Paul Flowers, the Libor fiddle, services mis-sold...What has happened to business ethics?

We need a return to the partnership model if we are to rescue the City

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The Independent Online

Finally, we have an admission we have all being waiting to hear. The energy bosses have admitted the error of their ways. About time, too. When will we get one from the bankers who, it now transpires, have systematically mis-sold services and products and massaged the Libor rate, a crucial benchmark for the world’s financial industry. In fiddling Libor bankers sought to give the impression that they were more creditworthy than in fact they were.  The implications stemming from this skulduggery are immense: it is staggering to find, for example, that Libor underpins around $350 trillion in derivative trades worldwide.

The Reverend Paul Flowers is no banker (he couldn't read his own firm's balance sheet), yet he was still appointed Chairman of the Co-operative Bank. He surfaced again recently in an interview with Jeremy Paxman on Newsnight. Grilled by the BBC’s arch inquisitor he at least admitted some error: “We are not without sin” was his explanation for the catastrophic mis-management failures of this once revered banking name. Not much of an apology, but it was a start.The Bank of England as it functions today isn't what it once was, either. Following the Libor scandal, heads should have rolled at the Old Lady of Threadneadle Street. Yet instead the Governor, Mervyn King, received a coronet on his and an invitation to sit in the House of Lords.

This all leaves me pondering what has happened to ethics and accountability in public life and, in particular, amongst those involved in business? What has gone wrong in the City of London, which for many years adopted the partnership model with respect to the way in which it offered services to clients? In a partnership the partners assume personal responsibility for the financial creditworthiness of the firm and the integrity of the business practices that are followed. For decades this typified the way in which stockbrokers, lawyers and accountants operated. And for the most part it worked.

I have been a partner in a wealth management business, and a director of numerous others. I have seen good business models and practices as well as very bad ones. I sat at the feet of some of the very best, including Sir John Beckwith, who made a fortune through establishing and developing a successful business - London and Edinburgh Trust, one of Britain’s most successful real estate companies. I have also known business royalty including the late Sir Jimmy Goldsmith and that national treasure Lord (Jacob) Rothschild.

In my experience all these men could be and can be tricky. However, what separates them from the average businessmen is generally a degree of humility. They are grounded in reality and focused on a long-term vision to improve their business strategy in the best interest of shareholders, employees and their community.

Such men and women are rare but do exist. The good news is that they are generally the ones we remember because they are the ones whose courageous actions have had the greatest impact. This is far removed from the narcissistic behaviour of some of today’s Chief Executives (CEO's). I have recently seen this at first hand. You may recognize some of these common traits and how they conspire to turn a good business rotten.

Compelling, charming and charismatic, these people have the capacity to lure you under their spell until disagreements surfaces. This brings out a hidden dark and sinister trait in their personalities. These “movers and shakers” live in a world where there are no rules-except their own, and no wrong, except other people's. Such people have an insatiable appetite for control and seek to intimidate in order to exercise it. Writing some 600 years ago, Machiavelli asked whether it was realistic to expect people in business or politics to behave ethically, as opposed to merely pretending to do so? Machiavelli was clear that such an expectation was unrealistic. He also argued that if you wanted worldly success (as most people do) you cannot be inhibited by moral scruples in doing whatever is necessary to achieve these material goals. In his writings, for example in his primer for rulers (and today’s CEOs) The Prince, he talked about lying, breaking promises, cruelty, bullying and intimidation. Centuries later, his advice remains just as relevant. 

It is striking to note that not one of the bankers found negligent in the financial crisis we have endured in the UK has faced a prison sentence. This is in stark contrast to the US where many leading figures have been sentenced to jail. Bernie Madoff is the most spectacular example but there are plenty of others. The worst shame suffered by British bankers is the stripping of their knighthoods – Fred Goodwin is probably the best know example but he retained a very generous pension and other benefits. At least the former CEO of HBOS James Crosby returned his knighthood voluntarily. Yet looked at overall, whatever happened to the concept of public shame and public retribution?

In order to restore public confidence in business and the City we need to ensure that proper and effective penalties are in place. There should be no more light touch regulation. Too-big-to-fail banks should be disaggregated and partnerships restored to their former key role in the City. Furthermore, these partnerships should be audited to ensure fair play in the sense that no one presiding partner can dominate business strategy, especially when the partner concerned isn't the majority shareholder. The audit should also include claims to be “aligned”. DO all partners genuinely “share in the risk”? Partnership is about teamwork and fulfilling everyone’s potential contribution; it is not a dictatorship. Business strategy should reflect the owners’ interests not ignore them as has happened far too often with some of our mega investment banks, which paid out mind boggling bonuses to their favoured executives.

A return to the partnership model can – in my view - rescue the City and business. We need to establish a genuine partnership and not one in name only: a partnership model that rewards long term investment thinking and where are partnerships genuinely aligned with clients’ interests, with resulting benefits to wider society. After all , business forms a crucial plank in a well functioning society since it creates the wealth to fund all those things a modern and civilised society depends on.