Business ethics is inextricably linked to the current financial meltdown

By Huw Thomas, Editor

Keith Darcy tells Huw Thomas that the state of business ethics is inextricably linked to the current financial meltdown.

The absences of ethics are partly to blame for our current woes

“At one corner, we were stuck for 20 minutes and I watched a shoe storeowner give away his entire stock of flats and sneakers to women who would have to walk tens of miles to get home that evening”
-Keith Darcy of the Ethics and Compliance Officers Association

You can find inspiration in the most unlikely places. For Keith Darcy, Executive Director of the Ethics and Compliance Officers Association, it came during the darkest experience of his life as the horror of 11 September 2001 unfolded around him. Then working in New York’s financial district, he had front row seat for one of most terrible events in American history, even losing his brother in the collapse if the north tower. He tells us of the normally bustling Manhattan streets becoming like a war zone, how the fires burned for four months and the stench of death hung in the air. But amid the devastation, the fear and the panic, Darcy perceived something else. As he drove a carload of stranded employees north out of the city on the day of the attacks he saw things that spoke to the essential goodness to be found in humanity. “We listened on the radio to the reports over and over again, watched the fires burn behind us in silence,” he recounts. “But as we were stuck in traffic people would walk over to us, and without saying a word, they would hand us wet towels so we could wash all the soot and debris off our faces. Others came over, and again, without comment, just handed us bottles of water so we could clear our throats. At one corner, we were stuck for 20 minutes and I watched a shoe storeowner give away his entire stock of flats and sneakers to women who would have to walk tens of miles to get home that evening.”

The following weeks saw similar scenarios being played out across the city. People just pulled together and helped share each other’s burdens. Darcy himself did emotional triage in the lobby of his building, helping those employees who had lost loved ones into one-on-one or group counseling. It was during this time that his essentially optimistic attitude to human nature was confirmed. “I saw something that I’ve never seen before, a coming together of people helping other people,” he says. “I realized after while, that nobody had to pass a company policy, or a regulation, or a new law to tell us what we knew was the right thing to do.”

It’s fair to say that this optimism has had to endure a few knocks of late. The financial crisis rumbles on, gathering momentum and threatening to spill out into the wider market. Though its causes are far too complex to attribute to a single source, it is clear that a relentless pursuit of profit coupled with a stark disregard for long-term consequences played a major role. Self-interest trumped responsibility and we could all be paying the price for years to come.

Darcy is adamant that ethics, or more accurately an absence of them, are at least partly to blame for our current woes. It all comes down to trust. Take Bear Stearns, one of the credit crunch’s earliest victims. “The government had to step in and force a merger with JPMorgan Chase,” says Darcy. “That took place not because there was a lack of capital at Bear Stearns. There was a lack of confidence, a lack of trust.” According to Darcy, the inability of investors, depositors and regulators to believe in the good intentions of these financial institutions has had just as damaging an effect as the well publicized levels of toxic debt. In a climate where consumers are unusually attentive to any wrongdoing or uncertainty, the issue of trust takes on particular significance.

“Any hint or rumor of an impropriety at your firm and your market capitalization goes down,” Darcy continues. “If there’s any substance to it, it goes down even further. At a time like this where there is such a crisis. I can assure you there will be an intolerance of those people who breach the public trust any further. It is an environment now that is filled with fear. And people who breach the public trust are going to be punished swiftly, both by the market as well as by public servants.”

At the root of the problem is the approach many organizations take to ethics training, particularly in the financial sector. “When you look at the financial sector as a whole, it is a heavily regulated one. Therefore, the training and the monitoring that tends to take place is very regulatory and compliance focused,” Darcy continues. “What I think we’ve been missing in the financial sector is attention to ethics.” But this doesn’t only apply to the financial space. “It is incredibly important, not just to that sector, but to all companies. There is such a profound lack of trust in our institutions and in their leaders that we need to do much more to try and reassure all stakeholders, employees, customers, investors, suppliers and even regulators that we are going beyond just mere compliance.”

A common complaint of those resistant to ethics training and legislation is that an increased focus on doing the right thing could have a negative impact on profits. With more than three decades of experience in the financial industry, it’s an attitude that Darcy is extremely familiar with. “When I would talk about ethics, especially to people directly in the Wall Street community, I would typically get a response, ‘What do you want, Darcy? Do you want ethics or profits?’” he says. “I would always say, ‘I want both. This is not an either/or proposition. I want the highest possible financial outcomes for our organizations at the highest possible standards.’ They’re not mutually exclusive.”

On the contrary, there is strong evidence that a good company culture is a key differentiator for long-term success. Darcy references a 1994 book, Built To Last by Jim Collins and Jerry Porras, to illustrate the point. “They studied 18 different sectors over a period from 1926 to 1991,” he explains. “If you had invested one dollar in the stock market in 1926 in a bread basket of stocks you would have gotten 415 times your money back by 1991.” On the other hand, had you invested your money in the second best performing companies in each sector, you would have made 973 times your initial investment. That might seem like a good return but, had you invested in the top performing companies, you would have made a staggering 6300 times your stake. The factor that ties these industry leaders together? “At the core, in every example, was a values-based culture imbedded in those organizations,” Darcy continues. “Clearly, ethics, values and principles aligned to a culture are what builds and sustains great organizations.”

This focus on culture continues to lead to success. Darcy points to a couple of organizations that embody this fact, Southwest Airlines and the retailer Nordstrom. “At Southwest Airlines, they know exactly the kind of person that they want to take into the organization,” he explains. “In fact, they have a provisional training program only at the end of which do you find out if you’re a permanent hire.” The results of this attention to detail are striking. The airline has a staff turnover of just 8% compared to a 22% industry average and is virtually the only carrier that has consistently posted profits, year on year, for decades. For Nordstrom’s everything is constructed around customer service. “You go into Nordstrom’s and everybody wants to help you,” says Darcy. “If one of the salespeople is not as helpful as the rest think they should be, they’ll speak to that person. Strong cultures self-regulate.”

The idea of self-regulation should not be underestimated, particularly in our current climate. “What emerges in strong cultures is, rather than trying to create a compliance based top model program which tells people what they can and can’t do, people self-regulate the organization,” he continues. “When you think about it in the larger context, there’s only one alternative to self-regulation, and that’s more regulation.”

It now seems clear that, particularly for the financial industry, more regulations are an inevitability. Darcy sees the roots of our current malaise in the deregulation-fuelled boom of the nineties when the NASDAQ jumped from 453 in 1991 to a high of 5132 in 2000. “Unfortunately, not only did we get the growth that came from that, but the energy deregulation also gave us Enron. The telecom deregulation gave us WorldCom, and we are today paying the price for banking deregulation,” he says. “I’m a free market economist by training, I would prefer to see the markets work in a free system. The argument is between idealogues who believe totally in the free market system and those who have seen the failings of it. We need an effective balance between the two.”

But it won’t be easy. Despite Darcy’s professed faith in human nature, nearly two decades of erosion in ethical standards will take some time to repair. It seems the problem is at risk of moving outside the office and affecting other areas of life. “I like to be an optimist about the future,” he confirms. “My concern is data that says 54% of MBA students cheat their way through their degree, that 52% of engineering and masters students do the same, where 48% of law students cheat their way through their degree and 55% of high school students admit to cheating so they can get ahead. I am concerned that somewhere over time we began to feel like people who were entitled to something, that we wouldn’t have to sacrifice for getting ahead, that somehow life was there to pick from. With that kind of attitude comes a certain arrogance. I really do think that we need to make sure we understand the difference between acceptable profits and greed, that we understand that there’s no substitute for hard work and rolling up your sleeves to reach the next level.”

Asked for a prescription to reverse our ethical decline, Darcy can provide no quick fixes. He talks about the need to remember what people are capable of achieving and how the positive human spirit must be given the opportunity to grow and express itself. On a more conventionally business-focused level he outlines a requirement to get back to the basic fundamentals: positive cash flow, quality products, good customer service, being respectful of all stakeholders and rebuilding the trust that has been broken. “There is a mandate today,” he explains. “Companies have to understand the meaning of trust and the importance of ethical awareness in their organizations is a differentiator in the marketplace. It is a differentiator for building enduring great companies. None of this is a six-month rollout. All of this is a permanent commitment to the future. It’s ethics training. It’s ethics awareness. It’s raising the consciousness of people on understanding what’s the right thing to do and building cultures therefore that will self-regulate over time.”

But even if all this hard work is successful, it will require constant vigilance for it to be maintained. Thinking back to the collective spirit that he witnessed following the attacks on New York, Darcy is clear that such a feeling can evaporate as quickly as it appeared. “ I remember remarking about six weeks after 9/11 to a group that I was speaking to,” he recalls. “I said, ‘My biggest fear is that someday we will take this moment, leave it behind and go back to business as usual.’ And we did.”

Keith Darcy is Executive Director of the Ethics and Compliance Officer Association, the largest association of ethics and compliance professionals in the world with over 1400 members across six continents. He spent over 30 years in the financial services industry, is a director of E*Trade Bank, and teaches ethics and leadership at the Wharton School, University of Pennsylvania.

Hollywood ending

Lessons in ethics from the silver screen
Darcy: Watch the Tom Hanks movie Castaway. It’s a two-hour FedEx commercial. The plane is flying over the Pacific. The plane goes down in a storm. Tom Hanks grows a beard and long hair. Five years later, somebody finds him. He gets a shave and a haircut and what does he do at the end of the movie? He delivers the package. I always ask the question, who does he deliver it to? Well, in fact, the person wasn’t home, so he left the note with the package, and the note said simply, “Thank you. This package saved my life.” Metaphorically, work gave him meaning. It kept him alive. He even took a volleyball, called him Wilson and drew a face on it because he needed to personify something. He understood that we do not exist alone. We exist in relationship to other people. I realize it’s fiction, but the implications are huge. Everything we do is done with, by, for and through people, and so ethics has to relate to people.

Follow the leader

Looking up to a more ethical future
Darcy: We need moral leadership, people who will stand up and bring voice and action to setting standards of behavior and conduct. Where are the great moral leaders today? I can think of two in my lifetime that stand out. I’m sure there are many more examples, but Dr. Martin Luther King Jr. was somebody who believed in something and gave his life for it. And another one that’s the most extraordinary example of leadership in my lifetime is Nelson Mandela. He was willing to be put to death and assumed he would be because the pain of apartheid was greater than the pain of death. In fact, he spends 27 years on Robben Island and somehow emerges from that not only as a free man but becomes president of the free republic of South Africa. He then has the audacity to create a truth and reconciliation commission saying, “We need to be able to tell the truth in South Africa and forgive ourselves because unless and until we do, we cannot take our seat at the table of nations. So we’ve got to get to the truth of what’s going on here.” It’s long been said that we’re only as well as our deepest secrets. That is true of families, it’s true of corporations and it’s true of society. So we need to address the truth of what ails us. And I do think at some level that we have to speak to the moral fiber of this country and get us back to the basics and the fundamentals that our founding fathers lived by. When they signed the Declaration of Independence, they said that they mutually pledged to each other their lives, their fortunes and their sacred honor. They were doing something enormously bold at the risk of failure. They had no real sense that they could succeed, but they did. But it was built on a foundation of values. We need to get back to that. We’ve got to get away from self-interest and promote the common interest and the common good.