Expenses and ethics

I recall once reading that ethics was best defined as how you behaved when no-one else was looking. The implication being that one should always go beyond what is required by "the rules" for ethical behaviour. That any deviation from ethical behaviour cheapens and demeans the individual and the community of which they are a constituent part. In the past couple of months we have seen two clear examples of what happens when people in positions of power and influence (once referred to as "the great and the good") fail to behave ethically: banking–including other elements of the financial system–and politics in the United Kingdom.

For some time, the result of the credit crunch and the ensuing economic crisis was laid at the door of 'greedy' behaviour on the part of bankers and other financiers, with much of this criticism coming from politicians. The argument was generally that poor corporate governance had led to excessive risk-taking, which had led to systemic risk becoming manifest. Of course, where any investment is concerned there is always going to be an element of risk: some pay off, others do not. My question to the policy makers and other so-called experts is to define exactly when a risk becomes excessive. Is there a cut off point between acceptable risk and excessive risk, and if so, how can we measure it? That the system of bonuses in the financial world has led to a bias in decision-making is undoubted; the system of financial corporate governance is ONE of the key factors behind the recent problems in the financial world. But it is not the only factor, and poor corporate governance structures is something which the financial system has in common with too many other elements of the society in which we live.

Bonuses in the commercial sector mirror those in the financial sector; they are paid regardless of whether or not the company has been run in the best interests of the shareholders (the owners of the company). Surely, a bonus should be based on longer-term performance factors, such as whether or not value has been added to the firm? When bonuses are paid for failure there is no incentive for executives (and hence others) to apply maximum effort and achieve. I am reliably informed that there is an old Russian saying that "a fish rots from the head". Too much of our financial and corporate sector resemble this apocryphal Russian fish.

Of course, whatever the issues in the financial and corporate world, it could be argued that there is a mechanism by which shareholders could act to provide checks and balances. As large shareholders in many listed companies, it is perhaps surprising that pension funds and insurance companies have not been more active in their approach to ensure that remuneration was more closely tied with longer-term success. Perhaps if the members of pension funds had a greater say in the election of their Trustees and the investment strategy there would be better governance, which could then filter down? What seems to be missing is transparency and accountability. Of course, if those in positions of power took greater responsibility for their own roles, via a sense perhaps of noblesse oblige, such accountability would be internalised. But as we have seen far too often recently, the notion of honour among our decision-makers had long since left the building.

Nowhere has this been more starkly revealed than in the case of MPs expenses. Of course, the structure has been entirely wrong for quite some time. And the fact that some claimed expenses were within the rules yet seem excessive suggests that there can be no confidence when MPs (like others) are allowed to be their own watchdog. And it has to be acknowledged that not all MPs have been brought low by the revelations of scandalous expenses claims: many have indeed acted ethically, and not sought to bilk the system (and hence the taxpayer) for every penny available. But those MPs who have claimed for non-existent mortgages (for example) are guilty of fraud, and must be brought to book for their crimes. In a democracy there can be one set of laws, applied equally to all. If this principle is not upheld then we no longer live in a democracy, and any desire for honesty and integrity has long departed. It is a state if anarchy, in which those who play by the rules lose, and to the criminal victor goes the spoils.

It is interesting to note that the general public have been quick to condemn almost all MPs over the expenses scandal. But we must be careful not to put all MPs together. Some have acted ethically, not claiming as much as they would have been entitled within the rules. Some have claimed within the rules, but the rules were poorly framed (like so much governance elsewhere). Others have acted fraudulently, and need to be convicted for their crimes. But we, the general public, also need to examine our own behaviour in the workplace. While there is a difference in scale, anyone "borrowing" stationery from their place of work for private, personal use is guilty of theft, even though this has become an acceptable practice. Inflated expenses claims by employees are as fraudulent as an MP claiming for a mortgage which has previously been paid off; and both should be treated equally under the law. As a well-known philosopher once said: let him without sin cast the first stone!

We live in a world in dire need of a return to a strong moral compass, via the implementation of better and more reliable governance mechanisms. Rewards such as bonuses should act as incentives to improve the lot of all, not to feather one's nest at the expense of others. The top of the tree must set a clear example for those further down; the roots and branches will always emulate the behaviour of those at the top. There can be no doubt that this governance vacuum is partly responsible for the economic crisis in which we currently find ourselves. But, ethical behaviour would mean that the system is not to blame at all. We need a better system of governance in all of our institutions because it has become abundantly clear that far too many people are morally, ethically, and personally corrupt. We have become a decadent society. It is time to take stock and review quickly and efficiently the way in which we operate and then make clear and effective changes for the longer-term. In the meantime, a large number of MPs and corporate executives should finally do the right thing and resign. The British public deserve an immediate general election, to be fought mainly on the issue of rules of governance.