Posted Friday, August 1, 2014 in Finance
The cat's out of the bag. The organizations that played fast and loose with subprime loans are now at a moment of self-reflection and the big question is this: how do we prevent the financial crisis from happening again? Fingers may be pointed to abate the fury of shareholders and customers but future success is going to need a different way of conducting business. So here's two points that financial organizations should be focusing on:
If decisions are at the fire of the financial crisis then data is it's fuel. Global financial institutions did not just one day say, “Let's give out loans to people who can't afford them and see how that goes.” No, piles upon piles of data drives financial market decisions not flights of fancy. Whether it's bank lending rates or credit scores, data used for decision making relies on a few important concepts of ethics such as honesty and trust.
Less sound financial data such as those provided through the credit reporting agenciess (CRAs) were a key component to the financial crisis. For the CRAs Scalet & Kelly (2012) identify a need for ethical oversight to ensure responsibility is taken for the greater good. Data conflicted with self-interests and little or no checks and balances threatens the very fundamentals of decision making. They say that to find corruption you follow the money but to find what corrupts ethical decisions you follow the data.
Unfortunately, ethical data doesn't make ethical decisions, people do. If financial organizations want to turn their act around a strategy for ethics needs be something more than a box to check. From Thiel, Bagdasarov, Harkrider, Johnson & Mumford (2012) a strategy revolving around sensemaking is presented. The key findings seek a strategy that involves:
The points made by Thiel et al. (2012) revolve around inter-personal relationships. It's not a corporate memo emailed to thousands at a time. It's personal stories about self sacrifice for the greater good and how we could have been more honest that one time. It's a culture of good faith on the part of the organization and in practice by it's members. Whether from training, recruitment or policy, organizations must break the mold of poor ethics to survive in a society demanding justice.
Scalet, S., & Kelly, T. (2012). The ethics of credit rating agencies: What happened and the way forward. Journal Of Business Ethics, 111(4), 477-490.
Thiel, C., Bagdasarov, Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader ethical decision-making in organizations: Strategies for sensemaking. Journal Of Business Ethics, 107(1), 49-64. doi:10.1007/s10551-012-1299-1