JAIIB PPB Unit 49 - Banking Ethics: Changing Dynamics

JAIIB PPB Unit 49 - Banking Ethics: Changing Dynamics (Year: 2019)

What is Business Ethics Cyber Age?

Doing business in the cyber age is totally unlike from the traditional theories of business, which captured down many periods ago. In addition, as the proliferation of internet and communication technologies have been growing in an unparalleled rate, business organizations feel that, it is important to address the ethical issues that convoy technological progress.

It is significant to realize that mere knowledge of cyber age problems is not enough; one has to take concrete steps to minimize the negative effects of the technological progress that is applicable to business organizations and individuals alike.

The major issues of cyber ethics can be broadly divided into five sections

  • Privacy
  • Property
  • Security
  • Accuracy
  • Accessibility

Privacy Angle

In an 1890 Harvard Law Review seminar in, Warren and Brande said the golden words about privacy. It is an ethical and moral concept.

The Constituents of Privacy

Privacy can be broken down to limiting others' access to an individual or business organizations’ information with "three elements of secrecy, anonymity, and solitude."

  • Anonymity is related with the right to protection from undesired attention.
  • Solitude refers to the deficiency of physical proximity of a business or an individual.
  • Secrecy is the protection of personalized information from being freely accessed.
  • Protection of Private Information
  • Direct or indirect misuse of private information can lead to fake and impression. Individuality theft is a growing issue of discussion due to the availability of personal and private information on the web.

Identity Theft

Millions of people were subject to identity theft. Public records, search engines, and databases are the main culprits contributing to the rise of cybercrime.

To restrict and limit online databases from proliferating sensitive personnel information, the following commandments may be useful.

  • Do not comprise delicate unique identifiers, such as social security numbers, birth dates, hometown and mothers' maiden names in the database records.
  • Reject those phone numbers, which are normally unlisted.
  • There must be simple and clear provision for people to remove their names from a database.
  • Reverse social security number lookup services should be banned.

Private Data Collection

Individuals frequently surrender private information for numerous online services. Ethical business practice would be to defend this information, which may lead to the loss of privacy, anonymity, and solitude.

Additionally, data warehouses now collect and store enormous amounts of personal and consumer transactions data. Preserving large volumes of consumer and business information is likely for an unlimited amount of time. Erosion of confidentiality can be done with these databases, cookies and spyware.

There is a lookout that data warehouses are destined to stand-alone and need to be protected. Though, private information can be collected from corporate websites and social networking sites to initiate a malicious reverse lookup. So, how public domains should use information is an ethical debate.

Property Issues

The concept of property is a dispute of ethical debate for a long time. Some persons contend that the internet is based around the concept of freedom of information. Though, disagreement over ownership has frequently occurred when the property of information is infringed upon.

Intellectual Property Rights

The aggregate speed of the internet facilities and the emergence of file compression technology, such as mp3 have led to Peer-to-peer file sharing, which is an expertise that permits users to secretly transfer and share files to each other.

Facilities offered by Napster or Bit Torrent fall under the issue of file transfer and sharing. These sites offer copyrighted music and content which are illegal to transfer to other users.

Intellectual property rights include a host of rights that belong to businesses of individuals, such as patents, copyright, industrial design rights, trademarks, plant variety rights, trade dress, and in some jurisdictions trade secrets. We take up the most important constituents that having an ethical dilemma associated with them.

Patent Rights

A patent is a form of right decided by the government to an inventor, so that he may advantage financially from his/her invention. Many businesses have their R&D departments and their patents bring a source of revenue for them. It is continually supposed that patent breach is common in the cyber age and that it should be dealt legally and ethically with the strictest norms.

Copyright Violation

A copyright offers the maker of original work high-class rights to it, typically for a limited time. Copyright is usually appropriate to creative, intellectual, or artistic forms, or "works". As is clear, copying and re-creating the matter is quite effortlessly possible in the age of information. This increases the business ethics queries whether copyright protection should be made mandatory for all creative productions. The limit of copying and re-creation is also an ethical issue.


A trademark is a familiar and sole sign, design or expression, which differentiates products or services. It has been quite informal to duplicate trademarks in the age of computers and internet. It raises the concerns whether there should be any mercy to those who use trademarks unethically or illegally.

Trade Secrets

A trade secret is a formula, practice, process, design, instrument, pattern, information which is secret and by which a business can obtain an economic advantage over competitors or customers. Trade secrets theft can be considered unethical because it may be tough to create or ideate a unique formula, but quite easy to replicate it.

Digital Rights Management (DRM)
The outline and use of digital rights management software, has elevated the question of whether the subverting of DRM is ethical. Some see DRM to be an ethical step; others trust that, this is incorrect because the costs of products or services may go up due to DRM.

DRM is also depicted as defenders of users' rights. This lets, for instance, making copies of audio books of PDFs they receive; also letting people to burn music they have legally bought to CD or to transfer it to a new computer is an issue. It looks like a defilement of the rights of the intellectual property holders, leading to uncompensated use of copyrighted media.

Security Concerns

Security, in business domains, has long been an issue of moral debate. Is it significant to protect the common good of the public or we should safeguard the rights of the individual? There is a repeated and growing argument over the boundaries of these two ideas. This raises the question whether making compromises are right.

As uncountable people connect to the internet and the amount of personal data that is obtainable online goes on to increase forever, there is vulnerability to identity theft, cyber-crimes and computer hackings.

There is also an quarrel over ownership of the internet. People tend to ask who has the right to control the internet in the interest of security. This is a very complex issue because huge amounts of data and uncountable people are associated with the internet.

Responsibility of Accuracy

The concern of correctness is evident. We must ask queries like, who is accountable for the genuineness and loyalty of the information available online. Morally, the concept comprises a debate over who can contribute content and who should be held answerable when the content is mistaken or false. This also has a legal angle for recompense for the injured party due to wrong information and loss of capital due to these accuracy defects.

Accessibility, Censorship, and Filtering
The opinions that apply to offline restriction and filtering apply to online censorship and filtering. Is it superior to have free access to information or should be endangered from what is considered by a governing body as harmful, indecent or illicit. The issue of access by minors is also a major concern.

Many corporations limit their employees' access to cyberspace by blocking some sites, which are related only to personal usage and therefore destructive to productivity. On a superior scale, governments also create large firewalls, which censor and filter access to certain information available online which is often from foreign countries to their citizens and anyone within their borders.

Enhancing ethical codes

The difficult question, of course, is how to do this in practice.

Anyone who has been involved in corporate governance of some sort, in financial and non-financial institutions alike, either public or private, has experience with ethical codes. Typically that experience gives rise to mixed feelings. In principle, everybody thinks they are important and supports them. In practice, codes are often so general and high level, and difficult to implement and enforce, that their practical impact remains limited. They almost never play a central role in corporate board agendas. This is still true recently, I believe, even though attempts have been made to make ethical practices more systematic.

Useful elements to move forward can be derived by combining inputs from corporate experience, behavioural research and concrete cases from the recent crisis. Based on them, as well as, once again, on a fundamental intuition by Adam Smith, I think we can say that at the root of much unethical or fraudulent corporate behaviour is a mix of two partly conflicting sentiments: self-justification and opaqueness.

Self-justification is the array of reasons that people typically give themselves when they are about to violate laws or ethical rules. Here are some examples:

  • Everybody does it
  • We have always done it, so why change now
  • This is how this business works
  • If I don’t do it, somebody else will
  • It works, so let’s not ask too many questions
  • Nobody will notice and nobody will be hurt or similar

Many humans find such self-arguments convincing enough, but at the same time a deeper voice tells them that there is something wrong; hence the need for opaqueness. The acts they embark on and the self-justifications given must not be exposed. Any risk of exposure constitutes a very powerful disincentive to misbehave.

Leveraging on this psychological mechanisms, one could establish practices whereby employees engaged in certain activities that critically impinge on trust are routinely made accountable to answer the following questions:

  • Are you doing what you promised to do?
  • Are you using your best knowledge and intention in doing it?
  • Are you doing what public authorities, superiors, colleagues and business partners expect you to do, and if not why?
  • Are you conforming to the mission and the values of your company, as they are publicly stated?
  • Will your actions enhance public confidence in your company and in the financial sector?
  • Would you behave similarly if your actions were publicly observed?

The fundamental importance of the last question was understood by Adam Smith, who believed that an “impartial spectator” scrutinising individual behaviour was a necessary complement of the “invisible hand”. To quote:
“We suppose ourselves the spectators of our own behaviour, and endeavour to imagine what effect it would, in this light, produce upon us. This is the only looking glass by which we can, in some measure, with the eyes of other people, scrutinize the propriety of our own conduct.” (A. Smith, The Theory of Moral Sentiments, Section III.1.5.)

Putting all this into practice is evidently a challenge for supervisors, but once the logic is understood it does not seem impossible. By looking across a range of indicators and fact patterns, helped by intrusive questioning, if supervisors make the effort to connect the dots they should be able to see which banks are lax about culture and ethics. Shareholders, board members and senior management play an evidently important role in setting the example, putting in place adequate control mechanisms and enforcing them. Such processes need to be enshrined in explicit codes. Incentives of managers and staff need to be consistently aligned. The ethical framework should influence the annual appraisals and bonuses. Peer pressure and transparency help in this respect, especially when there is a risk of conflict of interests, for instance between sales employees and clients. Making commissions and reward schemes transparent would be helpful. An emphasis on ethics should also be placed on the recruitment process and career promotion mechanisms.

The role of banking supervision

The current process of reform aims at changing not only regulations but also the supervisory approach. This suggests in principle a change relative to the reactive and hands-off approach of the past, and asks supervisors to use their judgement and engage in a dialogue scrutinising and probing senior management and board members. The intrusive questions listed in the last section can also play a role here. That said, assessing whether a bank has a sound risk culture and proper internal controls to promote it is not easy, as it is a broad concept. Supervisors should check that mechanisms are in place and ensure that the necessary checks and balances are in place throughout the organisation, as well as proper accountability and transparency provisions.
Ethics are inextricably connected to the financial world as they form the basis for trust. Without trust the system is either dysfunctional or unstable or both, as the recent experience have shown.

Regulatory and supervisory reform can contribute to strengthening trust, by placing the emphasis on robust risk management systems, strong corporate governance frameworks and a sound risk culture. But in itself regulation is not sufficient, if not complemented by a sound ethical framework. As “trust comes by foot, but leaves on horseback”, it may take a while before we see results, but I am confident results can be achieved. Banking supervisors should be aware of these issues and contribute to the process.

Ethics and Technology

Businesses today are technology and innovation driven. There is huge competition in the sphere and therefore like other industry or business function ethics is essential here also. Specially because ethics by itself is only a tool to create and doesn’t know ethics or morals!

Every day we have innovative products and services that announce their arrival in the market place and others that go obsolete. It is this technology and innovation that leads to ethical issues, considering the competition to stay ahead by innovating is immense. Issues like data mining, invasion to privacy, data theft and workplace monitoring are common and critical.

In technology we speak of ethics in two contexts; one is whether the pace of technological innovation is benefiting the humankind or not, the other is either severely empowering people while choking others for the same. Technology, for example, has drastically replaced people at work.

In the first case we are compelled to think about the pace at which technology is progressing. There are manifold implications here, be it things like computer security or viruses, Trojans, spam’s that invade the privacy of people or the fact the technology is promoting consumerism.

Nowadays data storage is primarily on computer systems. With the advent of internet technology the world has got interconnected and data can be accessed remotely by those who are otherwise unauthorized to do the same. This is one of the pitfalls of innovation. The other one i.e. the pace of technological change also raises the question of ethics.

New products make their way and leave the existing ones obsolete. In fact technological change and innovation is at the heart of consumerism, which is bad for economy and environment in general. The recent economic downturn makes up for a very good example.

Increasingly technological products are adding up to environmental degradation. Computer screens, keyboards, the ink used in the printers are some of the ways in which technology is polluting the environment. All these produce toxins that cannot be decomposed easily.

The other major issue in technology that brings in ethics is interface between technology and the computers. Many scientists are of the opinion that the world will come to an end with a war between the humankind and the technology. Technology they say will advance to an extent beyond the control of those who have made it!

No doubt technology has replaced people at work and made certain others redundant. On the flip side many people have been raised to power while others have been severely handicapped. The latter is especially true for third world countries. New manufacturing processes that are outsourced either replace manpower there or either exploits the latter in the name of employment by engaging them cheaper prices.

Technology has also made inroads into the field of medicine and life care. New cloning techniques, genetic modifications or other life saving drugs need continuous monitoring and surveillance. Bioethics has thus emerged as ethics in the field of medical technology.

Whereas we cannot talk of controlling technology and innovation, the better way is to adapt and change. The role of ethics in technology is of managing rather controlling the same. Continuous monitoring is required to keep track of latest innovations and technological changes and for ensuring fair practices.

Intellectual Property?

Intellectual property (IP) is any unique product of the mind or human intellect. Examples of IP include: music, movies, books, software, paintings, words, phrases, symbols, designs, chemical formulas, etc.

Intellectual property rights protect the interests of creators by giving them property rights over their creations. IP is protected with laws (copyrights, patents, etc.) which enable people to earn recognition or financial benefit from what they invent or create. By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish.

Intellectual property relates to items of information or knowledge, which can be incorporated in tangible objects at the same time in an unlimited number of copies at different locations anywhere in the world. The property is not in those copies but in the information or knowledge reflected in them.

In other words, intellectual property is distinguished from the media on which it is expressed. The physical pages of a book aren't the intellectual property. The intellectual property is in the words and their order no matter how they are expressed. You can't transcribe the contents of a book by hand and sell your notes.

Rational for Intellectual Property Rights

There is a question about whether or not there is a natural right to intellectual property. Regardless, in order to encourage its creation, most societies choose to grant intellectual property rights (legal monopolies) to people through laws. These laws recognize a form of property called intellectual property (IP). Intellectual property rights are like any other property right. They give people the right to own and profit from their artistic, scientific and technological creations for a designated period of time.

IP can be easily copied so it is hard to control. IP laws give creators more control over their work.

Countries with strong IP laws tend to be sources of most inventions and creative work. IP laws promote creativity and the dissemination and application of its results

There is a balance, sometimes tension, between wanting to (1) reward creators of intellectual property, and (2) the need for the public to benefit from the IP. The constitution specifically mentions this balance with the mention of (1) "exclusive right", (2) "for limited times". IP laws are supposed to reflect the need for this compromise. If IP laws are too weak, there would be less incentive for some people to create valuable intellectual property. If IP laws are too strong, the public misses out on the beneficial consequences of creative work.

Special Challenges of the Digital Age

Everything in cyberspace is composed of bits. If those bits are viewable on a general purpose computer, those bits are capable of being copied. In their digital form, images, music, video, and text are perfectly reproducible (perfect copies). As long as it's legal to send an encrypted message from one person to another on the Internet, it will be possible to easily share copyrighted material (easily distributable). Consequently there is no easy answer to thwarting the pirating of digital content.

Fair Use

In some cases you are allowed limited use of copyrighted material (fair use) without having a license or permission of the author.

The fair use provision allows limited use of copyrighted materials under certain circumstances. Fair use applies mainly when the work is used for the purpose of criticism, parody, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research. The fair use clause isn't specific and requires interpretation. The factors to be considered are:

  • the purpose and character of the use, including whether such use is of a commercial nature or is for news reporting and/or non profit educational purposes;
  • the nature of the copyrighted work (fiction has more protection than factual work)
  • the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
  • the effect of the use upon the potential market for or value of the copyrighted work.

The last item carries the most weight. For example, if a substantial portion of a book was copied and distributed in a classroom it would likely not be considered fair use because it would potentially hurt sales of the book.

Note, Fair Use isn’t a right or entitlement, but rather a legal defence against a claim of infringement.

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