Comparative Business Ethics and Social Responsibility Assignment

This essay examines the ethical dimensions of financial planning, focusing on the absence of professional standards and its consequences, using the collapse of Storm Financial as a case study. It summarizes an article discussing the ethical issues arising from the lack of financial regulation and unethical leadership. The essay identifies key ethical concerns such as unethical leadership and failures in corporate governance. It analyzes whether ethical decisions were made, highlighting the directors' breach of fiduciary duties. The discussion includes the process of ethical decision-making, referencing deontological ethics and the importance of adhering to ethical guidelines. The essay concludes by emphasizing the need for ethical practices in the financial advisory sector and the importance of regulatory compliance to prevent future ethical failures, referencing legal cases such as ASIC v Cassimatis and others.

5/21/2018
Essay | (Student Details: )
Comparative Business Ethics and Social Responsibility

May 21,
2018 Comparative Business Ethics and Social Responsibility
Contents
Introduction.....................................................................................................................................3
Summarizing the article...................................................................................................................3
Key ethical issue(s)/concern(s)........................................................................................................4
Has an ethical decision been made?...............................................................................................5
Process of ethical decision making..................................................................................................6
Conclusion........................................................................................................................................7
References.......................................................................................................................................9
Appendix: Published Article...........................................................................................................11
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Introduction
Andrew Robertson wrote a business article on the concept of financial planning and was
predominantly related to the absence of financial professional standards. This article was
published online on ABC News on April 16th, 2018. This article was written in the backdrop of
collapse of Storm Financial, which resulted in a lot of people losing their hard earned money.
The article also highlighted on the lack of financial planning being deemed as a profession like
the other professions like law, engineering, medicine and accounting. As a result of the
professional standards being absent, such a huge blunder was created; even though later on,
the directors of Storm Financial had to face consequences of their actions, as ASIC had initiated
a case of breach of director duties against the duo running the company. This discussion is not
focused on the legal aspects, but on the ethical aspects of this incidence, particularly in light of
the concept of business ethics. The discussion would cover a brief of this article, the key ethical
issues, the lack of proper ethical decision being made, and the requisite process of making
ethical decision making, in light of the article posted by Robertson (2018).
Summarizing the article
Robertson (2018) submitted the news article online which was focused on financial planning
and drew evidence on the blunders being caused due to absence of financial professional
standards. The reason for banking royal commission being present in the nation was attributed
to the long list of financial planning scandals, which has proven costly for a number of people.
The collapse of Storm Financial resulted in certain attempts being brought forth for brining in
the much needed reform in financial planning. The article also highlighted that this industry has
seen certain reforms, but these have not been much successful. In the collapse of Storm
Financial, the directors of the company had given wrong financial advice to the investors, who
were cash strapped and vulnerable. This led to ASIC (Australian Securities and Investment
Commission) making a case against the director duo and the two directors were disbarred from
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managing the affairs of any company for a long period of seven years. The reason for such strict
approach being adopted by the court stemmed from the destitution of 3,000 as then clients of
the company had no scope of getting their invested money back (Hamilton-Smith, 2018).
Not only a problem was highlighted by Robertson (2018), but the key cause to this problem was
given as well. The absence of professional standards, properly defined education standards,
code of professional conduct and commitment towards fiduciary duty to the consumers were
deemed as the key attributes for this problem. Due to such blunders, individuals lost faith in
financial sector and also formed a negative imaged towards the government for not being able
to protect them. If the figures highlighted by ASIC were looked at, these highlight that 79% of
financial advice given in the nation breached the sections of Corporations Act, 2001 (Cth). This
is not the present case but the history of this sector is also the same. In case of Storm Financial,
the client of company lost about $3 billion. Such instance took place despite clear evidence
being present. This led to reforms like bans on commissions on superannuation products and
introduction of best interest duty (Robertson, 2018).
Key ethical issue(s)/concern(s)
Leadership in its literal sense refers to a group of people being led by a person. In case of
companies, the directors of the company are the ones who lead the company towards success.
This is also true in reverse situation, where the directors or the key officers of the company
have the capacity of taking the company towards its end (Ferrell, Fraedrich and Ferrell, 2016).
In case of Storm Financial, the leadership of the company was focused on personal interests,
instead of being focused on working towards the stakeholders of the company, particularly the
investors who had invested their life savings in the company, and were majorly retired people.
In their role as financial advisors, they worked in favour of themselves, instead of the clients to
whom the advice was being given (Robertson, 2018). This raises the issue of unethical
leadership in context of the discussed article. Apart from Storm Financial, this theme is also true
in other financial scandals taking place in the nation. So, the overcharging or the wrong
charging of interest money from clients by banks like AMP and Commonwealth Bank shed light
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on unethical leaderships, which shift their focus from stakeholder interest to personal interests
(Janda, 2018).
Corporate governance usually refers to the processes and procedures through which the
companies are directed and are controlled. This concept is majorly focused on the role of top
management. The majority of standards related to corporate governance relate to
independence of directors and key officers of companies, along with their focus on best interest
of the company, instead of being focused on the personal best interest (Ferrell, Fraedrich and
Ferrell, 2016). The board of any company is balanced through this concept. In case of Storm
Financial and the other financial institutions referred in the article of Robertson (2018), the
theme or the essence of corporate governance is completely ignored. Putting the focus on
Storm Financial, the directors of the company gave out wrong advice to the people resulting in
their money being lost. As a result of breach of provisions of financial services, market integrity
and corporate governance, ASIC initiated a case against the directors of the company (James,
2016).
Has an ethical decision been made?
In context of what happened in Storm Financial, it is clear that the actions were entirely
unethical. The directors of the company were in a position to know the truth behind the type of
advice they were giving to their clients. Despite this, they failed in taking the proper care, which
was required on their part. They cited a business judgment rule given under Section 180(2) of
the Corporations Act, 2001 in their defence (Smith and Gold, 2018). Yet, the duo was held liable
by the court as being in breach of their fiduciary duties owed under this Corporations Act, 2001
(Tills and Wills, 2016). The theme here is that not only did their decisions prove unfruitful for
the clients, but their decision also proved disastrous for them. This is one of the reasons for
putting so much emphasis over working in an ethical manner. This is the reason why the
business ethics are given a lot of attention.
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Robertson (2018) further went on to highlight the line of unethical decisions taking place in
financial planning industry, which dates back to nearly ten years. This has led to the
government putting emphasis on brining improvements in the working of this industry. The
article also sheds light on the financial planners refusing to remove the conflicted payments
regarding commissions and asset based fees. The past has proved how these things have been
used unethically, as the financial advisors are paid for advice which they give and also for the
money invested by the customers. This includes what can be sold to the customers by such
financial advisors. The path to ethical approach has seen resistance from the financial planning
industry. The evidence for this can be drawn from the recommendations drawn by Association
of Financial Advisers in not banning insurance commissions and asset based fees. This shows
that even the bodies of this industry are taking unethical path. The famous example of such
resistance delaying ethical approach being adopted is Ripoll inquiry. Even after 9 years of this
inquiry, there is a lack of code of conduct being finalized (Robertson, 2018).
There have been a number of cases in Australia, where unethical approach has been adopted
by the directors of companies, and these have resulted in ASIC brining claims against the
leadership of the company, and them being made liable by the court. Apart from the case ofAustralian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023,
these instances include
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171,
ASIC v Vines [2005]
NSWSC 738,
Australian Securities and Investments Commission v Vizard [2005] FCA 1037, andASIC v Edwards [2006] NSWSC 376; (2006) 57 ACSR 209. All these cases involved the top
management or the leadership of the company being focused on personal interest over the
interests of the stakeholders of the company (Du Plessis, Hargovan and Harris, 2018).
Process of ethical decision making
There are seven ethical philosophies which prove to be of assistance in the process of ethical
decisions making. One of these seven ethical philosophies is deontology, as had been given by
Immanuel Kant (Ferrell, Fraedrich and Ferrell, 2016). Deontological ethics basically refer to an
action being ethical where the course adopted to fulfill that action is ethical. It judges or
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examines the morality of actions based on certain rules (Hooker, 2012). This form of ethics is
often referred to as a duty based approach as a person is bound by the rules, as the duty being
such rule. Kant’s view of deontological ethics is based on acting in a morally right manner which
has to be entirely duty based (Kant, 2017). So, the results of the actions are not make them
wrong or right; the motives of the individual while carrying out the actions are what determine
the act being ethical or unethical. This philosophy of Kant is based on treating everything in a
universal manner, so that the person treats another in the same manner as they want to be
treated themselves (Bowie, 2017).
In context of this approach given by Kant, the ethical decision making which the directors of
Storm Financial should have adopted relates to giving proper advice to the clients. This advice
had to be based on properly calculations and had to be backed up by proper caution. By giving
careless financial advice to vulnerable strata of people, the director duo of Storm Financial did
not fulfill their fiduciary duty, as was established in the court. The deontological ethics given by
Kant focus on need for fulfilling duty based on rules. Here, the rules were completely ignored by
the directors. And this is commonly done in the financial advisory industry, which has resulted
in various reforms being brought to it. However, due to lack of duty based approach being
adopted by the financial industry, despite the Royal Commission being present, people have
lost faith. It is the result of such unethical approaches being adopted by financial advisers,
which make the actions undertaken by the individuals in this industry as unethical. There is
thus, a need of adhering to the rules drawn by the regulatory bodies, and to abide by them
properly. There is a need for the financial advisory industry to make it their duty to follow these
norms/ rules. This includes even the advice given by the royal commission, and the different
provisions of the Corporations Act, 2001.
Conclusion
To bring this discussion to its conclusion, it can be stated that the acts being undertaken in the
financial advisory sector at present are highly unethical. The latest example of this includes the
blunder which took place at Storm Financial. Such instances not only prove disastrous for the
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stakeholders, but also prove to be the same for the people involved in such ethical and legal
wrongdoings. This discussion was focused on the wrongdoing aspect highlighted in the quoted
article regarding the directors of Storm Financial. The analysis of this case began from ethical
perspectives and ended with laying down the manner in which ethical decisions making could
have been adopted. This was not only done for Storm Financial, but for the financial advisory
industry of the nation in general. In doing so, the assistance of ethical perspective of
deontological ethics given by Kant was taken. The previous parts also highlighted the faulty
leadership and the lack of theme of corporate governance being adopted in the financial
advisory industry. This situation is present despite the number of reforms taking place in the
nation. Thus, it is crucial for the individuals in this industry to follow the rules and abide by it as
their duty, to avoid any legal or ethical ramifications.
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References
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171
ASIC v Edwards [2006] NSWSC 376; (2006) 57 ACSR 209
ASIC v Vines [2005] NSWSC 738
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023
Australian Securities and Investments Commission v Vizard [2005] FCA 1037
Bowie, N. E. (2017)
Business ethics: A Kantian perspective. Cambridge: Cambridge University
Press.
Corporations Act, 2001 (Cth)
Du Plessis, J. J., Hargovan, A., and Harris, J. (2018)
Principles of contemporary corporate
governance. Victoria: Cambridge University Press.
Hamilton-Smith, L. (2018)
Storm Financial clients slam $140k fine after 3,000 investors left
destitute. [online] Available from: http://www.abc.net.au/news/2018-03-22/storm-financial-
founders-fined-140k-over-800m-company-collapse/9576418 [Accessed 21/05/18]
Hooker, B. (ed.) (2012) Developing deontology: new essays in ethical theory (Vol. 14). West
Sussex: John Wiley & Sons.
James, C. (2016)
Avoiding the Storm: the kind of breaches of director’s duties that ASIC eyes.
[online] Available from: https://www.lewisholdway.com.au/avoiding-storm-kind-breaches-
directors-duties-asic-eyes/ [Accessed 21/05/18]
Janda, M. (2018)
Banking royal commission: AMP says it misled ASIC over fee-for-no-service
financial advice. [online] Available from: http://www.abc.net.au/news/2018-04-16/banking-
royal-commission-financial-planners/9662166 [Accessed 21/05/18]
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Kant, I. (2017)
The metaphysical elements of ethics. Russia: LitRes.
Robertson, A. (2018)
Financial planning 'doesn't have professional standards', resisting reform.
[online] Available from: http://www.abc.net.au/news/2018-04-16/financial-planning-lacks-
professional-standards/9664134 [Accessed 21/05/18]
Smith, D. G., and Gold, A. S. (2018)
Research Handbook on Fiduciary Law. Northampton:
Edward Elgar Publishing.
Tills, M., and Wills, C. (2016) Corporate law: Directors found guilty of breaching duties following
corporation's breaches.
Governance Directions, 68(10), p. 624.
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Appendix: Published Article
ANALYSIS
Financial planning 'doesn't
have professional standards',
resisting reform
By business reporter Andrew Robertson
Updated 17 Apr 2018, 8:04am
PHOTO: Former Labor MP Bernie Ripoll wants financial planning to be a reputable profession, but says it's not there
yet. (AAP)
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RELATED STORY: AMP admits it misled ASIC over financial advice fee-for-no-service
RELATED STORY: Best interest test failures show banks still putting profit before customers
RELATED STORY: Financial planner accountants have one last chance to redeem reputation
Probably the biggest reason the banking royal commission
exists is because of the litany of financial planning scandals
which have cost many thousands of people their life savings.
To the industry's enormous discredit, Royal Commissioner Ken
Hayne, has a lot of material to work with.
Watching closely from the sidelines is Bernie Ripoll, the man whose
inquiry into the collapse of Storm Financial set the ball rolling to try to
make financial planning a profession that could stand beside other
professions like law, accounting, medicine and engineering.
Despite nearly 10 years of reform, Mr Ripoll believes it's not there yet.
"Financial planning doesn't have professional standards, a code of
conduct, defined educational standards and the commitment to a
fiduciary type duty to customers that real professions have," lamented
the former Labor MP.
"When it comes to financial services, people don't trust the system or
the sector, or for that matter, really, government to be able to protect
them fully and properly."
Problems highlighted by a recent ASIC survey which found 79 per
cent of financial advice still breached the Corporations Act.
"A large number of financial advisers are still tied within the major
institutions and maybe the question is, are the systems they are
working in supporting them giving advice that is in their clients' best
interests?" questioned Claire Mackay, the principal of independent
advice firm Quantum Financial.
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Who do financial planners work for?
Ten years ago, financial planning was an industry out of control.
It was riddled with conflicts. It was hard to know whether the planner
was working for the customer, or him or herself.
How bad are our banks?
The calls for a full banking inquiry have been relentless for years, from a broad section of the community. So just how
bad are the banks?
For example, clients of Storm Financial lost around $3 billion, while,
among other things, the big banks and AMP are accused of charging
hundreds of thousands of people for advice they didn't receive.
"We've got evidence of that failure, not just through the GFC, but in
the collapses we've seen, whether it be Storm Financial, Opes
Prime or a long, long laundry list of many others," argued Mr Ripoll.
In 2009 Mr Ripoll led a parliamentary inquiry which took the first steps
towards trying to fix a mess which cost many thousands of people
their life savings.
What emerged was the Future of Financial Advice (FOFA) reforms
which banned commissions on superannuation products and
introduced the "best interests duty" — trying to force financial advisers
to put their clients' interests ahead of their own.
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"There was a lot of push back … whether it was best interests,
conflicted remuneration and a whole range of other elements that
really was about changing culture," Mr Ripoll reflected.
The pushback included the Abbott Government trying unsuccessfully
to gut the FOFA reforms, but as the scandals kept coming, including
horror stories from Commonwealth Bank financial planning and
others, FOFA survived.
An issue at the heart of the industry's problems is education, or the
lack of it.
"The base levels for the current education is a lot lower than virtually
any other industry that's out there, for example hairdressing," said
Associate Professor, Adrian Raftery, from the Deakin Business
School.
"You can be a car salesman one week and effectively do a 34-hour
course and be a financial adviser the next week."
Refusal to abandon conflicts
A new government body called the Financial Advisor Standards and
Ethics Authority (FASEA) has been created to fix that — a degree will
be the minimum standard — from 2024.
The Australian Financial Complaints Authority is also being created to
streamline disputes handling — it will start work in November.
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CPA advice tackles conflicts
CPA launches a conflict-free, fee-for-service financial planning arm, but it could have supported this standard
universally.
And the terms "financial planner" and "financial adviser" have been
enshrined in legislation.
"Clients are also far more savvy than they were 10 years ago and they
are putting a lot of pressure on us to improve, and that's a great thing,"
Ms Mackay said.
But probably the biggest issue, though, is that most financial planners
refuse to abandon conflicted payments, such as so-called "asset-
based fees" and commissions.
That means they're not being paid just for their advice, but for how
much money you've invested, or what they can sell you.
In submissions to a review of how accountant financial planners are
paid, it's plain the industry is not in favour of change.
For example, the Association of Financial Advisers strongly
recommends against any ban on life insurance commissions or asset-
based fees.
"I guess it's a bit concerning that they are against a fee for service," Mr
Raftery said.
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"Commissions have been the bane of the whole industry and the lack
of trust mums and dads have towards financial advisers."
Nine years after the Ripoll inquiry the financial planning industry still
hasn't finalised a code of conduct, professional standards and the
fiduciary duty we see in the legal world and so, in Bernie Ripoll's eyes,
it's not yet entitled to be called a profession.
On the other side of the coin, there's an increasing number of
genuinely independent, fee-for-service financial planners who are
showing the industry there is a better way.
Topics: business-economics-and-finance, banking, royal-commissions, law-crime-and-justice, a
ustralia
First posted 16 Apr 2018, 2:24pm
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