the ethics of finance chapter 7

8/14/2019 The Ethics of Finance Chapter 7

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The Ethics of Finance


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Investment Ethics

Corporations are created by capitalist order to seekprofit maximization.

Corporations exist to maximize shareholders value.

Social responsibility can be tolerated only when it is in

the corporations and shareholders interest.


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Investment Ethics (Cont..)

Enron violated the principle of the best interests of thecorporation.

Enrons executives were cheating its shareholders as

the corporation is an instrument for the maximization

of shareholders value.

Protecting investors is the primary responsibility ofcapitalist governments.


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Investment Ethics (Cont..)

Investors within capitalist order behave ethically when:

They seek the maximization of long run profit for the

corporation in which they invest.

Take appropriate account of social, environmentalconsequences likely to impact on the long term

profitability of the corporation.

Obey laws established by the capitalist state.


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Corporate Corruption

Corporations behave unethically when they maximizetheir profits in violation of the rules that legitimatelyconstrain profit maximizing behavior within thecapitalist order.

Price fixing and market manipulation is the norm andin most cases inevitable within capitalist order.

The immorality of price fixing is an unavoidable sin in

mature capitalist order


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Corporate Corruption (Cont)

It is the capitalist state and not the corporation which

is responsible welfare. for aggregate.

For example, the state has the power to make or not

to make a law prohibiting child labor.

Therefore, corporation cannot be said to be acting

unethically if it employs child labor in a country such

as Pakistan, where it is legal to do so.


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Upholding human rights is the basic and universalethical norm of capitalist order.

Therefore, corporate corruption may thus be defined

as either violation of human right and/or violation of

laws sanctioned by capitalist states.


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Invitations to Corruption:

Abolishing restrictions on mergers and acquisitions and

on one company owning the shares of another.

The removal of these restrictions has been a majorstimulant of the rapid concentration and centralization

of capital in mature capitalist economies.


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Corporate culture forces people to act immorally.

Ms Roddick, the founder of Body Shop blamed the

religion of maximizing profit for the corporations

necessary immorality. (Bakan)


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Standard traits of a human psychopath:

Put others at risk and manipulate them.

Make grandiose claims and avoid socialresponsibility.

Use marketing strategies.


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Downsizing is unethical.

Corporations violate laws and human rights because

they are designed for the minimization of costs and

maximization of profits.

Regulations tend to reduce profits.

Corporations invest heavily in political lobbying and

government donations.


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Corporate Governance

After the revelation of serious scandals in leading

multinational companies, attention was focused on theneed of strengthened corporate governance.

However, it had to settle with liberalization,

privatization, and de-regulation.

Regulation is an unnecessary barrier to trade in

services. (WTO)


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Individual Financial Corruption

Conflict of Interests

When an individual is carrying out a task for acorporation but he himself is affected by the outcome

of the task.

Corporations seek to reduce conflict of interests by:

Specifying the amount of stock the corp. will allow itsemployees to hold in suppliers firm.

Prohibiting employees from entering into specified

transaction with competitors.

Requiring senior management and directors to

disclose their financial statements.


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Individual Corruption (contd..)

Several measures are adopted by corporations

to promote employee ethical behavior:

Promoting and image building of a select few moral

guardians who champion values enshrined in vision

and mission statements and in the ethical codes ofthe corporation.

Empowerment of role models.

Reward ethical behavior and punish ethical

offenders.

I di id l C ti ( td )


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Fraud and Theft:

A deception which benefits the fraudulent person andinjures the defrauded party. (Arlidge)

Combating Fraud involves:

Reducing opportunities for fraud.

Undermining the motivation which induces fraud

Promoting the internalization of capitalist ethics by

individual employees.

I di id l C ti ( td )


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Insider Trading

It is the buying and selling of a corporations stock onthe basis of information available only to insiders.

The information available to insiders legally belongs to

the outsider: a collective body of the corporationsshareholders.

Insider trading in considered illegal and unethical within

capitalist order but it is difficult to apportion blame forit.

Thats why, no one was punished for the manipulated

KSE crises in March2005.


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Islamic Perspectives

Th O th d A h


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The Orthodox Approach

Interest is the lifeblood of capitalism. (MaulanaMaudidi)

Orthodox Islamic Approach rejects capitalist propertyform.

The person who dedicates himself to accumulation iscursed. (Imam Ghazali)

Professions which include interest and speculativetransactions are rejected.

Th O th d A h ( td )


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The Orthodox Approach (contd..)

Competitiveness is born of malice. Competition

destroys (mankind).

Wealth should be spent for the promotion of worship,

hajj and jihad. It should be spent in charity and for the

protection of honor and for serving those who serveyou.

Orthodox Islamic teachings thus reject bothmaximization of pleasure and maximization of the rate

of accumulation as legitimate economic objectives.

Th R i i i t A h


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The Revisionist Approach

Monzar Kahf has described the Islamic financemovement as the rise of a new power alliance ofwealth and Sharia scholarship.

Financial markets are seen as serving necessary

functions for the achievement of Sharaiah endorsedpurposes.

Many interest alternatives have been invented for both

money and capital market transactions, the mostwidely used one is MURABAHA.


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THANK YOU

the ethics of finance chapter 7

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