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The Daily Sabbatical/Tuck School of Business | Jul 11, 2012 | 4862 views

Business Leaders Must Be More Ethical

Business schools not only need to sensitize their current students to the full range of their future responsibilities, but they should work with practicing professionals on their continuing education
Business Leaders Must Be More Ethical
Dean Paul Danos, Dean of Tuck School of Business

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s the world’s economies grow and form ever stronger links, the world’s financial institutions will increase in size, sophistication, complexity and integration. Therefore, we should be prepared for more highly-publicized shortcoming of people and institutions that will inevitably be uncovered from time-to-time. Bigger institutions will result in bigger problems being exposed. There will be potential for some to be wide-spread as were the United States financial crises centered on collapsing real estate values which also reverberated throughout the world or the current European debt crisis that is creating uncertainties that depress economies around the globe.  More contained and institution-specific problems such as the incidents recently disclosed at Barclays and JP Morgan Chase will also get much attention because of the magnitudes involved and the intense media coverage.

In order to reduce the impact of such defaults, I believe that the various regulators in the important economies must fully grasp and predict  the developments in the private sector,  and they should converge their policies and activities and make them much more sophisticated and effective.  We have seen some of this in the wake of the 2008 financial crisis, but a redoubling of those efforts is required.  Regulators must anticipate the innovations in the private sector and create sensible policies that allow for vibrant financial systems that are less prone to breakdowns. All of this will require engaging more experts’ analyst and more capable theorist along with individuals with practical experience.  

Of course, business schools in which most of the private sector financial professionals get their education, must pay more attention to sensitizing future business leaders to their responsibilities to the people in all of the societies in which their institutions hold sway, which as I said is increasing all the time. We have seen some good developments in business schools along this line with the advent of required ethics and social responsibility courses and other experiences designed to show that businesses must be run with an eye on the welfare of all. There has been an increase in the students’ interest in societal welfare and the interface between business and society, and schools have increased the number of courses, speakers and cases devoted to these issues. In another vein, I believe that business schools must explore ways of giving students the insights needed to be skeptical and questioning of the models used in business. The financial crisis showed that board members and regulators of financial institutions were out of their depth in understanding the kinds of risk assessment models that were in common usage in the big banks. Their assumptions and reliance on status quo thinking resulted is very dangerous behavior being tolerated for far too long.  Business schools should give deeper coverage that will help to instill in leaders the courage to challenge conventional wisdom.   

If we are to have fewer financial crises in ever more complex and sophisticated economic settings, we need to be aggressive on several fronts. Certainly business leaders must be more ethical and sensitive to societal needs, and their early education in business schools must play a part. However, most of the key participants in the recent crises were in their fifties and sixties, decades after their MBA or law school educations.  The same can be said for the top economists who consult with governments and regulatory bodies. Therefore, there is a need for all of those key parties to engage in continuous education throughout their careers.   

The definition of “ethical” behavior should be expanded to include being prepared intellectually for the challenges of the latest developments. I would guess that few of the board members and regulators were fully on top of, much less ahead of, the developments that engulfed them during the crisis. Business schools not only need to sensitize their current students to the full range of their future responsibilities, but they should work with practicing professionals on their continuing education. Regulators must invest in more experts who are primed to analyze the complex risk factors and continuously test both the ability of banks to survive amidst the morass of financial relationships among the banks and across economies.  

[This article republished with permission from the author and the Tuck School of Business.]

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