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The Financial Crisis 2008- A case Study


Enterprise & Social Responsibility
Assignment-1

11/25/2013

This report has been written as partial fulfilment of the requirement of the B.A. (Hons) Business Studies Level 6 course for the module - Enterprise & Social Responsibility.

Contents The financial crisis- A case study ......................................................................... 3 Question 1 .......................................................................................................... 3 Question 2 .......................................................................................................... 4 Question 3 .......................................................................................................... 4 Question 4 .......................................................................................................... 5 Question 5 .......................................................................................................... 6 Refrences ............................................................................................................... 8

The Financial Crisis- A Case Study


Question 1
Identify each of the stakeholders and how they are affected. What are the main harms and benefits in this case for the different stakeholders based on the current situation? STAKE HOLDERS Share holders HARMS BENEFITS Low share values Diluted ownership due to government takeover Exposed to environment threatened by corruption and controversies High amount of profits which could be used as shareholder dividends or capital gains are used for lavish senior management pays. 70 billion financing support Liabilities (which could potentially rise to over a trillion pound) Loss of deposits made Inability to get new finance Fraud, altered information provided to them by banks and financial institutions Return on capital Deregulation of banks Credit crunch

Government

Ownership of shares Power over the Banks High taxation Cuts on public expenditure

Customers

Employees British Financial companies

High bonuses

Economy C.E.O

Public Credit crunch Higher taxation Cuts in public expenditure Loans being recalled

Extraordinary levels of pay Lavish compensation packages

Businesses

Inability get new finance Mis-selling of interest rate hedging products to small business customers From the table, we can see that the C.E.Os and employees of the banks are at the most beneficial position. After them, the government has few benefits from the current situation; however it is bearing more harms than benefits with liabilities potentially over a trillion pound. The public on the other hand is at the most harmful position from this situation, be it customers, businesses or just plain public. Everyone is being affected negatively by the crisis.

Question 2
From a utilitarian perspective, would you argue for or against the proposed tightening of UK banking regulation? According to utilitarianism, an action is morally right if it results in the greatest amount of good for the greatest number of people affected by the action. In regard of the current crisis, I support the UK governments plan to reform banking sector. Doing so, the banks leverage ratios (the total amount of lending versus the capital) would be regulated which results in a strong and safe banking system, which would support the consumers, businesses, and the overall economy. The new reformation would also place in act tough restrictions on the bonuses that banks can pay to their staffs.This step protects the shareholders as it allows them the fair distribution of high amount of profits which could be used as shareholder dividends or capital gains otherwise used for lavish senior management pays. Following the recommendations of the Independent Commission on Banking (ICB) the government has put forward new laws to protect tax payers by separating retail operations from the riskier investment banking. This step ensures that the banking system will not have to be saved from collapse by billions of pounds of taxpayers' money as in the past. Moreover,the new regulations will allow the once betrayed public to gain confidence in the banking system.Without it, they will not borrow, invest or grow directly affecting the overall the economy in adverse.

Question 3
Using arguments based on the maxims of duty, would you consider the UK banks to have acted ethically in their operations? Maxim 1: Consistency Act only according to that maxim by which you can at the same time will that it should become a universal law.

This maxim checks an action with the perspective of consistency. Banks being institutions dealing with high amount of capital affecting the whole economy and hence should be consistent as to abide principles of integrity, transparency, neutrality, dependability, social obligation, and the control on money laundering. Banks not doing so have resulted in the global financial crisis, affecting thousands of lives in negative manner. Maxim 2: Human Dignity Act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only.

This maxim checks an action with the perspective of human dignity. Banks following their unethical practices have cheated its customers and used them only as means and they have been ignoring their dignity. Banks,in order to maintain their customer base,neither provide full information to the customers nor engage in commitment with them. According to the case study,services have been made available even to the lowest income earner in order to exploit all possibilities in terms of lending and customer deposits. In addition, banks are also taking part in discrimination by categorizing their clients in terms of their income structure and as to what customers to offer services to or not and allowing accesses to the crucial information provided by the customers to the large number of employees risking the customers privacy.

Maxim 3: Universality Act only so that the will through its maxims could regard itself at the same time as universally lawgiving The element of universality is scrutinized by this maxim. The purpose of this maxim is to check if the principles of the actions are acceptable universally or not. Banks with their unethical conduct resulted in an environment threatened by corruption and controversies. Bank managers andCEOs, focusing only on their bonus and sales volumes, misguided customers and got involved in fraudulent activities.The self centric approach of the banks resulted in global economic crisis affecting a large number of people and businesses. The consequence clearly implies that unethical banking behaviours cannot be acceptable universally.

Question 4
What clashes of rights are involved in this situation? Is it possible to judge their relative importance? Whose rights matter most in this situation? The following clashes of rights are involved with respect to the case study.

The right of proper information to customers and public The right of shareholders extend their profits The right of government to put the interests of taxpayers first The right of customers to no discrimination The right of privacy to customers The right of taxpayers to use their money on the desired project

Looking the situation with a utilitarian perspective, the rights of the public matters the most in this situation. The unethical operationsof banks have affected the public the most, be it the credit crunch, the bad economy, the high taxation or the cuts in public expenditure. Public are the most vulnerable in the midst of the entire crisis. They are misguided, manipulated, and used as ends of means in order to maintain customer base and boost sales volumes. Banking sector as a public institution should have wider ramifications of their actions. The case study mentions banks and financial institutions misguiding customers to sell their products. Also the tax payers money was used to bail out the bankers while trying save the banking industry from collapse. Moreover, many depositors lost their saving as a result of bank failures (Example: Iceland and Isle of Man).Client firms losing the relationships with theirbanks, fall into financially troubled conditions resulting, idling the business activities of stakeholders and this stagnation affects non stakeholders of failed banks on many levels ultimately affecting the real economy. The unethical practises of the banks had led to the economic crisis where the general population not only lost their savings but also faced difficulty due to high unemployment, credit crunch, and so on.

Question 5
Select and apply two other normative theories to critically examine the current situation? Theory of Justice
Business creates wealth how should it be fairly distributed?

Banks arebusinesses and their first priority is high return on investment. And, undoubtedly they create wealth; however, the question arises on how the wealth is acquired and whether or not the wealth is fairly distributed. With the disclosure of unethical practices of banks to maintain their customer base, the process of wealth acquisition and distribution is highly doubted. Banks, following the deregulation,made services available even to the lowest income earner in order for them to take advantage of all possibilities in terms of lending and customer

deposits.For instance - the banking practices mentioned in case studies where they sell their products with false information exploiting their customers. On the other hand, the senior management and employees have the most advantage. The bonus culture in the banking industry is one of the main reasons behind this. The ability of star performers to negotiate lavish pay or compensation deals can be seen as unfair distribution of the acquired wealth. With high amount of profits used as lavish senior management pays(bonus and packages) instead of shareholders dividends or capital gains, share holders are at loss.

The wrong incentive structure if they win, they take huge bonuses. If they lose, shareholders and public loose. So, due to this, they are inclined to take huge risks. Looking into the current situation with the perspective of Justice, which can be defined as the simultaneously fair treatment of individuals in a given situation with the result that everybody gets what they deserve, it can be concluded that shareholders and customers are not fairly treated by the banks[Cran&Matten,2010].

Egoism Following the theory of egoism, an action is morally right if the decision-maker freely decides in order to pursue either their (short-term) desires or their(long-term) interests.[Crane &Matten,2010] If we apply this theory to the case, we can perceive that the actors involved (bank managers and C.E.Os) were focusing on their own individual desires and interests. The actors were focusing on increasing the customer base, meeting the target, and boosting the sales volumes in order to maximize of the desired outcome (higher pay and bonuses). From an egoistic perspective, the actions of bank managers and C.E.Os can be translated as morally right. Whereas keeping in respect with the desires of the other involved parties, that is shareholders, customers, businesses, and public suggests that from egoistic point of view the actions of the banks are immoral.

Refrences
BBC (2011). Banking reform: Impact on the UK's biggest banks. [ONLINE] Available at: http://www.bbc.co.uk/news/business-14879427. [Last Accessed 20/11/2013]. Crane A. & Matten D, (2010). 'Evaluating Business Ethics', Business Ethics. 3rd ed. New York: Oxford University Press Inc. pp.92-129. GOV.UK (2013). Banking Reform Bill amendments published. [ONLINE] Available at: https://www.gov.uk/government/news/banking-reform-billamendments-published. [Last Accessed 17/11/2013]. Robert Peston (2010). Bankers' bonuses squeezed, salaries up. [ONLINE] Available at: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/12/bankers_bon uses_squeezed_salar.html. [Last Accessed 18/11/2013]. WILLIAM JAMES (2013). UK banking reforms leave London exposed banking commission. [ONLINE] Available at: http://uk.reuters.com/article/2013/10/15/uk-britain-banking-tyrieidUKBRE99E03I20131015. [Last Accessed 20/11/2013].