Ethics in Finance talks about financial behavior or activities that are ethically right or wrong.
Business ethics that are followed by financial institutions, financial services, or financial markets are the integral parts of ethics in finance.
It is generally used for describing finance which takes into account the ethical channelization of financial returns along with ESG (environmental, social, and governance) factors.
Table of Contents
What is Ethics in Finance?
The ethics in finance incorporate truthfulness, integrity, honesty, justice, and fairness in all sorts of financial activities.
Financial ethics or business ethics are actually subsets of general ethics. It is crucial for maintaining harmony and stability in financial services where people interact with one another and do any sort of financial or monetary transactions.
To understand it more properly, let us dive deep into both the terms separately-
What do you mean by Finance?
Finance talks about money about the market or other financial resources for example financial markets, investment, insider trading, etc.
The field of finances is diverse, and it is mainly about the definition and interrelation of many factors such as money, risk, and time. These are assets that take the form of money, where banks serve as the primary facilitators.
In the domain of financial markets, there are a plethora of activities that deal with the management of monetary funds. This backbone can help and direct companies in conducting their business.
Companies can use this as a metric to know their position in the market and leverage it to win a position over others. The knowledge of finances is also essential for making future investments, acquisitions, and other decisions. It is the heart and brain of any organization and has to be carefully followed.
What is Financial Ethics or Ethics in Finance?
Ethics governs the course of action taken by a human that can be right or wrong.
Generally speaking, ethics form the person’s attitude to do right; and they can be specified in terms of a profession or even an organization in the form of business ethics.
Since a company is primarily based on financial needs and directives, it must follow the ethics route towards the future. This can be achieved both internally and externally, thereby resulting in a suitable environment for employees, stakeholders as well as market position.
Ethics is one of the most critical and intricate aspects of an organization, especially in domains like finances. There is either “right” or “wrong” associated with any human action based on the organization’s conventional morality and business ethics.
Finance ethics is highly crucial because of the countless scandals and ethical issues of the financial industry. Ethics in the finance sector mainly revolves around the handling of material non-public information and reporting of the unethical act.
Upholding ethical standards in finance-related activities by being aware, educated, and holding high moral standards in economic, corporate, business or finance activities. It resolves all sorts of unethical act and interests.
Importance of Ethics in Finance
Now that we have discussed the basics of the ethics and finance terms, let us discuss the needs of ethics in the financial and service industry while handling the ethics-related crisis
1. Provides a moral code of standard
In the financial market, some barriers range from unequal information, misuse of power and resources, etc.
In such cases and those which involve third-party connections, there is a dire need for a proper code to be followed in the industry. From investment to trading to stock to economical activities of the corporate or finance system, all follow an ethical code in all their transactions
2. Ethics in finance channelizes confidence in business/corporate dealings
The main objective of the financial industry is to have direct dealings with the industry.
These directly connect to their clients in the form of product or service delivery where they look forward to winning their confidence.
Despite the primary objective to maintain a competitive stature in the industry, they must do so on ethical grounds. In addition to such practices, being ethically right will gives businesses good returns in the long term.
3. Ethics makes business/corporate behavior and activities harmonious
In the financial industry, we can expect many people to be part of an organization.
Since these have to work together at different levels and towards a similar core objective, there has to be a set of ethical rules and guidelines that have to be followed.
This will help in proper management and higher productivity from the employees.
Codes of Ethics in Finance
Different moral codes that are supposed to be followed the finance-related behavior of a company towards its employees, customers, public and other stakeholders-
- Acting with honesty and integrity while handling dilemmas of the world of finances
- Not associating with any real/clear conflicts of interest in personal, or company relationships
- Providing information that is full, accurate, fair, complete, relevant, objective, understandable, and timely in and for different documents and reports
- Acting in accordance with all the applicable rules, laws, and regulations of governments along with other relevant public/private regulatory agencies
- Acting responsibly and in good faith with due care, carefulness, and competence without any sort of misrepresentation of material facts
- Respecting the confidentiality of information which is acquired in the business course and such information should not be used for the personal benefit
- Promoting ethical behavior among all the associates and stakeholders of a company
- Adhering and promoting a code of ethics in the company
Key Terms of Financial or Business Ethics
Key terminologies that are an integral part of the information, investment, stock, trading, customers, and transaction sorts of activities of finances are-
The full form of ESG is Economical, Social, and governance, and their positive impact show if the finances-system and related information are ethical or not.
2. Green finances
It talks about finance that focuses on offering measurable and positive environmental results
3. Principles for Responsible Investment
It is a set of six principles that give a global standard for responsible investment
4. Shariah-compliant finances
It talks about the finance information and activities that are supported by Islamic-based principles
It is commonly used in substitution for ethics finances
6. UN Global Compact
It is a voluntary initiative based on CEO commitments for the implementation of ten universal sustainability principles such as environmental responsibility, human rights, employee relations, anti-bribery and corruption, and business ethics
7. UN Sustainable Development Goals (SDGs)
It covers the 17 key goals that the United Nations published by focussing upon the alleviation of poverty, climate, inequality, environmental degradation, peace, prosperity, and justice.
Implementation of Ethics in Finances
To deal with ethical problems in finances like those ranging from ethical codes in place for financial professionals to the replacement of the egoistic theory, there are a large variety of domains covered in business ethics.
It is not an uncommon practice of applying ethical means in contemporary businesses. These codes adhering to a morally established financial set of ethics are regulated and maintained by self-regulating agencies and official regulating authorities.
These are kept in place to ensure ethically and morally responsible behaviour from the various operatives that operate in the financial market.
Example of ethical violations in the financial market includes insider trading, investor management, campaign financing, and stockholder interest vs stakeholder interest.
Businesses in both financial and general markets have to be wary of loyalty and trust violations in both private and public dealings.
Over the years, there have been multiple cases of whistleblowing in the world. People have been involved in cases where just the knowledge of such practices landed them in problems. No one prefers to blow a whistle on their fellow worker or the organization.
Still, it is also an essential and ethical duty to ensure that fair practices are being followed in the financial industry or society.
For instance, take the example of Harshad Mehta in the 20th century. It was the morally responsible ethics of a news reporter to make sure such practices were reported.
The examples discussed above are just a handful compared to the various ethical situations and dilemmas faced by finance-professionals every day.
Over these years, these professionals’ involvement in countless various allegiances and scandals has given these professionals a black eye and completely rocked the industry.
With proper knowledge of the guidelines that have to be followed, encouragement of ethics-driven behavior in the workplace, and following the highest standards of applied ethics is crucial for every finance professional today.
Here is a video by Marketing91 on Ethics in Finance.
Unethical Behavior in Financial Markets
1. Faking the Numbers
In the reporting and analysis of finances, economics, investment, or business activities, “faking the numbers” is one of the common unethical behaviors.
2. Asset Misappropriation
When funds of an organization are used for the things that are not related to the organization then it is an unethical act.
3. Disclosure Concerns
Disclosing information (public or private) overly or disclosing too little is also unethical in different situations. For instance, hiding a loss from potential investors is unlawful.
4. Executive Focusing
Another unethical concern is focussing too much upon the executives and giving them too much power, as it may give power to the executive to pressure the reporting and analysis team.
5. No Direct Chain of Command
Every company should incorporate a proper chain of command for offering reporting and analysis of the finances, and if it is not there, it would be unethical.
Ethics is one of the most important factors in the world of finances.
In the financial industry, the participating organizations must follow a proper ethics code. This is necessary for the internal functioning of the organization as well as external decisions that affect it.
Since finance is the backbone of any business and ethics are of similar importance, ethics in finance must be followed religiously without any discrepancy.
How would you define the role of business ethics in finances?