This lecture was given by Prof. Dr. Kohlhof at the International Conference of the 10th. Anniversary
of the Banking Institution of Higher Education, Riga, September 12th. 2002.

Ethics management and banks - opposition or economic rationality?

Ethic questions become more and more a substantial factor of success for banks and companies. Reasons for this are above all the increasing critics towards banks in public, intensified laws and modulation in favor of customers and consumers, as well as increasing consequential charges for illegal practices of bank employees and a general higher meaning of moral conviction on money and capital markets.

The following shows the test of registering the different ethic problems of banks in relation to their customers, in their sociopolitical challenges and in the managerial sector towards their customers. If necessary, company ethic solutions are shown in practical.
In this case, company ethics means the creation of qualified basic conditions with innovative methods, with help of which a moral behavior in the credit service sector can prove as competitive advantage.

Finally, I would like to present an ethics management idea with three pillars, namely content, instruments and organization, where principles for the presentation of ethic codes, influences of ethic questions towards the bank strategy and the integrity oriented development of the compliance approach, which is already established in the Anglo-American area, are contained.

The substantial questions in connection with banks and their ethic positioning are:

1. How to register, systematize and interpret economically the ethic problem structures of banks?

2. How to define the "social responsibility" of banks and the credit service sector in general?

3. Which real possibilities are given for systematic quarreling with company ethic questions?

4. How should an "ethics management" in banks be conceived, which seems to be compatible with the economic rationality of a successful bank management?

The following theses are to be understood as main statement for an ethic discussion:

1. Ethic questions are gaining more and more interest in daily bank practice.
In Germany, the research- and application-oriented bank ethic practice limped afterwards the American development. According to a survey of the "Center for Business Ethics", 32 % of all large concerns had already integrated in 1992 a fix authorized agent for ethics in their companies. Three years later, the same survey result was merely at tightly 9 % in German and Swiss companies.

Reasons: - General uneasiness of customers due to permanent moral criticism about bank typical ethic misdemeanor.

- Narrowing of the range of behavior by judgement, regulations and consumer protection rules.

- High consequential charges for illegal, illegitim and trust maring bank behavior.

- Increasing meaning of reputation on financial markets.

- realization, that moral acting and entrepreneurial success are not mutually exclusive but complementary.

1. Bank ethics as institution ethics is a meaningful instrument of analysis for entrepreneurial ethic aspects.

Ethic problems are interpreted as conflict of interest, which base on failed appeal conditions and the resulting captive dilemma:
If I am not the one who does it, another one will do it or If everyone does it, I will also do it.

Individual ethic action approach does often not offer support to solve ethic problems.

2. Development of credit economical basic order clarifies that legal appeals for banks have obviously increased if they confront themselves with entrepreneurial ethic questions.
A changing in fault principle of individual fault to organizational fault - similar to the situation in the USA - and a structural allocation of responsibility to the bank management could make necessary a basic reorientation for the benefit of an organized management for reputation and good conduct.

This applies especially to a strengthened social and municipal engagement, as it is successfully practiced in the USA since many years with CRA (Community Reinvestment Act).

3. Many contractual relations between a bank and its social claim groups, its customers and its business partners, as well as in the internal sector are incomplete, patchy and often without legal basis.

The result is that ethic conflicts are often due to non-performance of contracts. However, the performance of such claims assumes in many cases an ethic tenor on the part of the bank, realized for its own interest to be attractive for current and future partners and customers.

The perception of social liability by credit economical companies is the performance of the targeted social requirements.

These are naturally subject to a permanent change, as well as the discussion about values is in fact always in a constant state of flux. Some call it a gain of values, some call it a loss. Presently ties return to traditional religions while sects gain a lot of popularity; authorities - sometimes also capacities - hierarchies are challenged and no longer accepted. Ethic virtues are lost: demands towards the state are increasing. Public spirit and readiness to fellow engagement are on a decreasing.
Meanwhile others are recognizing a positive change of values. Readiness to secure sustainable living conditions as climate protection, environmental protection, protection of individual life are increasing; disadvantaged groups are tolerated and are at least politically clubbable. Ability to creative self-development is used stronger and self-esteem is trained.
This lifestyle is partly mint by banks, as they offer public discourses, signalize their readiness for dialogues or commit their potential in training and education in an offensive way.

5. The entrepreneurial ethic escrow issues are based on three different sections:

5.1 Bank political sector

This sector requires to accept public challenges, i. e. for example to offer social desired financial services, to develop processes for moral improvement of products and processes and to demonstrate a higher management of acceptance, which is advocated by the society in a positive way. This is partially accepted by the Volks- and Raiffeisenbanken (by solidarity and secondary liability orders) and the Sparkassen (by public order). In contrast, ethic objections become reputation brakes and endanger success of business.

5.2 Bank business sector

In customer segment of bank both contract partners are uncertain to a high degree. This is frequently governed by the long terms of business relations, the incompleteness of their contractual arrangements, the projection of information and the specific investment or the high costs for a change in business relation.

On the basis of tips from insiders, TV published on 12 August 2001 the sale of Telekom shares through the German bank with the headling "Faint of the small once". As a consequence, German Telekom threatened the largest German financial institute with serious consequences:

What happened?

Just one day after a public buying recommendation for major customers through the analysis department, the bank transferred 44 million Telekom shares. With that immoral tactics, they put another negative facet in Germany's share culture and they exploit their better information to burden f the small private investors which missed out on this placement. DSW asked for examination of this disputed sale of shares by the German Bank.
This act is also seen as a proof how far the banks' recommendations can be brought in line with own ethic ideas of business. However, this is a big favor for the transparency perception of bank business behavior.
German Telekom thinks about political consequences in business, but in view of the exorbitant high specific investments, a change of bank is not taken into consideration.

These customer retention potentials lead to a point of change where customer loyalty is not questioned in case of transgression due to cost reasons. A shortfall might lead to a reduction of the traditional customer relation of to a building up of multiple bank relations.

Therefore ethic care of customer relations will become a strategic factor of success for banks to improve the basis of confidence and to shelve own economical efficiency towards the customers' aspects of good conduct. This does not inevitably mean to agree to all customer requests, but the effect of reputation as a consequence to own inappropriate behavior has to be focussed and to be taken more into consideration.

The system of values and human behavior - this means also banks and their executives - is expressed on three levels. Highest values mean leading ideas which influence the own behavior and shape the "esprit de corps". The second level is dominated by skills, namely the ability to convert economic and ethic efficiency and the third level is determined by actual acting, toleration and omission.

An example of a comparison between two banks: Both banks have same skills and resources. The one is acting according to their ethic occurrence, their collective autonomy and in pursue of their system of values, the other bank surrenders reputation regeneration and just realizes fast profit without consideration of ethic doubts. They only differ from each other in their system of values, which controls their actions and rules their institutional surviving. In perpetuity, the ethic lead company will gain the customers' confidence and the contractual relations.

5.3 Personal sector

The relationship of a bank to its own employees forms the third level where conflicts of interests and instabilities in behavior on both sides are possible. At the same time, this is the most difficult ethic sector, because a bank always needs the employee's internal and external agreement to keep their structure of values and to realize it in other relational sectors.

Another line of bank action follows to achieve own employees in an ethic line and to take care for an own good conduct towards all groups: Creation of leading ideas with an appropriate spread of norms and a code of behavior, ethic shaped reimbursement and assessment systems, model function of management by moral leadership in accordance with setting and care of values. Who does not live to values is acting for the moment and is fading out the thought of creative growth and development of human existence.
And adequate mixture of ethic incentive and integrated management is decisive for a good relationship between a bank and its employees.

6. Ethic management recommendations

A frame concept has to contain three different dimensions:

6.1 the material-content shaping

It contains all objectives, strategies, norms and virtues, i. a. attitudes according to which a bank is organized, orientates its business politics and shapes its value system.

Professor Dr. Joachim Kohlhof


Translation: Thanks to Mrs. Melanie Schmitz, Jünkerath/Germany

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