Essay on Truth Vs Loyalty

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This essay illustrates five relevant leadership theories to explore the business ethics issues surrounding the recent Australian Royal Commission into the misconduct in the banking, superannuation, and financial services industry. At first, a brief of the Banking Royal Commission (BRC) report will be described. Secondly, the toxic triangle model will be related to the findings in the report for further explanation. Additionally, Kellerman’s approach will be used to define bad leadership within the banking sector. Kidder’s four ethical dilemmas and ethical checkpoint framework will describe how to make the right decision as employees in financial organizations. At last, some issues of trust in leadership are found and resolved by strengthening qualities of leadership.

Introduction of the Case Study

The BRC report was released after Commissioner Kenneth Hayne finished the investigation and inquiries into the practices of banks, superannuation, and financial service institutions. There are four main findings in this report: conflict of interest was increasing due to higher personal goals and the lack of an ethical remuneration structure; failure to separate duties between the provision of financial advice and financial products selling; the lack of information transparency on financial products; and people broke the laws and regulations without punishments. Besides, 76 recommendations are offered to reform the financial industry as well. Five relevant leadership theories will be linked to the report’s findings to do the critical analysis. Some of the components of these theories will explain why ethical leadership failures happen in the financial industry and how to prevent and reform them.

Toxic Triangle

The three components of the toxic triangle are destructive leaders, susceptible followers, and conducive environments. In the BRC report, destructive leaders are found to have one characteristic which is a personalized need for power. In the banking, superannuation, and financial services industry, unethical employees are likely to use power to market unsolicited products to members for personal gain and self-promotion, therefore hawking should be banned. Susceptible followers can be divided into two groups: conformers and colluders. Conformers comply with destructive leaders out of fear whereas colluders actively participate in a destructive leader’s agenda. The vulnerability of conformers is based on unmet basic needs, negative self-evaluations, and psychological immaturity. In contrast, colluders are ambitious, and selfish and share the destructive leader’s world views. Some followers benefit from destructive activities and thus contribute to the toxic vision of the leader. The third domain in the toxic triangle is the environmental context that contains leaders, followers, and their interactions. There are four important environmental factors for destructive leadership: instability, perceived threat, cultural values, absence of checks and balances, and institutionalization. The BRC final report shows the real problem is how we value executives and workers because setting remuneration targets and measuring performance are rooted in corporate culture in the bank industry. Destructive leaders and followers want to achieve remuneration targets regardless of how they achieve them. For example, treating customers poorly, being less than frank with the regulator, and cutting corners to achieve sales. These actions may not be considered in their measurement of performance by some financial institutions under the corporate culture.

Kellerman’s Approach

In Kellerman’s viewpoint, bad leadership is divided into two obvious types: ineffective and unethical. Also, Kellerman develops her typology and lists seven distinct categories of bad leadership: incompetent; rigid; intemperate; callous; corrupt; insular; and evil. Ineffective leadership means bad leaders fail to produce the change desired by the followers. And the definition of unethical can be violating common codes of decency and good conduct, which means bad leaders fail to distinguish between right and wrong.

Within the banking sector, unethical leadership played an important role in the financial institutions’ scandal, while acknowledging the wider culture of profit maximization and targets. However, as leaders, they should also consider their ethics. Also, ethics must indeed begin at the top, leaders can set a moral example for their followers. Additionally, formal ethical codes and ethics training could be useful unless the top management is aligned with it. Hence, the ethical actions and behavior of leaders depend on their weaknesses of human nature. If leaders and at least some followers are callous; corrupt; insular or evil, no amount of training and ethical codes can change their actions and behavior. Hence, the recommendation in the BRC report is to remove ethical temptations by prohibiting conflicts of interest. However, removing all temptations is unrealistic, therefore regulators also are recommended to strengthen the principles of conduct and punish offenders.

Kidder’s Four Ethical Dilemmas

Kidder’s four paradigms for understanding ethical dilemmas are truth vs. Loyalty, Individual vs. Community, Short-Term vs. Long-Term, and Justice vs. Mercy. They are genuine dilemmas precisely because each side is firmly rooted in human basic values. When people face these tough decisions, individuals or organizations can choose among several actions that must be evaluated as right or wrong, ethical or unethical.

Financial institutions have become very complex and sophisticated in the way they operate. The products and services they offer tend to be more and more complicated. Furthermore, financial institutions play a key role in the supply and movement of money. Unfortunately, governments, regulators, and other institutions hard to deal with this development properly within a short time because banks are moving too quickly. Hence, due to the lack of information transparency on financial products and weak supervision, leaders and followers from those financial institutions must have the ability to make the right decision at the right time. For example, banks that charge excessive interest rates, abusive commissions, or ultra-profitable credit charges that go beyond reasonable standards for taking an extra benefit from their customers. As an employee, it is right to stand on the truth and tell their customers not to go into excessive debt at too high interest rates, or it is right to be loyal to the company and encourage their customers to take more irresponsible credit from banks. Moreover, when deciding between the individual and community, if financial institutions reward for selling the wrong product or providing inappropriate advice to their clients, the integrity of capital markets could be significantly impacted because the level of trust and confidence from their clients could be impaired. In conclusion, the hardest decisions are not a matter of one choice being right and the others wrong, peak performance leaders are recommended to resolve arguments and debates based on the ethical dilemma by finding the highest ‘right’.

Kidder’s Ethical Checkpoint Framework

Kidder lays out nine checkpoints for ethical decision-making: recognize there is a moral issue; determine the actor (who does the problem belong to?); gather the relevant facts; test for right vs. wrong issues; test for right vs. right paradigms; apply the resolution principles; investigate the “trilemma” option; make the decision; revisit and reflect on the decision.

Ethical dilemma analysis begins with knowing a conflict of core values exists. Using the example of the chosen unsuitable and risky financial products will attract significant commissions, the employees must first be aware of the moral responsibility to sell the product or provide advice to their clients and the conflicting personal interests of their financial institution development. There are two conflicting moral values. The employees have a responsibility to both their clients and their financial institution. The employees are the actors or the owners of the dilemma. Analysis cannot be performed until after all the facts have been gathered. Collecting all the details may reveal a different scenario than originally determined. Two core values may not conflict. The facts might reveal that clients may acquire what they want and financial institutions could care about their service quality for clients to set up attractive commissions for employees. The next step is the most important step in which the employees maintain objectivity in analysis.

Five tests distinguish wrongdoing from an ethical dilemma:

The legal test. Does the choice or action violate any laws? When employees sell financial products or provide advice to their clients whether breaking relevant provisions of the Australian Banking Association and ASIC or the corporate code of conduct of their financial institutions.

The intuition test. Does the choice or action intuitively feel wrong? If employees had already known the financial products that were unsuitable and risky but still introduced their clients to buy, they could have felt the action was wrong.

The publicity test. How will the actor feel if the choice or action becomes common knowledge in the public? If employees sell unsuitable and risky products by cheating and misleading, most of them would be worried when this behavior is announced in their local media, or become common knowledge in their financial companies.

The role model test. Would a person of high moral stature do this? Using the example of ethical leaders to judge their actions and behaviors. Imagine what the reaction of their parents, children, or spiritual advisors is and would they approve or disapprove?

After gathering the facts, if two core values are indeed in conflict, the employees need to categorize the dilemma into one of four following paradigms for analysis: Truth vs. Loyalty, Individual vs. Community, Short-Term vs. Long-Term, and Justice vs. Mercy. This is an example of a right versus right dilemma involving truth and loyalty. It is right in the interest of truth to tell clients products are unsuitable and risky. On the other hand, it is right to be loyal to their financial institutions to acquire more interests.

To resolve the ethical dilemma, there are three resolution principles: ends-based, rule-based, and care-based. Under the ends-based principle, decision-makers should select the option that creates the greatest good for the greatest number of people. Hence, the clients are more likely to obtain the greatest good by knowing the truth. Under the rule-based, the employees should follow the standard such as provisions of the Australian Banking Association and ASIC or corporate code of conduct to make a decision. Under the care-based principle, when employees sell financial products to clients, they should treat their clients as they treat themselves.

At the stage of investigating a third alternative, the employees seek a different option that can achieve a win-win result. For example, they could provide low-risk or more appropriate financial products to their clients but receive fewer commissions. As soon as all options have been considered, a choice must be made. At the decision-making stage, the employees should in the interest of truth tell clients products are unsuitable and risky and also can provide more options to their clients so that not only help them to maximize clients’ profits but also receive commissions. After some time, revisit and reflect on the decision that should implemented. Reflection is a significant tool in preparing for the next ethical dilemma. Therefore, the employees from different financial institutions could cope with the issues properly when the same ethical dilemma happened.

Issues of Trust in Leadership

The BRC report uncovers a range of issues that have affected the level of stakeholder trust and confidence in capital markets and the investment industry. The lack of trust and poor culture not only could lose many clients but also hurt the ability of banks to hire talented graduates. Hence, financial services organizations must restore trust among leaders, followers, and clients in the future. Following the report’s recommendations alone is not enough to restore public trust in financial institutions. It will implement strong leadership to make a difference. Four qualities of leadership engender trust: vision, empathy, consistency, and integrity. As leaders, they should have a vision for the organization that is clear, attractive, and attainable and have unconditional empathy. Besides, their positions are consistent and integrity is unquestionable. As followers, they tend to trust leaders who create inspiring visions and can understand them. Also, they tend to trust leaders who demonstrate their ethical actions as well as when they know where they stand about the organization. In the report, executives are lacking in the critical leadership skills of empathy and integrity. Thus, leaders should strengthen empathy to ensure shareholder returns are not prioritized over the value, which could be shared with other stakeholders. It is about balancing interests and sharing value with clients, employees, and broader communities. Additionally, leaders should uphold a standard of ethics and encourage themselves and their followers to comply with this moral code.

Conclusion

Given the analysis outlined above, under the circumstance of unethical leadership in the financial industry, the toxic triangle model explains that unethical leadership is formed by destructive leaders, susceptible followers, and conducive environments. From Kellerman’s viewpoint, ineffective and unethical leadership are belonging to bad leadership. Therefore, to control unethical leadership, Kidder’s four ethical dilemmas and ethical checkpoint framework are provided to leaders to make ethical decisions when they face different ethical dilemmas. Eventually, the method of restoring trust after unethical leadership control is to build vision, empathy, consistency, and integrity leadership.

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