn business practicein the entire globe and as such many business have internalized theneed to conduct honest contract deals (Bowie, 1999:123). However,corruption and bribery cases are common aspects in most capitalist’snations and have even threatened international business practices.The overall perspective of Kant on business ethics portrays a worldwhere business practices and individuals participate in commercialactivities that bring people together, thereby enhancing world peace(Kant, 1994:134).

Roleof managers in an ethical banking sector

Managersplay an important role in facilitating effective corporate governancein the banking sector. The banking sector requires astute managementfor it to achieve objective goals and enhance effective corporategovernance. As such, effective supervision and the management ofethical aspects require the diligence of experienced supervisors whoare able to link the bank objectives with the corporate socialresponsibility(DeGeorge 2010: 200).Corporate governance is enhanced through creating a set ofrelationships with the firm management, shareholders, boards andother stakeholders. It is through effective corporate governance thatthe objectives of the firm are achieved while monitoring activitieswithin the institution. Banks are essential institutions in anyeconomy the importance of banks in the growth of national economiescannot be underscored, as such it is important that the bank havestrong corporate governance(Sun, 2010:13).The bank managers together with the management board have theresponsibilities of setting the objectives of the bank, managing ofday to day activities.

Inthe same cue, the management of banks institutions is tasked with theresponsibility of aligning the corporate activities with the socialand environment expectations, and in accordance to the set laws andregulations under which the banks operate (Rowe,2005:1).Similarly, the management has an ethical responsibility of protectingthe interest of the depositors. In addition, managers have theresponsibility of ensuring that corporate values, codes of conductand other principles of conduct are adhered to this is achievedthrough well strategized corporate policies through which the successof the bank can be measured (Miller,2009:123-155).

Furthermore,the managing board have the responsibility of ensuring that allrelevant stakeholders are included in the decision making team andcreating a mechanism of cooperation and interactions. Bank managersand the governing board should ensure that there are strong internalcontrol systems and checks and balances to oversee the bankfunctions. Effective, bank management, requires having special risksmonitoring and addressing all conflicts. It is a moralresponsibility for managers to facilitate information flow to thepublic(Carroll, 2006: 100).

Ina broad sense, bank managers are tasked with the responsibility ofsetting corporate values, objectives that are shared throughout thebanking institution. It is difficult for organizations to operatewithout clear values and objectives. Values prohibit unethicalbehaviors such as corruption, bribery and other unworthy deals. Assuch, managers should implement policies avoids conflict ofinterests lending money in accordance t the thresholds establishedby the bank (Sacconi,2004: 89).

Bankmanagers, just like other managers in other institutions areresponsible for setting and monitoring accountability throughout thebanking institution. They are thus, obligated in creatingaccountability and responsibility on all cadres of workers to improveon bank performance and corporate image (Miller,2009:123-155).In the same way, the managing boards have an oversight authority onsenior bank managers, in similar measure senior managers shouldensure that there are adequate checks and balance for line managers.Important decision making should be done by core group of seniormanagement officers.

Effectiveethical banking management requires that, managers use appropriateapproaches of remunerating staffs in accordance to bank ethicalvalues, strategy, objective and the environment. Managers need toconduct corporate governance in a transparent way this meansavailing relevant information to stakeholders, public and the staffs.Corporate governance in banks is reinforced through transparency(Kytle, 2005:12).The primary basis of good corporate governance is adherence togovernment laws and regulations, protecting the shareholders rights,ensuring that the bank operate in an environment that is free ofcorruption, aligning the interests of employees, stakeholders and themanagers with the bank objectives (Christopher&amp Thompson, 2000: 2).

Inthe modern world, corporations have a great stake in contributing tocorporate responsibility (Rowe,2005:2).As such, managers should be able to engage in solving social problemsby cooperating with other institutions. To this end, effectivemanagement in the banking sector requires responding to the needs ofthe general public and fulfilling the objectives of the companythrough the application of ethical principles(DeGeorge, 2010: 200).

BusinessEthics: A Case Study of Barclays Bank Plc.

Barclay’sbank has been in operation for close to 300 years since 1690 and hasan international presence covering more than 50 countries in Africa,Europe, Asia and in the Americas. It is estimated to have a customerbase of 48 million globally where it provides diverse financialservices. The bank has a well structured product differentiation fromother financial institutions that have enabled it cut a niche withcorporate and urban communities. Major source of funds are derivedfrom customer deposits and as such gets competitive interest ratesfirm these funds.

Thebank winning strategy is efficient and speedy services, competitiveinterest rates, free services like credits cards and enhancing asatisfactory information flow to the public. In its operations, thebank reaches its potential and existing clients through loans, freecards, mortgages, e-banking and branch banking. Barclays bank is amajor financial service provider with an estimated employee base of135,000 its human resource management has set up remunerationcommittee that oversees excellent employee motivations that in turnhelps to promote personal and business performance. As a majoremployer, the bank promotes and monitors human rights through itspractices and policies (Lozano,2000: 183–204).

Thebank has institutionalized effective policies to counter unethicalpractices such as money laundering, group sanctions, policy onbribery and corruption, environmental and social risks managementpolicy and know the customer policies. In addition, the bank has beeninvolved heavily in the corporate social responsibility by advocatinghuman right concerns, and engaging in social and environmental risksassessments(Miller, 2009:123-155).In the same line, the bank has adequate mechanisms of checkingsources of its supplies through its sourcing policy.

Thebank has other several policies aimed at corporate socialresponsibility in which it interacts with these include human rightsand other aspects of community development. The bank established apolicy in which all its practices and policies would be carried outas indicated by the International Labor Organization (ILO) and theUniversal Declaration of human rights (UDHR). As such, all bankactivities in the provision of financial services, purchasing ofgoods and employee relations would be guided through the two regimes(Christopher &amp Thompson, 2000: 2).The policy was aimed at upholding human rights this would beextended to educating other stakeholders on the need of observingeffective human rights(Lozano, 2000: 183–204).

However,despite these ethical practices, in 2004, the bank was involved infinancing a controversial project in Thailand that posed greatenvironmental and human rights abuse. The pipeline project in therural Thailand and Malaysia faced high protests due to naturepollution it posed to the fishermen and farmers in those regions. Thebank had acted unethically and in total contrast to its corporatesocial responsibility of carrying environmental assessment of suchproject(McWilliams, 2010: 117-127).By not heeding the social outcry, the corporation could be said tohave acted in contrast to Kantian ethical theory of ‘respect forpersons.’ Barclays bank was a major participant in theestablishment of Equator Principles (EP) that ensures private banksdo not fund projects that pose social and environmental problems. Assuch, the bank was expected to show a good example in the ThailandMalaysian pipeline, a case that was different from EP values. It isrecorded that the bank went on with the operation thereby putting itsreputation at stake(Rowe, 2005:3).

Conclusions

Businessethics is important for the success of a business. It is throughethics that business organizations establish good relationships withall stakeholders. The aim of business ethics is to regulate and guidebusiness operations in areas that are beyond government control thebanking sector has the responsibility of creating socially andenvironmentally conscious business practices that enhance thesustainability country’s economy. As such, effective bank ethicsrequires involvement in business practices that improve the lives ofthe community as well as creating favorable and sustainableenvironments. Business firms should operate as a moral community.Organizations should treat all individuals with dignity and respect.

Decisionsmade by the organization should reflect, incorporate and be endorsedby all subjects within the organization this is achieved through,taking into consideration the interest of all relevant stakeholders.Managers play an important role in facilitating effective corporategovernance in the banking sector. Corporate governance is enhancedthrough creating a set of relationships with the firm management,shareholders, boards and other stakeholders. Effective management inthe banking sector requires the management to address the needs ofthe society and fulfilling the company objectives through theapplication of ethical principles.

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