Business Ethics!

            Ethics, fairness, trust, and freedom from corruption are all part of the social capital of country, and social capital matters in financial markets because investors consider not only the available information when assessing the trade-off between risk and return but also how much they trust the accuracy of the information and the fairness of markets. The experience of WorldCom, Health-South Corporation, and Enron Corporation teaches investors that even information issued by U.S. companies cannot always be trusted, and their experience with the colluding behavior of NASDAQ's market makers and many reports of insider trading teaches them that they are not always assured of fair markets. Deficiencies in ethics and fairness mark all markets, but such deficiencies are more pronounced in some markets than in others.

Ethics and fairness in the financial markets of a company are reflected, in part, in people's assessments of the fairness of trading practices, such as insider trading. Why is insider trading considered more unfair in some countries than in others? And what can be done to improve levels of ethics and fairness around the globe? These are the questions I address in this article. I present assessments of fairness in financial trading by people in eight countries.

            Culture, religion, and politics explain some differences in levels of corruption among countries. Egalitarian or individualistic religions, such as Protestantism, encourage challenges to power, whereas hierarchical religions, such as Catholicism, Eastern Orthodoxy, and Islam, discourages them. They found that Protestantism is associated with lower levels of corruption. The effect of political structure on corruption is nonlinear. Partial democratization may increase corruption, but established democracies inhibit corruption. Researchers have reported that 40 years of democracy are required for countries to become less corrupt.

Differences between ultimatum game offers in societies of vastly different standing in the global economy, such as those of the United States, the Polynesian Lamalera, and the Amazonian Machiguenga, are large. For example, although the mean offer in the ultimatum game played in Pittsburgh was 46 percent, in line with offers in other developed markets, the mean offer in the game played among the Lamalera was 56 percent; among the Machiguenga, it was only 25 percent. Some of the differences in offers to differences in market integration and differences in payoffs to cooperation. The Machiguenga, Peruvian hunter-gatherers, ranked low on ultimatum offers and also ranked low on payoffs to cooperation. The Machiguenga are almost entirely economically independent at the family level, so their well-being does not depend on cooperation with non-relatives. In contrast, the economy of the whale-hunting Lamalera depends on the cooperation of large groups of non-relatives.

In addition, there is little market integration among the Machiguenga, whose members engage in market exchange only infrequently and whose way of life would change little if markets were to disappear. In contrast, market integration among the Lamalera is substantial. Ensminger (2004) noted that the idea that people in developed market economies are more fair minded than people in societies where markets play a less prominent role seems counterintuitive because markets are often accused of undermining the moral foundations of society. But she found support for the idea in the work of earlier scholars, such as Montesquieu, who wrote in 1749 "wherever there is commerce, manners are gentle. . . .commerce polishes and softens barbaric ways" (vol. 2, no. 8). Current levels of trust reflect past economic structures; current culture affects future economic structures. He related the prevalence of family business in Italy's Tarza region, where levels of trust are low, to its economic history of sharecropping based on long-term contracts between landowners and heads of the families who contracted on behalf of the other family members.

Leaders are change agents. Leaders should be responsible for building ethical organizations where individuals have the knowledge, skill, desire, and opportunity to personally succeed in a way that leads to collective organizational success.