Law, ethics, and corporate governance

¶ … Ethics, and Corporate Governance

The need for legal oversight, ethical compliance regulation, and sufficient incentives to promote effective corporate governance should be more than evident even from the most cursory survey of recent (as well as not so recent) events in contemporary business. Currently, the entire Gulf Coast is threatened by the ongoing ecological disaster caused by the apparent failure of the modern deep-water oil mining industry to develop safety and disaster-recovery technologies and capabilities commensurate with their development of profit-generating mining operations.

That ongoing disaster occurred at a time when the United States has still not recovered from the devastating consequences of the 2007 collapse of the housing boom and the subsequent implosion of some of the largest and oldest Wall Street investment firms. Their dependence on unstable and overvalued home mortgage obligations that were issued in violation of the most basic ethical business and financial practices nearly triggered an even more serious economic crisis. The list of illustrative examples of industry and corporate ethical failures in the history of American business is very long (Halbert & Ingulli, 2008), but the manner in which inadvisable government deregulation, systemically unstable financial industry practices, and outright fraud and exploitation at several different levels caused the current U.S. economic crisis provides one of the best contemporary examples of the confluence of government regulatory failure, corporate irresponsibility, and individual greed (Phillips, 2008).

The origin of the economic disaster that nearly precipitated a nationwide depression more devastating than the historic Great Depression began with deregulation of the banking industry in the second term of the Clinton presidential administration and the continuation of similar policies under George W. Bush thereafter (Phillips, 2008). Specifically, changes to rules that had previously required banks issuing mortgage loans to keep those debt obligations were changed allowing banks to sell off those debt obligations. This undermined the most fundamental basis for ensuring the integrity of home mortgages that had remained unchanged in principle since the inception of the concept of home mortgages. Because lending institutions stood to lose anytime borrowers defaulted on a loan, lenders always engaged in a very careful process of ensuring that loan applicants were capable of repaying any debts they sought to take on (Phillips, 2008).

Deregulation shortly before the turn of the century eliminated the self-interest basis of rejecting risky debtors, leaving only legal and ethical obligations to exercise due diligence in good faith (Phillips, 2008). Unfortunately, mortgage lenders throughout the nation began issuing loans irresponsibly and often without any collateral or interest due on the loan. Since they intended to sell off the obligation anyway, they had little concern for what might happen subsequently. Likewise, home realtors and mortgage brokers began aggressively soliciting business from customers unethically, often by exploiting their ignorance about variable-rate mortgage loans. Unfortunately, this process also triggered an artificial housing bubble based largely on inflated property value statements and those overvalued but unstable and improperly secured loan obligations were subsequently incorporated into commercial paper that (as it turned out) were not even understood by executives and risk managers at the largest investment firms in the world.