norms suppliers confidentiality fairness ethics responsibility · contents issue 25, 2017 feature...

PUBLISHED BY ASIAN INSTITUTE OF FINANCE | www.ai f .org.myISSUE 25 2017 | PP18302/11/2013 (033704) | ISSN 2462-1226

Professionalism

Professio

nalism

Professio

nalism

Professio

nalism

COMPETENCE

INTEGRITYFAIRNESS

CO

NF

IDE

NT

IALI

TY

OB

JEC

TIV

ITY

TRUST

NormsN

orm

s

Character

Mo

ralit

y

Standards

Cus

tom

ers

Regulators

Leadership

Res

po

nsib

ility

Val

ues

Norms

Principles

Practices

Polic

yRules

SuppliersVoluntary

Advocacy

Suppliers

Regulators

RegulatorsHonesty

Beh

avio

ur

Gui

del

ines

Culture

Codes

Character

Cul

ture

Reputation

Co

nduc

t

Business

Industry

Honesty

Organisations

IndustryIndustry

TRU

ST

Leadership

Leadership

Leadership

Honesty

Honesty

Cus

tom

ers

Sup

plie

rs

Sup

plie

rs

Ad

voca

cy

Bus

ines

s

Bus

ines

s

Bus

ines

s

Ho

nest

yR

eput

atio

nCo

n�d

ence

Vo

lunt

ary

Reg

ulat

ors

Co

n�d

ence

Reg

ulat

ors

Polic

y

GuidelinesPr

inci

ple

s

Prin

cip

les

Prin

cip

les

IndustryIndustry

Leadership

TRUST

FAIR

NE

SS

CO

NFI

DE

NTI

ALI

TY

Guidelines

Polic

yReputation

Rep

utat

ion

Morality

Voluntary

Suppliers

Regulators

Policy

Guidelines Rules

Rules

Co

des

Prin

cip

les

No

rms

Cha

ract

er

Culture

Organisations

Industry

Morality

Morality

Morality

ReputationOrganisations

Culture

Feature

A Looming Crisisof Con�dence?

Personality

Peter BellewCEO, Malaysia Airlines

Honesty

Guidelines

Behaviour

Con�dence

Org

anis

atio

ns

Individuals

ETHICS

CONTENTS Issue 25, 2017

Feature

24A Looming Crisis of Confidence?Ethical Challenges for the Malaysian Financial Services Industry

Personality

10Peter Bellew, Chief Executive Officer, Malaysia Airlines Berhad

Talking Points

5The Future of Corporate Ethics You Can Run but You Cannot Hide

15Why Good People Do Bad Things

20Conduct Top-Down and All-Around

30 Protecting ReputationThe Best Approach to Ethical Business

AIF Board of Directors Editorial Team

Chief EditorDr Raymond Madden, FRSA

EditorNeil Smith

Publications ManagerParamjeet Kaur

DISCLAIMER: The Asian Institute of Finance does not represent nor warrant the completeness, accuracy, timeliness or adequacy of this material and it should not be relied on as such. The Asian Institute of Finance neither accepts nor assumes any responsibility or liability whatsoever for any data, errors or omissions that may be contained in this material or for any consequences or results obtained from the use of this information. This publication does not necessarily reflect the views or the positions of the Asian Institute of Finance. (838740P)

Published by: Asian Institute of Finance Unit 1B-05 Level 5 Block 1B, Plaza Sentral

Jalan Stesen Sentral 5 50470 Kuala Lumpur

Printed by: Percetakan Okid Sdn Bhd No. 2, Jalan SS13/3C

Subang Jaya Industrial Estate 47500 Subang Jaya, Selangor okidpress.com

Datuk Muhammad bin IbrahimChairman of the BoardGovernor, Bank Negara Malaysia

Tan Sri Dato’ Seri Ranjit Ajit SinghVice Chairman of the BoardChairman, Securities Commission Malaysia

Tan Sri Azman HashimChairman, AmBank Group & Chairman,Asian Institute of Chartered Bankers

Dato’ Sri Zukri SamatManaging Director, Bank Islam MalaysiaBerhad & Chairman, Islamic Banking and Finance Institute Malaysia (IBFIM)

Datuk Seri Dr Nik Norzrul ThaniNik Hassan ThaniExecutive Chairman, Zaid Ibrahim & Co

Mr Kung Beng HongDirector, Alliance Finance Group Berhad & Alliance Bank Malaysia Berhad

Mr Hashim HarunChairman, The Malaysian Insurance Institute (MII)

Mr Ken PushpanathanChairman of the AIF Audit Committee

Ethical issues in the financial services industry affect everyone, as almost all of society are consumers of its products and services. Given the vital role that financial institutions play, moral hazards may be more acute and it is therefore unsurprising that the industry should be subject to the highest ethical standards. Ethical dimensions create an environment based on trust and make economic transactions more predictable for producers and consumers.

In this edition of Asian Link, Tan Sri Dato’ Dr Mohd Munir Abdul Majid, Chairman, Financial Services Professional Board (FSPB), and Chairman, Bank Muamalat Malaysia Berhad, highlights

the importance of financial institutions having a duty to adhere to sound business conduct based on good ethical standards in line with regulations and laws. He suggests that beyond good enforcement and explicit codes financial institutions need to internalise professional conduct by developing a strong culture of professionalism and ethics.

Our personality for this edition, Peter Bellew, Chief Executive Officer of Malaysia Airlines Berhad (MAB), talks about how extremely important professionalism and ethics are in MAB and how, following restructuring, emphasis has been given to ethics and compliance. MAB has set up a dedicated department tasked to look into matters pertaining to ethics and compliance which includes formulating new procedures, training and enforcement.

Dr Simon Longstaff, Executive Director of The Ethics Centre, Australia, expresses his thoughts on why good people do bad things. He says that beyond a prudent minimum level of formal compliance, it is essential that people working within organisations be recruited, mentored and evaluated in terms of their character and to have a personal ethical framework of core values and principles that ‘resonate’ with the equivalent ethical foundations of their employer.

According to Timothy Erblich, Chief Executive Officer of the Ethisphere Institute, USA, today’s trends in corporate ethics are going to grow in relevance and the demand for ethical companies will increase. Younger generations have a healthy appetite for ethics, so resistance is futile as they often measure the quality of a company not only by what they sell but by who they are and, for this reason, it is important for companies to stay ahead of the curve.

Businesses must be built on an acceptable ethical foundation to ensure they have a long-term ‘licence to operate’, meet the needs of their customers and comply with regulations. In his article Datuk John Zinkin, Managing Director, Zinkin Ettinger Sdn Bhd, stresses that once a financial institution’s reputation is called into question, the resulting loss of confidence can overwhelm the best people, products and processes.

AIF, working with the Financial Services Professional Board, has conducted a study on the ethical climate in the financial services industry in Malaysia, including what safeguards are in place and what more needs to be done to retain the public’s trust. The article entitled ‘A Looming Crisis of Confidence – Ethical Challenges for the Malaysian Financial Services Industry’ highlights the key findings from this study and is a wake-up call for all of us in the industry.

I hope you find this edition of Asian Link insightful and an interesting read. We welcome feedback on our articles and do follow us on LinkedIn.

Dr Raymond MaddenChief Executive Officer, AIF

EDITOR'S NOTE

4 Asian Link | Issue 25 2017

Timothy Erblich, Chief Executive Officer of the Ethisphere Institute, USA, says that corporate ethics is going to grow in relevance in the future and the demand for ethical companies will increase. Younger generations have a healthy appetite for ethics, so resistance is futile as they often measure the quality of a company, not only by what they sell, but by who they are and, for this reason, it is important for companies to stay ahead of the curve.

few weeks ago I was proud to host Ethisphere’s 9th annual Global Ethics Summit in New York City. The Global Ethics

Summit is an opportunity for companies from around the world to celebrate what makes them great businesses with corporate cultures that shine above the rest. At the summit great ideas were exchanged and, during one of the keynote panels, I heard something that literally stopped me in my tracks, not because it was bad or unethical, but because it just sounded so strange by today’s standards.

We live in an age where ethics matter more than ever. In the wake of a greed-induced worldwide financial crisis that crippled the markets and caused global panic, consumers, investors and regulators alike have demanded cultural

A

Timothy Erblich

The Future of Corporate Ethics You Can Run but You Cannot Hide

Issue 25 2017 | Asian Link 5

TALKING POINTS

reforms of the corporate world. So when distinguished businessman Stanley Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein, a Fortune 500 medical devices company with annual revenues in excess of US$10 billion, said that twenty one years ago his company attempted to insert a statement about ethics and corporate social responsibility into their financial statements only to be rebuffed by investors, all I could think of is how times have changed.

Of course, today you would be hard-pressed to find a successful company that does not prioritise ethics. The Corporate Social Responsibility Report has become standard practice in the business world and CEOs are more likely than not to include a component of ethics and responsibility in every public presentation – even when delivering quarterly financial reports. Those same investors, who once shunned any discussions about ethics, are now embracing the notion that being a good corporate citizen is, in fact, good for business. Why is that? Probably because they view a good corporate reputation as an inoculation from an episode of bad public relations. Investors are particular about controlling risk and companies that are less likely to make negative headlines are a smaller risk.

The Ethisphere® Institute is the global leader in defining and advancing the standards of ethical business practices that fuel corporate character, marketplace trust and business success. Earlier this

... today you would be hard-pressed to find a successful company that does not prioritise ethics.

TALKING POINTS


year, Ethisphere and Kroll released the 2017 Anti-Bribery and Corruption Benchmarking Report, which highlighted that companies with engaged leadership teams believe that their bribery and corruption risks will decrease in the coming year. At the same time, the reputational risk associated with bribery and corruption allegations remains a top-of-mind issue for most respondents.

In essence, all research points toward a clear link between ethics and performance and, with more involvement from leadership, we are seeing that these efforts are being prioritised.

So it made me wonder, given how much has improved in two decades, what might the state of corporate ethics look like in 2037? In short, I think today’s trends are only going to grow in relevance and the demand for ethical companies will only increase. As the research shows, younger generations have a healthy appetite for ethics, so resistance is futile. Millennials, or Gen Y, and Gen Z often measure the quality of

... today’s trends are only going to grow in relevance and the demand for ethical companies will only increase.

How does your company measure corporate ethical culture?

77%

73%

69%

66%

66%

57%

49%

22%

Questions on measuring employeeperceptions of ethical culture in HRengagement survey

Review of social media

Management interviews on culture

Employee focus groups or interviews

Physical site visits and assessments

Dedicated employee perceptions of ethical culture survey

Formal review following investigations thatinclude culture of ethics

We use a unique approach

a company not only by what they sell but by who they are and therefore, it is important for companies to stay ahead of the curve and make ethics a vital part of their business plan or they could find themselves on thin ice.

We have said it time and time again, what gets measured, gets done. Each year, Ethisphere surveys companies across the globe to create the World's Most Ethical Companies’ list, which is announced annually in March. In 2017 one hundred and twenty four companies

made it to the coveted list. Ethisphere’s notion that financial value and ethics are inexorably tied together has been explained through an analysis of how stock prices of publicly-traded 2017 honorees compare to the S&P 500 Index over the last two years. The analysis demonstrates a 6.4 percent premium which Ethisphere refers to as the ‘ethics premium’. To expand on this further, the entire community of World’s Most Ethical Companies believe that customers, employees, investors and regulators place


a high premium on trust and that ethics and good governance are key to earning that trust.

Take Tokyo-based Kao Corporation, for instance, an 11-time World’s Most Ethical Companies honoree that continuously stands by its mission to enrich the lives of people globally and contribute to the sustainability of the world. As one of the leading companies in Japan with its household and personal care, cosmetics and chemical businesses, the company has been engaging in business for over 130 years with integrity – a core value spelled out the ‘Kao Way’. Very early in its journey, the company recognised that millennials and Gen Z are less fixated on a company’s financial performance but more interested in its potential to do good. As a result, Kao has made sustainability a major part of its business operations. This is reflected in all aspects, including how it designs its products. Kao adopted a universal design which facilitates the enrichment of the lives of consumers through a wide range of its products. There are three pillars to its universal

design programme: products are user-friendly and developed with a focus on accessibility, safety and ease; they bring joy to the daily lives of consumers; and they contribute to the promotion of social inclusion through the consideration of diverse lifestyles.

So, how important are ethics in Japan? A recent survey done by US-based Aflac, a Fortune 500 company and also an 11-time World’s Most Ethical Companies honoree that sells a variety of health and life insurance products in the US and Japan, shows just how deep the desire for companies to be good corporate citizens actually runs among consumers and investors. According to this study, 81 percent of potential customers are more likely to purchase products from a company active in philanthropic efforts year-round, rather than just in times of need. What is even more concerning to business executives is that 75 percent of consumers are likely to take some negative action ranging from social media posts, negative recommendations to family and friends and even boycotts against

... the stock prices of those that appear on the 2017 list of World’s Most Ethical Companies outpaced the S&P 500 Index by more than 6 percentage points.

Aflac President of Global Operations, Paul S. Amos II.

TALKING POINTS


companies they deem irresponsible. In addition, companies perceived as unethical risk losing 39 percent of their customer base while, as I explained earlier, the stock prices of those that appear on the 2017 list of World’s Most Ethical Companies outpaced the S&P 500 Index by more than 6 percentage points.

A commitment to ethical business is more important now than ever before. One theory has to do with the millennial generation. Not only are they currently the largest demographic in the workforce, but they are incredibly skeptical, and why not? This is the generation most impacted by the aftermath of an ethics-induced financial meltdown. They are the ones whose hopes and dreams were put on hold because of the bad actions of the generation that preceded them. How many of them saw their family’s college savings evaporate, resulting in huge tuition debts before they even had a chance to graduate and begin their careers? How many saw their trust in the free market system forever changed? Of course they are skeptical and with good reason. More than that, they have all the means to act on these emotions in the palm of their hands.

Twenty-one years ago, when Henry Schein’s plan to focus on ethics was rebuked by investors it was a different world. There were no mobile apps and the internet was in its relative infancy. Most people logged on to their computers just to hear a familiar voice say, ‘you’ve got mail’. It was not the research tool that it is today. However, today the internet and smart phones are nuclear arrows in the quiver of every potential consumer and investor. This has impacted on the corporate world in a big way. Today, companies that could once seek sanctuary by omitting discussions on ethics and responsibility from their financial reports will find very quickly that they can run but they cannot hide. Today’s consumer is going to find out one way or another.

Looking through the crystal ball I can see a day when the term ‘corporate ethics’ rolls of the tongue as easily as the air we breathe, and I see this commitment going global. Our inaugural ethics summits in Dubai and Tokyo and similar events in Brazil and Singapore revealed a hunger for sharing best practices that companies can employ to improve their compliance and governance programmes. Whether in the United States, Europe or South America, companies are learning that they have no choice: they will either adapt to the will of the consumer or perish. In fact, I envision the day when being honoured as the World’s Most Ethical Company becomes universal because only those who are ethical will continue to exist.

Timothy Erblich is Chief Executive Officer, Ethisphere Institute, USA.

Peter BellewPeter Bellew was appointed Chief Executive Officer and Group Managing

Director of Malaysia Airlines Berhad (MAB) in July 2016. Prior to this appointment he was the Chief Operations Officer at Malaysian Airlines Berhad.

Before joining the national carrier Peter was at Ryanair in various roles since 2006 with increasing responsibility, leaving the airline as the Director of Flight

Operations for up to 72 bases, operating a total of 320 aircrafts.

Peter is a veteran in the tourism and aviation industry with over 30 years of experience in the travel business and 20 directly in aviation.

PERSONALITY

10 Asian Link | Issue 25 201710 Asian Link | Issue 25 2017

PERSONALITY

Issue 25 2017 | Asian Link 11Issue 25 2017 | Asian Link 11

Q. Tell us about your career before taking up the position of CEO of Malaysia Airlines? A» I have been in the travel business some 30 years and 20 directly in aviation. I joined Malaysia Airlines Berhad (MAB) as Chief Operations Officer on 1 September 2015 before becoming CEO in July 2016.

Before this I was at Ryanair in various roles since 2006 with increasing responsibility, leaving the airline as the Director of Flight Operations for up to 72 bases, operating a total of 320 aircrafts. In this role, I ensured cost effective operations and punctuality at more than 150 airports in over 30 countries, created a training organisation for 600 new Boeing pilots, built employee representative council structures in 19 countries, opened 61 new overseas bases and introduced new technologies to reduce costs across the airline.

Before Ryanair I was the CEO and founder of vbnets.com/ wapprofit Ireland established in 1998, an IT service business focused on mobile wireless technology.

Q. What are some of the key challenges facing you as CEO of Malaysia Airlines and how do you plan to overcome them? A» The biggest challenge is complacency. We have good momentum at the moment and it is important not to get distracted. The focus in the first half of 2016 was on reducing cost and improving customer experience. The second half of 2016 saw a hard push on revenue generation with more aggressive sales and marketing initiatives. This has translated to improvements in passenger load factors in the second half of 2016 at 80 percent against 72 percent in 2015. Load factor hit an impressive 90 percent for the month of December with the airline making a profit in the quarter.

We also focused on accelerating cost-saving initiatives, which are tied to the KPIs of each business unit and subsidiary. These efforts are in tandem with a drive to realise cost savings as negotiated by the procurement division through its work on contract negotiations with all major suppliers.

The airline and the Group finished the year ahead of budget and the Group’s turnaround initiatives are delivering positive results. Overall, we recorded a smaller loss than initially projected under the business plan for the fiscal year 2016 and we are on track to achieve our goal of being profitable again by 2018 and listed on the stock exchange by March 2019.

Q. What is your strategic vision for Malaysia Airlines and where do you think the areas of future growth will be? A» Our focus is to be a five-star premium Asian airline, offering the best of ‘Malaysian Hospitality’ to 15 million customers a year, travelling to 54 destinations in 21 countries. At the core of our brand is the ‘Golden Rule’ – treat customers as you would wish to be treated yourself. The ‘Golden Rule’ will be supported by simpler customer service policies and a large investment in training in 2017.

Our guests are at the heart of everything we do and we are working hard to improve and enhance our overall product.

Technology will be a key enabler for us in this journey. A full technology and digital transformation is underway within Malaysia Airlines – all with the aim of delivering the very best in terms of luxury, comfort and getting everyone to their destinations on time, every time.

As an airline on the journey of the greatest transformation ever, the need to leverage on technology is crucial. The ‘Malaysia Airlines Travel Hackathon’ is an important event which we recently launched to promote innovation in technology. Malaysia Airlines is the first airline in the country

premium Asian airline,

15 millioncustomers a year,

travelling to

54

destinationsin 21 countries.

-

PERSONALITY


to embark on this innovative approach to encourage programmers, developers and creative designers to develop solutions for the customer. Taking from this year’s theme ‘Innovate Traveller’s Experience’, our ‘Travel Hackathon’ is all about working with the digital community to improve the customer experience and the efficiency of our operations.

This year will also see us collaborating with our partner Amadeus, to launch a brand new passenger service system (PSS). The new system is termed internally as the ‘Heart of Malaysia Airlines’ and promises to also enhance the overall customer experience to make it easier and more seamless for our customers from the point of booking their flights right up to checking-in and boarding. This will be a huge step forward for Malaysia Airlines as we join over 120 airlines around the world that are using the same system.


Technology will be a key enabler for us in this journey. A full technology and digital transformation is underway within Malaysia Airlines – all with the aim of delivering the very best in terms of luxury, comfort and getting everyone to their destinations on time, every time.

Q. How is Malaysia Airlines rebuilding its reputation following the high profile incidents in 2014? A» Slowly but surely.

The incidents hit us hard. Business aside we lost friends and family and we will never forget. No group in history has been through what we have been through so it has built a bit of steel among us. There is a mission to fix it. It will never leave us, but maybe the tragedies give us the will to go on.

We owe it to them to ensure this turnaround is a success.

Q. There was some restructuring of operations and services in 2015. What was the aim of this restructuring and has it been successful? A» Malaysia Airlines went through a restructuring under its main shareholder Khazanah, which included a network rationalisation exercise which entailed some reduction in capacity.

1 September 2015 marked the start of our new company Malaysia Airlines Berhad (MAB), which replaced Malaysian Airlines System Berhad.

Since then we have been working hard and have made solid progress and the aggressive sales and marketing we have launched is resonating with customers. Passengers vote with their feet and our forward bookings in the next 6 months look very healthy and show we are on the right track. There is still a long way to go but with the progress we have seen so far I remain optimistic.

Q. The theme of this issue of Asian Link is professionalism and ethics. How important are these at Malaysia Airlines? And in business generally in your opinion? A» Professionalism and ethics is obviously extremely important in any industry.

The same approach has been applied at MAB and under the new company a lot of emphasis has been given to ethics and compliance.

A dedicated department has been tasked to look into matters pertaining to ethics and compliance which includes formulating new procedures, training and enforcement.

Q. How important is human capital development at Malaysia Airlines and what strategies do you have in place to develop existing staff and identify future talent? A» Human capital development has always been one of the critical enablers for our business turnaround plan. The end goal is that the future generation of leaders for the airline will be recruited entirely from within.

We have put in place our talent management and leadership development framework with clear strategies on how we can accelerate our people development within the organisation. Our focus in 2016 was to strengthen the management and supervisory levels via several internal human capital development projects. This includes projects such as Project Olympic, where top employees were identified and given training to ensure their progression.

In 2017 we shall focus on managing performance and strengthening our junior management group in terms of leadership competencies and capabilities.

In alignment with our ‘Golden Rule’ we are rolling out enhanced customer service modules and training to all relevant employees to ensure our customers have the best experience when travelling with us.

We are also building a succession plan for the senior management team to ensure a strong leadership pipeline and bench strength for the Group.

Q. What is the best piece of advice you have been given? A» All the most successful people I have worked with start at 7.30am and are incredibly focused. A lot of success in business is about sheer hard work and having a laser beam focus on short and medium-term priorities. It is encapsulated in a phrase: focus next on the task you may get fined for not doing well.

Q. How do you relax? A» I play guitar and sing very enthusiastically and loudly – although not very well. I love hanging out by the pitch or courtside watching my kids grow up.

Peter Bellew is Chief Executive Officer, Malaysia Airlines Berhad.

PERSONALITY


Human capital development has always been one of the critical enablers for our business turnaround plan. The end goal is that the future generation of leaders for the airline will be recruited entirely from within.

E


TALKING POINTS

Purpose, values and principles provide the foundations on which all cultures are built. But it is not enough for organisations to recruit and mentor people of good character who are aligned to their core purpose, values and principles. Dr Simon Longstaff, Executive Director of The Ethics Centre, Australia, says that it is also essential that employees have a personal ethical framework of core values and principles that ‘resonate’ with the equivalent ethical foundations of their employer.

Dr Simon Longstaff

Why Good PeopleDo Bad Things

very society has a proportion of its members who are malicious – even criminal – in their contempt for others.

However, most people – for most of the time – live and work in a state of quiet decency. That is, the majority of any community will be honest, diligent and concerned not to cause avoidable harm to others. Given this, it often comes as something of a surprise to realise that, to a considerable degree, the bad things that happen in the world are not the product of the malicious few. Rather, it is the decent majority that cause the greater part of harm.

Now, this may seem to be wrong-headed. However, if you consider some of the world’s great, collective disasters

TALKING POINTS


Apart from recruiting people of general good character, it is also essential that employees have a personal ethical framework of core values and principles that ‘resonate’ with the equivalent ethical foundations of their employer.

1 My area of expertise is in Western philosophy, so that is the source from which I draw my insights. I will leave others more familiar with Eastern traditions to contribute additional perspectives.

– such as the ‘global financial crisis’ – we do not find the machinery of destruction being driven by just a few bad people (mainly men). Instead, the engines are manned by a ‘cast of thousands’ – loyal lieutenants who enable the damaging conduct and those who carry out the immediate plans. I have in mind here the lawyers and accountants who construct schemes that are clearly conceived to side-step relevant legislation and regulation, as well as the countless

‘foot soldiers’ who carry out day-to-day operations.

Having spoken to many people who have been complicit in wrongdoing over the years, I have become used to them claiming to be puzzled by their own conduct. With the benefit of hindsight, they have no problem in seeing that what they have done is wrong. However, when they look back at their former selves, they are convinced that what seems so clear today, was completely

unseen at the time. It is tempting to think that the claim of past ‘blindness’ is just an attempt to excuse the inexcusable. However, in every case of someone telling me such a story, I have believed them – not because I am gullible (for I am not) but because what they said rang true.

There are various explanations for how it can be that essentially good people cannot see the wrong that they do1. The first explanation that we can


consider comes from the work of the ancient Greek philosopher, Aristotle. He argued that the person of practical wisdom (the phronimos) is only able to see the world clearly because their vision is not distorted by ‘vice’. For example, Aristotle argues that a glutton – who is unable to control their appetite – will always overestimate how much it is really good for him to eat. Similarly, a coward will always overestimate the danger that they face in any situation. Given this, Aristotle argues in favour of a kind of moral development in which each individual is guided by the example of wiser mentors who help them to develop the ‘golden mean’.

The ‘golden mean’ is the midpoint between two extremes. So, in the case of the virtue of ‘courage’, the mid-point sits between the extreme of cowardice and its opposite, which is recklessness. On this view, a courageous person is not recklessly indifferent to danger – nor is he or she overwhelmed by it. Instead, the courageous person picks the right time and the right means to confront his or her fears and act.

The practical implications of this model are clear. It is not enough that well-governed systems be regulated by a compliance system of comprehensive regulation and surveillance (external or internal). Beyond a prudent minimum level of formal compliance, it is also essential that people working within organisations – and across systems as a whole – be recruited, mentored and evaluated in terms of their character – and not just their technical mastery. In turn, this implies that there will exist a corps of senior practitioners who can act as ‘wise guides’ to those who fall under their care and example.

Beyond a prudent minimum level of formal compliance, it is also essential that people working within organisations – and across systems as a whole – be recruited, mentored and evaluated in terms of their character – and not just their technical mastery.

Apart from recruiting* people of general good character, it is also essential that employees have a personal ethical framework of core values and principles that ‘resonate’ with the equivalent ethical foundations of their employer. This places an obligation on organisations to establish a clear and coherent ethical framework that, as a minimum, defines an organisation’s purpose, values and principles.

Mentors – and those in their care – consequently need to be attentive to

consider the costs already borne as a result of our failure to address such issues. What is the cost to individuals, societies and the world of the global financial crisis? In financial terms alone, it is trillions. The human cost – often borne by the most vulnerable – is incalculable.

Despite the wisdom that can be derived from Aristotle in this area, it is not enough. The second insight to come from ancient Greek philosophy is even more telling. Before Aristotle there was Plato and before Plato there was

It is possible to form a reasonably good appreciation of a person’s character during the recruitment process by a) asking them to give examples of situations in which their ethics were tested – and an explanation of how they responded; and b) by proposing them scenarios in which a range of possible responses are open to them in order to have them make a choice and give reasons for their decisions. Finally, there are tools under development (such as The Ethics Centre’s ‘Waymaker’ app) that allows one to diagnose the dominant ethical decision-making styles of individuals. A combination of these methods will usually reveal a candidate’s ethical orientation.

Ethical recruitment*

these ethical foundations. Where there is a ‘bad fit’, it makes sense for people to leave an organisation and find one where greater alignment can be achieved.

Some will object that this is an expensive (in terms of time and money) and ‘subjective’ approach to take during times of constrained resources. My response would be to ask critics to

Socrates and his great claim was that ‘the unexamined life is not worth living’. Although philosophers have debated the precise meaning of this claim for millennia, I believe that there is a simple enough insight to be derived from it.

Returning to the example of good people who have done bad things – and their inability to understand how they

TALKING POINTS


Organisations that rely on top-down systems of compliance and control are simply too vulnerable. That is why good governance is increasingly understood in terms of the creation and maintenance of an ethical culture in which good intentions are reflected in consistent conduct, structures, policies and practices.

came to ‘do wrong’ – there is a further dimension to the claim that people did not ‘see’ what they were doing as being wrong. It is that people did not ‘see’, because they did not ‘look’! And the reason why they did not look? It is because, at the time, they felt that there was no need look because ‘everyone was doing it’, because ‘that is just the way things were done back then’.

Along with the perception of hypocrisy (where organisations and their leaders say one thing and do another), unthinking custom and practice is the great enemy of ethics. Unfortunately, ‘blind habit’ is dangerous even when it is basically virtuous. That is why it is not enough for organisations to recruit and mentor people of good character who are aligned to their core purpose, values and principles. That is necessary, but not sufficient. Such people need to be trained to make conscious decisions that explicitly tie their choices back to an organisation’s or profession’s core ethical framework.

It is only if people think before they act then it is possible to avoid the slow corruption of cultures that arises out of a progressive ‘normalisation of deviance’. That is, organisations need to create and support cultures in which constructive questioning of the status quo is seen as being admirable and is thus rewarded.

There are some cultures (in both the West and East) in which hierarchical structures work against the kind of reflective practice that I am advocating. Such cultures are quite resilient when the pace of change is relatively slow and when decisions of strategic significance are only able to be made by those near the top of the pyramid. However, that is not the world in which we are now living. The pace of change is furious and technological developments (such as the ubiquity of smartphones and social media) mean that even the most junior person can cause strategic effects if they act badly. Organisations that rely on top-down systems of compliance and control are simply too vulnerable. That

is why good governance is increasingly understood in terms of the creation and maintenance of an ethical culture in which good intentions are reflected in consistent conduct, structures, policies and practices. In other words, these are cultures of integrity.

It is for all of the reasons given above that The Ethics Centre has developed a suite of products that allow organisations to define, measure and manage their ethical foundations and the cultures that grow out of them. After almost 30 years of work in this area, in Australia and abroad, the lessons are simple and compelling.

Everything that I have said so far applies to all of an organisation’s employees. However, I should also note that there is a special obligation that falls on the shoulders of those who claim the status of belonging to a profession. To make this claim is to invoke the privileges of a group that explicitly offer to act for the public good – even when engaged in commerce. Members of the professions


Geoff Cousins (previous board member of The Ethics Centre), Peter Joseph AM (Chairman of The Ethics Centre), Her Excellency the Honourable Quentin Bryce, 25th Governor-General of the Commonwealth of Australia, and Dr Simon Longstaff AO, at the official opening of The Ethics Centre in Legion House, Sydney, in 2013.

serve as informal ‘gatekeepers’ whose ‘ethical skin’ is thick enough to resist the wear and tear of commercial demands – where self-interest is often the principal driver.

Well-governed societies depend on members of the professions exercising vigilance as an effective complement to formal systems of regulation and surveillance. In return for performing this function, society grants members of the professions a series of special privileges (such as an exclusive right to perform certain income-generating tasks). However, the ‘social compact’ that arises can only be discharged if members of the professions are especially vigilant and adept at ‘seeing’ the true character of the conduct that surrounds them. Beyond this, they must also possess the moral courage to act in the face of evident wrong-doing.

Without them, good people will continue to do bad things.

Dr Simon Longstaff AO FCPA is Executive Director, The Ethics Centre, Sydney, Australia.

Well-governed societies depend on members of the professions exercising vigilance as an effective complement to formal systems of regulation and surveillance.

x!

HOW THE MENTOR HELPS

CAREERINTRODUCTIONS

PROBLEM SOLVING EXPLORE WORKMETHODS

CORPORATEUNDERSTANDING

OVERCOME HURDLES CAREERPLANNING

Conduct Top-Down and All-AroundTan Sri Dato’ Dr Mohd Munir Abdul MajidChairman, Financial Services Professional Board (FSPB), shares his vision for an ethical future for financial services.

Tan Sri Dato’ Dr Mohd Munir Abdul Majid

TALKING POINTS


e are seeing populist movements in different countries rising up against the political and financial establishment, most notably the vote for Brexit in the UK and for Donald Trump’s election as

the 45th President of the United States.Too generally seen as a demonstration against

globalisation, this can also be seen as a reaction by the marginalised against the powerful elite who are seen to benefit from an infrastructure of privilege and a different set of rules.

I dare say the same kind of sentiment is to be found in the financial services industry. In a survey commissioned by the Financial Services Professional Board (FSPB), an industry-styled initiative launched by Bank Negara Malaysia and the Securities Commission Malaysia to develop a strong culture of professionalism and ethics across the financial

W

In this article Tan Sri Dato’ Dr Mohd Munir Abdul Majid, Chairman, Financial Services Professional Board (FSPB), talks about financial institutions having a duty to adhere to sound business conduct based on good ethical standards in line with regulations and laws. Beyond good enforcement and explicit codes financial institutions need help to internalise professional conduct.


services industry, there was a response of scepticism about codes of ethics and conduct which are seen as not being adhered to by those at the top.

A study by IDEAS (Institute for Democracy and Economic Affairs) on Whistleblowing in Malaysia established that only 0.3 per cent of cases reported to the Malaysian Anti-Corruption Commission (MACC) are submitted by whistleblowers. One of the main reasons identified was the lack of legal protection against retribution by the powerful.

There does therefore seem to be a fair amount of apathy towards some of the codes of ethics and conduct which are not followed by or do not seem to apply to those at the top and, at the same time, a fear of landing in trouble if something is done about it as, under the infrastructure of privilege, the rules are deemed to be applied discriminately.

This is the kind of tension that can result in potentially calamitous outcomes – as arguably can be seen from the Brexit vote and the Trump election. In a financial institution, a deepening gulf between top leadership and those below will at best result in sub-optimal performance because resentment does not encourage commitment and efficiency.

At its worst there can be labour and union strive. A good part of top management's time could be taken up by firefighting and human resource problems.

If nothing else, the utilitarian case for good ethics and conduct – right across

a financial institution – should move the board, top management and all members of staff to work together to have a well-functioning and ethical organisation for everyone's good.

This was what moved Lee Kuan Yew to fashion a Singapore which works, where corruption is not tolerated and the rules and laws are applied top-to-

bottom without fear or favour. It was a behaviourist approach based on effective enforcement. This is the best approach because all other ways will take a long time.

So there is no alternative to uniformly-applied rules, regulations and laws. This is the challenge to regulators. Yes, they need good information to work on – but they will only get it if those providing the information are protected.

A structure of accountability that is asymmetrical, institutional top-down decision-making which is not transparent and a climate of fear – these are all conditions which will not result in good information coming forth.

Of course, beyond the deterrence of good enforcement, if most of the time is taken up dealing with violations, it would mean the whole system is not working. Financial institutions exist to conduct business and to make a profit, so good ethics and good conduct must prevail if organisations do not want to waste shareholder capital on scandals and investigations.

The utilitarian case for good ethics and conduct – right across a financial institution – should move the board, top management and all members of staff to work together to have a well-functioning and ethical organisation for everyone's good.

TALKING POINTS


Thus, top-down and bottom-up, they have a duty to adhere to sound business conduct based on good ethical standards in agreement with the rules, regulations and laws.

It is not a desirable situation if all the time is taken up enforcing rules and laws, and if – assuming there is protection for the whistleblower – accusatory fingers are ceaselessly pointed at some boss for his or her misdeeds. That would mean the whole system is not working. There must be initiatives taken to help financial institutions help themselves to secure a level of conduct and professionalism which is for their own good.

What I envisage for FSPB, once the codes of ethics and conduct are established, is work on two matters which would assist financial institutions in gaining adherence to the codes even as they strive to prosper in their businesses.

First, an internalisation handbook to help financial institutions develop human resources cognisant of the need for and the value of ethical professional conduct. We are not talking of lessons in morality but of value being attached to such conduct in performance appraisal.

There is no reason why such appraisals by the heads of risk, compliance and audit cannot take place separately from that undertaken by the head of department. The CEO can also be evaluated by the relevant board committees with independent input from risk, compliance and audit.

The board itself, as part of the peer review process, should reserve a column for measurement of individual

There must be initiatives taken to help financial institutions help themselves to secure a level of conduct and professionalism which is for their own good.

FINANCIAL SERVICES PROFESSIONAL BOARD | LOGO

COPYRIGHT© DIA BRANDS | 12.06.2014 | FSPB


directors against ethical and professional conduct. The chairman of the board should initiate a discussion on how the organisation has performed against codes of ethics and conduct, at least a couple of times a year.

A more serious and better structured conduct review process would breathe life into the many drafts of the different codes that exist. At the same time, FSPB should run workshops and publish the deliberations on case studies to highlight conduct failures and corporate disasters.

For example, a workshop on what went wrong at Enron might draw attention to the series of questionable relationships internally and with external parties which condemned the company to bankruptcy. The causes of the Western financial crisis in 2008 or the Asian financial crisis of 1997-98 could be dramatised to remind us greed, lack of transparency and poor corporate governance can shatter a whole system and its most venerable institutions.

The point is FSPB, and other initiatives, once they have issued codes of ethics and conduct must give life to what they are meant to be and what they are all about.

Second, FSPB can truly add value by anticipating issues that may arise in the future from the digitalisation of finance. The multiplication of practitioners that this brings and the speed with which transactions are made have to be examined in the context of conduct and standards and protection of the customer. In many senses this is a space that has to be watched for its enormous promise and its great risks.

The development of guidance notes in the digital environment is something that can be usefully undertaken as an industry-driven exercise to achieve a balanced approach even as regulators themselves grapple with this new frontier in finance.

Issues pertaining to good ethical practices and professional conduct should be addressed in the round and without complacency. Regulators have their defined role. Individual financial institutions have a clear responsibility. Bodies such as FSPB have to work with the industry to come up with ways and means to make such practices and conduct a matter of course.

Tan Sri Dato' Dr Mohd Munir Abdul Majid is Chairman, Financial Services Professional Board (FSPB); and Chairman, Bank Muamalat Malaysia Berhad.

Issues pertaining to good ethical practices and professional conduct should be addressed in the round and without complacency.

A Looming Crisis of

ConfidenCe?Ethical Challenges for

the Malaysian Financial Services Industry

FEATURE


As the Malaysian financial services industry makes deeper inroads into global markets, will it succumb to the same temptations that have been the undoing of its Western counterparts? What is the ethical climate in the industry today? What safeguards are in place? What more needs to be done to retain the public’s trust earned over many years? AIF conducted a survey in 2016 to address these questions. The survey was motivated by a Code of Ethics introduced by the Financial Services Professional Board (FSPB) in 2016. The Code seeks to harmonise the Malaysian financial services industry’s standards of ethics with international standards.

and education, rapid industrialisation and modernisation have heralded the rise of a new generation with very different aspirations and attitudes towards wealth.

Some things never changeGlobalisation has seen an extraordinary surge in the financial services industry’s influence. As every country seeks global markets and capital, the world is becoming rapidly monetised. Even informal economies increasingly depend on the industry, which affects the lives and livelihoods of almost everyone today. As society’s money manager and custodian of wealth, the industry needs the public’s trust more than ever. From the era of village money lenders to today’s financial giants, trust is the glue that binds the industry to society.


1 Bank for International Settlements, Monetary and Economic Department, Statistical Release: OTC Derivatives Statistics at End-June 2016, November 2016.

In the middle of a revolutionhe financial services industry took hundreds of years to evolve from village money lending to corporate finance. By the end of the 20th century,

it had morphed into a giant global network that dwarfed entire nations in the volume of wealth it managed. The 21st century has seen the industry going through a technology-driven revolution which is redefining money and wealth and reshaping the industry and society’s expectations of it.

Today, the word ‘money’ covers coins, currency notes, treasury and corporate bonds, digitised cards and cryptocurrencies. FinTech, a new range of financial technologies, has sprung up, promising an even greater shake-up of the financial system. Wealth itself is getting redefined by an array of financial innovations. Financial derivatives have exploded into a worldwide market conservatively estimated at U$544 trillion annually, seven times the global GDP of U$75 trillion in 20161. Social networking has turned information into a multibillion dollar business.

The financial revolution is the product of globalisation, which has spurred global finance, the increasingly fluid trans-border movement of capital. The impact on Asia has been dramatic. Its long-stagnant economies have become dynamos of growth, some now challenging advanced western economies. Steep declines in poverty, better health

TFrom the era of village money lenders to today’s financial giants, trust is the glue that binds the industry to society.

Falling from graceRecent developments in the West suggest the industry is struggling to cope with its newfound power. The industry’s contribution to the well-being of societies as opposed to enriching the privileged few is being questioned.

According to Oxfam’s latest report, the richest 1 percent own more wealth than the rest of the world today, with just eight men having the same wealth as the poorest half of the world2. Rightly or wrongly, the financial services industry is viewed as an enabler of this distorted development.

The 2008 global financial crisis, which wiped out trillions of dollars of consumer wealth, is attributed largely to the industry’s excesses. The crisis saw the demise of several high profile international financial institutions, drove the US economy into recession and triggered the European sovereign debt crisis. Taxpayers’ money was used to bail out supposedly ‘too big to fail’ financial institutions. The US Financial Crisis Inquiry Commission attributed the crisis to a

combination of factors, notably ‘systemic breaches in accountability and ethics at all levels’3.

Financial scandals continue to rock the industry to this day. In 2016 Wells Fargo Bank was found guilty of charging its customers fees on two million deposit and credit card accounts created without their knowledge to meet the bank’s business targets4. Deutsche Bank, caught in the Libor rigging, mirror trading and subprime mortgage scandals, was fined U$7.2 billion by the US Justice Department5. HSBC is being investigated by several governments for violations of money laundering, tax and anti-corruption laws. These cases indicate the industry has not learnt its lesson and faces a crisis of confidence today.

A perverse outcome of all these has been new bail-in laws that punish customers of the industry who are the victims of its unethical practices. In 2013, Bank of Cyprus customers lost 47.5 percent of their deposits (4 billion euro) under such laws aimed at avoiding a wider public bail-out6.

Ethical challenges for the Malaysian financial services industryAsia has been largely spared these mega scandals due to its cautious approach to new developments and a conservative regulatory environment. However, the situation is changing rapidly as financial integration continues across the world.

Following the 2008 global financial crisis, the balance of economic power shifted from the West to the East. Asia’s economies now bear a greater responsibility for future global growth. A trading nation like Malaysia will experience increased financial activity, more intense interaction with foreign markets and institutions, and greater exposure to global events and risks. One evidence of this trend is Asia’s 39.2 percent market share of the financial derivatives market outstripping both North America (33.1 percent) and Europe (19.3 percent) in 20157.

As the Malaysian financial services industry makes deeper inroads into global markets, will it succumb to the same temptations that have undone its Western counterparts? What is the ethical climate in the industry today? What safeguards are in place? What more is needed to retain the public’s trust earned over many years?

An AIF survey in 2016 addressed these questions. The survey was motivated by a Code of Ethics from the Financial Services Professional Board (FSPB), a voluntary international industry initiative launched in 2014 by Bank Negara Malaysia and the Securities Commission Malaysia. The Code seeks to harmonise the Malaysian

2 Oxfam, An Economy for the 99 percent, Oxfam Briefing Paper (Oxford, Oxfam GB, 2017).

3 Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (US Government Publishing Office, Washington D.C., 2011).

4 Lucinda Shen, Wells Fargo’s Scandal Could End Up Costing Bank U$8 Billion (Fortune, 25 October 2016).

5 Reuters, Deutsche Bank reaches U$7.2 billion settlement with DOJ on mortgages case (CNBC International, 22 December 2016).

6 Menelaos Hadjicostis, Bank of Cyprus depositors lose 47.5 percent of savings, Associated Press (USA Today, July 29th, 2013).

7 Will Acworth, Asia Takes the Lead: 2015 Annual Survey of Global Derivatives Volume, MarketVoice (Washington, D.C., FIA, March 2016).

FEATURE


The 2008 global financial crisis, which wiped out trillions of dollars of consumer wealth, is attributed largely to the industry’s excesses.

Less often/Never Frequently Always

financial industry’s standards of ethics with international standards. While the survey results are reassuring overall, there are early warning signs of potentially serious problems down the road.

Mechanisms in place Many Malaysian financial institutions have guidelines and codes governing ethical and professional conduct. They assist employees on issues of ethics through training, hotlines or centres for consultation on ethical matters, as well as whistleblowing policies and procedures. While 97 percent of professionals say they would take advantage of these mechanisms, specifically whistleblowing, as many as 40 percent have reservations about confidentiality and the repercussions of reporting on colleagues.

Upholding ethical valuesAn overwhelming majority (90 percent) says ethical values are embraced frequently, if not always, at the work place (Figure 1). However, there is considerable ambiguity on what is ethical as highlighted later. Also the 11 percent negative response is too high on such a fundamental question in view of the potential contagion effects on the rest over time.

Ethics in practiceWhile most managers emphasise ethical practices, 37 percent either reward or may be inclined to reward employees for achieving business targets even if the means are less than ethical (Figure 2). This tacit ‘the end justifies the means’ culture is most apparent in the insurance segment where 56 percent

37%

87%

89%

93%

My supervisor rewards employees who get good results via less ethical means

My organisation takes disciplinary action against employees who act unethically

My supervisor sets a good example of ethical behaviour

My supervisor stresses the importance of ethics in our work

Insurance: 56%

Figure 2: Ethical practices in organisations

Proportion of respondents who agree with statements

11%

28%

61%


Figure 1: Frequency of upholding ethical values

Many Malaysian financial institutions have guidelines and codes governing ethical and professional conduct. However, there is considerable ambiguity on what is ethical.

9%

13%

14%

21%

15%

4%

7%

7%

21%

9%

50+ years

40-49 years

30-39 years

20-29 years

FSI

Agree Ambivalent

24%

42%

21%

20%

13%

of respondents say rewards are linked to business results irrespective of ethics.

Personal integrityAs many as 24 percent of professionals admit to acting ethically only in ‘public’, when their conduct is observable by others. Alarmingly, this attitude is more common among younger professionals in their 20s, many of whom will assume

senior industry positions in the future (Figure 3).

Grey areasWhile certain unethical practices are unambiguously rejected by the vast majority of professionals, there are ‘grey areas’ such as receiving gifts or favouring family and friends, which are ambivalent or even permissive (Figure 4). For example,

FEATURE


Figure 4: Ethical ambiguities

Figure 3: Public and private faces of ethics

As many as 24 percent of professionals admit to acting ethically only in ‘public’, when their conduct is observable to others.

Proportion who accept or are ambivalent about practice

"We act ethically unless someone is not aware (we take advantage where we can)"

Favouring family/friends when awarding contract

Favouring family/friends when recruiting

Receiving gifts

Acceptable Ambivalent

4%

11%

21%

9%

19%

21% 42%

30%

13%

8 Chartered Accountants Australia and New Zealand and Centre for Ethical Leadership, A Question of Ethics: Navigating Ethical Failure in the Banking and Financial Services Industry (August 2016).

those who reject bribes are receptive to gifts that may come with an expectation of favours.

Lessons from the surveyWhile the ethics climate in the Malaysian financial services industry is not comparable to the tangled situation in the West, there is cause for concern. Standards and policies are inconsistent across organisations and industry segments. They can be interpreted loosely to condone unethical practices. Mechanisms to deter unethical behaviour do not enjoy the confidence of employees. Slack attitudes towards ethics, especially among those just starting out in the industry, are worrisome.

While these gaps exist at both institutional and individual levels, evidence from another survey of industry professionals found corporate cultures together with legal/regulatory environments influence ethical behaviour far more than personal standards and values8. The implication for the Malaysian industry is that it needs to step up at the corporate level as it steps forward into the global arena.

Closing thoughtsThe financial services industry is caught in the eye of a storm whipped up by a revolution of its own making. Given the numerous scandals, it is tempting to view the industry as a villain. This might be unfair as the industry has contributed much to the widespread benefits of globalisation.

The industry may be more appropriately seen as a victim of speeding. The changes across the global

economy have come at a fast and furious pace, triggering major disruptions in the industry. New products emerging from its ‘laboratories’ are not well understood within the industry or by the public. In its eagerness to stay ahead of the curve, the industry has sought to achieve too much in too little a time. Perhaps, it is prudent to pause and regroup before moving to the next stage. Upgrading ethical standards and practices is a vital part of this consolidation.

The industry clearly needs to reform to regain the public’s trust, which is essential for sustainable progress. Trust is a fragile thing. It is not a matter of rules, tools or tricks, but of character. Ethics is about doing the right thing, every time. Warren Buffett said, ‘It takes 20 years to build a reputation and five minutes to ruin it’. Trust, once lost, is hard to regain. The message for the Malaysian financial services industry is to not lose it by letting these early warning signals go unheeded.

Kee Gek Choo is General Manager, Market Research at AIF.


While the ethics climate in the Malaysian financial services industry is not comparable to the tangled situation in the West, there is cause for concern.

Businesses must be built on an acceptable ethical foundation to ensure they have a long-term ‘licence to operate’, meet the needs of their customers and comply with regulations. In this article Datuk John Zinkin, Managing Director, Zinkin Ettinger Sdn Bhd, outlines the factors that determine whether an organisation has, and can keep, a good long-term reputation for ethical business dealings.

hen Narayana Murthy was asked at the Securities Commission’s World Capital Market Symposium in 2015 what

his goal was when he founded Infosys, he replied: “It was not to become the largest or most profitable IT company in India; it was to become the most respected”. He went on to say every decision taken by every person in Infosys had to increase the respect for the company internally and externally. Any decision that could damage that respect was unacceptable.

I remember thinking, if I replaced ‘respect’ with ‘reputation’, Narayana Murthy had found the key to making the job of the board regarding business ethics simple and practical. Boards must focus on having the right culture and good governance to protect and enhance their company’s reputation.

W

Datuk John Zinkin

Protecting ReputationThe Best Approach to Ethical Business

TALKING POINTS


productivity is the manager to whom the employee reports3.

4. Power: Perhaps the most obvious manifestation of the ‘tone at the top’ and the ethical foundation of the financial institution is power: how it is used/abused; who reports to whom and on what basis and whether this creates silos that destroy a unifying organisational culture; how people are recruited, rewarded and promoted; whether the financial institution is

Protecting and enhancing a company’s ‘reputation’ is to pay attention to the most important asset of any financial institution. A financial institution’s good reputation is a more important asset than the people who work for it. Once a financial institution’s reputation is called into question, the resulting loss of confidence can overwhelm the best people, products and processes. Damage to reputation and the loss of trust that goes with it can result in a liquidity crunch and overnight collapse, as Bear Stearns discovered just before it was taken over by J.P. Morgan Chase1 .

Five factors define reputation Five factors determine whether an

organisation has, and can keep, a good long-term reputation for ethical business dealings: 1. Purpose: This defines who an

organisation’s customers are and what products and services it will provide to create and maintain satisfied customers. It answers the following questions: • Whoarethebeneficiariesofthe

organisation?• Whatdifferencewillitmakeintheir

lives?• Whatvaluewilltheyplaceonsuch

a difference?• Howmuchwilldoingthiscost?• Howwillsuccessbemeasuredby

its stakeholders? Financial institutions should satisfy

an economic purpose that suits society’s requirements, by putting their customers’ interests first and foremost, and by making a profit in so doing; as opposed to taking advantage of their customers because of information asymmetries in so many financial products. Organisations that fail to

develop a socially acceptable purpose will face increased regulatory and political sanctions over time and may eventually be denied permission to operate.

2. Principles: These determine the values of the organisation: whom it will do business with; what products it will offer; and how it will treat its customers, employees, society and the environment. They are central to the organisation achieving a sustainable ‘licence to operate’. It is the board’s responsibility to determine what the guiding principles of the company will be, and to make it absolutely clear they are non-negotiable. In so doing, boards can hope to prevent charismatic, successful and unprincipled CEOs from hijacking the values of their financial institutions to justify a change in direction, strategy or culture. To do anything else is to allow the financial institution to embark on a slippery slope of short-term profit-driven expediency that will destroy the ‘tone in the middle’ with tragic consequences2.

3. People: The board is responsible for the quality of the people who work for the financial institution through succession planning and talent development. Too often the criteria used in recruiting, developing and promoting people are purely technical and downplay the importance of good character. Such an approach does not focus enough on the importance of ethical behaviour in mid-level managers, nor does it reinforce the ‘tone at the top’. Given the importance of the ‘tone in the middle’ in underpinning the ‘tone at the top’, boards must be concerned with recruitment and promotion practices at all levels, since what matters most in terms of employee engagement and

1 The SEC Chairman, Christopher Cox, showed Bear Stearns' liquidity pool started at US$18.1 billion on March 10th, 2009 plummeting to US$2 billion on March 13th, 2009. Sound Practices for Managing Liquidity in Banking Organisations, Letter of March 20th, 2009 to Dr Nout Wellink, Chairman of Basel Committee on Banking Supervision.

2 If HSBC had adhered to its principles more closely, they might not have bought their Mexican subsidiary which was involved in money laundering for Mexican drug cartels through HSBC’s US subsidiary. HSBC agreed to pay a US$1.25 billion forfeiture and US$655million in civil penalties. HSBC is still subject to a DPA that has changed the way it does business. United States v HSBC Bank USA, N.A. 12-cr-00763, U.S. District Court, Eastern District of New York (Brooklyn).

3 Jim Clifton, The Coming Jobs War: What Every Leader Must Know about the Future of Job Creation (New York: Gallup Press, 2011), cited in John Zinkin, Rebuilding Trust in Banks: The Role of Leadership and Governance (John Wiley & Sons, Singapore, 2014), 62.


Protecting and enhancing a company’s ‘reputation’ is to pay attention to the most important asset of any financial institution.

run on a top-down, ‘need to know’ basis where information is hoarded, or on a bottom-up, information-sharing basis; whether ‘speaking truth to power’ is encouraged or if the culture is one of ‘shooting the messenger’. It is the board’s responsibility to prevent over-mighty CEOs taking control of the business through force of personality in the boardroom, where, by brooking no dissent, they destroy the bank or its reputation4.

5. Processes: These are all types of feedback binding operations into a coherent whole. They include planning processes, key performance indicators (KPIs) and financial metrics, market research and intelligence, methods of recruitment and promotion, personal development plans, as well as management appraisals and reward and recognition systems. They form the basis of codes of conduct, compliance and whistle-blowing mechanisms that are the framework for the financial institution’s culture for which the board is responsible5. Boards are expected to ‘trust, but verify’, to be proactive and conduct inspections that all is well in the lower levels of the company.

Emotional organisational integrity

When boards realise there is much more to setting the ‘tone at the top’ than

When boards realise there is much more to setting the ‘tone at the top’ than just exhorting CEOs and top management to behave ethically, there may be fewer disastrous failures of governance and leadership.

It is also important for boards to ensure that short-term profitable diversions from the originally agreed purpose do not lead to the company forgetting what its mission is or what its values are ...

just exhorting CEOs and top management to behave ethically, there may be fewer disastrous failures of governance and leadership. Getting the ‘right tone at the top’ requires a holistic review of decisions by the board to ensure:1. The mission and vision have an

ethical foundation so that the company’s long-term ‘licence to operate’ is not put at risk by either doing business with customers who are unethical or by offering products that are not ethical, but legal (e.g. Goldman’s Timberwolf Collateralised Debt Obligations (CDOs)6 ).

2. The purpose is not only to maximise short-term shareholder value regardless of the social consequences of what the financial institution is doing or by ignoring what is actually in the interests of clients and customers. It is also important for boards to ensure that short-term profitable diversions from the originally agreed purpose do not lead to the company forgetting what its mission is or what its values are (e.g. banks mis-selling payment protection insurance (PPI) in the UK7).

3. Principles are not undermined by inappropriate KPIs, incentives and remuneration encouraging short-term behaviour violating company values and rewarding bad behaviour.

4. People of good character are recruited, rewarded and promoted rather than those who have little

4 Failure by boards to provide suitable checks and balances to abuses of power in leadership led to the problems of Bear Stearns, Merrill Lynch, Lehman Brothers, Citi, Countrywide Financial, Fannie Mae, RBS and UBS, to name a few banks.

5 ‘The question is: what does it say about your senior management team that in the end an instruction to manipulate LIBOR was not questioned? You have overall responsibility for the culture of the bank [emphasis mine]. That is why you have resigned.’ Response of Michael Fallon M.P. to Barclays’ Chairman after he argued he was a non-executive whose job was not to make executive decisions, ‘Fixing LIBOR’, UK Treasury Committee evidence, July 10th, 2012.

6 ‘When marketing Timberwolf, Goldman withheld its internal marks showing the securities losing value and did not mention its short position. Senior Goldman executives knew the firm was selling poor quality assets at inflated prices. Within six months of issuance, AAA Timberwolf securities lost almost 80% of their value…’ US Senate PSI Report, ‘Wall Street and the Financial Crisis: Anatomy of a Financial Collapse’, 559.

7 The fines by the FCA so far for mis-selling PPI totals £19.4 billion. www.financialreform.co.uk/payment-protection-insurance/ ‘Recent estimates suggest the total figure for PPI claims will top £24 billion by the time the scandal has been cleared up’, PPI Claims: Common Questions and Answers, Oracle Legal, https://www.oraclelegal.co.uk/ppi-claims/ visited on December 29th, 2016.

TALKING POINTS


Figure 1: ‘Five Ps’Ensuring ethical organisation alignment

integrity, but are great at generating short-term financial results, regardless of the long-term impact of their behaviour on the reputation and staff of the company.

5. Power does not lead to ‘shooting the messenger’ or managing by fear so that mid-level managers are afraid to speak up when things are going wrong.

6. Processes reflect the principles. Boards must ensure processes reinforce the agreed purpose and principles rather than undermine them by either allowing the financial institution to enter into lines of business it should avoid, if it is to be true to its purpose, or by having KPIs that lead mid-level employees to violate the values of the organisation, turning ethical exhortations from the top into empty rhetoric. Figure 1 shows how the ‘Five Ps’ interact with each

other and must be aligned if the company is to fulfil its mission and vision. It serves as a useful checklist for boards to ensure that all the ‘Five Ps’ point in the same direction. If any ‘P’ is unaligned, the company risks its reputation and is unlikely to achieve its mission.

Putting reputation at the heart of the business

If a business is to have a long-term future, it must be built on an acceptable ethical foundation to ensure it has a long-term ‘licence to operate’. It must also meet the needs of its customers and comply with regulations. These three fundamental constraints frame its culture, which in turn relies on its code of conduct to ensure customer needs

People

Principles

Power

PurposeProcesses MISSIONVISION

Culture

ComplianceCodes ofconduct

REPU

TATI

ON

Satisfying regulationsMee

ting

clie

nt n

eeds

Ethical foundation


are satisfied in accordance with its values and its compliance to ensure it meets regulatory demands. Reputation is the result of the interaction of culture, codes of conduct and compliance. This is shown in Figure 2.

This brings me back to Narayana Murthy’s goal when he founded Infosys: it was not to be the biggest or the most profitable IT company, but to be the most respected. By putting reputation ahead of profits, he was ensuring that decisions taken at every level would be ethical. If boards put reputation ahead of short-term financials, they will oversee ethical businesses.

Datuk John Zinkin is Managing Director, Zinkin Ettinger Sdn Bhd.

If a business is to have a long-term future, it must be built on an acceptable ethical foundation to ensure it has a long-term ‘licence to operate’. It must also meet the needs of its customers and comply with regulations.

TALKING POINTS


Figure 2: Putting reputation ahead of short-term profits

Roles of culture, codes of conduct and compliance

People

Principles

Power

PurposeProcesses MISSIONVISION

Culture

ComplianceCodes ofconduct

REPU

TATI

ON

Satisfying regulationsMee

ting

clie

nt n

eeds

Ethical foundation

The Business of Ethics, edited by Dr Raymond Madden, CEO,

Asian Institue of Finance, explores the role of ethics in business and

the challenges faced by organisations in restoring public trust. The

book contains ten unique and personal perspectives on how

organisations should rethink what they are doing about ethics.

For further inquiries, please contact us on [email protected].

norms suppliers confidentiality fairness ethics responsibility · contents issue 25, 2017 feature...

Documents