Introduction
The recent global financial meltdown left the world economy in a terrible condition. The economic power houses such as France, Japan, Great Britain, Russia, China, and the sole superpower, the United States of America trembled. A series of bailouts had to be carried out especially in the United States as a way of avoiding a deeper economic catastrophe that would have trashed the October 1929 stock market crash. A number of governments around the globe spent taxpayers’ money as a stimulant for stagnant or receding economies. The crisis is not yet over, but there are signs that the worst days have passed. The question that is not yet properly answered is: Who is to blame? This paper will look at the different parties involved and determine how they contributed to the problem by not playing by the rules. Upon the unraveling of the dilemma of rightly apportioning blame, the next issue of preventing a future catastrophe will be dealt with.
The Players
Like a game of soccer, the financial sector has a variety of participants. It turns out right only when each participant handles his or her part as required. The governing principle is playing by the rules. Any short cuts will always lead to problems, and the choice to take short cuts is a sign of diminishing or absence of values that are supposed to be part of the game. In proper terms, this is called lack of business ethics. At the country level, we have the governments. They are the referees for the local economic entities. The government is at the top of the economic ladder of a country’s financial establishment. The companies and their executives are next followed by investors. A point to be clarified here is that the regulatory agencies for the stock market and other areas of the financial sector are under government.
The Global Watchdog
Who keeps an eye on the global economy? This is a blurred field with the leading economies assuming the lion’s share of economic control. But the Bretton Woods institutions led by the World Bank and the International Monetary Fund as well as the World Trade Organization have a role to play.Ideally; they ought to have more powers. But the reality is quite different. These institutions are funded by the big nations, a fact that makes them marionettes of these nations. It is therefore not possible for officials of these institutions to give suggestions on how to conduct business affairs in the developed world. They only bulldoze the governments of developing nations.
The Participants and Their Roles and the Dictates of Business Ethics
Each of the participants identified above has a role that is to be fulfilled under business ethics. There is the prevailing opinion on what this participant should or should not do; which I will disclose and state my position, with a justification for the same.
The Executives, Speculation, Compensation and Business Ethics
Compensation
The position held by executives of institutions that manage hedge funds, equity funds and mortgages are challenging. The atmosphere is full of vitriol directed at executives for taking home fat compensations in a failing economic system. It is however prudent to ask ourselves whether executive compensation is a crime. In all major institutions, executive compensation is a decision made by the board of directors. A number of issues are considered when fixing executive pay. Some of these include the history of executive pay as well as the qualification of the person occupying the office. In some institutions, reasonable compensation that is not pegged on the economic times makes the leader work harder to positively affect the fortunes of the institution. In such a case, the management sits down and decides to compensate the executive in a manner that goes hand in hand with that type of history. On the side of qualifications, a highly experienced and qualified executive can only be hired at a particular level of compensation. This means that if the institution must have that highly qualified executive, then it should be ready to give the corresponding compensation.
What Is The Idea Out There?
The prevailing notion in the market is that it is unethical for executives to be paid huge sums of money when institutions that they manage are in dire financial positions. These statements are made without considerations such as qualifications and the particular specifics of each institution.
Why I Disagree
Opposing executive pay is a good move only when it is well understood that the history of each organization is taken into consideration. If the executive of a company is known for wasting time in boardrooms followed by a hefty monthly compensation, then there is reason for alarm (Graham, Roth & Dugan 2008, 415-416).But complaining and blaming executive compensation in a wholesale manner is unethical. It damages the organization in question in particular and the larger economy in general. The explanation behind this is that the financial sector is hugely maintained by confidence (Krugman, 2008). Once this bank of confidence runs into deficits, investors normally make a rush to salvage their investments by floating their shares in the market due to the fear of an ultimate collapse based on the so much hyped executive compensation. The panic leads to a crash for the shares of the organization in question.
Speculation
This is a frequent game played by hedge funds. Economies of countries have been brought down by managers of hedge funds as well as big investors who have over speculated in the financial markets leading to crashes. Examples of these include the Malaysian problem that had the Malaysian Prime Minister complaining (Blustein, 1997). Also, the Justice Department in the European Union Court of Justice just launched a new case investigating the role of some famous hedge fund managers in recent heavy losses of the Euro. (Pulliam and Kelly, 2010).This has weakened some economies within the European Union such as Greece.
The Argument I disagree with
Many investors like Mark Siegel, managing director of Darby Overseas Investments Ltd believe this financial turbulence is a necessary price to be paid by emerging economies as they join the global market. (Blustein, 1997).
Reason for Disagreement
There is no justification for hurting millions of people in developing countries in the name of initiation into the financial market. This is ethically unacceptable
The Governments around the World
The buck stops with the governments when it comes to financial regulation. The United States for example has a regulatory body by the name Securities and Exchange Council (SEC). Enron executives have court cases emanating from the mismanagement of company finances that led to the collapse of the company; a phenomenon that touched on the economies of several countries since Enron was a multinational. In fact at the time of the collapse, senior members of the Bush administration were directly involved. The Vice president, Dick Cheney had the audacity to hide under the umbrella of executive privilege when he was asked to come clean regarding the role the Bush administration played in the collapse of Enron (Amar, 2002).
It is my understanding that the governments can and should take responsibility for keeping checks and balances in the financial sector as well as the bigger economy. The avenues for this are many. Legislation is one of them. The discussions at the G20 summit whereby the leaders of Europe led by the Germany Chancellor Angela Merkel and the French President Nicholas Sarkozy wanted to create a global regulator for the financial sector (Skyrzycki,2009) is evidence of the immense power that governments have for financial regulation. The thinking behind this is that no country would be left to pursue risky financial behavior thus causing the larger world economy to suffer. But the President of the United States managed to tone down the push for a global financial regulator. He advocated for country level regulation. This position has its own ups and downs, but the point is that governments have the potential to regulate not only country level finances but also through bodies like the G20, global finances.
But What Do We Hear Every Day?
The governments around the world have come out with guns blazing blaming the executives for the mess. The complaints are coming out when the mess has already been done and people have lost their savings and mortgages are valueless. The rhetoric makes us believe that the executives of the hedge fund managing institutions are totally responsible for the turmoil. The presidential campaigns in the United States created a field for placing the blame on two main participants in the mortgage industry; Fannie Mae and Freddie Mac (Fox, 2008).The point here is that the executives of the hedge fund managing institutions, the equity fund managers and bank managers are given the power to manage the financial sector and when things go wrong, they take the blame.
Why Do I Disagree?
The legislative power of the governments gives them the authority to come up with bills that bring into existence bodies that regulate financial sectors in the countries around the world. Under such bodies, the managers and chief executive officers would be required to disclose their actions from time to time as demanded by the government as a way of ensuring that nothing goes wrong. Indeed the United States has the Securities and Exchange Council that has oversight role in Wallstreet.The current push for a financial regulation bill is further evidence that the government ought to do more to avoid financial crises.
Where The Issue Of Ethics Does Comes In?
The inability of the government to perform the role of a watchdog as a way of protecting investors is unethical. It is a failure to take responsibility seriously; an act that leads to the loss of the people’s source of security, especially at old age.
In occlusion, my opinion is that government inactivity is lack of business ethics given the legislative power it has to regulate the financial sector. Blaming executive pay without looking at each individual case is unsound and unethical in business. I recommend that governments take their responsibility seriously and stop pushing the blame into the territory of executives. They (governments) also need to carefully examine the issue of executive compensation before making public pronouncements of blame since this has serious implications on investor confidence.
References
Amar, A.R. (2002).Cheney, Enron, and the Constitution. Time Magazine. Web.
Blustein P. 1997, Thai’s Reluctance to Act Added to Currency Crisis (Electronic version), The Washington Post
Fox, J. (2008).The Financial Crisis Blame Game: The Ownership Obsession. Time Magazine.
Graham, M.D., Roth, T, A. & Dugan, D. (2008). Effective Executive Compensation: Creating a Total Rewards Strategy for Executives. New York: AMACOM.
Krugman, P. (2008). The Return of Depression Economics., New York: W.W. Norton, London.
Pulliam, S, Kelly K & Mollenkamp, C. (2010). Hedge Funds try “Career Trade” against Euro. The Wall Street Journal.
Skrzycki, C. (2009).Branding American Regualtion.Global Post.