Ethics and Finance in the Financial Services Industry

Ethics and Finance 1
Ethics and financial services
by Name
Class &Course
Professor
University
City & State
Date

Ethics and Finance 2
Executive Summary
The report aims to provide an overview about business culture that globally places a lot of
emphasis on personal rewards with the idea that motivated employees are more likely to
positively to transform an organisation. This study examines how and why companies in the
financial sector use the culture of greed to offer disincentives remuneration to the employees
while ignoring the plight of their customers. It illustrates that under the ASX Corporate
governance and recommendations, Banking Royal Commission requires banks to act with
fairness, accountability, transparency, and responsibility. The report also provides an
overview that system quality, transparency, fairness will improve the rate of employee
retention as well as gaining back the trust and confidence of customers.

Ethics and Finance 3
Question One
Business culture globally places a lot of emphasis on personal rewards with the idea that
motivated employees are more likely to positively to transform an organisation. In the 1980s,
financial greed was considered to be a good thing. However, in the 1990s Australian
companies have become bankrupt and traumatised from using inappropriate remuneration
methods to motivate their employees (Hendry, 2013, p. 113). Most companies implement
unethical and inappropriate financial policies which increase their earnings, improve
employees' remuneration at the expense of the customers. Organisations should apply
remuneration systems that treat the involved shareholders fairly. For instance, while ensuring
that all the employees are remunerated fairly, organisations should also ensure that the rights
of customers have been protected (Federwisch, 2015, p. 23).
According to the interim report released by the Royal Commission on the Misconduct in the
Australian Banking, Superannuation and Financial Services Industry, organisations have
developed a culture of greed as a result of remuneration misincentives. This study examines
how and why companies in the financial sector use the culture of greed to offer misincentives
remuneration to the employees while ignoring the plight of their customers. Specifically, the
study focus on the application of agency theory to miscentively remunerates employees while
pointing out specific cases in the industry (Fleckenstein, 2012, p. 26).
Agency theory
The agency theory states that managers have a responsibility to manage companies on behalf
of shareholders (investors). Although managers are expected to be investors' watchdogs in the
management of companies, they cannot be expected that they would be as vigilant as owners
would have been. As the stewards of the shareholders, managers sometimes consider
investment options that would benefit them. Profusion and negligence always prevail in the

Ethics and Finance 4
management of a financial organisation which gives rise to agency cost (Gentilin, 2016, p.
98).
Employees are offered compensation packages for running an organisation on behalf of the
investors. When employees are likely to minimise their efforts towards maximising owners'
wealth when the compensation packages are not satisfactory. Employers are always provided
with two option of maximising their wealth. First, they can engage directly in running the
organisation thereby incurring observation cost (Boylan, 2013, p. 128). And second, they can
increase the incentives offered to the employees as a form of motivation to increase their
vigilance in running a company. However, increasing the employees' incentive compensation
does not provide an amicable solution to agency cost. In some cases, imperfect incentives are
caused by outside factors which are beyond the employees' control (Boatright, 2013, p. 149).
Agency problems lead to divergent objectives which cause moral hazard. In the financial
industry, the objectives of the shareholders tend to differ with those of the payoff agents ate
loan introducers. Considering that banks and insurance companies operate in a highly volatile
environment, managers are likely to engage external agents in an attempt to increase
profitability, competition, and firm values. External agents such as loan introducers are more
interested in increasing their wealth without considering the moral and ethical impact of their
actions (Orlitzky & Monga, 2017, p. 123). On the other hand, the employees are likely to
engage in unethical operations to increase their incentives. In such a situation, the employees
believe that ‘greed is good' because such opportunities allow them to make more income
compared to the incentive offered by the employers. Some of the elements associated with
agency cost are agents bonding expenditure, residual loss, and additional expenditure. In
summary remuneration, misincentives encourage agents (employees) to engage in activities
that maximise their welfare and not that of the principal (shareholders) while oppressing the
customers as well (Soker, 2013, p. 213).