A code of ethics for bankers – Challenges and opportunities

Alexandra Zeitz (St Antony’s College, Oxford)

Speaker: Robert Mass, Head of International Compliance, Goldman Sachs
Chair: David Vines, Balliol College, Oxford

The financial services sector continues to grapple with a string of headline-grabbing scandals. One interpretation of this has been that the industry suffers from a serious shortfall in ethical standards. Various solutions have been offered for the apparent “culture problem”. High profile commentators have argued, for instance, that managers should set a “tone from the top,” correcting for deficits in ethical standards by modelling conscientious behaviour towards clients, competitors and co-workers and expecting the same from those further down the ladder.

One popular response to the seeming problem of values has been to set out ethics codes that explicitly commit bankers to clear normative standards. Barclays, for instance, unveiled a code of conduct in 2013 as part of its efforts to address the cultural deficits that underlay the foreign exchange-fixing and personal protection insurance scandals. In 2015, the G20 released a set of Principle of Corporate Governance. What can such codes achieve, and what should they include?

In February, PEFM hosted Robert Mass, Head of International Compliance at Goldman Sachs, to discuss his proposals for a code of ethics for bankers. Mass’ engagement with codes of ethics was incredibly wide-ranging, spanning both the philosophical and pragmatic.

In order to be effective, says Mass, codes of ethics must be rooted in existing social practice, in the day-to-day lives and expectations of those they hope to influence. Drawing on moral philosophers including Hume and Smith, Mass argues that ethical standards cannot be given a priori; instead, cultural norms arise out of particular cultural milieus and conventions. The challenge of an ethics code is to set out the principles contained in existing practice, to codify them, in order to encourage socially appropriate behaviour.

Moving from moral philosophy to finance, this means that no single code can be appropriate for different types of banking business. Not all banking business is governed by the same cultural values, nor do the actions of asset managers and derivatives traders, for instance, have the same moral consequences. Codes of ethics have to be responsive to the differing practices and expectations of participants in different kinds of banking business.

One social practice, however, is at the root of most banking business, says Mass: the mutual exchange of promises. Grounded in the right to contract, bankers operate on the shared norm that market participants exchange voluntary commitments and make every possible effort to fulfil the promises they have given. Codifying this norm carries with it the obligation not to lie about material facts to induce a promise from a counterpart.

This obligation not to lie is complicated somewhat when we consider one of the other social practices that characterizes banking activity: game-playing. Mass argues that trading is best understood in terms of the norms associated with the playing of games; players must play by rules and cannot cheat, they are also expected to play to win. In this context, lying about one’s intentions is understood as skilful rather than immoral, it is seen as part of the tactics of the game.

Mass insists on the distinction between lying about material facts to extract promises that would not otherwise be freely given and dissembling about intentions to gain a tactical advantage in a game where all players know the rules. In order for such subtleties in moral expectations to be effective, however, they would have to be very explicitly set out in an ethical code, because there are many situations with possible normative contradictions.

Sales, for instance, is best understood through the social practice of persuasion, says Mass. This requires that salespeople act with sincerity, only selling products or ideas they understand and genuinely believe in, disclosing hidden material biases, and not lying about material facts. In order to be effective, however, the best salespeople cultivate relationships with clients that are, in essence, friendships. This relationship of friendship creates additional obligations, since standards of persuasion among friends are higher, argues Moss.

The normative imperative of compassion may also come into contradiction with other moral obligations, and Mass argues that bankers should be required to act with special care when their actions could have a material impact on an individual customer’s health or home. Yet, as some in the audience pointed out, this may not be sufficient to encourage ethical behaviour, since the most serious repercussions of bankers’ behaviour are often not for their clients, but rather for third parties.

Mass is doubtful that codes of ethics can address larger social accountability issues, claiming that the social desirability of certain behaviour (e.g. supporting green investment) does not reach the level of moral intuition. These objectives, he suggests, should be pursued through legislation rather than ethical codes.

Mass’ proposal that codes of ethics be grounded in existing social practice is compelling, since it points a way to setting up codes that may genuinely be adhered to. However, it also raises questions of whose social practice, which social practice? The pre-existing culture gave rise to the undoubtedly immoral behaviour that has set off countless scandals. How can the balance be struck between extracting principles from the existing culture and ensuring codes are sufficiently ambitious to address the ethical shortcomings that have so harmed the industry?