Bangladesh's future rests on development of ethical financial markets

The Financial Express, October 7, 2009

A recent Bangladesh Bank (BB) policy paper asserts that moving into the future, Bangladesh will have to rely heavily on capital markets to raise the necessary money to fund capital expansion projects. Capital expansion projects need a lot of money and relying solely on banks to raise that money is inefficient. In Bangladesh, financing via debt market is generally small and stock markets are in their infancy, albeit growing rapidly. Stock market capitalisation has grown at an average annual rate of 77 per cent from 2003 to 2008.

Despite such positive signs, Bangladesh has an Achilles' heel as it has been consistently cited by Transparency International (TI) as one of the countries with the highest levels of corruption. Transparency International, a civil society organisation, cites the economic cost of corruption as, "Corruption leads to the depletion of national wealth. It is often responsible for the funneling of scarce public resources to uneconomic high-profile projects, such as dams, power plants, pipelines and refineries, at the expense of less spectacular but fundamental infrastructure projects such as schools, hospitals and roads, or the supply of power and water to rural areas. Furthermore, it hinders the development of fair market structures and distorts competition, thereby deterring investment." The benefits from the development of the financial markets can easily be undone by the general pervasiveness and permissiveness of corruption.

The centrality of ethics in economic development is easily discerned from the fact that the three largest economies of the world US, Japan and Germany all rank among the top 20 (least corrupt) in the Corruption Perception Index. In developed countries like the US, business school curriculums and professional organisations are accelerating the integration of ethics. The hope is that effectively integrating ethics and social responsibility into pedagogy will allow the grooming of professionals who will avoid the ethical pitfalls that have become the hallmark of the many financial scandals in the recent past. Bangladesh should not wait to address the issue of ethics after some scandal rocks its markets. Rather a proactive strategy can avoid major scandals allowing Bangladesh to sustain its economic development.

The solution lies in a pursuing a two-pronged strategy. First, ethics has to be integrated in the business curriculum so that tomorrow's business leaders graduate armed with the motivation and knowledge about why ethics matter. The second strategy requires major businesses to voluntarily adopt the principles of the UN Global Compact.

Popular text books in finance and business state that the goal of the financial manger is, "to maximise the current value per share of the existing stock," fostering a notion that shareholder wealth maximisation is devoid of any moral concern. Such ambiguity leaves students unsure about the role of ethics in business. At worst, practitioners may treat ethics and shareholder wealth maximisation as a zero-sum game, more of one leading to less of the other. Effective integration of ethics will come about if students are convinced that shareholder wealth maximisation is indeed consistent with the pursuit of ethics and social responsibility.

Ethics need not be exclusively policed using paternalistic mechanisms. Rather, the marketplace can moderate the urge to be self-centered. This is possible so long as media and civic society accept their responsibility of naming and shaming ethical violators. Take for example the well publicised controversy regarding American talk show host Don Imus. On the April 4, 2007, he said referred to the players in the women's basketball team at Rutgers University as "nappy-headed hoes," a description deemed offensive to the teams' Black players. This was not the first time Imus had used derogatory language to insult minorities. A few days later, facing a surge of protests, Imus' show was cancelled and later he was fired from his position by CBS, although Imus had not violated any law.

Was CBS' action consistent with shareholder wealth maximisation? NGOs made appeals to advertisers withdraw their support of Imus' show. Customers threatened advertisers with economic sanctions. By firing Imus, CBS acted as a conduit for the ethical beliefs of the stakeholders. CBS did not need to become expert on the US. Constitution nor did it need to conduct a shareholder referendum to determine their moral beliefs. CBS made an ethical decision but within the framework of what is called the marketplace of morality.

In Bangladesh, purveyors of Islamic finance are assuming prominence. Islamic universities are competing side-by-side with established secular institutions. Scholars dating back to Adam Smith and Max Weber have argued that religion plays a fundamental role in shaping economics. The development of a stronger ethical foundation for Bangladesh's financial markets can be aided by understanding the consistency between normative Islam and modern theories of virtue ethics.

The comparable word for ethics in Islam is 'akhlaq' or 'khuluq'. The issue of "internal good" is best captured in the two Islamic concepts of 'taqwa' (piety) and 'ihsan' (excellence). Having 'taqwa' allows a person to be aware of God's omnipresence and attributes, serving to remind believers of their responsibility towards God. 'Ihsan' pertains to obtaining perfection or excellence in worship, morals, manners, attitudes and social interactions.

The idea of "moral judgment" is best exemplified by two Islamic concepts of justice (adl) and trusteeship (khilafa). In pursuing wealth maximisation, people should not lie or cheat; they must uphold promises and fulfill contracts. Usurious dealings are prohibited. Excessive speculation is shunned. In the Islamic hermeneutics, the rich are not the real owners of their wealth; they are only the trustees. Thus, justice requires that the rich spend their wealth in accordance with the terms of the trust, one of the most important of which is fulfilling the needs of the poor. Islam views human beings as God's vicegerent or trustee (khalifa) on earth, implying that there is no conflict between the morality and the pursuit of economic success. Given the right motivation and means, all economic activity can assume the character of worship.

The second leg in the effective integration of ethics in finance rests with businesses voluntarily adopting the UN Global Compact. On July 26, 2000 the United Nations launched an innovative public-private partnership (PPP), calling it the UN Global Compact. The idea was to foster "social responsibility," amongst corporations. It was a call to the business community that their goal in managing businesses should not be exclusively focused on profit margins but in addition take steps to realise a more sustainable, just and inclusive global economy.

To achieve this goal, the Global Compact outlined ten principles broadly classified in the areas of human rights, labour, environment and anti-corruption. The Global Compact requires participating businesses to annually report their progress on the ten principles. If the business community takes the necessary steps to apply these principles, it will inevitably lead to not only preserving their profit margins but to a general well-being of the society. In particular, principle 10 of the Global Compact asks businesses to strive against corruption in all its forms, including extortion and bribery. Only 25 Bangladeshi companies have signed on to the UN Global Compact. Unfortunately, over half of them are classified as "non-communicating", having failed to comply with the reporting requirements. Eight Bangladeshi small and medium enterprises (SME) have signed on the UN Global Compact but only three have complied with all the reporting requirements. More businesses need to voluntarily adopt the UN Global Compact and this will come about only if civic society uses the marketplace of morality to demand business practices adhere to standards, which can ensure a more sustainable globalization.

Adam Smith defines "internal good" as "the man who acts according to the rules of perfect prudence, of strict justice, and of proper benevolence." Attaining "internal good" is necessary not just for altruistic reasons but also for profit making purposes. Providing profit by harming society perverts the purpose of business. An effective marketplace of morality, Dobson asserts will make financial markets truly ethical. He goes on to say, "Dishonesty and deceit would be anathema, because honesty and integrity are themselves internal goods. A truly ethical individual, pursuing internal goods, would never sacrifice honesty for material gain, but only too readily sacrifice material gain for honesty."