The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

12 1 Ethical Economy, Economic Ethics, Business Ethics: Foundations of Finance Ethics
The duty of loyalty inherent in the fiduciary duties obliges the manager to undivided
and unselfish loyalty to the firm, not just the shareholders. It is more than just
a contract between the manager and the owners who appoint him; it is an obligation
towards the firm as a whole. The duty of diligence and prudence obliges the
manager to act with diligence and prudence in the interests of the firm and not just
in his own interests. The duty of disclosure obliges the manager not to take advantage
of facts that become known to him in confidence in the course of his work or
information divulged to him by the firm’s owners. His fiduciary duty of disclosure
rules out the use of this knowledge as insider knowledge in order to carry out insider
trading in the course of performing his management role or as a private individual.
The prohibition on the use of insider knowledge, or the duty of disclosure, follows
from the fiduciary role of the manager towards the firm as a whole, not just from
an agent role vis à vis the owners. This is also reinforced by the fact that the ban
on insider trading applies even where the owner might authorize the manager to use
insider knowledge. The overall interest of the firm and the right of all shareholders
to the inside knowledge prohibit the use of insider knowledge by the manager even
where the owner or principal shareholder releases him from his duty to refrain from
insider trading.
The duties that arise from a fiduciary relationship are valid for all fiduciary
relationships: for the relationship of bank clerks and financial consultants to their
consultancy clients, for the employee as an administrator, for the doctor in relation
to the patient, for the architect in relation to the home-builder, and so on.
The definition of the relationship between the firm and the manager solely
according to the principal/agent relationship and the almost exclusive remuneration
of the manager according to improvement in the firm’s stock market value leads
to the neglect of success criteria other than stock market price development. What
results is a hit-and-run mentality. It is the task of business ethics to ask whether the
right incentives are set, since there are also such things as perverse incentives which
counteract the firm’s objectives. It is not just a matter of setting economic incentives
but also of setting economically and ethically sound incentives to stimulate the right
contributions within the firm.
Through movements like Global Compact and the Global Reporting Initiative,
state coercion as an element of efforts to reduce environmental pollution and to
respect the rights of future generations is replaced by voluntary self-commitments
in the form of voluntary undertakings by the companies. Respecting natural capital
is reputation-enhancing for companies, a fact that is acknowledged by investors and
viewed positively in the valuation of firms. Investors – within the scope of institutionalized
ethical investment or outside it – are more and more frequently prepared
to pay a price-premium for firms which possess a higher reputation for respecting
ethical principles like the rights of nature and future generations.
Similarly, showing the corporation’s environmental and social audits in the
annual accounts on the triple bottom line accounting principle according to economic
performance indicators, environmental performance indicators and social
performance indicators, effects a greater inclusion of ethical criteria and corporate
social responsibility in the overall valuation of corporate success. These criteria