One of the courses that I enjoy teaching is Corporate Governance and Ethics.
I was fascinated by the (un) ethical decisions people make ever since I started working in corporate finance. I signed up to teach Code of Ethics which was a volunteer-led short course for new hires at my company and continued doing so for 15 years.
I now teach at a different level to a different audience, but the topic of ethics and ethical decision-making framework is still one of my favorites. It is a well-discussed and a controversial subject. Newspapers pour on us daily accounts of fraud, scandals, excessive compensation, and other corporate behavior failures. The experts imply that the core reason is the failure of corporate governance.
There is no shortage of examples (see one recent scandal here). One thing I ask my students at the beginning of the course is to search for some popular or recent scandals, get some facts and circumstances and try to understand, based on their knowledge:
- Why these scandals occurred?
- How they could have been prevented?
- How can investors’ confidence be restored?
Their answers typically rotate around the failings of the board of directors, external auditors, supervisors etc. But they all boil down to the fact that the masterminds of the scandal are self-interested, greedy and thirsty for power individuals.
This is where we typically talk about the theory of rational self -interest which explains human tendencies to commit fraud and crime. Without detection, and, therefore, avoiding the costs of punishments, we can take action to benefit ourselves. This is inherent in human nature. The only way to discourage such behavior is to reduce expected rewards and increase the probability of punishment.
Not all individuals are uniformly and completely self-interested: not everyone will steal from an open cash box, and many know that certain actions are wrong even if undetected. That’s our moral compass which depends on personality, religious convictions, personal and financial circumstances. Moral compass also depends on the company involved – and this is where I usually give an example of a firm that promotes and endorses the strong culture of integrity and ethics. Do you know which ones are the most ethical firms?