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Speaking at a panel discussion on business ethics and the global financial crisis at The University of Western Australia’s Business School, Dr Michael Chaney AO, UWA Chancellor and Chairman of NAB and Woodside, said that openness and transparency in companies were key pre-requisites for preventing further shocks like the global financial crisis.

The panel discussion, held on 12 March, also featured Winthrop Professor Julie Lee from the UWA Business School, and Canon Frank Sheehan, Director, Centre for Ethics, Christ Church Grammar School, and was moderated by Winthrop Professor Phil Dolan, Dean, UWA Business School.

‘It gets down really, I think, to the message from the top. The leader of the organisation has to convey the message that people are encouraged to speak up if they see something wrong and carry it through,’ Dr Chaney said.

‘What you need to try and engender in an organisation is, “We’re all in this together.” If we see a problem we try to raise it and so on.’

Dr Chaney warned that the structure of American boards could contribute to a repeat of the financial crisis.

‘One of the problems of the American system is having the CEO as Chairman - there's not the check and balance that exists in Australia or the UK. It is hard enough as an independent chairman to clamp down where a CEO is not acting in the interests of the company, but near impossible for the directors where the CEO is also the Chair. CEOs in the US have a huge influence over who is on the board and who is on the remuneration committee,’ he said.

New paradigm or new crisis?

Responding to an audience question on where the next problem will arise, Dr Chaney said: ‘My advice would be to look at a sector or an industry where asset prices have risen way above their trend line and people say, “There’s a new paradigm.” If people say it isn’t going to happen this time they’re usually wrong.’

Winthrop Professor Dolan agreed that any new trends should be treated with caution, emphasising the need to learn from past financial crises.

‘Every 15 years or so a new bunch of people come through the industry who don’t necessarily remember what happened in the past,’ said Winthrop Professor Dolan. ‘I would like to think some lessons have been learnt. I’m keen to introduce a new unit here at the Business School on economic history so we can at least teach it here in the classroom.’

Disturbing and hilarious

According to Father Sheehan, human nature means that people will seize opportunities for greed and push the system to its limits.

‘Politicians did come out of it rather badly in the end because they had the chance early to have done a lot more,’ he said. ‘We’re all watching it from a particular perspective. As someone interested in philosophy, theology and ethics, that makes me ask about what people are really like and what it means to have freedom rather than being completely driven. Did the people who were watching and regulating deliberately turn away or had they lost a capacity to make moral judgments?

‘I found Inside Job disturbing and hilariously funny at times when people were trying to explain a very complete lack of moral standards; it illustrates that that system didn’t work.

‘Given the extraordinary rewards that were there, the financial rewards, some people are just going to be completely out of control. What are the ethical positions that people base their individual lives on?  What do they actually believe in? Do they think that participation in a thing like that is going to make them happy?

‘I would have thought very clearly not. What’s human happiness about? Is it the relentless acquisition of things without caring about anyone else or is it about the group?’

The blurring of moral boundaries, explained Winthrop Professor Lee, could partly be attributed to fact that the majority of individuals working in the finance industry have achievement oriented values.

‘If we think about it we really do want people who are in charge of investments to be achievement oriented. However, when you have a whole industry where everyone is focused on achievement in the form of personal gain, and people can achieve an enormous amount of money in the process of having their success recognised, you’re setting up a very flawed system’ she said.

‘Achievement values rely on putting yourself above other people to achieve and gain more, whereas moral or more universalistic values rely on putting others above yourself. So there is a motivational conflict in trying to do both at the same time.’

However, says Winthrop Professor Lee, achievement values can also be used to create positive social value for organisations by refocusing these highly motivated people’s attention away from sales.

‘Reward systems can be refocused toward customer satisfaction, rather than sales. Achievement oriented people are driven to gain success according to social standards. We need to change the social standards, and re-socialise these people to think about the greater good. Perhaps we could challenge them to come up with new ideas to strengthen the economy and reward them with status reinforcing events or awards rather than obscene amounts of money. Companies need to think about changing their culture,’ she said.

Taking a gamble

Socialising the losses of large corporations meant that individuals were willing to take larger risks, argued Winthrop Professor Dolan.

‘I think, ultimately, it gets back to incentive programs. If you believed you were working for an organisation that was too big to fail and would be bailed out you’re effectively gambling with other people’s money. If you can identify an industry that has those incentives, I would be betting against it. It is only a matter of time until there is an issue,’ he said.

The panellists noted that in many cases only losses were socialised, with company executives still claiming large salaries and bonuses. Winthrop Professor Dolan suggested re-writing tax laws retrospectively to tax certain kinds of bonuses at 100 per cent, while Dr Chaney acknowledged that the United Kingdom and Australia had provisions for clawbacks on bonuses. In February this year, Lloyds Banking Group became the first major UK bank to exercise the clawback option when it announced that it would retrieve bonuses awarded to executives in 2010 after an insurance mis-selling debacle.

Clawback schemes, taxation and regulatory changes, greater education on ethics and financial disasters, and teaching people to measure achievement in non-monetary terms could all – according to the UWA Business School’s panellists – help to ensure that we avoid future financial crises.

The problem, however, is that championing change can be difficult. ‘It isn’t about individuals and how they behave, but what happens to you when you’re caught up in something like that,’ said Father Sheehan. ‘We did hear about a few people who were trying to do things and they were side-lined very early and their career was brushed aside. I wouldn’t recommend whistle blowing as a career.’

According to our panellists, however, driving change and ensuring that ethics are incorporated into all aspects of business must occur if past mistakes are to be avoided in future.

Media references

Catherine Vogel (UWA Business School) +618 6488 7340
Verity Chia (UWA Business School) +618 6488 1346