An interview with John R. Boatright
Professor Boatright recently published the third edition of his book, Ethics in Finance (Wiley Blackwell). We speak with him about his book and about financial ethics.
Seven Pillars Institute: Why did you write this book?
John R. Boatright: Although finance occupies a prominent place in business—both as an industry unto itself and as a function within all companies—it was at the time I began writing and continues to this day to be largely neglected in business ethics teaching and research. The reasons are many but include a lack of familiarity with finance on the part of most business ethics scholars and the lack of interest, not to say outright hostility, on the part of finance faculty and professionals. I never expected the field of finance ethics to boom, and it hasn’t; but interest is growing, though probably more in Europe than in the United States.
SPI: What is this book about?
JRB: The book is organized around three major areas of finance: financial markets, financial services, and financial management. Within these areas, the book focuses on the main normative issues that are faced by practitioners. The issues in financial markets are mainly those of fairness, which arise in specific trading practices, such as fraud, disclosure, insider trading, and, more recently, high-frequency trading. By far the biggest area is the financial services industry, which includes banking, insurance, mutual funds, and the like. Each of these industries raises industry-specific ethical problems, many of which have been the subject of legislation and regulatory attention. Finally, the area of financial management addresses the kind of normative issues that would confront a CFO of a corporation. In addition to this tripartite focus, the book offers a framework for addressing ethical issues in finance with an emphasis on the ethics of markets, which governs the behavior of arm’s-length market actors, and the ethics of roles and relationships, which includes such prominent concepts in finance as fiduciary duty and conflict of interest.
SPI: How does the third edition differ from earlier editions?
JRB: This edition is greatly expanded (about 60 more pages) and updated to include more current issues, including those that were prominent in the recent financial crisis. The second edition was completed before 2008, and so the third edition provided my first opportunity to take account of the crisis. Among the new topics are the ethics of risk management, microfinance, mortgage lending, and securitization.
SPI: For whom is this book designed, i.e. for what purposes?
JRB: This is principally a textbook, designed for use as a supplement in a finance course or as the core text of a finance ethics course. I hope that it will also be read by scholars in business ethics and finance in order to enhance teaching and research in the subjects.
SPI: What do you say to the mainstream finance academy steeped in Modern Finance Theory who argue:
(i) That there is no need to teach ethics in finance because general business ethics is already taught and required at the MBA level.
JRB: A good ethics course at the MBA level should provide a student with a broad understanding of ethics in business, and it is the rare school that can offer an additional course in finance ethics. I would not expect many students to take both a standard MBA course in ethics and one in finance ethics. A course in finance ethics is arguably more valuable for finance students than the usual business ethics course not only because of the more relevant content but also because the ethical issues in finance require specialized study. For example, fairness is a basic concept in business generally, but whether high-frequency trading is fair, for example, is a difficult question which requires thinking about what fairness means in this context. In short, a basic business ethics course is not likely to provide all the resources needed for addressing the kind of issues that arise in finance.
SPI: (ii) What matters in the practice of finance is not what is ethical but what is legal.
JRB: The relationship between ethics and law is a complicated one about which much could be said. To brief, in finance, as in most other areas of business, much of what is unethical is also illegal, and so the law is usually a good guide. One reason for studying ethics is to understand why we have the law that we do. It is important to understand not only what the law is but its ethical basis. Fraud is generally illegal, but why? What is the wrong in fraud, and why do we make the distinctions in fraud cases that we do? Second, the law is often still developing, and many questions arise as to whether we have the right law or how the law should perhaps be changed. These are essentially policy questions that regulators, the courts, industry associations, and others debate as normative issues. Third, the law may provide the standards for conduct, but having these standards and observing these standards are two different matters. Any financial institution or organization pays great attention to legal compliance, but people obey the law only when they have a moral commitment to it that is also cultivated by the organization.
SPI: What role do you see for institutions outside the business academy in particular think-tanks and NGOs to shape the field of financial ethics?
JRB: I see the main locus for financial ethics to be the legislative and regulatory bodies of government and the self-regulation of financial markets and the financial services industry, such as the New York Stock Exchange, FINRA, Investment Company Institute, and the like. A great deal of close scrutiny and hard thinking is going on constantly by well-informed, generally well-intentioned experts. I see the academy as mainly examining the work of these experts, subjecting the conclusions to empirical verification and conformity to sound normative principles. More to the points, I see task of improving ethics in finance to be very much a collaborative process among the many parties with expertise and an interest in reform.
BIOGRAPHY:John R. Boatright is the Raymond C. Baumhart, S.J., Professor of Business Ethics in the Quinlan School of Business at Loyola University Chicago, and the Director of the Baumhart Center for Social Enterprise and Responsibility. He has served as the Executive Director of the Society for Business Ethics, and is a past president of the Society. He is the author of the books Ethics and the Conduct of Business and Ethics in Finance, and the editor of Finance Ethics: Critical Issues in Theory and Practice. He has contributed chapters to many books, and has published widely in major journals. He serves on the editorial boards of Business Ethics Quarterly, Journal of Business Ethics, and Business and Society Review. He received his Ph.D. in philosophy from the University of Chicago.