Table Of ContentEthical Conflicts in
Finance
Edited by
Andreas R. Prindl and Bimal Prodhan
BLACKWELL
i n a n c e
Copyright © The Association of Corporate Treasurers 1994
First published 1994
Reprinted 1995
Blackwell Publishers, the publishing imprint of Basil Blackwell Ltd
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British Library Cataloguing in Publication Data
A CIP catalogue record for this book is available from the British Library.
Library oj Congress Cataloging-in-Publicatwn Data
Prindl, Andreas R.
Ethical conflicts in finance / edited by Andreas
R. Prindl and Bimal Prodhan.
p. cm.
Tor the use and guidance of Association of Corporate Treasurers'
members and students and other participants in today's financial
markets' - Pref.
Includes bibliographical references and index.
ISBN 0-631-19264-6 (pbk.)
1. Business ethics. 2. Social responsibility of business.
3. Financial services industry - Corrupt practices. 4. Insider
trading of securities. I. Prodhan, B. II. Association of
Corporate Treasurers (Great Britain) III. Title: Guide to ethical conflicts
in finance. IV. Title: Ethical conflicts in finance.
HF5387.P74 1994
174' .9332 - dc20 93-25762
CIP
Typeset in 12 on 14 pt Baskerville by Best-set Typesetter Ltd., Hong Kong
Printed and bound by Athenaeum Press Ltd., Gateshead, Tyne & Wear.
This book is printed on acid-free paper
List of Tables
1.1 A knowledge-consent matrix 14
1.2 Equality vs freedom 15
14.1 Avoidance of military contractors 221
vii
List of Contributors
Sir Gordon Borrie, QC: Director General of Fair Trading,
1976-92
Sir Adrian Cadbury: Chairman, Committee on Financial
Aspects of Corporate Governance
Adrian L. Cohen: Member of the insolvency group in the law
firm Clifford Chance in London
Christopher J. Cowton: University Lecturer in Management
Studies and Fellow in Accounting, Templeton College,
Oxford
R. E. Freeman: School of Management, University of
Minnesota, USA
D. R. Gilbert, Jr: School of Management, University of
Minnesota, USA
Carol Jacobson: School of Management, University of
Minnesota, USA
ix
List of Contributors
Christopher Jones: Partner at Price Waterhouse, London,
specializing in the financial services industry
Jennifer Moore: Department of Philosophy, University of
Delaware, USA
Fred Pointon: Head of Group Credit Risk, National West
minster Bank Pic, London
Andreas R. Prindl: Chairman, Nomura Bank International,
London
Bimal Prodhan: Fellow in Finance, Templeton College,
Oxford
Patricia Werhane: Wirtenberger Professor of Philosophy at
Loyola University of Chicago, USA
x
Preface and
Acknowledgements
Even a cursory reader of the press will see much evidence of
serious ethical problems in the business world. The cases of
BCCI, the Maxwell Communications Corporation and Blue
Arrow are well known, yet they probably represent only a
small proportion of the type of ethical conflicts - or lapses -
in our markets. Ethical conflicts do of course arise in every
human endeavour, since ethics deals with human contact
and relations with others - ethical conflicts arise even in
academia and the Church.
One level of ethical conflict is between individuals such as
employees, managers, customers, borrowers or regulators. A
second level of conflict arises in the case of small groups
of individuals with common interests. Such groups may try
to protect their own personal group interest at the expense
of other individuals or groups. A third level can represent
conglomerations of small groups, again protecting common
interest at the expense of others. Such large groups form
themselves on the basis of age, profession, culture, political
allegiance and many other categorizations. Ethical conflicts
can occur both within and between the three groups.
xi
Preface and Acknowledgements
Ethical conflicts in the financial area are exacerbated
by the nature of its markets. Financial markets, institutions
and users deal with enormous amounts of money, often
by word of mouth and through ordinary communication
systems. Not only is the scale of potential gain much higher,
but the ability to achieve such gain is perhaps also augmented
by arcane and mysterious mechanisms. Conflicts of interest
abound. More to the point, financial markets are used for
transaction purposes and the allocation of risk return and
property rights between individuals, between time horizons,
between nations and across generations. This allocation
process and our free markets give rise to several types
of ethical conflicts for intermediaries/executives in the
financial system.
This volume deals with three basic types of ethical conflict
in finance, which we have classified as follows:
Conflicts between stakeholders, within and without the organi
zation. These raise questions such as: What kind of re
structuring is appropriate in a distress situation (which
group is to sacrifice how much) and how are priorities to
be set between employees, shareholders, bondholders and
the general public? How should performance-related pay
be administered between top management and employees?
Are traders interested in increasing potential gains for them
selves at the expense of the corporation?
Conflicts between holders of information. Is information a
private good or a public good? Since information is re
flected in prices, thus signalling potential gains or losses, is
insider trading harmful? How should disclosure rules be
formed?
Conflicts in societal values. These revolve around the con
flict of corporate goals (especially profits) and the ultimate
effect on the entire society in which companies operate.
Should corporate polluters pay compensation for their
xii
Preface and Acknowledgements
effect on other members of the community? Is privatization
a plausible objective even if it may mean unemployment on
a massive scale? Is debt forgiveness in the domain of the
banks or in the political arena? Should banks take societal
values into consideration when making credit or investment
decisions?
We have included academic analyses of such conflicts as
well as chapters on how practitioners face - and avoid -
them in practice. Our intent has been to give both a prac
tical and theoretical framework to these conflicts, to supple
ment the ethical codes now appearing in many companies.
Members of the Association of Corporate Treasurers, for
example, are bound by its ethical code, which is included
below as an Appendix.
This volume begins with a general introduction on
'Ethics, Finance and Society' by Bimal Prodhan, followed by
two broad discussions on the role of ethics in corporate life
and the marketplace by Sir Adrian Cadbury and Sir Gordon
Borrie. Authors from the City include Fred Pointon of
National Westminster Bank on conflicts of interest for
lending bankers, Adrian Cohen of Clifford Chance on
who sacrifices in bankruptcy, and Chris Jones of Price
Waterhouse on how to avoid insider trading. Chris Cowton
of Templeton College discusses ethical investment products,
while Andreas Prindl deals with privatization and the public
interest, with emphasis on Eastern Europe. Written intro
ductions give the background to each area and tie together
those practical viewpoints with academic articles on green-
mail and insider trading. Taken as a whole, the book codifies
and depicts the area of such ethical conflicts in finance for
the first time, for the use and guidance of Association of
Corporate Treasurers' members and students and other
participants in today's financial markets.
The editors would like to express their appreciation to
xiii
Preface and Acknowledgements
Harvard Business Review, Sweet & Maxwell and Kluwer for
their agreement to allow articles published by them to be
included in this volume.
Andreas Prindl and Bimal Prodhan
xiv
1
Ethics, Finance and
Society
Bimal Prodhan
Introduction
Ethics can be defined as a mode of human behaviour (in
corporating ends, norms, good, right and choice) in dealing
with others. In general this mode deprecates behaviour
which is only myopically self-serving, or which, conversely,
imposes large costs on others with small gains to oneself.
Finance as practised in the professions and in industry
is seen as a value-neutral positive discipline promoting
efficiency without regard to the social consequences which
follow from its products. Yet there are implicit value judge
ments in accepting the consequences of so-called efficiency.
Disregard of social consequences of the products of
finance is manifest in unethical behaviour in business in
general. Examples of such behaviour include insider deal
ings by management and others to boost share prices
artificially in the case of a takeover, tax fraud, lack of pollu
tion disclosure, manipulating accounting numbers to strike
abnormal profits, overcharging customers in defence con
tracts, leveraged buy-outs1 and the practice of greenmail.2
These are but the tip of the iceberg of unethical dealings.
3
