State University of New York Institute of Technology
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Ethics Blog #1

How a “Systemic Breakdown” in Ethics Drove the Financial Crisis — And What to Do About It

That point now has been partially recognized in a new report from the financial Crisis Inquiry Commission. Created by Congress in May 2009, the Commission issued its well-written but controversial 545-page report last month. Of its six conclusions, the final one identifies “a systemic breakdown in accountability and ethics” as a fundamental cause of the crisis. “The integrity of our financial markets and the public’s trust in those markets are essential to the economic well-being of our nation,” the authors observe. “The soundness and the sustained prosperity of the financial system and our economy rely on the notions of fair dealing, responsibility, and transparency.” For the economy to prosper, “we expect businesses and individuals to … conduct themselves well.”

Needed, instead, is a recognition that an unethical culture — a “pervasive permissiveness,” in the report’s words — played a key role in this crisis. Through an “erosion of responsibility and ethics,” standards were relaxed, rules were circumvented, and long-term stability was sacrificed for short-term gain.

So how can it be fixed? When a culture’s moral atmosphere becomes this toxic, it’s not enough to correct the ethics of individuals.

What are those signs?

  • An indifference to core values. The Commission’s report identifies a number of these values, including responsibility, transparency, fairness, and trust. Cultures of integrity hold these values in high regard and return to them regularly, systematically, and without exception.
  • A failure of ethical decision making. When smart people use the tools of rational discussion to promote me-first short-termism, they find, in the report’s words, that “risk management [becomes] risk justification.” Reasoning rooted in values has clearer views of risk, more patience in achieving its goals, and more humility in the face of complexity and nuance.
  • A collapse of moral courage. When individuals recognize dangers and do nothing, the culture begins to freeze up — as happened at the highest levels during this crisis. In a culture of integrity, where speaking up is rewarded, risks can be foreseen and issues courageously addressed.

In finance as elsewhere, cultures of integrity are built around values, decision making, and courage — operating together, not piecemeal. The Commission’s report focused largely on organizations whose flawed ethical cultures led them astray. It’s worth remembering that there are organizations with sound ethical cultures that didn’t get swept up in this crisis.

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