Ethical Dilemmas
Former Federal Reserve Chair Paul Volcker expounds on ethics in banking

A sea of dark suits from across the state flooded the Georgetown College Leadership Center in late February for a day-long Ethics and Banking Conference. Heading the agenda was a keynote address by Paul Volcker, chairman of the board of governors of the Federal Reserve System under Presidents Carter and Reagan.

During his time with the Treasury Department, Volcker was responsible for implementing Treasury debt management, federal credit, the auctioning of Treasury bonds, and leading international negotiations during the transition from a fixed rate exchange system to the current floating rate system. After almost 30 years of public service, including serving in high office under five presidents, Volcker is currently serving as director and consultant to a number of organizations, and was recently named a director of Bankers Trust Company.

It was precisely that word "trust" that concerned the attendees of the conference, among them the new Kentucky Commissioner of Banking Art Freeland and 1962 Georgetown graduate and current vice-chairman of Johnson & Johnson Robert Wilson.

In his speech, Volcker cited the titles of recent financial books – Predators' Ball, Den of Thieves, Barbarians at the Gate – and what they said about the current state of affairs in high finance.

"There are some rather discouraging trends at work here," he began. "There is certainly a surplus of vanity on Wall Street, as well as greed and fear. But I wonder if some of the old constraints or restraints – a sense of ethical morality – haven't weakened over the years."

"With the current attention on Asia, it's amazing how much emphasis is put on moral standards there by the wise men in Washington and New York. The argument is that those countries can't prosper and continue to grow unless they clean up their act. Sometimes I wonder if we turn that spotlight sufficiently inward."

Volcker harkened back to the "good old days" of banking, when moral and ethical problems didn't seem to be as pervasive and observed the characteristics of the era: small units, personal communication with customers, a sense of professional pride, a more compressed range of salaries.

"And given how unfashionable some of these concepts are today," he noted, "I have to point out that the growth of the United States was a lot more rapid in those days. So you can't argue that there's a great correlation on the surface between modern management and compensation techniques and economic growth, compared to those old-fashioned days."

But conspicuous by their absence then, and perhaps the biggest ethical problem now, were bonuses and incentive pay.

"Individual bonuses were anathema," said Volcker. "The thought was they would motivate people in the wrong way: short-run thinking, too much aggressiveness, looking for their own personal reward instead of what was good for the customer." In many ways, he continued, ethical problems of the day were modulated by the community bank's specialization, its separation from other interests like insurance and investment banking.

Volcker noted that today we have firms acting as brokers, agents, and principal investors, thereby placing a huge burden on controls in policing unethical behavior.

Volcker further noted that in our obsession with money as a measure of self-worth rather than just a tool, we may also be missing out on other aspects of life. And this overemphasis reaches its extreme, in both intensity and dollars, in the world of finance.

"Investment banking today must be the best-paying career in history. If you're not receiving a $3 million bonus, you commit hari kari. But are they wonderfully happy, motivated people? In fact, they seem genuinely unhappy and disturbed much of the time," he observed. He noted the concomitant loss of loyalty to the institution, with the reciprocal losses of company loyalty to the individual and, perhaps most worrisome, toward the customer.

Volcker maintains that a sure sign of trouble at a bank is when a management consultant is brought in to introduce an incentive pay system. Noting the recent series of ethical problems at Prudential Insurance and during the savings and loan debacle, Volcker offered some avenues for approaching these ethical dilemmas, when private managerial interests have perilously mixed with the interests of shareholders and customers.

"First, some of the top companies are looking at different methods of compensation. Next, top management needs to state its business values and ethical standards. This is more than fancy brochures – they need to live and breathe these standards. Bob Wilson's company (Johnson & Johnson) has a superb reputation for putting in practice and inculcating in his employees these ethical standards. Of course there was the very famous Tylenol problem, where they reacted promptly and removed it from the market until safety could be assured. It was dramatic as a demonstration of ethical practice in real life, at what appeared to be a short-term cost to the company, but which turned out to be a great bonanza to the reputation of the company and its performance since then. The worst case is when management denies there's a conflict or problem."

A good company ought to have the healthy tension that an internal auditing and compliance staff brings to the table, he continued, a staff that commands the respect of the rest of the firm. Companies need to measure success in the long term. There should also be laws where appropriate (like public disclosure), and a sense of community and international responsibility that overlaps public service initiatives with profit goals.

In the end, Volcker concluded, many of the ethical dilemmas brought on by modern management – downsizing, reengineering and mergers for example are virtually insoluble. But in some sense, he ended, "the relationship between these very difficult moral concerns and the final success of our individual companies and industries and country is not that distant."

Adam Bruns is a staff writer for The Lane Report.

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