FRBNY Executive Vice President Baxter Discusses Ethical Culture in Financial Services Firms (with Lofchie Comment)

At the Bank of England in London, Federal Reserve Bank of New York Executive Vice President and General Counsel Thomas Baxter discussed the importance for financial services firms of developing and reinforcing an "ethical culture."

Mr. Baxter stated that, although enforcement actions against bad actors and their employers can have a deterrent effect on undesirable behavior, enforcement actions are inevitably retrospective and must be complemented by combined efforts to build strong "ethical cultures" within financial institutions. To that end, Mr. Baxter recommended that financial services firms implement the following policies:

• tie the compensation and promotion of employees to "ethical considerations" and not merely how much money the individuals made for the firm;
• ensure that all actions of managers and high-level executives are consistent with their statements regarding the firm's ethical obligations, as well as its internal policies and procedures;
• do not refer to persons with whom the firm does business as "counterparties," since the implication is that customers are viewed as profit opportunities to be exploited;
• adjust time horizons for bonus compensation to align the short-term incentives of employees with the long-term incentives of the firm; and
• do not view the firm's purpose as that of a "money making machine." Instead, the Firm's goal "should be to provide service to its customers through financial intermediation . . . that contributes to human flourishing."

Lofchie Comment: While it is nice to say that banks should contribute to "human flourishing," in a free capitalist society, such flourishing is in the eye of the beholder. In such a society, the role of banks should be to sell services such as capital raising and risk management – even if these mercenary activities may be asserted to contribute less than the writing of poetry to "human flourishing." In response to the regulators' ability to determine which bank activities should be sanctioned as contributing to human flourishing, please note economist and philosopher Friedrich Hayek's warning: "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has . . . control of the means must also determine which ends are to be served, which values are to be rated higher and which lower." See The Road to Serfdom, chapter titled "Economic Control and Totalitarianism." In short, sanctioning "human flourishing" is a power that should be regarded as too personal to individual citizens to be delegated to bank regulators.(For those interested in the fostering of human flourishing through the writing of poetry, please see Billy Collins' website for teaching poetry to high school students: Poetry 180. His poem on teaching poetry, "Introduction to Poetry," is a worthy read.)Discomfort with assumptions about ethics, or at least with a government that assumes it has the authority to interpret what it means to be ethical, should increase with the expanding power of our government – power that can be exercised by the regulators with ever-greater discretion. Since market participants are subject to rules that are not only absurdly complex, but often make no sense and satisfy no reasonable policy objective, regulators ought to be satisfied that market participants are making a reasonable effort to obey those rules. It is not (or at least should not be) the role of financial regulators to serve as moral judges, especially in a society that prides itself on the written law. If moral judgments are to be made, then it would be better if they ran from the governed to the government instead of the reverse.

See: Mr. Baxter's Speech.