The Ethics of Finance

Contents
• Investment Ethics • Corporate Corruption • Corporate Governance • Individual Financial Corruption • Islamic Perspective

Investment Ethics
• Corporations are created by capitalist order to seek profit maximization. • Corporations exist to maximize shareholder’s value. • Social responsibility can be tolerated only when it is in the corporation’s and shareholders’ interest.

Investment Ethics (Cont..)
• Enron violated the “principle of the best interests of the corporation.” • Enron’s executives were cheating its shareholders as the corporation is an instrument for the maximization of shareholder’s value. • Protecting investors is the primary responsibility of capitalist governments.

Investment Ethics (Cont..)
• Investors within capitalist order behave ethically when:
• They seek the maximization of long run profit for the corporation in which they invest. • Take appropriate account of social, environmental consequences likely to impact on the long term profitability of the corporation. • Obey laws established by the capitalist state.

Corporate Corruption
• Corporations behave unethically when they maximize their profits in violation of the rules that legitimately constrain profit maximizing behavior within the capitalist order. • Price fixing and market manipulation is the norm and in most cases inevitable within capitalist order. • The immorality of price fixing is an unavoidable ‘sin’ in mature capitalist order

Corporate Corruption (Cont…)
• It is the capitalist state and not the corporation which is responsible welfare. for aggregate. • For example, the state has the power to make or not to make a law prohibiting child labor. • Therefore, corporation cannot be said to be acting unethically if it employs child labor in a country such as Pakistan, where it is legal to do so.

Corporate Corruption (Cont…)
• Upholding human rights is the basic and universal ethical norm of capitalist order. • Therefore, corporate corruption may thus be defined as either violation of human right and/or violation of laws sanctioned by capitalist states.

Corporate Corruption (Cont…)
• Invitations to Corruption:
• Abolishing restrictions on mergers and acquisitions and on one company owning the shares of another. • The removal of these restrictions has been a major stimulant of the rapid concentration and centralization of capital in mature capitalist economies.

Corporate Corruption (Cont…)
• Corporate culture forces people to act immorally. • Ms Roddick, the founder of Body Shop blamed “the religion of maximizing profit” for the corporation’s necessary immorality. (Bakan)

Corporate Corruption (Cont…)
• Standard traits of a human psychopath:
• Put others at risk and manipulate them. • Make grandiose claims and avoid social responsibility. • Use marketing strategies.

Corporate Corruption (Cont…)
• Downsizing is unethical. • Corporations violate laws and human rights because they are designed for the minimization of costs and maximization of profits. • Regulations tend to reduce profits. • Corporations invest heavily in political lobbying and government donations.

Corporate Governance
• After the revelation of serious scandals in leading multinational companies, attention was focused on the need of strengthened “corporate governance.” • However, it had to settle with liberalization, privatization, and de-regulation. • “Regulation is an unnecessary barrier to trade in services.” (WTO)

Individual Financial Corruption
• By signing a contract a person agrees to the responsibility to maximize the firm’s long run profit and minimize risk • Put firms interest before self interest • White collar crime • Capital law manager : manager is called the agent and the shareholder is called the principal

Individual Financial Corruption
• Conflict of Interests
• When an individual is carrying out a task for a corporation but he himself is affected by the outcome of the task.

• Corporations seek to reduce conflict of interests by:
• Specifying the amount of stock the corp. will allow its employees to hold in suppliers firm. • Prohibiting employees from entering into specified transaction with competitors. • Requiring senior management and directors to disclose their financial statements.

Individual Corruption (contd..)
• Several measures are adopted by corporations to promote employee ethical behavior:
• Promoting and image building of a select few “moral guardians” who champion values enshrined in vision and mission statements and in the ethical codes of the corporation. • Empowerment of role models. • Reward ethical behavior and punish ethical offenders.

Individual Corruption (contd..)
• Fraud and Theft:
• A deception which benefits the fraudulent person and injures the defrauded party. (Arlidge)

• Combating Fraud involves:
• Reducing opportunities for fraud. • Undermining the motivation which induces fraud • Promoting the internalization of capitalist ethics by individual employees.

Individual Corruption (contd..)
• Insider Trading
• It is the buying and selling of a corporation’s stock on the basis of information available only to ‘insiders’. • The information available to ‘insiders’ legally belongs to the ‘outsider’: a collective body of the corporation’s shareholders. • Insider trading in considered illegal and unethical within capitalist order but it is difficult to apportion blame for it. • That’s why, no one was punished for the manipulated KSE crises in March2005.

Islamic Perspectives

The Orthodox Approach
• “Interest is the lifeblood of capitalism.” (Maulana Maudidi) • Orthodox Islamic Approach rejects capitalist property form. • “The person who dedicates himself to accumulation is cursed.” (Imam Ghazali) • Professions which include interest and speculative transactions are rejected.

The Orthodox Approach (contd..)
• Competitiveness is born of malice. Competition destroys (mankind).” • “Wealth should be spent for the promotion of worship, hajj and jihad. It should be spent in charity and for the protection of honor and for serving those who serve you.” • Orthodox Islamic teachings thus reject both maximization of pleasure and maximization of the rate of accumulation as legitimate economic objectives.

The Revisionist Approach
• Monzar Kahf has described the Islamic finance movement as “the rise of a new power alliance of wealth and Sharia scholarship.” • Financial markets are seen as serving necessary functions for the achievement of Sharaiah endorsed purposes. • Many interest alternatives have been invented for both money and capital market transactions, the most widely used one is MURABAHA.

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