Ethics Paper

Endrit Avdullari Ethics and Professional Standards in International Management

Ethics and Professional Standards

in International Management

Contents

1. Morality and moral dilemmas

2. Action Research Plan

The research issue Initial claim Research aim Research design Data gathering Success criteria Evidence generation from the data Knowledge creation New knowledge - Existing knowledge link Submission of the claim to critique

The stages

Context Plan Act Observe Reflect

3. The Stakeholder Theory

4. Primary Research1


The Process The Stakeholders Map Findings Conclusion

5. Secondary Research

Employer – employee conflict Famous cases of international banking frauds Ethics in Recession

6. The Ethical Dilemma

The Ethical Test

Hall’s five step test for ethics:

Blanchard and Peale’s ethics check:

Jaszay’s ethics analysis:

Steare’s R.I.G.H.T Test

The analysis

I. Appendix I

References

1. Morality and moral dilemmas

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There exist very different views on what morality is about. On the “Absolutist” extreme morality consists in following God’s commands. On the other hand, there is the “Existentialism” view which sees morality as a deep commitment of individual people (Morton 2004), which should choose their own moral values.

According to Steare (2006), there are three main dominant moral philosophies. Virtue Ethics (guided by moral principles); Utilitarianism (focused on what is acceptable within the society) and Deontology (defined by legal rights and duties).

Atkinson (1969: 10) defines morality as “a set of beliefs current in a society about character and conduct, about what people should try to be or try to do”.

Despite the many discussions in this subject, Velasquez (1992) offers some universal features of moral standards:

First, moral standards deal with matters that are (or are thought to be) of serious consequence to our human well-being. Second, moral standards cannot be established or changed by the decision of particular bodies. They are not made up by any particular individual or group nor does the validity rest on the particular decisions of particular persons. Their validity rests on the adequacy of the reasons that are taken to support and justify them. Third, moral standards are supposed to override self-interest. That is, if a person has a moral obligation to do something, then the person is supposed to do it even if it is not in the person’s own interests to do so. This is an obvious feature of the moral norms we commonly accept, such as the negative prohibitions on stealing, lying, cheating as well as the positive injunctions to be honest and to keep one`s promises. Forth, moral standards are based on impartial considerations.

Moral dilemmas demand contradictory things of a person. The contradiction arises from the existing norms of behaviour of the person (Velasquez 1992).

2. Action Research Plan*

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The research issue

Since many banks suffered a rise in bad loans during the recession, (See: Thomas 2010; Dedman 2009) there might be worth investigating whether loan officers (brokers) considered the risk taken by the company they were working for when they processed the applications to the department that approved the loans, or were they only interested in taking their commissions which increased with the rising of the total amount of approved loans. The study will take place in Albania.

Initial claim

In such structured working environments such as financial institutions, loan officers will try to get approved as many loans as possible in order to reach their targets (and earn their bonuses/commissions) since bad loans and risk evaluation are dealt by other departments. They might be able to achieve this by not giving particular risk-related information to whoever approves the loan as it might disqualify the customer and as a result inhibit the loan officers to cash their commissions.

Research aim

The study will investigate whether loan brokers faced the dilemma of putting their personal interests before their duty.

Research design

The research will be a qualitative study consisting in gathering data from open interviews with professionals of the field in Albania. After collecting and analysing the data there will be a second round of interviews with the same people that participated in the first round to discuss the findings and see if the interviewees agree with them or have something to add or object. A validation group with different people that have knowledge in finance will take place contemporarily.

Data gathering Since the interviews are not entirely structured, new points may come up from each loan broker. As the number of the interviewees increases, so does the list of the findings and issues to be discussed. As a result, there is the risk that things that came up from later meetings have not been discussed in the earlier ones. To avoid this gap, the final findings will be re-discussed with all the people that contributed to the study.

*Adapted from McNiff et.al. (2003)

Success criteria

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The study will try to fulfil the following criteria: Explain and expose the research content. Develop and apply ethical principles. Confront data from different sources. Consider all alternatives.

Evidence generation from the data The interviews have been carried out by using SkypeTM and IMTM software so that all data is recorded instantaneously and can be re-consulted and confronted at any time by such enabling to filter and extract the valuable information which is to be presented at the end as a conclusion.

Knowledge creation The study will aim to generate new findings by exploring the whole loan process. How do the financial institutions respond to the possible loopholes that might exist in the system? All interviews will be channelled to cover as many different points of views as possible.

New knowledge - Existing knowledge link

The final findings will be discussed by a number of well-known ethical models which will be applied to the overall view.

Submission of the claim to critique A preliminary list of findings will be presented to the interviewed professionals for review.

The stages

ContextMy concern is to understand whether the behaviour of loan officers is ethical or not.

PlanI need to understand the loan process and interview loan brokers.

ActA questionnaire developed by McNiff and Whitehead (2006) will be used.

Diagram 1. Action Research Stages. Adapted from

McNiff and Whitehead 2002.

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The answers to the following questions served as a starting point:

What is my concern?

What are the reasons for my concern

What might I do to research this

How will I judge if I am successful?

Before starting the primary research, the complete questionnaire, which can be found on Appendix 1, was covered. After deciding what the main concern of the study would be, I started collecting secondary data in order to identify a gap and position the primary research accordingly in order to answer the initial questions. Due to the complexity of the situation, a qualitative study was considered being the most efficient approach.

ObserveDuring the interviews, new points came up continuously. The interviewees’ opinions were little influenced from the company they were working for most probably because of the very similar practices among these institutions. But because they were asked to answer to open questions (not multiple choice) most of them offered alternatives that hasn`t been mentioned in earlier interviews. Nonetheless, when they were asked specifically on the issue, they agreed on most answers previously given by their colleagues arguing that they “hadn`t thought about it...but now that you mentioned it, it makes sense”.

Reflect The structure of the interviews has to be regularly updated in order to include the new discussion points. This enables covering a wider view avoiding to inadvertently missing important and/or influential factors. After completing all the interviews, a form of feedback from the participants will be necessary.

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3. The Stakeholder Theory

According to Freeman et. al. (2010) the stakeholder theory has been developed in attempts to solve the problems caused by:

The value creation and trade

Ethics of capitalism

Managerial mindset

In order not to separate the world into “business realm” and “ethics realm” we need The Stakeholder Theory to integrate the two thesis since it makes no sense to talk about business without talking about ethics and vice-versa (Freeman et. al. 2010).

Stakeholders can be divided in two categories. The first category includes financiers, customers, suppliers, employees and communities that affect directly the company. The second category includes all other groups or individuals that can affect the business indirectly but still have to be taken into consideration. The theory sees stakeholders' interest as joint rather than opposed although different stakeholders have different interests. At any time, a stakeholder approach should be adopted to create as much value as possible for stakeholders by trying to avoid trade-offs (Freeman et. al. 2010).

The theory has evolved in time from considering the stakeholders as subjects that are to be managed to forming a network where the business can engage with them and take the interdependence into consideration. This can be best achieved by integrating corporate social responsibility into strategic management (Andriof 2002).

We can conclude that by studying the stakeholder theory we can see capitalism as a network of relationships which consists of human beings fully integrated in both the business and ethics world (Freeman et. al. 2010).

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4. Primary Research

To complete this study a series of qualitative interviews has been completed with loan brokers from six financial institutions in Albania.

Bank

Raiffeisen Bank

Emporiki Bank (part of Credit Agricole`)

National Commercial Bank

Procredit Bank

Non – bank Crediting Institutions

Opportunity International

Besa Foundation

The interviews have covered mostly the following areas:

- The process of loan application from the first contact with the customer up to the repayment of the loan.

- Who approves the loans?

- What are the criteria for judging the performance of the loan officers?

- Who takes responsibility for the bad loans?

The Process

With minor differences the loan process passes the following stages:

- Application

- Documentary Collection

- Consideration by the Loan Officer

- Request for approval (Risk department, Branch or HO Credit Committee)

- Disbursement

- Repayment

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The Stakeholders Map

│______________________________________________│ │_______________│

Primary Stakeholders Secondary Stakeholders

Findings

- 4 out of the 6 institutions covered in the study do not give personal target but rather team targets. This is believed to be minimizing risk-driven behaviors of particular individuals.

- The officer that forwards the loans for approval is always responsible for its repayment, even though it is not him/her who approves it.

- Bonuses are calculated after taking in consideration both the processed amount of loans, the bad loan weight to the whole portfolio as well as factors from totally different nature such as communications skills.

- High credit risks/amounts are all approved in high levels of the hierarchy in order for the case to be scrutinized by the high management.

- The Central Bank is more concerned with the liquidity of the credit institutions and that the process is transparent to the customers. In the bad credit process, it just gives suggestions but does not force any practice to the institutions.

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Media

Customers

Managers

Competitors

Risk Evaluators

Regulation bodies

Auditors

Competitors

Bank Shareholders

Loan Brokers


Conclusion

The study does not confirm the initial hypothesis. Although there might be some isolated cases of loan officers trying to gain extra profit from their position harming the company, the study suggests that generally institutions have successfully managed to minimise the possibility of the brokers’ actions to be profit-driven. On the other hand, is possible for the loan officers to act in customers' interest (and against company’s interest) for human reasons (i.e. mercy) or due to other factors (i.e. bribes, blackmail etc) but the risk to be discovered is high since there is continuous control from internal and external auditors. Table 1. summarizes the changes made to the claim of the study before and after the validation process.

Initial claim

(before validation)

Loan officers try to get approved as many loans as possible in order to reach their targets (and earn their bonuses/commissions) since bad loans and risk evaluation are dealt by other departments. They might be able to achieve this by not passing particular risk-related information to whoever approves the loan as it might disqualify the customer and as a result inhibit the loan officers to cash their commissions.

Final claim

(after validation)

It seems like companies have managed to minimise the possibility of the brokers’ actions to take on extensive amount of risks in order to increase their loan portfolio by abolishing the “loans approved – high commission” relationship. On the other hand abuse for non financial gains is still possible but the risk to be discovered is high due to the continuous auditing.

Table 1. Claims before and after validation.

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5. Secondary Research

Employer – employee conflict

Velasquez (1992) explains that the conflict arises when the employee is engaged in carrying out a task on behalf of the company – as in our case receiving and processing loan applications (my note) – while on the other hand he might be benefiting from a private unofficial interest in the outcome of the task:

a) that it does not coincide with the interest of the company and

b) it considerable enough to affect the judgement that the employee is expected to exercise on the company's behalf.

More simply, the conflict arises when the self-interest of the employee pushes him/her to disregard the directions given by the employer and against employer's interest.

Famous cases of international banking frauds

• France's second biggest bank, Societe’ Generale, revealed in 2008 what it described as an "exceptional" fraud by a junior trader totalling 4.9 billion euros (£3.7 billion).

• Barings Bank, one of Britain's oldest, collapsed in 1995 after Nick Leeson, the original rogue trader, lost £860 million while betting on the future of the Tokyo stock market.

• In 2002 John Rusnak, a currency trader at US bank Allfirst, based in Baltimore, Maryland, and then a subsidy of Allied Irish Bank, pleaded guilty to fraud amounting to $691 million (£345 million).

• Toshihide Iguchi, a former car dealer, lost more than one billion dollars (£500m) at Japanese bank Daiwa, in fraudulent trading over 11 years from 1984 onwards. He claimed losses spiralled after he tried to cover up his initial bad bets.

• In 1991 the Bank of Credit and Commerce International (BCCI), was seized by regulators, after auditors reported huge losses from illegal loans to corporate insiders and trades. The bank collapsed with debts of more than $16 billion (£8 billion) and about 250,000 savers lost money.

(Daily Mail 2008)

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Ethics in Recession

Although this might come as a surprise to some, ethical awareness seems to increase in times of financial turmoil. Managers and supervisors talking more about ethical behaviours when the company's existence is in discussion might be one of the probable reasons why this occurs. Another explanation is that employees tend not to take risks in times of tension when management is on high alert.

Table 2. shows the results on some unethical behaviours, relevant to our case, and how the results change during the recession period.

Behaviours 2009 2007

Company resource abuse 23% n/a

Abusive behaviour 22% 21%

Conflicts of interest 16% 22%

Lying to outside stakeholders 12% 14%

Document alteration 6% 6%

Misuse company’s confidential info 6% 6%

Customer privacy breach 6% n/a

Misrepresent financial records 4% 5%

Accept gifts or kickbacks* 4% 4%

* In 2007, accepting/giving bribes, kickbacks and gifts was asked as one question.

Table 2.Percentage of US workforce observing specific forms of misconduct (2007 – 2009).Source: “2009 National Business Ethics Survey” Ethics Resource Centre.

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6. The Ethical Dilemma

When two values collide Steare (2006) argues that there arises a conflict of principle or a right-versus-right dilemma. He groups them in five types:

Individual vs. Community The choice between self-interest and the common good.

Short term vs. Long term The dilemma between getting a profit now by sacrificing some-thing in the future.

Rules vs. Principles The conflict between following the rules or own principles.

Justice vs. Mercy The choice between legal duties and human circumstances.

Truth vs. Loyalty Reporting or not somebody who is doing something wrong to the risk of becoming unpopular.

In our case, we can see the first three dilemmas applying to the loan brokers. While the first two are financially motivated, the third case can apply when the broker can be motivated by human feelings as for example if somebody needs the loan for a life-saving surgery. As Velasquez (1992) points out, conflicts of interest do not need to be financial.

The Ethical Test

When different interest, principle or values conflict with each other ethics might helps us in finding a solution. To do this, we have to first understand the nature and source of the conflict (Steare 2006).

Business Ethics is the study of business situations, activities and decisions where issues of right and wrong are addressed (Crane and Matten 2007:6)

In this paper we will offer four tests that one can run in order to decide whether his actions are ethical or not.

Hall’s (1992) Five Step test for ethics :

Is the decision legal?

Does the decision hurt anyone?

Is the decision fair?

Have I been honest with those affected?

Can I live with my decision?

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Blanchard and Peale’s (1988) ethics check :

Is it legal? Will I be violating either civil law or company policy?

Is it balanced? Is it fair to all concerned in the short term as well as the long term? Does it promote win-win relationships?

How will it make me feel about myself? Will it make me proud? Would I feel good if the decision were published in a newspaper?

Would I feel good if my family knew about it?

Jaszay’s (2002) ethics analysis :

What are we trying to accomplish? Is it ethical?

Where do our loyalties belong?

Who are the stakeholders that will be affected by our decision?

What are our decision options (Is there a better alternative)?

Are there any ethical principles that will be violated by any of the options?

What are the consequences (positive and negative) to all the stakeholders for each option?

Steare’s (2006) R.I.G.H.T test

Right : What are the rules?

Integrity: What do our principles guide us?

Good : Who would benefit and how?

Harm : Who could be harmed and how?

Truth : Are we honest and accountable?

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The analysis

The brokers’ behaviour is not legal since it conflicts with the work contract and the code of conduct of the companies (e.g Emporiki Bank 2009: RZB Group: n.d) where is clearly written that the employee has the duty to act in shareholders’ interest and operate in full transparency.

The decision of hiding information harms the shareholders since it exposes them to additional risk and in the long term will be reflected in financial terms. While the loan officer's loyalty should belong to the employer, they are putting their interest (or a third party`s) first. Eventually, other stakeholders like managers, auditors or risk evaluators may be harmed as well. As a result, we can confirm that the decision to neglect risk will most probably hurt other people and as such is not fair or balanced.

The alternative decision is to pass the information to whoever approves the loan. This action will decrease the personal gain of the loan officer and the customer and increase the other stakeholders; interest. By definition, the action of hiding information is secret so the officers are not being honest. They would not feel good if the information was divulged, on the contrary they would suffer serious consequences.

It is the employees’ moral duty to work in the same line with the goals of the firm and to avoid all activities that might go against these goals. Deviating from these goals will be an unethical behaviour (Velasquez 1992) which leads us to conclude that this activity is unethical.

As a final conclusion, the decision of hiding information for personal gain will fail all four previously mentioned ethical tests by suggesting that this kind of behaviour is unethical.

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Appendix 1.

Action plan adapted from McNiff and Whitehead (2006).

What is my concern?

Why am I concerned?

What experiences can I describe to show that I am concerned?

What I can and will do about it?

What kind of data will I gather to show the situation as it unfolds?

How will I modify my concerns, ideas and practice in the light of the evidence?

How will I ensure that any conclusions I reach are reasonably fair and accurate?

How will I evaluate the validity of the findings?

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References

Andriof, J. (2002), Unfolding stakeholder thinking: theory, responsibility and engagement, Greanleaf Publishing Ltd: Sheffield.

Atkinson, R.F. (1969), Conduct: An introduction to moral philosophy, Macmillan and Co: London.

Blanchard, K. & Peale, N.V. (1988), The power of ethical managemen,. William Morrow: New York.

Crane, A & Matten, D (2007) Business Ethics, 2nd. Edition, Oxford University Press: New York.

Daily Mail (2008), “The biggest banking frauds at the world’s largest banks”, [Online] (Accessed 12 April 2010) Available at: http://www.dailymail.co.uk/news/article-510150/The-

biggest-banking-frauds-worlds-largest-banks.html

Dedman, B. (2009), “U.S banks suffer 149 percent rise in bad loans”, MSNBC Online, Available at: http://www.msnbc.msn.com/id/29619163/ (Accessed 12 April 2010).

Emporiki Bank (2009) Corporate Social Responsibility, [Online] Available at: http://www.emporiki.gr/cbgen/gr/sport&culture/social_responsibility.jsp (Accessed 12 April 2010).

Ethics Resource Centre (2009), National Business Ethics Survey. Ethics Resource Centre:Arlington V.A.

Freeman, R.E., Harrison, J.S., Wicks, A.C., Parmar, B.L. & De Colle, S. (2010), Stakeholder theory: the state of the art, Cambridge University Press: Cambridge.

Hall, S.J. (1992), The emergence of ethics in quality. S.J. Hall (Ed.), Ethics in hospitality management: A book of readings. East Lancing, MI: Educational Fund of the American Hotel and Motel Association.

Jaszay, C. (2002), “Teaching ethics in hospitality programs”, Journal of Hospitality Tourism Education, 14(3), pp.57-63.

McNiff, J., Lomax, P. & Whitehead, J (2003), You and your action research project, 2nd. Edition, RoutledgeFarmer: Oxfordshire.

McNiff, J. & Whitehead, J. (2002), Action research: principles and practice, 2nd. Ed., RoutledgeFalmer: Oxfordshire.

McNiff, J. & Whitehead, J. (2006), Action research: all you need to know about, Sage Publications Ltd: London.

Morton, A. (2004), Philosophy in practice: An introduction to the main questions, 2nd. Edition, Blackwell Publishing: Oxford.

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http://www.emporiki.gr/cbgen/gr/sport&culture/social_responsibility.jsp

http://www.msnbc.msn.com/id/29619163/

http://www.dailymail.co.uk/news/article-510150/The-biggest-banking-frauds-worlds-largest-banks.html

http://www.dailymail.co.uk/news/article-510150/The-biggest-banking-frauds-worlds-largest-banks.html


RZB Group (No date) Code of conduct, [Online] Available at: http://www.rba.hr/web/pdf/annual-report/rzb-code-of-conduct.pdf (Accessed 12 April 2010)

Steare, R. (2006) Ethicability ® - (n) how to decide what’s right and have the courage to do it, Roger Steare Consulting Ltd: London.

Thomas, D. (2010), “Europe faces bad loans on property”, [Online] Financial Times, Available at: http://www.ft.com/cms/s/0/31e1a51c-3164-11df-9741-00144feabdc0.html (Accessed 12 April 2010).

Velasquez, M.G. (1992), Business Ethics: Concepts and cases. 3rd. Edition, Prentice Hall Inc.: Englewood Cliffs, NJ.

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http://www.ft.com/cms/s/0/31e1a51c-3164-11df-9741-00144feabdc0.html

http://www.rba.hr/web/pdf/annual-report/rzb-code-of-conduct.pdf

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Ethics Paper