Tan Kin Lian / Columnist
In the absence of adequate regulation, we have to cultivate a strong sense of business ethics.
In Ancient China, there was a hierarchic social class structure developed by scholars as far back as 1000 years BC. In descending order, these were the shi (gentry scholars), the nong (peasant farmers), gong (artisans and craftsmen), and the shang (merchants and traders).
The merchants and traders were placed by the scholarly elite on the lowest of the four grades in the social hierarchy. The scholars in their writings denounced the merchant class as greedy and lacking moral character. Merchants were seen as somewhat parasitic, since they used the goods that others produced and made their own profits from them. In essence, they were seen as business savvy, but not morally cultivated enough to be venerated representatives of Chinese culture.
In the modern economy, the merchants and traders, including financial traders, are considered to be among the choice occupations to pursue. We call them “entrepreneurs” if they are successful in creating great wealth within a short time.
The products suitable for trading have extended beyond physical goods to include trading in financial assets and instruments.
Even the lofty professions such as medicine, law and accounting, which previously belonged to the scholar class, have now been converted into businesses.
What is the difference between a profession and a business?
A professional, such as a doctor or lawyer, has to observe the professional ethic of looking after the best interest of the client. A doctor would consider it improper to take unfair advantage of the trust of a patient and prescribe medication or treatment that is harmful or not suitable for the patient.
When medical practice turns into a business, there is the pressure for the doctor to generate revenue to meet the bottom line, and later to increase profits and maximize shareholder value. It becomes a challenge to balance professional ethics and business interests.
The same challenges apply to the legal and accountancy practices. From time to time, there are cases of malpractices where lawyers abuse the trust of their clients for their personal gains.
In recent years, in Singapore, many financial products were created ostensibly to meet the needs of consumers to earn a higher yield compared to bank deposits. In reality, these products were designed primarily to make huge profits for the product issuers and intermediaries who market the products. The financial institutions made billions of dollars on the back of poor yield given to the unwary investors.
Look at the financial crisis triggered by the sub-prime mortgages in America. I am sure that the expert professionals involved in the business were aware about the risks and that the practice was unsustainable. But it seemed that nearly everyone in the business was recording large profits as the housing prices skyrocketed. Why not join in and make billions while the sun shines?
When the crunch comes, the people involved earlier had already made their fortunes and could comfortably retire from the scene. They leave behind a financial mess for other people to sort out. This is business ethics at its worst.
In the old days, it would be considered immoral to cheat people. Cheating include the practices of taking unfair advantage of other people for one’s personal gain. It may be charging an excessive price much more than what the product is really worth or giving a misleading description of the value of the product.
Nowadays, these practices seem to be acceptable under the philosophy of “caveat emptor” or “let the buyer beware”. It does not appear to matter that the buyer is a trusting person, who is not financially savvy, and is easily taken for a ride. These practices are now regarded as ingenuous ways to increase profits and maximize shareholder value.
What is the underlying cause of these problems?
It started about twenty years ago, when some economists argued that it is best for economic decisions to be left to competition and the free market. If full information is readily available, consumers can make the best choice, such as buying the right products or making the right investments.
According to these economists, there was no need for regulation, as a competitive market with perfect information can take care of things. This argument was accepted and many governments reduced regulation over many aspects of the economic life.
Unfortunately, this turned out to be a naive view. The professors did not realize that the rest of the population do not have the same level of knowledge that the professors have, nor the available time to carry out the research to make the right decisions.
These ordinary people are now exposed to the free market, which now offers good and bad products in a de-regulated environment. It is easy for the seller to increase the marketing budget to push the bad products to unwary customers and make more profit.
What has been the outcome of the de-regulated environment of the past two decades? The majority of the population suffered a decline in their real income, after adjusting for inflation. The gap between the high and low income increased to obscene levels. Many people became poorer and had to work harder, just to survive. They do not have enough savings for retirement.
This applies to Singapore as well, as we suffer from a bad GINI co-efficient (measuring the fairness in income distribution) and a rapidly declining birth rate (suggesting that our social and economic policies are out of balance).
What should be done for the future?
We need to pursue:
· A better balance between regulation and free market
· A stronger sense of business ethics.
Business ethics require us to run a business honestly and to treat our customers fairly. We are entitled to a fair profit margin for our efforts, our skills and for taking the business risks. We should not cheat customers by over-charging them and misrepresenting the value of our products.
In the past, we had Government regulation to keep all parties on the right track. Today, in the absence of adequate regulation, we have to cultivate a strong sense of business ethics, so that our merchants and traders can avoid “being greedy and lacking moral character”.