The recent global slump is seen by many as a business cycle inherent in capitalism and market economy. Contrary to these beliefs, it was actually man-made as the leadership wholly responsible for it lacked professional ethics.

Take the financial sector in the USA. Lending institutions lent to sub-prime borrowers, securitized bunching good and bad loans together and issued it with good ratings aided by rating agencies. This was done for raising funds for deployment to meet demands in a buoyant market irrespective of credibility and shifting risk. Similarly, in foreign exchange and interest rate management, business was sought to be increased by foreign currency floating rate loans and selling complex derivative products where basically a position is taken on the future movement of rates.

In a volatile market this often goes wrong. Almost all leading players in pursuit of increasing business resorted to such practices. In selling these products, the risk involved and chances of crystallization were mostly not explained to the buyers. While buyers inevitably take a hit if the position taken proves wrong, the sellers may sometimes offset loss or even net gain in their portfolio of deals with different positions, some of which may succeed. It is known that risk can be shifted but will crystallize at some stage. In an integrated set-up, it becomes systemic risk. With drastic fall in prices of property, the value of collaterals and mortgages fell below outstanding loan amount, leading to default as a better option, impacting housing banks, mortgage banks, and insurance companies. Further, lenders started trading in assets not backed by capital, worshipping at the altar of leverage. Despite that, the regulators did not intervene. They instead allowed banks relaxation in accounting standard by allowing not marking to market of financial assets. This happened due to the lack of professional ethics at the highest level.

What about ponzi deals, mostly by investment managers like Bernie Madoff  and Angello Mozillo, the mortgage market leader? They were also professionals of repute. Wrongdoing by auditors’ firms needs no mention. They are plagued by the same problem: professional misconduct.

In the corporate sector, Motorola was not doing well and there was allegation by the sacked CFO that unsubstantiated and misleading financial forecasts were put up to the audit committee. Take GM, Chrysler and Ford. They produce overpriced gas-guzzling cars in declining market. The first one had gone to Chapter 11 despite govt support illustrating wrong decisions by professionals both in the company and govt.

In America, corporate gearing and default rates are the highest since the second world war. This is because of the tendency to show higher earnings per share in turn increasing market capitalization. This also determines pay package of the professionals. Further, demanding owners sometimes force chasing higher performance target at the cost of professionalism.

Now, let us look at Indian finance sector. Fortunately, here liberalisation was not extended to unbridled use of complex derivatives. Nevertheless, there are some cases of misuse. Tirupur Exporters Association had moved RBI and perhaps court alleging mis-selling. Satyam has exposed the involvement of senior professionals in accounts, audit and software. Cipla, DRL, Ranbaxy and Johnson & Johnson are accused of overcharging consumers by about Rs 2,038 crore on price-controlled medicines.

What about the tax and legal experts and professionals in bureaucracy. It is they who facilitate round tripping and treaty shopping. Bofors and Hasan Ali scandal, and illicit fund flow (India is 5th in a list of 160 countries). A World Bank survey done five years ago established that urban poor paying bribe is 33% in Bangalore, 26% in Chennai, 20% in Ahmedabad and 12% in Kolkata. Wipro and Videocon were accused of unduly favouring WB officials. Investigation from London was initiated against seven senior officials of Stanchart, India for alleged bribery. Even the UGC chairman, AICTE chairman and Medical Council chairman have been held on corruption charges. Bureaucratic efficiency is the worst in India among 12 Asian nations.

India has immense entrepreneurship. Indians form a major part of immigrants responsible for 52% of Silicon Valley start-ups. All this will be worthwhile if we rediscover our professional ethics. There is thus an imperative need to follow value-oriented and professional ethics in the governance of business and financial institutions.