The Case Against Business: Barclays and Ethical Capitalism

If a newspaper were to report that a bank had been involved in activities that increased profits and, in a time of crisis, somewhat disingenuously gave a favourable impression of its strength, we may roll our eyes and say that we expected little less, but we would most probably not withdraw our money from it. Familiarity has bred quite a large amount of, well, familiarity in the past five years and the general public's expectations of the banks are low.

If a newspaper were to report that a bank had been involved in activities that increased profits and, in a time of crisis, somewhat disingenuously gave a favourable impression of its strength, we may roll our eyes and say that we expected little less, but we would most probably not withdraw our money from it. Familiarity has bred quite a large amount of, well, familiarity in the past five years and the general public's expectations of the banks are low.

Nevertheless, the recent scandal involving Barclays, in which the bank manipulated inter-bank lending rates (raising them to increase profitability and lowering them to give an impression of systemic health) has provoked quite a different reaction. The global complicity and public ramifications for rigging the Libor rate have shocked many. The affair has led the UK business secretary, Vince Cable, to state its "biblical proportions" and to comment that "Incompetence, corruption and greed have been endemic in British banking."

The potential damage for the banks - both internationally and with customers at home - is a cause of great concern. Despite how it might seem at times, the wheels of capitalism do not turn autonomously, but rather depend heavily on the workers, consumers and business relationships that keep them oiled.

The public's relationship with capitalism is fraught with complications. The system is viewed as both productive and predatory: applauded for providing jobs and innovation while harangued for promoting risk-taking and the pursuit of profit. So, too, the public's response to a variety of corporate scandals is also somewhat uncertain. It is not clear when the needle of public opinion will swing from "tolerated" to "unacceptable" for any given action. Many are clear that the Libor affair went too far. But it is harder to say why other scandals - identified or widely publicised as such - have not led to criminal prosecutions or, at the least, the firing of senior figures within business.

America is much better at criminal prosecution than the UK. The US Securities and Exchange Commission (SEC) brings hundreds of civil enforcement actions against individuals and companies each year for violation of the securities laws. Typical abuses include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. Furthermore, the SEC offers an attractive 'whistle blowers' programme that uses financial incentives to engage investors themselves to provide information on fraudulent practices: those who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered can expect to receive between 10% and 30% of the money collected.

The UK Treasury select committee hearing, which took place this week, threatened to implicate the Bank of England in the Barclays affair. It was suggested that the deputy governor, Mr Tucker, advised Barclays to lie over its Libor submissions. This aspect of the case was down-played by Bob Diamond, Barclays' CEO, when he faced cross-examination from the parliamentary committee. Nevertheless, the accusation caused the UK media to pose yet more questions about the complicity of our national institutions and served to highlight the lack of authority that the FSA and other governing bodies possess to impose criminal sanctions for market manipulation.

All these are issues that need addressing. However, at their core, a question over moral ambivalence needs to be answered. Seemingly, there exists a perennial tension between asking a company to pursue success, financial gain, and to ward off its competitors while also demanding that it be mindful of sustainability, ethical considerations and good behaviour. Many commentators have reflected that our system of business ethics has been seen to fail, with banks unable to self-regulate and with a shift in business from Adam Smith's principle of utility maximisation to the modern pursuit of profit maximisation. But is this true? It would be easy to put forward an alternative argument: that there was no true system of business ethics in place prior to this latest scandal, or the larger financial crisis, and that this is at the root of all that is going wrong.

A serious "market failure" has occurred when, as a result of fraud and unethical company behaviour, a lack of trust has developed in lending markets, between business and the public, and between businesses themselves. This is the bottom line for capitalists to understand if they want the system to succeed again: far from the market being too free, it has been taken hostage by those who sought to manipulate it for their own gain. For as long as this continues, whether displayed in crony capitalism or some other distortion such as manipulated lending rates, the case against business and its practices will remain.

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