Publications

Jean Guill's Speech

 

Integrity and the financial centre: some thoughts from the regulator on financial integrity.

 

An informal summary of a talk by Jean Guill, Director General, Commission de surveillance du secteur  financier to The Institute for Global Financial Integrity, Luxembourg, 12th October 2011.

 

 

 

Having looked at the TIGFI web site and looked at the list of speakers and topics in recent months I see that you have covered many of the subjects that I might have spoken about so I will try not to be repetitive in any way.

 

The need for integrity should be obvious in all business areas but it is particularly important in the financial industry because the financial sector irrigates all business sectors and because the financial industry is based on trust. If trust is lost, for instance because of fraud, the whole financial sector and ultimately the whole economy suffers deeply. An international centre such as Luxembourg - relying on non-resident institutions, depositors and investors - is especially vulnerable on its reputation for integrity and any example of non-ethical behaviour is likely to be magnified enormously by the media, much more so than similar behaviour in a centre with deeper national roots.

 

What can the regulator do in this respect?  Regulating is something different from just controlling or supervising. It of course involves issuing and enforcing authoritative rules but it also implies a guiding and shaping hand, a permanent, corrective and moderating intervention to keep things on track and to ensure the smooth, can I say clockwork, functioning of the financial sector. A regulator is no longer a reactive controller and supervisor but has to take a much more hands on, proactive and preventive stance. It is important also to note that European and international financial institutions expect us to implement and enforce the highest common supervisory and ethical standards.  Responsible financial institutions realise that because of the international nature of our business here, a regulatory failure would put the survival of the financial centre at risk.

 

The regulator has to intervene at the earliest possible stage, when someone wants to establish a financial business here in Luxembourg. We are obliged by law, and this is an essential function of the supervisor, to vet this person and this business before admitting them to Luxembourg. This starts so early and goes so deeply that it goes much beyond what is done in most other business areas. We not only look at the people who want to run the business; we are even obliged to look at the people who own the business to establish whether they are ‘fit and proper’. I like this English term as it expresses better than the French legal terms of “honorabilité et expérience”.  We have to check this not just at the starting phase, as to be ‘fit and proper’ is something you have to keep up for life. Fitness and propriety are not just a matter of staying out of jail but go much beyond that, especially in the financial sector. They find their most complete expression by a loyal co-operation with the supervisor. Propriety is checked very much in detail and has sometimes led to negative decisions on our part. A clear criterion for us that someone is no longer ‘fit and proper’ is if he has lied to us or not told us the whole truth.  We have prepared at the request of the government a draft bill which will provide a better structured sanctioning regime and we have included the loss of “‘fit and proper’” status as one distinct reason for either suspending a person or shutting down a business.

 

One specific area we have been looking into, if for different reasons, is remuneration policy in the financial sector. This is basically a question of whether the remuneration is for taking a risk which subsequently might create a problem for the business.  But there is an element here of ensuring that remuneration in the financial sector is not disconnected from ensuring proper behaviour.

 

We are trying to be more active in the whole area of corporate governance which of course is not just limited to the financial sector.  To date the merit goes mainly to initiatives from the private sector, notably the stock exchange and the compliance officers’ association. There are already rules and there will be more in the area of company management. We have a committee working on corporate governance issues and we will have a meeting in the fall to discuss a study commissioned to compare corporate governance rules in Luxembourg with the rest of Europe.  It is too early to go into details at the moment but it is definitely a subject I will come back to in the New Year.

 

It is not just the financial sector that needs to be fit and proper. The regulator himself also has to stick to the rules which is why we have a code of conduct and our decisions are subject to review by the courts.

 

I have underlined that the financial sector needs to be subject to stricter rules of integrity than most other areas of the economy and I thought I would touch on a few of the areas where more is expected. 

 

A businessman is by definition on the other side of the table from his customer and seeks to do the best for himself, but in the financial sector professionals are expected to put themselves in the place of the customer and to be loyal to them, taking the interest of the customer to heart and where necessary selling competitors’ products if they better suit the customer.  This is justified by the legislator on the basis that the customer is usually at a disadvantage to the financial company which knows more about its products and their risks. The legislator has required that the guiding hand of the regulator should intervene in the area of consumer and investor protection which is a very wide field. Although we are not liable for an individual’s loss, we are there to protect him against malpractice and possibly also against his own folly. This concern is not new and shows up in MiFID of course,  the regulation on prospectuses, key investor information documents, transparency laws, the rules governing UCITS and payment services and regulations on consumer credit. Financial professionals have had to get used to a very special approach which almost goes against nature from a business perspective.  Lord Rothschild was reputed to have made a fortune because he knew the outcome of the Battle of Waterloo before the others. I suppose that now-a-days he would be put in jail for insider trading and market abuse. So you see some changes in perspective in the financial sector have been wrought through legislation and we are living in a different world from what was considered to be acceptable behaviour only a few decades ago.

 

The financial crisis has laid bare a certain amount of misselling of financial products which was easily covered in boom times. The sellers were of course motivated by their profit and bonuses. The buyers were very much driven by their own greed and they would never admit that they had not understood the risk they were taking on. No wonder then that consumer protection and product vetting are very much to the forefront of politicians’ concerns and they have been added specifically to the mission of the new European supervisory authorities. This is one aspect of integrity and loyalty to the customer that the new European authorities will be judged upon in about three years’ time when the Commission and the Parliament will look at their efficiency. This also means for us that together with the industry and stakeholders from the consumer side we will have to go very much beyond what we are mainly doing now in responding to complaints and go very much into the area of financial education, consumer information and product control or even banning?

 

Another area on which you have had a presentation recently is money laundering where the financial sector has to act as the long arm of the law enforcement authorities. I remember when we had the first law on money laundering - restricted at the time to drug trafficking - the general complaint from bankers was that this was not a banker’s job. It is now accepted that keeping the financial sector clean by making an effort to make sure that it is not being used and abused by those who wish to do illegal business is important for the health and reputation of the financial sector. Anti-money laundering implies you need to know your customer quite well, and it extends into the areas of bribery, corruption and even tax evasion.

 

Sometimes you wonder if some activities should be considered to be more ethical than others. Investing in development aid, microfinance, environmental protection might be candidates for such a labelling, with production of weapons at the other end of the range. But what about nuclear energy for instance? Drawing lines between what should be encouraged and what might even be forbidden should be left to the legislator rather than to financial professionals.

 

Nevertheless there are many other interesting tracks to follow, to take into account what is ultimately a social responsibility and ethical awareness in financing some things rather than others. I just mention the interest taken in Islamic finance which is based very much on ethical values. I would dare to say they are not different from the values that we also know; for instance through keeping the link between taking the risk and earning an income which is something that has been lost in some other financial operations in the past few years.

 

Has the crisis changed our views on integrity? I would just make two remarks on this. As mentioned, ‘fit and proper’ is very much about being honest. But I would also like to say that the crisis has underlined that other elements of character - beyond just being honest - have also been shown to be very important from the point of view of ethics and integrity; in a crisis you need the necessary character of soundness, the necessary responsible behaviour not to panic when things get tough, not to run away from difficult decisions, to keep a steady hand to get through the crisis. Patience is required because the aftermath of a crisis is a long-time effort.

 

Ethical considerations are not a luxury which we can afford when things are fine but they are even more important in difficult times because they underlie the whole integrity of the financial system.  I do not talk so much about Luxembourg here but globally, the financial sector comes under heavy criticism from those who say that it has become disconnected from the real economy. It is important that the financial sector shows its integrity in being at the service of the whole economy. I believe that this is the noblest collective social responsibility that the financial sector can provide.

 

-oXo-

 

Q and A

 

Q. In the past few years the banking industry has gone through improvements to the regulation of banking, but what about shadow banking?

 

A. The supervisory authorities prefer not to use the term “shadow banking” as it does not reflect the reality of that phenomenon. But that does not detract from the relevance of your question. As banks have more difficulties to provide sufficient credit to the economy, other channels and institutions fulfil that role to a greater extent. This has come very much to the forefront of the authorities’ attention lately. It is being discussed at the G20 level, it is being discussed at the Financial Stability Board and it is being discussed at the level of the European Union. It all goes under the strict principle agreed at the highest level in 2008 that no financial activity should go unregulated or unsupervised. The intention thus is to drag these activities out of the perceived shadows. In Luxembourg, we already had the principle that all financial activities should be licensed and supervised. Now with the transposition of the AIMF Directive we have an opportunity to regulate at least a major part of the non-bank sector better.

 

Q. You mentioned your criteria of ‘fit and proper’. What happens when you come across cultures that find these questions intrusive and aren’t used to these kinds of investigations?

 

A. Yes that happens but if somebody wants to come here he has to play according to our rules. That may sometimes be awkward and need some explaining but that is how it is.

 

Q. This question is addressed to you in your capacity as a board member of ESMA. On the scale of 1-10 how optimistic are you about global regulation given the discrepancy between the European and American views?

 

A. If you asked me about the European level I would put it at above 5. If you ask me about the global level, especially the United States, I would put it at below 5. It is indeed fairly difficult to get agreement, especially on technical details, with the Americans - accounting rules are an example. At the European level it will take some more time for the new authorities to reach cruising speed especially if they are restricted in their resources – thus I am above 5 for Europe but it will take time.

 

Q. You have mentioned the quality of honesty. A lot of what went wrong in the crisis with structured products could be put down to an absence of common sense or traditional banking skills. A lot of people working on these products work in silos and do not seem to have a proper perspective partly as a result of Chinese walls imposed by regulators. Do you see a solution to this?

 

A. You are certainly right about a lack of common sense in many of the reactions to the crisis. It’s called common sense but it’s not that common. We saw plenty of panicky reactions forcing people to sell at a loss. It’s not what you would tell your customers to do, which is to buy low and sell high. This kind of thing goes beyond my understanding. In a complex organisation many people who are doing the actual business will not have a global view and this may result in uncoordinated action. This is a question of corporate governance, of grasping all implications of one’s actions at management level and even at the level of the board.

 

Q What are the requirements for an organisation that wants to establish in Luxembourg?

 

A. The requirements cannot be other than are established in law. For example transparency; the transparency of the whole structure; the funding and the origin of funds has to be transparent; supervision afterwards must not be encumbered by the structure of an organisation. All these elements come from European Directives and are enshrined in our laws. Actually they date back to the BCCI case when we did not have all those laws and therefore authorities were powerless to take action as the structure was not transparent and almost impossible to supervise since no single supervisor had a full view of the group.  These laws were put in place at that time and Luxembourg was at the forefront of this.

 

Q. How does the regulator see the importance of banking secrecy for the Luxembourg financial centre in the light of the Savings Directive and requests for full exchange of information and also in the light of what Switzerland has agreed with the UK and Germany?

 

A. Being on the regulatory side and previously on the Treasury side it is obvious to me that integrity also involves paying one’s taxes. Bank secrecy should not impede the honest payment of taxes. Actually, bank secrecy is a term which is becoming much less used. Now-a-days the accent is much more on the duty of confidentiality which is very much what this topic is all about. We have tried to explain this before but it is sheer impossible. Confidentiality is required because people don’t want their financial affairs to be known too widely, put on the public place. It is no different from having your medical records put in the public place. Besides, the duty of confidentiality is not contested, also not by GAFI and the OECD.  Tax issues as such have become much less relevant. When the withholding tax went up from 20% to 35%, a rate higher than many income tax rates, there was virtually no impact. Many customers have actually opted for exchange of information, an option which exists also here in Luxembourg and is thus widely used. This should facilitate the on-going discussions at the European level on reforms to the Savings Directive because the amounts involved are getting smaller. The agreements between Switzerland and the two member states in question are an interesting element for Luxembourg and also a somewhat awkward element for the Commission as well as for those two member states. One will somehow have to find a way of squaring that circle. Of course there is, and rightly so, the argument that being inside the Union is different from being outside. I don’t know what the outcome will be, but it is an interesting evolution which we are watching very closely; on the other hand as I say the real problem is actually shrinking.

 

Q. What is the biggest reputational risk for the Luxembourg financial sector from the regulator’s point of view?

 

A. You are never completely certain that there cannot be fraud. You can’t regulate it away. If something happens the media quickly pick it up and your reputation suffers. Apart from that ever-present danger, the place would run a serious reputational risk if its regulation and supervision as well as the implementation of all legal and prudential requirements by the financial actors present here were not up to the highest international standards. We cannot afford to get bad marks from the increasingly tough outside scrutiny by our peers and by international institutions.

 

   

 

Charles Hamer's Keynotes Speech

Fostering good governance at an international private bank: a practical experience

 

Talk by Charles Hamer, former CEO of Crédit Agricole, Luxembourg

to The institute for Global Financial Integrity, Luxembourg, 24 May 2011

 

I have been a supporter of TIGFI since its inception and was delighted to accept your invitation to

address you.  

 What can I, as retired Managing Director of an international bank, bring to the members of TIGFI?

I bring my practical experience after 15 years in business in Luxembourg, 10 years of which was with

Crédit Agricole.

 

What are the pre-requisites of good governance in an international private bank?

 

Legislation. This should be clear but not in too much detail, otherwise it induces a

bureaucratic attitude and the following of the letter rather than the spirit of the law.

Deconsolidation vehicles are a result of this approach.

Regulator who should be strict but ready to discuss issues with the regulated and to agree

changes. A rigorous regulator is a good thing. You know you can’t get away with foolishness

and the playing field is level for all participants. But you can also voice your opinion, discuss

issues and get answers.  A good example of this is the attitude of the CSSF > see the recent

press interview with Jean Guill.

 

Shareholder (mother company) 

o enforces strict rules for all entities in the group;

o lays down clear objectives 

o is practical, limiting bureaucratic reporting (avoiding duplication of reports resulting

from a lack of communication at Head Office) 

o is open for dialogue

o in a nutshell, prove their value added.

 

Managing Director – 

o has to be the driver of good governance

o has everyday responsibility

o has to be an example to staff

o has to bring  added value to legislators, regulators, shareholders and customers.

I will revert to this during my presentation.

 

As a Managing Director what are your objectives in terms of governance?

I sometimes said to heads of control and audit that my objective was to be able to sleep soundly at

night and that their objective was to enable me to do this. That may have been something of a joke

but there is much truth in it.

 

The main objectives are:

The good reputation of the bank

o Essential for legislators and regulators

o Essential for shareholders

o Essential for customers

 

Good governance is protection for customers

o Essential for staff self-esteem and recruitment.

Good reputation must be earned. Trust has to be established through transparency.

Be profitable but on a healthy basis.

o Internal and external factors

o Product placement

o Credit

o Cost control

o Avoid internal and external conflicts which waste time

 

Develop sense of responsibility.

Private banking is about long-term relationships, putting the interests of customers

foremost, and not short term.

How does one develop good governance?

Start with the organisation chart

 I have seen many with double, even triple, reporting lines, dotted lines, straight lines etc.

with the organisation chart looking like the plan of a petrol refinery.  In consequence nobody

knows who is responsible for what and subordinates will play on this for their own interest.

An example is a commercial desk in private banking but under the authority of the head of

capital markets.

The problem is trying to make staff happy with a temptation to organise the bank’s

accounting to the satisfaction of individual groups and not in the long-term interests of the

bank. This creates conflicts of interest for these people or their successors. I have seen a

case where internal controller also managed customer relationships.

Organisation charts should be simple and logical and avoid potential conflicts of interest.

 Clearly distinguish levels of control

o Auto-controls by staff themselves

 All staff

 Controls to be controlled

o Internal control

o Internal audit

o External audit.

The bank I was in charge of originally had very strong centralised internal control but no

auto-controls. This de-motivates staff. Now auto-controls defined by internal control

together with them through an electronic reporting tool; this is checked by internal control

who themselves have their internal control programmes.

Internal controls checked by internal audit though inspections on a three year rolling basis.

Respect has to be given to controls by regulator but also to those imposed by external

auditors. This is achieved by an internal control committee headed by the Managing Director

and meeting every two months - “COPIREC” Comité pour le Pilotage des Recommandations.

It is essential to ensure that there is a rigorous follow up of audit points. When I started at

Crédit Agricole, Luxembourg there were 350 outstanding and overdue audit points which

had been reduced to 10 by the time that I left.

 

Training. This is essential for the compliance and control culture in the bank. Trust

commercial staff but only if the governance culture and control functions are in place. There

can be no trust without controls.

Execution departments. These are as important as commercial departments in this respect.

Commercial staff improve the profitability of the bank, but execution departments avoid

losses; they should know it and act accordingly.

 

A general system of checks and balances should be in place. Commercial and control

functions should have respect for each other and should work together on a day-to-day

basis. This is easier said than done.

o Commercial staff criticise support functions

o  Support staff criticise  commercial functions

At Credit Agricole Luxembourg this attitude was only resolved in the crisis of 2008

when everyone realised that they needed the other.

Role of managing Director was to ensure that there was a balanced functioning of

the bank.

Areas of danger

o Credits: Ensure equal weight is given to the opinions of commercial staff and the risk

department though the latter should always have right of veto subject to arbitration

by Managing Director, after hearing both sides.

o Products. It is easy to tell toxic products.

Customers want them

Account managers want them

Even Head Office want them

A product is not good because customers want it: an example was a product

based on 40 structured bonds which proved to be popular with personal banking

customers.

A product is not good because it has been offered by Head Office.

Head Office will give global approval of a product for all group entities but

that does not mean it is suitable for all types of client

The fashion factor should also be considered

In the end responsibility is with the local entity which should establish a local

product committee.

o Country risk. Underestimated for a long time, e.g. peripheral European country debt

clear in crisis of 2008 not in customers’ interest to keep such debt. But annual yield

leads to greed factor.

Difficult situation for Managing Director with a risk of appearing anti-commercial.

Problem of being right too soon. 

General rules:

o Use common sense

o First gut feeling is the right one

o Consider first and foremost the long term interests of the customers

o Only sell what you understand; the customer will understand even less.

Conclusion

Everybody complains about governance costs, impediments to developing customer assets,

profitability and lack of trust shown to commercial staff.

But: 

o You cannot short circuit good governance

o It is in fact a commercial asset, leading to a sound reputation, seriousness and the self-esteem of staff.

Therefore regulatory developments over the last 10 years have generally been positive but the message to regulators is - don’t overdo it.

 
 
ALFI Sustainable and Responsible Investments conference
Luxembourg, 17 February 2011
 
Keynote speech
 
Jacques SANTER
 
 
 
 
We live in a world plenty of contradictions. On the one hand, we never witnessed in the last twenty to fifty years a so strong movement of solidarity at many levels, solidarity between nations, solidarity between young and elderly people, solidarity between generations, solidarity between poor and rich, solidarity - yes solidarity is becoming a common key word in all discussions.
 
 
Today you have outstanding consultant offices from top strategy firms such as Mc Kinsey, the Boston Consulting Group, Monitor, Mercer which are committed to increasing the effectiveness of philanthropy and the non profit sector around the world in order to accelerate social progress through better use of society’s resources. In many reviews and articles f.i. in Harvard Business Review, ways are highlighted how to integrate social issues in the pursuit of corporate competitive strategies, ways in which corporations can create value through these social investments in order to magnify the impact they achieve.
 
 
On the other hand, through the globalization of the world economic our planet is reduced to become a global village, where competition in business is becoming much more harsh than it was in the past. Quarterly review is a common exercise for CEO’s; benchmarks and competitiveness indicators are more relevant than social responsibility or solidarity.
 
In a Journal Article by Daryl Koehn from the Philosophy Department of De Paul University about the “Ethics of Business Moving beyond Legalism” he writes: The economist Milton Friedman argued that business has only one ethical responsibility: Business has a responsibility to employ all available legal means to increase corporate profits owed to stockholders (Friedman 1993).
 
Perhaps the most often quoted view of business ethics comes from a man who is not an ethicist and who has never worked in a business. I refer precisely to the economist Milton Friedman. In his article “The social Responsibility of Business is to increase its profits”, Friedman argued that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without description or fraud” (p. 60). These “rules of the game” are to be understood as that particular society’s laws. In a nutshell, Friedman is arguing that business persons are ethical if and only if the struggle to ever increase their profits and that they are entitled as part of that struggle to do whatever the law permits. As long as person’s profit maximizing actions conform to the law he is, in Friedman’s view, acting morally correctly.
 
The conclusion of Prof. Daryl Koehn is the following: “Although I think Friedman’s position is both naïve and dangerous, 5 years of teaching business ethics to undergraduate and graduate students has convinced me that it is the view held by most students and would be business”.
 
This argument is worth to be discussed.                                                                 
 
In my view values and ethics in our society as well in business have to be considered in a larger and broader context.
 
The first question which has to be tackled is: How can we inspire enterprises to go beyond their minimum legal obligations in favor of society and sustainable development? In other words how can the business commitment to corporate Social Responsibility (CSR) be enhanced? In my view this is the perquisite condition for the development of values and ethics in business. Indeed, CSR matters because it mirrors the core values of the society in which we wish to live. It matters to individual companies, big or small, who through innovative products and services, new skills and stakeholder engagement can improve their economic environmental and social performance in the short and long term. Il matters to those who work in and for companies, for whom it can help to create a more rewarding and working environment. It matters to those who buy from companies, to consumers who are paying more and more attention to the social and environmental credentials of the products and services they buy. It matters to the local communities where companies operate, who want to know that they are living amongst organizations that share their values and concerns. It matters to investors who feel that responsible business behavior needs to be encouraged. It matters to people in other parts of the world who expect for instance European based companies to behave in accordance with European and international values principles. And it matters to our children and future generations who expect to live in a world which respects people and nature.                                                         
 
A strong business commitment to CRS as well as an overall supportive role of public authorities towards CSR has become particularly important over the last 15 years as regard its contribution to the respect for human rights and the rule of law as well as the sustainable functioning of democracy and market economy, be it on a local, national, European or global scale. In order to be a successful economic model, the market economy needs to build on some essential prerequisites: - on the one hand, an effective and coherent legislative and regulatory framework; - on the other hand, self limitation and self control as much as a proactive climate of innovation and entrepreneurship, fairness and trust: all these are necessary elements to combine high levels of economic success, environmental protection, social cohesion and welfare. To this end leading enterprises in Europe are more than ever undergoing a process of searching, learning and innovating as regards their governance, management, stakeholder dialogue and product development, thereby making corporate and product responsibility a natural part of their everyday business practice and competitiveness. Small companies, as a key driver for growth and jobs in Europe, have as much to offer as large companies when it comes to corporate responsibility, even though they often adopt a more informal and intuitive approach to CRS. Against the background of globalization and the associated structural changes, companies are making these shifts in the expectation that the other stakeholders also commit and shoulder their share of the risks and opportunities of responsibility and innovation. Dialogue with stakeholders helps companies to anticipate and deal with social and environmental issues which may affect future competitiveness.
 
                                            ___________________________
 
 
Given that much of the blame for the recent crisis has been put on the financial sector, the crisis has also been perceived as a crisis of ethics for this sector. Socially-responsible investment is therefore increasingly at the heart of investors concerns on the long-term sustainability of their investment.
 
Since the end of the Cold War the market economy has prevailed throughout most of the world. While this has opened up new opportunities for business, it also creates a corresponding need for self-limitation and mobilization on the part of the business community, in the interest of social stability and the well-being of modern democratic societies. Moreover, within the EU, better regulation and the promotion of entrepreneurial culture are now high on the European agenda, as confirmed by the Commission’s 2006 Annual Progress Report on Growth and Jobs. The Commission is committed to promoting the competitiveness of the European of the European economy in the context of the relaunched Lisbon Partnership for Growth and Jobs. In turn it calls on the European business community to publicly demonstrate its commitment to sustainable development, economic growth and more and better jobs, and to step up its commitment to CSR, including cooperation with other stakeholders. More than ever Europe needs active entrepreneurs, positive attitudes towards entrepreneurship, and confidence and trust in business. Europe needs a public climate in which entrepreneurs are appreciated not just for making a good profit but also for making a fair contribution to addressing certain social challenges. The Commission therefore wishes to give greater political visibility to CSR, to acknowledge what European enterprises already do in this field and to encourage them to do more.
 
Indeed there are many achievements in this field.
 
A recent report from the European Sustainable Investment Forum (EUROSIF) estimates that the socially responsible investment sector (SRI) in Europe has a total of Euro 5 trillion assets under management, an increase of 87% in 2 years. That comprises Euro 1 trillion “core” SRI (covering positive screening, or excluding companies from investment portfolios on ethical/values grounds) and Euro 4 trillion “broad” SRI (covering simple screening, engaging with companies in ESG issues, or actively integrating ESG criteria in valuations). Most of the growth in the last two years has come from the broad rather than the core SRI market. According to Eurosif, core SRI now represents about 10% of the asset management industry in Europe.
 
The nature and relative importance of SRI is different in different EU Member States. EUROSIF itself is a network of national socially responsible investment fora, and such fora exist in less than half EU Member States.
 
The rating CSR agency Vigeo’s latest report notes an increase in European SRI mutual funds of 29% between June 2009 and June 2010, and an increase in SRI assets under management of 41% over the same period. SRI volumes have increased in recent years due not least to increased participation by pension funds. SRI is likely to increase further despite – and because of – the crisis, and in response to cases such as the BP Deepwater Horizon oil spill case.
 
In its recent Communication on Industrial Policy, the European Commission stated that “the financial crisis showed a new approach is needed to the balance between short-term profit maximization and sustainable value creation in the longer run”. This could be undertaken through a mixture of transparency and governance initiatives, including innovative solutions, to maintain momentum. There are some questions which are important to be discussed:
 
- Is there a balance to be found between promoting SRI as a separate market, and promoting the integration of sustainability consideration into the mainstream investment market?
 
- Are there good examples of national policies and initiatives that could usefully be taken up at European level?
 
- What areas of EU competence are most directly relevant to the promotion of more responsible investment? Where can European policy bring greatest added value?
 
- What should the key elements of European policy on ESG disclosure be if the aim is to promote more responsible investment?
 
- How can the European market for socially-responsible, green, or sustainable investment be made more effective?
 
- Is it appropriate for the EU to support SRI in Member States where SRI is currently less well developed, and if so how can this best be done?
 
                                       _________________________________
 
 
Referring to the discussions at the conference Protect, Respect, Remedy – a Conference on Corporate Social Responsibility (CSR) in Stockholm on 10-11 November 2009, the Swedish Presidency of the European Union and the incoming Spanish Presidency have concluded: The European Union and its Member States should take a global lead and serve as a good example on CSR when building markets, combating corruption, safe-guarding the environment and ensuring human dignity and human rights in the workplace. The European Union is the largest economy in the world and the largest development cooperation partner. Europe hosts many of the multinational enterprises in the world. We welcome that European employers consider it an important task to promote and take a global lead on CSR.
 
The responsibility is threefold: the State duty to protect – including legislation as well as implementation of human rights obligations, in particular with regard to business; the corporate responsibility to respect human rights; and the responsibility of all parties involved to ensure access to adequate remedies to uphold and develop such human rights.
 
Today’s common challenges, emanating from the rapid evolution of globalization, climate change and the current economic turmoil, require a sustained international response. There is a need for common solutions that can balance economic imperatives with the realization of universal norms embodied in internationally recognized human rights instruments. This can only be achieved through active participation of all stakeholders. We need to continue our important dialogue with non-member states, civil society, trade unions and business, including small and medium-sized enterprises, to realize the Protect, Respect and Remedy framework.
 
 
Corporate social responsibility – even if in my view it is a perquisite for values and ethics in business – cannot avoid corruption and bribery, which are two main curses of business today. They are many recent examples to document this.
 
Corruption is a universal phenomenon found in developed, developing and transitional countries.
 
The original definition of corruption – abuse of public office for private gain – reflects a historical focus on the bribe-taker. This casts the bribe-payer, the company, in a passive role as an unwilling victim of a “corrupt” or difficult environment, with bribes being extracted by “rent-seeking” public officials through solicitation or extortion.
 
In reality there are numerous examples of corruption environments which are far from “difficult”: privatization operations in several countries, construction projects. There is also a considerable volume of research indicating that multinational companies actively pursue bribery as a means to enhance their own economic interests.
 
Bribery however does have victims. Decision making reflects the private interests of the few, rather than the public interest. The effect is to undermine democracy, misallocate resources, impede development and distort international trade. The outcomes range from lower quality products and public services, to higher prices, to environmental damage, to the funding on inappropriate and expensive projects, with basic needs remaining un-met. Citizens, consumers, workers and, most of all, the poor all pay the price.
 
The now accepted definition of corruption – “the misuse of trusted power from private gain” – reflects a fundamental shift in the focus of the anti-corruption agenda, which today seeks to hold MNC’s that pay bribes to account wherever they operate in the world.
 
 
In recent years there has been a host of international legal instruments aimed at combating corruption and international bribery. Most notably they include:
 
- the OECD Anti-bribery Convention (1999): came into effect on the 15th February 1999 and was the first international instrument specifically targeted at curbing the payment of bribes by MNC’s to foreign public officials;
 
- the United Nations Convention against Corruption (2003): came into effect on
 14th December 2005 and is the first global, legally binding anti-corruption instrument.
 
Unlike the OECD Anti-bribery Convention it is broad in scope covering public, private, domestic and international corruption.
 
Efforts have also been focused on either extending codes of conduct or developing new anti corruption codes (at company, sect oral or international level).
 
Beside the OECD Guidelines on multinational Enterprises, backed by governments and used by trade unions and NGO’s and companies, and the United Nations Global
 
Compact launched in 2000, there are many examples of dedicated anti-corruption codes of conduct; they include: Business, Principles for Countering Bribery (2002): a joint initiative of Transparency International (TI) and Social Accountability International (SAI).
 
They apply to the bribery of public officials, as well as private-to-private transactions and aim to provide a practical anti-bribery tool for companies.
 
 
I would mention also the Partnering against Corruption Initiatives established by the World Economic Forum in 2004 and initially focusing on companies from construction,oil and defense. They aim to develop “multi-industry principles and practices that will result in a level playing field, based on integrity, fairness and ethical conduct.”
 
I think it would be boring for you to give an overview of all these instruments, about the possible loopholes, the monitoring procedures etc. I would only stress the role and concerns of trade unions combating corruption.
 
 
Trade unions are committed players in local and international efforts to combat corruption, due to concerns over the:
 
- threat to workers / trade union rights;
 
- impact on the role and integrity of public services
 
- need to protect workers who disclose information in the public interest.
 
Trade unions have a potentially unique role to combating corruption given their dual function as representation of public and private sector workers on the one hand, and (mass) members of civil society on the other. Further more they are globally connected and financially independent of both government and of corporations.
 
Overall, there is a considerable overlap between the anti-corruption agenda and trade union’s core activities as negotiators with companies on behalf of workers, and as campaigners for democracy, social reform and corporate accountability. Trade unions are thus well-placed to undertake a range of activities aimed at raising awareness, deterring and detecting international bribery, both in the workplace and through trade union campaigns.
 
 
                                              ___________________________
 
 
 
Speaking about Ethics in Business, I am quite aware that the “corollaire” is to enhance ethical values in Government and public institution. In this respect it is important that civil servants perform their duties and arrange their private affairs so that public confidence and trust in the integrity, objectivity and impartiality of the government are conserved and enhanced. On the other hand in order to guaranty an objective and neutral judgment , a democratic state needs impartial Justice, qualified jurisdictions which have to enforce the legislation in an independent way and in full connection with the Human Rights Conventions. The European Commission and all the other European Institutions are right, when they impose to the applicant countries to the European Union as formal conditions:
 
a) a strong and impartial administration
 
b) a qualified and neutral organization of the Justice Department.
      
                                                   ____________________________
 
 
I would have some words of conclusion.
 
As I said my address this morning is far from being comprehensive. I made only some remarks which I personally consider important and relevant to the topic Ethics in Business and in relation with Corporate Social Responsibility.
 
In my view successful social dialogue structures and processes have the potential to resolve important economic and social issues, encourage good governance, advance social and industrial peace and stability and boost economic progress.
 
 
In our world of globalization, in our global village, it seems to me that our modern society would be only credible if we have the wisdom, the courage to promote the respect for human dignity, to comply with the Human Rights Conventions, to create the dialogue, share responsibility and build material understanding, accountability and transparency.
 
These are the values which give a moral compass to guide our behavior in business and in public life. I believe that now the time is ripe to take this important work further by developing common frameworks; raising awareness and improving dialogue between all stakeholders.
 

Publications

The Institute for Global Financial Integrity will post publications that it deems of particular interest and significance in the support and promotion of professional excellence, ethics and integrity in the global financial sector.

  • LexisNexis®
LexisNexis® is a leading global provider of content-enabled workflow solutions designed specifically for professionals in the legal, riskmanagement, corporate, government, law enforcement, accounting and academic reas. LexisNexis® provides, through its Solution Centers, solutions on Anti-Money Laundering, Debt Collections, Intelligence Solutions, Revenue Recovery, Fraud Detection and Accounts Receivable Management.
http://www.lexisnexis.com/

  • CFA Institute
The CFA Institute Centre for Market Integrity published so far in 2009 six Financial Market Integrity Index Surveys on the United States, Canada, the United Kingdom, Switzerland, Japan and Hong Kong. On a scale of one (not ethical at all) to five (very ethical), the United States is scored in the 2 range for “slightly ethical” and the other countries typically at or around 3 for “somewhat” ethical.
http://www.cfapubs.org/loi/ccb
  • Transparency International
Transparency International published 2009 updates to its Global Corruption Barometer (GCB), Corruption Perceptions Index (CPI) and Briber Payers Index (BPI). All three documents paint an unsatisfactory picture of the levels of corruption that prevail around the world.
http://www.transparency.org/policy_research/surveys_indices/gcb
http://www.transparency.org/policy_research/surveys_indices/cpi
http://www.transparency.org/policy_research/surveys_indices/bpi
  • Global Witness
Global Witness published in 2009 its study “Undue Diligence: How banks do business with corrupt regimes” that highlights corrupt funds finding their way into the global financial system and the lack of resolve of certain banks to address compliance in dealing with the sources of such funds given the lack or ambiguity of regulation and law.
http://www.globalwitness.org/media_library_detail.php/735/en/undue_diligence_how_banks_do_business_with_corrupt
  • Financial Stability Board (FSB)
The Financial Stability Board, whose Charter was endorsed by the G20 at the September 2009 Pittsburgh meeting, has published in September 2009 three recent reports on “Improving Financial Regulation”, “Overview of Progress in Implementing, the London Summit Recommendations for Strengthening Financial Stability”,  and “FSB Principles for Sound Compensation Practices”. The reports are a forewarning to the regulatory and oversight environment that banking and other financial services worldwide can expect over the coming months and years. They capture the political will expressed by the G20 to firmly address the issues of financial behavior and systemic risk that are the root cause of the current financial and economic crises.
http://www.financialstabilityboard.org/