Based on a thorough review of existing literature of the role of ethics in the banking industry, the role of the CEO as the ethical leader of their organization is next discussion. Based on the concepts presented in the paper to this point as the foundation, these key points provide insights into how CEOs and senior management actively shape the ethical standards of the organizations they manage on behalf of shareholders.
Risk Management Is a CEOs' Ethical Responsibility combination of forces -- changing regulatory expectations that open companies up to intense levels of examination, heightened stakeholder sensitivity to and scrutiny of corporate behavior, and the severity of punishment by financial markets for corporate missteps -- push reputation and ethics management onto the CEOs' and senior managements' agenda. The paradox CEOs face is when to risk the reputation and brand of the company and engage in risky decisions for the sake of incremental gain or to realize greater cost savings. There are few positions in any industry that have such a direct interrelationship between ethics and brand performance, and also the long-term stability of their clients' financial conditions and the broader condition of the general economy (Rutberg, 2008)
CEOs in Banks and Subprime Mortgage Lenders Share No Common Definition of Risk
Startling from the research is the finding that there is no single definition of safety risk in any of the ethical analyses completed of the financial services industry, yet there is an abundance of research on Corporate Social Responsibility (CSR) initiatives and programs. In conjunction with the lack of definition for subprime borrower risk, there is no consensus on a definition for reputation and broader ethics risk, but industry participants agree that it is broader than legal, compliance, and regulatory risk that arise from a lack of congruence between ethics standards each company espouses in their CSR initiatives. A common meaning of reputation risk would improve companies' ability to identify, assess, and mitigate risks that can potentially generate negative stakeholder reaction. This lack of ethical standard definition on the part of banks and specifically subprime mortgage lenders translates into why Option One Mortgage could lend to many customers who could not verify their income (Churchill, 2007) while Countrywide Home Loans often lied to existing customers and told them a home equity credit line had been approved and they just had to sign for it (Cassling, 2008). In a few cases Countrywide representative signed up homeowners for these equity lines and then sent them the paperwork saying it was a perk of their existing loan package, which not surprisingly led to many lawsuits today (Cassling, 2008). There are many more examples of this type of behavior yet it is all tied back to the ethical lapse of CEOs and senior management which redefined the culture of these companies to adopt a more unethical stance on illegal transactions.
The Future of Banking and Mortgage Lending Includes Compliance Management Officers
As has been the case with publicly-held corporations that are held to the standards of the Sarbanes-Oxley Act, a comparable set of regulations will eventually be needed to ensure the ethical violations so pervasive in the subprime mortgage industry are not repeated. The baseline metrics of performance for this industry need to also be re-evaluated (Verschoor, 2007) with the Chief Compliance Officer being at the same level as the CEO, reporting to the Board of Directors on all matters pertaining to auditing, reporting and management of the business. Any company governed by the Sarbanes-Oxley Act has since 2002 been engaging in the same approach to regulating and enforcing ethics throughout their organizations.
The role of Compliance and Ethics Officers in the banking and financial services industry will also be noteworthy for the growing authority to evaluate each process in their companies, from loan origination and client screening to the actual packaging of loans for resale as investment programs for institutional investors. Further, their role is to sensitize the business to key reputation risks and instill and create escalation processes that reduce the effort required of loan origination, branch sales and services development managers to recognize and report threats and build accountability into each process. This continues to be critical for the development of ethical guidelines that give banks and subprime mortgage lenders the means to stay in compliance to an increasingly high level of government regulations across nearly sixty different nations looking to increase banking accountability, auditability and transparency (Schwendimann, 2007).
Financial institutions, banks and increasingly government treasuries are and will increasingly relying on compliance management officers as part of their executive management teams, reporting directly into the board of directors of their organizations and governments. The challenge for many financial institutions however is the increasing pressure this places on CEOs to stay in greater compliance to both government regulations (Riotto, 2008) and internal CSR programs and objectives that are now critical to the entire industry rebuilding process (Urbany, Reynolds, Phillips, 2008). These broader strategic challenges for attaining compliance are leading banks and subprime mortgage lenders to align their internal ethics with the many emerging challenges, both market-based and regulatory, in an attempt to attain higher levels of ethical performance than before.
In responding to the ethical dilemma of why banks and mortgage companies, specifically subprime lenders engaged in lending practices to those that could not, even least afford them, one must first consider how drastically the culture of this industry and its organizations have changed. CEOs and their senior management teams found that low interest rates made mortgage funds very fluid, creating an illusion of no risk given how plentiful cash was. As CEOs lost sight of their customers as someone they served ethically and bettered their lives, the transaction itself, not the customer, became the primary focus. Ethics lapsed and degenerated as the transactions ceased being about enriching another and became recursively focused only on enriching the lenders. As a result, the teaser low-interest rate sub-prime mortgages that many of the nations' poorest families could afford in the first months quickly escalated into loan payments, on average, $1,600 above the first series of payments was (Schwendimann, 2007). The cultural shifts in banks and subprime mortgage lenders became so pervasive that the CEOs, many of them reporting to shareholders and institutional investors, began to believe their new sales growth was due to superior execution in the market, and not from deceiving low- and middle-income buyers to get adjustable rate mortgages (ARM), variable-rate, negative amortization and many other forms of financing, only to find their in initial years of payments meant nothing to the actual purchase of the house. The intensity in the cultures of these organizations, nurtured and rewarded by their CEOs and senior management teams, serves as the catalyst for continues defrauding of investors that led to the financial turmoil many world economies are experiencing today.
John Bond (2007). A safety culture with justice: A way to improve financial performance. Loss Prevention Bulletin,(196), 31-39. Retrieved October 20, 2008, from ABI/INFORM Global database. (Document ID: 1333256011).
Donald R. Cassling (2008). Poehl v. Countrywide Home Loans, Inc. The Banking Law Journal, 125(9), 865. Retrieved October 21, 2008, from ABI/INFORM Global database. (Document ID: 1571291211).
Chris Churchill (2007). State targets lender ethics: Mortgage brokers must get training, undergo criminal checks starting next year. Knight Ridder Tribune Business News. Retrieved October 21, 2008, from ABI/INFORM Dateline database. (Document ID: 1335614991).
Greenberg, J. (1990). Employee theft as a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 75, 561-569.
Radi Khasawneh (2008). Ratings, regulation and risk. Risk, 21(7), 69. Retrieved October 22, 2008, from ABI/INFORM Global database. (Document ID: 1528216011).
Kouzes, James M., Posner, Barry Z.. (1990, July). The Credibility Factor: What Followers Expect from Their Leaders. Business Credit, 92(5), 24. Retrieved October 21, 2008, from ABI/INFORM Global database. (Document ID: 271072).
Joseph J. Riotto (2008). Understanding the Sarbanes-Oxley Act -- a valued added approach for public interest. Critical Perspectives on Accounting: Part Special Issue 19(7), 952-962. Retrieved October 21, 2008, from ABI/INFORM Global database. (Document ID: 1566563151).
Sidney Rutberg (2008, January). Dodging the Subprime bullet. The Secured Lender, 64(1), 37-41. Retrieved October 23, 2008, from ABI/INFORM Global database. (Document ID: 1426039541).
Hans L. Schwendimann (2007). The Mortgage Default Crisis: The American Dream Becomes a NIGHTMARE. Business Perspectives, 18(4), 22-25. Retrieved October 21, 2008, from ABI/INFORM Global database. (Document ID: 1368737221).
Robert C. Solomon (2000). Business with virtue: Maybe next year? Business Ethics Quarterly, 10(1), 339. Retrieved October 21, 2008, from ABI/INFORM Global database. (Document ID: 383205731).
William Shaw (2004). Brian Hutchinson, G.E. Moore's Ethical Theory: Resistance and Reconciliation (Cambridge: Cambridge University Press, 2001), pp. viii + 219. Utilitas, 16(3), 334-336. Retrieved October 12,…