Ethical Issues in the Financial Industry - Coursework Example

Ethics in finance Name: Supervisor: Course: Title: Introduction In one way or another, we are all consumers of the different products and services that are provided in the financial industry. As such, the financial industry is made broad by the fact that we all are consumers of the products and services from the industry. With such a broad industry, it is likely that there would be ethical issues that will arise that need to be considered during the different interactions between the producers and consumers in the same industry [Anb11]. Today, the financial industry is considered to be among the top industries with the highest unethical issues. Although finance raises many unethical issues, few studies have been conducted to provide insights on how the issues in the industry could be managed. Finance could be easily defined as the generation, allocation, management and exchange of monetary resources in an economy [Boa10]. As such, finance could be divided into three main parts among them being public finance, corporate finance and personal finance. There are four main divisions of finance in any given economy. These are the financial markets, the finance theory, financial management and financial services. The financial framework comprises of the four divisions and each of the division provides for principles that need to be followed to guide the easy management of each of the division [Bre]. Financial ethics have therefore become an important part of finance and they are used in each of the four divisions to guide the people on how to act and work with others in the same industry. With the changes in the market structures overtime, the financial institutions have grown in size and their activities have continued to be diversified with the changing needs and preferences of the different customers in the industry. Although the ethical concerns in the finance industry are a new undertaking, the main concerns that have been considered ethics issues from the past are the legal and regulatory concerns in finance. To best understand the ethical issues in the finance industry, the main focus will be each of the four divisions. By understanding the ethical considerations in each of the divisions, then it will be easy for the players of the industry to understand the legal, regulatory and ethical concerns that should guide them. Ethical issues in the financial industry The first division of finance is the financial theory that is concerned with the functioning of the credit markets and he pricing of assets and liabilities in the market. The direct relationship between the organization and the customers usually raises less ethical issues. However, there are some distress that may occur when the individual players choose to put self-interest ahead of the interest of the clients that they choose to serve. This is an unethical activity that is common in the financial markets and it may occur either at the organizational level or a personal level. At the organizational level, the directors and other shareholders may choose to overcharge the customers and make supernormal profits. This is common in the pricing of assets and liabilities in the market by the directors of the organization [Dob97]. High pricing of assets and low pricing of liabilities will allow the organization to report profits that do not reflect a true and fair view of the current situation in the organization. Reporting such profits for the organization will allow the managers to easy award themselves with bonuses at the expense of the performance and the profitability of the organization. At the personal level, the main concern usually happens when the individuals choose to provide themselves with bonuses or they overcharge the clients or at time directly or indirectly steal from the organization to compensate themselves. Risk analysis is another issue in the financial market that has brought the need to develop ethical standards that need to be understood and followed when managing risk. From the past, risk has mainly been focused on the financial risks and the systemic risks [Hen04]. With time, however, the industry has come to understand that there is more to risk than financial and systemic risks. Therefore, when determining the challenges and operational risks that face any financial activity, ethical considerations have continued to be developed and improved to ensure that all forms of risks are analyzed and the players understand each of the risks well before getting into any contract. Analyzing the risks well means that the players in the financial industry are acting ethically and this ensures that the financial strategies that are placed by the players in the contract rarely fail. The financial market on the other hand has a large variety of activities being undertaken every day. These activities range from the sale of currencies, commodities, and other financial instruments such as bonds, shares, swaps and derivatives. The financial markets are in most cases considered to be fair and unethical practices in this markets are quite unlikely. However, the fact that the markets are dealing with the exchange of currencies, there must be some unethical concerns that are likely to occur in such markets [Tir06]. Fairness is the main moral concept that is common in the financial markets. Most financial markets have little regulation being done by the government. As such, the government only tries to set some rules and regulations that need to govern the financial markets. However, the players in the market are the main determinants of the activities of the market and how the free and fair the market will be. Financial services is another division of the finance department that provides the players in the markets with links to sources of finance. This division focuses on the financial intermediaries such as the banks, brokerage companies and firms, financial planners, pension and mutual funds and the insurance companies. These organizations usually provide a wide array of services to the consumers who in most cases comprise of the individual consumers, governments and other businesses and sometime they provide services to each other [Dey01]. In providing such services, the financial service providing companies act as intermediaries who enable their clients to have easier access to funds from third parties rather than seeking funds from among each other. The financial service providers usually operate as businesses and like all other businesses, they are expected to have their ethical obligations with which they are supposed to follow. As such, they are expected to understand both the legal duties and the financial and ethical obligations so that they can observe the expected standards of the business entities. The final division of finance is the financial management option. This option provides the need to understand the functions of the finance departments in the different corporations. The chief financial officer is the main person who is charged with the management of the finances of the organization. While the CFO may not have full access and control of the finances that are available to the organization, they have the power to provide reports that show the true and fair view of the performance of the organization. As such, the CFO is expected to manage the financial structure of the organization. In most cases, the shareholders make the major decisions on the financing of capital in the organization. In this way, they determine the percentage of capital that is to be financed by equity and the size of the share capital that is to be financed by the long term and short term debts. Stakeholder’s responsibilities and corporate governance The understanding of corporate governance has brought in new insights to the evolutions of the different business premises. As such, the financial management option has been diversified by the new developments in the corporate governance option [Wat04]. The modern theory of businesses and finances provides that the main reason for the operations of the business is to maximize funds. However, there are standards that should be set by the organization to govern the practice of the firms in finance. As such, the standard analysis of some of the finance models such as the capital asset pricing model and capital budgeting should be made clear. The goal of capital budgeting in corporate finance and financial management is to increase the general value of the organization. As such, it focuses on increasing the shareholders wealth and the overall prices of the shares of the firm. The capital budgeting therefore focuses less on the benefits of the organization to the society. Corporate governance should help to divide the line between the contributions of the firm’s projects and value creation to the shareholders of the organization. In this way, then it will be easy for emphasis to be made to take profitable projects that have benefits not only to the shareholders but also to other stakeholders in the organization such as the society. Corporate governance in finance embodies different views of the goals and nature of the firm’s finance. As such, it helps to bring out the contrast that may exist between the agency theory and the stakeholder’s theory. The shareholders are usually the owners of the firm. Their primary interest is to see the organization performance and overall profitability of the firm. However, some setbacks such as the skills required to run the organization and the size of owners of the organization become a setback for them to run the organization. As such, they hire agents in the form of directors to work in the organization and provide for the interest of the shareholders. The stakeholder theory on the other hand usually takes a different opinion from the agency theory. According to the stakeholder’s theory, the firm should aim to provide benefits to a wide array of constituents in the firm including but not limited to the shareholders, customers, society, employees and the government at large. Conclusion The ethical problem in finance stem out from the contrast in the different theories in finance and the rational thinking of the economic men in any market setting. The financial conflict in an organization has become a major problem. Some of the traditional regulations that had already been developed by the different organizations focus on profit maximization and have failed to provide the organization stakeholders with their necessary needs. The main ethical issue identified in financial management is the conflicts of interest that exist between the shareholders and other stakeholders. As such, the organization shareholders want to maximize their profits whereas the activities and demands of the other stakeholders are aimed at reducing the profits that are made by the organization. This forces the organization to deploy social corporate responsibilities that are aimed at providing for maximum profits for the shareholders while at the same time considering the welfare of the stakeholders. REFERENCES Anb11: , (Anbalagan, 2011), Boa10: , (Boatright , 2010), Bre: , (Brealey, Myers, & Allen, 2010), Dob97: , (Dobson, 1997), Hen04: , (Henry & Chari, 2004), Tir06: , (Tirole, 2006), Dey01: , (Deyoung, 2001), Wat04: , (Watson & Head, 2004), Read More