“My word was my bond”: Ethics and the City

by .

A lecture by Simon Heffer at the Last Thursday event, Thursday 26th September 2013

The foreword to this lecture, by George Pitcher, can be read here.

The British public has had to be disabused of any number of cosy notions in the last few decades. Its politicians, once supposedly the envy of Europe – if not of the world – for their uprightness and ethic of public service, are no longer free from the taint of corruption, following the exposure of an epidemic of expenses-fiddling. Its police, once a byword for probity, are no longer widely perceived as honest, fair and reliable.  Members of the teaching profession are no longer felt to be automatically worthy of status and respect. Clergymen can no longer be relied upon to engage only in officially sanctioned sexual practices, with the Roman Catholic church in some parts of the world resembling a paedophile front organisation. And, since the crash of 2008, our financial services sector, once distinguished by the notion encapsulated in the Stock Exchange’s motto that “my word is my bond”, has become an object of vilification among a large section of the media and the public.

Entertaining though it would be to discuss any on that list of declining professions in greater detail, I am principally concerned this evening only with the last. And I am concerned with it not merely because of the nature of my audience, but because of a perception of what capitalists do these days that should shock and concern all of us: the public simply feels that too many people in private enterprise, and especially in the financial services sector, are as bent as the proverbial nine-bob note. Captains of industry and commerce appear in some measure to have contracted the impropriety disease – a disease which in its mildest form presents as unreliability or sharp practice, but which in an extreme attack is nothing short of sheer criminality.  Following the financial crisis of 2008, whose aftershocks remain with us today, members of the public and shareholders regard sleek men (and they are, I regret, still mostly men) in well-cut suits who run big companies as no longer inevitably trustworthy. One would have had to be on Mars for the last four or five years to have missed this sociological development. From the moment Fred Goodwin and his friends started collapsing banks, all capitalism seemed to portend evil.

Of course this perception is not accurate, but is rather the old problem of a few rotten apples spoiling the entire barrel.  However, we delude ourselves if we imagine the perception to be entirely unfair, and we court danger if we do not examine why so many people feel that way about those who supposedly create wealth. Because of its sheer scale, and the panic it induced among members of the public with money in the bank, the banking crash of 2008 is central to this damaging perception; but so too has been the occasionally avaricious behaviour of bankers in its aftermath, hoovering up as they have large bonuses while their institutions, in some cases, relied on the taxpayer to bail them out. I know people who are bankers who invent euphemisms to describe what they do so as not to attract opprobrium at respectable dinnertables.  That such a thing was allowed to come about shames their profession, and the business culture of our country.  I am for part of my time a historian, so it would only be right for me to reflect for a moment upon how the time-honoured maxim that “my word is my bond”, and the ethical understanding that it allegedly brings into financial and commercial dealings, was always subject to occasional and severe bursts of non-observance. The Tudors clipped gold and silver coins and melted down the surplus while passing the mutilated coin as still a penny, sixpence or shilling. The South Sea Bubble of the early 18th century was not the result of speculators behaving honestly: and it led to the then Chancellor of the Exchequer being sent to jail. In the 19th century railway mania caused many investors to lose their shirts, thanks to the wickedly dishonest promises made by those who claimed they could secure Acts of Parliament to have their particular railway scheme built. In 1912 three such eminent men as the Chancellor of the Exchequer, the Chief Whip and the Attorney General engaged in rampant insider dealing in the shares of the Marconi Company, shortly before it was awarded a lucrative government contract: the Chancellor concerned was Lloyd George, who made something of a habit of dodgy dealing.  And then, in the boom years that preceded the crash of 1973 all sorts of dubious practices – romanticised as “buccaneering” – helped feed a new prosperity, but one that caused Ted Heath, in May 1973, to describe one such company – Tiny Rowland’s Lonrho – as the “unpleasant and unacceptable face of capitalism”. Mr Rowland, a man who was always ahead of his time, retorted that he would not want to be the acceptable face. It was out of men such as him, with his gift for charming others, that the public relations industry as we know it today was born.

A stake in the system

Yet there has been an important social change since the 1970s, and which puts the recent bad, unscrupulous or reckless behaviour of certain capitalists in a very different context. The general public now more widely perceive themselves to have a stake in the financial system in a way that they did not 40 years ago. Even if the Thatcherite ideal of a nation of small shareholders never quite caught on as much as she would have liked – those who, like Sid, bought their British Gas or BT shares often bought nothing else, and sold even those before too long millions of Britons now understand just how much their own personal prosperity depends on organised high finance.  Millions of us have private pension funds that invest in publicly quoted companies and great financial institutions. Millions of us have mortgages. Most of us have bank accounts. The financial world is no longer the province exclusively of the well-todo, of the cigar-chomping and silk-hatted classes. It is doing the job it should do, and contributing to the greater wealth of tens of millions of us in this country. But it is for that very reason that it has to do it not just well, but ethically so as to be beyond reproach.

In case anyone from the world of banking should imagine I am singling that sector out for abuse, I must stress how aware I am – and, I suspect, how aware we all are – that poor behaviour in commercial life is more widespread than just in banks or the financial sector. Supermarkets, oil companies, budget airlines, energy giants and even those who provide private security services are among those highprofile businesses that have been in the public eye, and criticised for poor or shoddy performance and mistreatment of customers and shareholders, over the last year or two. There is a classic cycle of error. A mistake is made; it is exposed, usually by our much-maligned printed press; there are denials, usually in the tone that the press is lying and the public wouldn’t be so stupid as to believe a smear.  But the press usually isn’t lying – the laws of libel are pretty terrifying in this country, which is precisely why I am naming only well-attested names – and the management looks incompetent, for having made the mistake in the first place, dishonest for having denied it, and insulting for imagining the public is so stupid that it would have believed its denials. Fear not, I shall give some examples later on.  As a journalist myself, I know from my mailbag that nothing to do with business upsets the general public more than a refusal to own up to error, and to take responsibility. Nor are people impressed by the swift recourse to the most cynical end of the public relations trade to seek to disguise the all-too-often undisguisable. It has become the habit of businesses, aided and abetted by those who undertake their public relations, to deal with any difficulty they may have by not telling the whole truth about it, or attempting to conceal it, or seeking to divert attention from it.  The private sector has, I fear, learned this profoundly unlovely behaviour from politicians, and it is serving to reduce business people in stature in much the same way as it has reduced those who govern us. I wouldn’t want to sound pious, but in business and especially in handling other people’s money it is always good to behave ethically for the sake of it.  Those of you of a more utilitarian cast of mind might like to consider, however, the damage done to a business’s reputation by the simple fact of treating its customers or potential customers with contempt.

The roots of the 2008 crisis

But let us deal first, in some detail, with what has been the driving force behind the recent crisis of capitalism, and what has brought the question of ethics in business so prominently into the public imagination: the crash of 2008, which led to the extinction of one great international bank, Lehman Brothers, and the near-death of two others, Royal Bank of Scotland and HBOS. The events of 2008 were, in their gravity, highly unusual, in that they brought about an economic contraction on a scale not seen since the 1930s. They also, however, sabotaged the general feeling of trust that the public had in financial institutions, even after the buccaneering of the 60s and 70s and the supposedly greed-driven self-enrichment of the 80s, 90s and beyond. It is worth tracing how they came about, for the way the crash was precipitated was an object lesson in what happens when rules are broken, a cover-up is put into action, and saving face becomes the principal concern of all those involved.

In 1999 Bill Clinton told Alan Greenspan, the head of the Federal Reserve Bank, that he wanted low interest rates and wider availability of loans for housing. This was to create a feelgood factor that would, allegedly, help his vice-president, Al Gore, to succeed him in the Oval Office the following year. Whether he let Greenspan into the secrets of his political thinking is not clear. But the economic message was conveyed, received and understood.  Greenspan took the brakes off liquidity and kept interest rates low. Mortgagees found themselves awash with cash to lend on to prospective housebuyers who in earlier times would have struggled to borrow a single cent. The normal rules for lending were waived. And a derivatives industry that came to be valued at an incomprehensible $500 trillion traded these increasingly bad debts around the world, until within a decade the contagion had spread everywhere. Their activities were, in America as in Britain, untrammeled by any traditional degree of regulation. Great banks, such as Lehman Brothers, found themselves saddled with unfeasible, and indeed fatal, levels of debt. Overexposed banks such as RBS and HBOS found they had gone into a fight they simply were not big enough to win, and would have gone the same way as Lehman had the British government at the time taken a less sentimental view of keeping these spavined businesses alive.  In Britain there was a fatal conjunction of poor regulation, imposed in May 1997 by politicians with no serious understanding of banking – Gordon Brown and his then adviser, Ed Balls – and utter recklessness by those working in financial services.  The concept of being careful with other people’s money never seems to have entered their heads once the blood got up. The market was driven by people too young to have seen boom and bust before, in the 1970s and at the end of the 1980s.  A fatal lack of experience just added to the cocktail that brought disaster. The politicians, whose stupidity created the conditions in the first place, had no idea what was going on.

As a commentator I have resisted over the last five years assaulting the financial community as the sole progenitors of our recent problems. Indeed, I was astonished by the virulence of some of the attacks by my fellow journalists upon the financial sector generally. It reminded me in great measure how the Jews were scapegoated for the failures of the Weimar Republic in the 1920s, and was about as rational. Of course some individual financiers behaved recklessly. But they were enabled to do so by a poor regulatory regime imposed or otherwise – by politicians. And the politicians did something else in those years that critics of the bankers choose to ignore. They allowed the money supply, in its M3 definition, to rise by an average of around 14 per cent per year between 2000 and 2006. This was far above the combined rates of inflation and growth at the time. But when some of us boring old monetarists had the bad manners to point this out, we were told to mind our own business. This, by the way, was Gordon Brown’s policy as Chancellor, and if it were up to me I’d have him impeached for it. It is all very well – and it may indeed be right – to argue that some of those who were the architects of the worst financial misjudgments of that era were lucky to escape criminal charges, and that the criminal law ought to be adapted to ensure that bankers and others should more easily be punished severely for the reckless use of other people’s money. But by that token, so too should politicians who create the conditions in which recklessness thrives.

The Mars Bar metaphor

Let me put it another way. Suppose you are a five-year old child, with the uncontrolled greed for which five-year old children are famed, and you go into a sweet shop with 58 pence to buy a Mars Bar – the price at which, when I checked just now, Marks and Spencer are selling them – and you find instead that the price has been cut to 5 pence. Some children, inevitably, having gone into the shop in search of just one Mars Bar will now buy eleven, and gorge themselves on them, not always with very satisfactory effects. Worse, others may go back to their parents and entice them to lend them more money – or perhaps even to “invest” it – so that they can buy hundreds of cheap Mars Bars and sell them to their friends still cheaply, but at a mark-up. Their friends might not always be in the position to afford a Mars Bar, even at the knock-down prices at which they are now being offered. No problem, says the trader, you can have it on account. But sometimes the account cannot be paid: and the investor doesn’t always get his money back, though the original child seems never to be short of Mars Bars for his own personal consumption: what we might call a bonus for his entrepreneurialism.

I hardly need to elucidate the myriad ethical questions that arise from all this.  However, they seem not to have occurred to those who greedily bought up lots of sub-prime debt a decade ago, or to the politicians who pumped so much extra liquidity into the economy that they were enabled to do so, so perhaps I had better –just for the record.

The first ethical issue must be one for the government. Is it right, in a time when growth is already good, to expand the supply of money to seek to ramp up growth further by means of an artificial stimulus? The effect of doing so in the first instance is to punish thrift, because it drives down interest rates, and to weaken the currency. Over the years, you will have noticed that the economies that have stood up best have been those where credit has been limited, and in which greater productivity has been used as the means to create expansion – I am thinking of Germany, Switzerland and even, under the careful rule of John Howard until 2007, Australia. Economies in which credit has become artificially plentiful and artificially cheap end up on their knees. Greece, Ireland and Spain are obvious examples, their misery exacerbated by their inability to devalue and acquire a value for their currency that reflects the dire state of their economies, a matter that stands outside of my subject today. In my view, an ethical government does not entice the citizens whom it governs into ever-larger amounts of debt, or pretend that living beyond one’s means indefinitely is sustainable either for the individual or for the country.  But that was exactly what happened in the eurozone until Germany asserted its authority four years ago and started ordering retrenchment in return for bail outs. It is what happened here until the coalition’s half-hearted attempts from 2010 onwards to bring our deficit, if not our debt, under some sort of control after Brown’s binge. And it is, of course, what happened in America, as politicians vied to create a new form of enfranchisement through property ownership, whether the owners could afford it or not. Some of us did not need the benefit of hindsight to see this not just as reckless, but as verging on the immoral. There has been much criticism lately of so-called payday lenders, who charge APRs of several thousand per cent to lend impoverished people relatively small amounts of money to tide them over until their next pay cheque arrives. All I would say about the moral worth of such lenders is that at least they are forced to publish the costs to the punter in advance. Governments are not required to do anything of the sort about the consequences of their sometimes intensely damaging policies, which creates a surprise that is all the more nasty when it finally turns up. I do not see how that can be regarded as ethical behaviour on the parts of those we elect to govern us. And I vividly remember the day when Lord Mandelson, a man who has long been an indispensable case-study for all students of ethics, stood up and told us during the months when the last Labour government was decomposing that the disaster inflicted upon Britain was all America’s fault. For the avoidance of doubt, it wasn’t.  But even when the people who purport to rule us have behaved improperly, not just by carelessly pursuing the most harmful policies but then by refusing to take responsibility for them when they go terribly wrong, there should be other safeguards for the public. One of those ought to be not just the ethical, but also the intellectual, dimension of those who take a serious part in the financial markets. No bank was forced to acquire huge quantities of sub-prime debt.  Certain bankers should have paused and asked themselves whether this was the wisest use of their depositors’ money.  They should certainly have wondered whether it was a good idea to impose vast extra liabilities on their shareholders by borrowing incomprehensible amounts to buy risky debt, or other complex financial instruments: or to lend money to those who wished to use the money for those purposes.

Off to the casino

This is one of the important ethical considerations that seems to have been pushed to one side by certain bankers in the 2000s, in their pursuit of ever greater profits and, on a personal note, ever greater bonuses. What safeguards need to be taken with other people’s money? When one chooses to deposit in a bank the bank pays a rate of interest for the use of your money so long as it remains on deposit there. The understanding, at least in our banking system, is that when the time comes that the depositor wants his money back, he gets it, subject to any fixed-term agreements concerning penalties that he has made with the bank. Yet at the height of the banking crisis in 2008 there were for a time serious doubts that depositors would get their money back, so recklessly had it been used by the banks to which they had lent it. A Labour government at last had to do what Michael Foot, Tony Benn and their far-leftist followers had wanted to do in 1983, as set out in Labour’s manifesto of that year – a document described famously, by Sir Gerald Kaufman, as “the longest suicide note in history”.  They started nationalising banks. First Northern Rock, then RBS, then a deeply questionable forced merger of Lloyds TSB and HBOS. The alternative, we were told, was that some or all of these banks would go under; that there would be a run on the banks generally; that the Bank of England, the lender of last resort, would be pressed to shore up a banking system with money even it did not have. We were brought to the edge of panic by the decisions of senior bankers to disregard the sense of what they were doing with other people’s money. Where, one asks, were the ethical considerations in that?

The argument, of course, was that the banking services most of us want or need can be provided only as cheaply as they are by those very same banks making huge profits (when things go well) by engaging in activities that have often been compared with those of a casino. The deal that one takes part in, as a customer and indeed as a shareholder, when engaging with a retail bank has changed over the years, and in a not very subtle fashion.  The problem is that most depositors and small shareholders did not realise, until the storms of 2008 blew in, that they had in fact been customers of or shareholders in a casino, and that in best Monte Carlo style the bank was about to be broken.  Therefore a debate continues today about whether these activities should be separated. To me, the ethics of that question seem quite simple. Members of the public have to be given full information about risk. Then, if they wish to deposit money or buy shares in a bank that has a casino element to it, so be it. I suspect many depositors would rather not, even if the government maintains its guarantee scheme for them in the event of a bank failure. And only those investors who want some serious risk in their portfolio would choose to buy shares in such an operation.  For both depositors and shareholders in the recent past, it is fair to argue that the rule of caveat emptor had to apply.  However, it is also fair to argue that banks were not straight with either customers or small shareholders – those who lack the sophistication to understand what was really going on as the nature of the business changed over a number of years –and they should have been. My word is my bond is an ideal principle, but one has to be clear what the word is.

In cases where other people’s money is put at risk because greed trumps common sense, there ought to have been other safeguards in place. I have several times mentioned small shareholders, aware that they account for a minuscule proportion of a bank’s equity, even though many will have more of a shareholding than they realise through pension funds and investment trusts or investment companies.  We have until the last few months heard the cries of Lloyds TSB shareholders, many of whom had held shares since the privatisation of TSB in 1987, seeing the value of their shares reduced to pennies because of the merger with HBOS. And anyone holding HBOS or RBS shares before 2008 and planning an exotic retirement on the back of them will have had to think again. But what were the big shareholders doing? There was absolutely no excuse for those big institutions who held shares in casino banks not to make their feelings known, for even in the heady days of 2005 and 2006 any chief executive who ignored such pressure would have been in trouble. Some sensible fund managers steered clear when they saw the way things were going. Others did not. When greed trumps sense it is an ethical issue: and those whose ethics are defective should be punished, even if only by a regulator telling them that they are manifestly unfit to run public companies, and disqualifying them from doing so for a long fixed period of time, or indefinitely.

And then there was Libor

We know the ethical deficiencies of certain bankers from what has been exposed about the Libor scandal. Senior bankers thought nothing of deflating or inflating their own rates so they could make a profit on trades. Barclays Bank admitted serious fraud and collusion, and we await a decision on whether the use of a fraudulently-calibrated Libor to manipulate US derivative markets was a breach of that country’s law. The Financial Services Act of 2012 makes such fraudulence a crime: but Libor had, it seems, been manipulated since the early 1990s, and the 2012 Act is not retrospective. However, the then governor of the Bank of England, Mervyn King, drew attention to the fictional nature of Libor as long ago as 2008, saying it was the rate at which banks did not lend to each other. In June last year Barclays was fined a total of $360m by American authorities and £59.5m by our own Financial Services Authority for its part in the fraud. Marcus Agius, Barclays’ chairman, walked at once, and his chief executive, Bob Diamond, a day later – though Mr Diamond claims not to have known about the manipulation.  However, a House of Commons Committee was also told that the then deputy governor of the Bank of England, Paul Tucker, had talked to Mr Diamond about Libor rigging. Given his professed ignorance of the matter, one might wonder what Mr Diamond actually did to earn all that money he was paid. UBS was then fined $1.2bn by the Americans and £160m by our authorities for its own role in the collusion, and the Americans are demanding the extradition of two traders to face trial there. It is important to note the irony of an exchange recorded between one alleged Libor manipulator and another, who was heard to tell his interlocutor “I’m a man of my word”. It is nice to know that, after all, that old city tradition has survived.

The more alert of you will have noted the disparity between the fines levied on Barclays and UBS in America and those levied here; and also that America is seeking to put manipulators on trial, something that has not happened here.  America beats Britain hands down as the land of serious financial scandal –even our banks have some way to go to match Bernie Madoff, and the string of accountancy scandals in America of a decade ago that peaked with the Enron disaster remains something of a world leader. However, America does appear to take white-collar crime more seriously than we do. Perhaps this is because our legislators and regulators persist in the notion that British high finance is the province still of honourable schoolboys, and all is honest and above board. Recent events make it clear that that is not the case. If young people going into the City are not being given a training in ethics from their elders, because their elders themselves were corrupted years ago, then examples may have to be set. Ensuring that those who play fast and loose with other people’s money are brought within the criminal law without question, and that that law is applied rigorously, may have to be the beginning of that moral education.  By the time the Libor scandal erupted, coming on top of the casino activity that brought about the crash of 2008, and the constant bad press about inflated bonuses and overpaid, under-moralised financiers, the financial world was in a state of profound reputational damage. How it repairs that reputation is, I suspect, the work of decades rather than years, and it is not going to be easy.

Teaching ethics

Perhaps it begins with some examples being made: though the law cannot be restrospective. We have had knighthoods removed and even, in one case, a knighthood surrendered, that last act by James Crosby, fiercely criticised for his role in bringing HBOS to its knees, being like the proverbial good deed in a naughty world. Mr Crosby also handed back 30 per cent of his pension and resigned from his job on the board of a catering company.

He at least understands the scale and gravity of the error he made and should be applauded for these acts of contrition even though, predictably, some pundits have argued that he should have gone further. We await such expressions of remorse from Lord Stevenson and Andy Hornby, fellow HBOS grandees who were also criticised.

Not only did HBOS’s collapse require a bail-out of £28bn, it also resulted in the loss of 32,000 jobs when the merger with Lloyds TSB took place. Mr Hornby however continues to draw a £240,000 pension from HBOS and is chief executive of the Coral betting group and chairman of Pharmacy 2U. I leave it to you to decide what message it sends to the taxpayers who bailed out HBOS, and who would have rather their money went to the NHS, education or care of the elderly, that a man whom the Banking Standards Commission has asked to be barred from working in the financial sector because of what the Commission called a “colossal failure of management” should continue to prosper in the way he does.  If politics is about perception, then so too is any business. My own trade, journalism, is perceived as being very rough at the moment, as several prominent journalists from one newspaper group face criminal charges for allegedly intercepting communications, conspiring to cause misconduct in public office and conspiring to pervert the course of justice. In my trade we are painfully aware that the law must take its course: that those accused of such grave misdeeds should be properly tried and, if convicted, properly punished.  If boils exist they must be lanced. The boil of the financial community in this country unquestionably exists. I am not sure how far it has been lanced. And, indeed, I am not sure how far the lessons that should have been learned have been.

Don’t bank on it

Some depressing evidence of this failing was published in the Times newspaper a month ago. The Chartered Institute for Securities and Investment, which is at least taking seriously the mephitic perception of the banking sector, relaunched last April an examination designed to measure the honesty and integrity of the young investment bankers who sit on it. Of the 10,000 candidates who had taken the exam – which is online – 98 per cent passed with an A or B grade. However, 200 of them scored too low to be allowed to take the Capital Markets Certificate 3 exam. The Institute’s own head of professional standards was quoted as saying “you have to work quite hard to do that badly”. From what one hears of the test, it hardly requires a PhD to navigate it successfully. Candidates are asked about falsifying expenses in the pursuit of new business, covering up mistakes and whistleblowing on colleagues suspected of behaving improperly.

Regrettably, the word was that the banks who employ the 200 failures were simply “considering” firing them. I am struggling to consider what consideration is needed when it comes to keeping on the payroll someone who thinks it acceptable to enter his expenses for the Booker prize; or ignoring mistakes rather than owning up to them and learning from them.  Whistleblowing is, of course, a difficult issue: no-one likes telling tales, and it is often hard to be sure of facts. But an employee who discovers sharp or criminal practice of the sort that is beyond doubt, and is likely further to sully the reputation of his firm or the business generally must be made to see that part of the responsibility of working in a trade with such disproportionately high rewards is to see that the rules are kept, however hard that may be. And the company that employs him should ensure that his job becomes more, rather than less, secure as a result of blowing the whistle.  I have resisted thus far using the word “leadership”, but that is something that has plainly been lacking in the financial sector.  To blow the whistle is an act of leadership.  It should be identified as such, celebrated as such, and rewarded as such. The point is, however, that it is not about enhancing the reputation of the whistleblower, but enhancing the reputation of the entire business. In the financial services sector now, that is the ultimate requirement of leadership. For telling the truth, and seeing that honesty prevails, are prime requirements of a leader, and in the financial services sector there is a need for more, and not fewer, such people, however shocking it may seem that an important part of their job should be to drive out the bad. The best questions that can be asked of young bankers are surely these: why would you not inevitably behave in an honest way in your work, so that you can at all times and without shame tell the whole truth about your actions? And what is wrong with acting in such a way?

PR vs honest capitalism

Leadership, in terms of setting a tone for the business, is also contracted out from the people who make the deals, and left in the hands of corporate affairs specialists. These people, too, should be asked the questions I have just set out for the young bankers. I don’t know how well the financial sector has been served by those who undertake its public relations, the gut instinct of many of whom would be to frame a dissembling answer to the questions. Much of that trade – whether undertaken by private enterprise or by government and its satellites – operates, as I said earlier, on the principle that the public does not always need to be told the whole truth. I’m sure reputable corporate affairs people do not lie; but it is their job to make the truth palatable, and that sometimes entails what we might tactfully term strict editing. There are always good days to bury bad news. However, the old maxim that the truth will out remains good in most cases. This means that in most cases enterprises that seek to lie about or simply to misrepresent what they do and how they do it are going to be exposed at some point, and possibly with devastating results. This surely is the lesson to be learned from the travails of the banking sector. The other is that when the excrement started to fly the first concern many of those involved had was for the salvation of their own reputations, with the reputation of the company for which they worked and of the sector in which that company operated being very distant, indeed almost incidental, considerations. That is the damage that must now be repaired. And it is why a man such as James Crosby, for all his faults and for all the just criticism he has had to endure, does by his act begin to rebuild the reputation of an entire area of our economic activity by seeking to reclaim part of his own. An admission that one was guilty as charged, that one did make terrible errors, but that one is now prepared to atone for them and recognise one’s limitations is a tremendously effective way of restoring trust. Any public relations executive, inside a beleaguered company or giving advice from without, would always be sensible to start from the basis that where wrong has been done, a full admission, apology and some act of sacrifice must be the basis on which any recovery is built.

Because I am at heart a libertarian I have always favoured capitalism over any other economic system for the simple reason that it seems to allow for freedom of the individual better than any other arrangement. I prize the link between effort and reward, and the freedom for individuals who have earned rewards to spend them as they choose. However, for capitalism to flourish and to survive it requires trust: trust so well summed up in the motto “dictum meum pactum”, my word is my bond. And honest capitalism requires that respect be shown by the capitalists to their customers, their investors and their staff.

Honest capitalism requires that workers can trust their bosses and that customers can trust the firms with which they do business. This is especially true when the commodity at issue is money itself, and when a customer’s money is being entrusted to a firm for investment and management. However, capitalism also requires that goods sold to customers are what they purport to be and function as they purport to function; and that staff are paid and treated fairly, and are hired and fired according to their merit and not because of any prejudices on the part of those who are in charge.

Occasionally great enterprises make great mistakes. The disaster of the banks in 2008 is the most obvious example. But to this point the failure of those charged with rescuing the reputations of those institutions has been abject, precisely because of an initial refusal to own up to the mistakes that were made, and the reluctance of those who made them to show any contrition. The life of a senior financier has to be a two-way street.  When things go well, when they make money for their shareholders, then they deserve to be rewarded; but when they are found to be negligent, there has to be a financial sanction, since it appears to be the only language they understand. They, and those who advise them about public relations, have to understand the toxic impression that they create when, having lost an inconceivable amount of money in one enterprise, they swan off to another, often taking their old pension pots with them. They have to understand that such behaviour garners opprobrium not just for them, but for the institutions for which they work and for the whole commercial sector. It creates, above all, the impression that capitalism is an unreliable system, and must be controlled by governments: even though we have seen that if there is anyone in our society who knows less about making honest money than certain bankers, it is certain high-ranking politicians.

It should be obvious now that the best way to restore a firm’s or an institution’s reputation after any sort of damage to it be it through dishonesty, incompetence or act of God – is to own up to the scale and nature of the problem, to remove those responsible where appropriate, and to put in place people and systems that will prevent the problem from being repeated and will repair the damage as speedily as possible. Yet there still seems to be a certain amount of reluctance to do some or all of these things.

Owning up

We appear to have become institutionally resistant to admitting error, partly because of cut-throat competition (which will exist so long as there is human nature) and partly because in some cases lower personal standards have advanced the cause and debased the means of self-preservation. In a society where the customer is not inevitably stupid as Gerald Ratner will testify – and the media are ever more vigilant, this strategy (if it can be called that) is a disaster in itself.

We need a new approach of transparency and honesty. As such, businesses have to accept that short-term losses caused by admissions of failure will be replaced by long-term trust when customers realise that the firm is one that acts in good faith and respects their integrity and intelligence.  There is a strong framework of law to regulate the behaviour of enterprises, their advertising and their products and services. However, much is left to the discretion of managers and directors, whose instincts to obfuscate and dissemble degrade themselves and their businesses and open them up to investigation and condemnation in the media, with longterm consequences.

It should once more become unthinkable to tell a lie in business, whether to one’s clients, colleagues or customers, and it should be ever more apparent that a firm must stand or fall according to the strength of its reputation. Ironically, it is the public relations industry – which is perceived by the public to have assisted the retreat that some businesses have made from the truth – that is best placed to restore ethical standards, by encouraging a return to straightforward honesty.

In an increasingly secular society – and I speak as an atheist – fewer and fewer people, whether engaged on the coal face of capitalism or elsewhere, imagine that their sins in this world will catch up with them in the next. Therefore society must provide its own temporal safeguards.  Toughening up the law is one means, and it is regrettably necessary. But individual commercial enterprises need their own system of clear sanctions for those who behave unethically, if their breach of ethics falls short of criminality. And their corporate affairs spokesmen or public relations advisers need to ensure absolute transparency in this regard. They must see to it that there is a clear statement of what the deal with investors and customers is. There should be no doubt about the nature of their trading, or of their trading practices. And as well as making it clear where the boundary lies between right and wrong, it should state clearly what type of behaviour by an employee, of whatever rank, constitutes such misconduct as to be a breach of contract, resulting in that person’s dismissal. This may seem heavy-handed. But I am in no doubt that rebuilding the reputation of the financial services sector in particular, and of the commercial sector in general, is going to depend on such hair-shirt activities in future. Anyone who doubts this must be unaware of how profoundly trust with the general public has been broken, and how difficult its rebuilding is going to be. We don’t need just a few James Crosbys: we probably need dozens of them.  And when a corporate affairs executive, or an external adviser, suggests to a chief executive again that he should tough it out, or deny everything, and cling on to his bonus, that adviser should think carefully of the public perceptions of such actions – more carefully, I think, than they have in the past. The casualties of the great financial crash were pensioners, shareholders, rank-and-file employees and taxpayers. Indeed, there were very few people in the country who were not directly affected by the stupidity, recklessness and self-service of those for whom greed trumped not just sense, but decency, in the years before the big crash.  The perception by the public is that trust was taken for granted and exploited; that the public were tricked; and that because the banks were “too big to fail” people who had already been tricked once as shareholders either directly or through pension funds were tricked a second time by being asked to contribute to bail-outs.  No PR professional should need to be told how damaging this collapse of trust has been to the reputations of the private sector, and especially to the financial services sector, in this country.

The final warning

The boys’ fiction of the inter-war years may have established the cult of the honourable schoolboy, who didn’t sneak on his chums and always played a straight bat for the XI, and who tried to live up to the reputations of those whose names were carved on the war memorial outside the chapel, and had put something larger than themselves first. However, there was always someone in those public school stories – usually characterised by the epithet “stinker” or “rotter” or “cad” –who played by rules that suited him rather than those agreed for the general benefit of everybody. From such rotten apples the whole barrel became infected, and long before the supposedly uncivilised barrow boys were let into the City in 1986. As the City’s activities mushroomed and its networks no longer relied on ancient social ties it just became harder to sweep bad behaviour under the carpet, or to control its spread. And the media, believe me, are constantly and increasingly vigilant on such matters, and they will be exposed.  Now, there will be no more warnings. If capitalism does not reconnect with its ethical base, and if ethical considerations about the use of other people’s money do not become paramount, it will be in mortal danger. Its reputation – never mind the reputations of individuals, or of their firms, or of their sectors – cannot take much more damage. Anyone who wants to play fast and loose, or to make excuses for those who do, should be painfully aware of how very little rope they have left.


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