When companies do the right thing

Some businesses have fronted up over investor losses, others haven't. Rob Stock considers the ethical dimension of those decisions.

"Our customers can be assured that where we have done wrong, we will put it right," said Ralph Norris, the Kiwi chief executive of Commonwealth Bank of Australia.

His public mea culpa 10 days ago followed revelations the bank had lent huge sums to pensioners on low incomes, who had invested it in disastrous schemes promoted by an ambitious financial advisory firm, Storm Financial.

Sound familiar?

On this side of the Ditch, hundreds of pensioners and low-income families face penury as lenders GE and Challenger foreclose on mortgages taken out to invest in schemes promoted by failed property firm Blue Chip.

A spokesman for one of the securitisers of the Blue Chip loans, Challenger, told the Sunday Star-Times that although the Australian firm provided the funding for the loans and sold them on, others were responsible for making them.

It now had no choice but to pursue them.

"Challenger is acutely aware of the difficulties experienced by Blue Chip scheme investors but also notes that it has a very clear moral and legal responsibility to the Kiwi mum and dad investors who lent money to Blue Chip investors in good faith in the first place," he said.

But back to Australia.

According to the Sydney Morning Herald, "Banks never even saw pensioners who were taking out huge loans on their houses. Loan documents were mysteriously witnessed in branches 1023km from the borrowers. And just how does an elderly worker, Frederick Grima, who earned $A500 a week, receive a $A460,000 home loan from the Commonwealth Bank?"

Norris's extraordinary response to the revelations was to immediately suspend repayment obligations of its 2500 customers involved with Storm and pay

for them to get independent legal advice.

"In some cases we have identified shortcomings in how we lent money to our customers involved with Storm Financial. We are not proud of our involvement in some of these issues and we are working toward a fair and equitable outcome for our affected customers," he said.

Commonwealth appears to have acknowledged some blame for its customers' predicaments, unlike lenders involved with Blue Chip in New Zealand.

A spokesman for GE told the Star-Times: "According to media reports, it seems the Storm/CBA issue is around bank lending practices, whereas the Blue Chip situation was caused by the Blue Chip company's management practices."

Still, "With Blue Chip we are attempting to work with all people affected on an individual basis to understand their circumstances and explore possible solutions acceptable to all parties. In some cases it has been hard to achieve this despite having tried for several months. This isn't an easy situation for anyone, but we're acutely aware that in some cases we are dealing with debts linked to the primary place of residence."

Does this mean the bank is more ethical than GE or Challenger? Or is there a more straightforward motivation?

Norris declined to be interviewed on the subject, but it's worth noting the potential influence of an impending government inquiry and class action law suit.

Wellington academic Gerard Prinsen believes public pressure is at least as important as legal obligation in making businesses "do the right thing".

Prinsen has been a key figure in a struggle to get ANZ and ING to make good losses suffered by mainly older people invested in ING's disastrous structured credit funds, which plunged in value by over 80% despite, investors claim, being sold as a low-risk alternative to a term deposit.

Initially, neither the bank nor the fund manager looked like they'd be paying up, but as publicity mounted, led by Prinsen's Frozen Funds group, the offers to investors improved from zero to a loan of 15 cents per unit, to the current offer of about $400 million.

"Each sum was what the shareholders were willing to put on the table and then the book keepers were told to come up with a formula that justifies that outcome," Prinsen said of the ANZ/ING offers.

While the behaviour of ING and ANZ appears driven by a calculation of what is financially acceptable, rather than a sense of ethics, Prinsen does not believe corporations are naturally immoral, instead seeing morally flawed behaviour as a failure of leadership.

He has an insider's insight.

Prinsen was once a manager in a Dutch government-run development corporation in Guinea-Bissau when the outbreak of civil war meant about 70 employees lost everything. They blamed the Dutch government for failing to warn them to get out sooner. The corporation's insurer did not cover acts of war, so there was no legal liability, said Prinsen, and there was insufficient cash in the kitty to pay them anyway. His boss, then a minister in the Dutch government, went to the prime minister for more cash.

"The minister said even if we have no obligation to pay out these people, I am needing them and people like them as my future employees," Prinsen said.

Good leadership perhaps, but the moral actions were justified by future business gains.

The case of Andrew Harding and Murray Scholfield looks different.

History won't judge them to be good businessmen, but even those who lost money when their Nelson-based F&I finance company collapsed believe strongly they are honest men.

In April last year, months after F&I had been closed, the pair, both lifelong Nelson residents, called an investor meeting at which they announced they would sell everything they owned as a first step towards paying investors back. They would also begin a legal campaign to recover millions from a second Nelson-based finance company they believe misled them over business deals.

That has led to a legal battle over around $8 million held by the receivers of that other company, LDC.

"The sales of our assets represented our lives' work," said Harding, "but this is not about us, it is about the investors. We continually grieve for our investors, they are our friends and our family and we have let them down.

"Murray and I have always given that commitment to people, that all of our assets were on the line because of our partnership status. We didn't hide behind a company structure.

"I had my house in a trust. I could have stood behind it and kept it, but I couldn't have lived with myself."

Both he and Scholfield were surprised they hadn't seen others emulate them, Harding said.

Public expressions of regret have been as rare as hen's teeth from the bosses of failed finance companies, let alone selling up assets voluntarily.

"I have always thought most people were pretty straight, but I have learned the hard way that they are not interested in doing the right thing," Harding said.

Some professionals had referred to business and litigation as a game.

What's more, Harding said, early legal advice was to consider going bankrupt and walk away from the problems and go sit on the beach.

Is the vision of business as a game where morality equals what you can get away with, and where limited liability provides not just a limit on legal, but also moral liability, accurate?

Some believe it is.

Joel Bakan, Canadian author of The Corporation, wrote: "The people who run corporations are, for the most part, good, moral people. They're mothers and fathers, lovers and friends, and upstanding citizens in their communities. Many want to make the world a better place and believe their jobs provide them the opportunity to do so. Despite their personal qualities and ambitions, however, their duty as corporate executives is clear: they must always put their corporation's interests first and not act out of concern for anyone or anything else."

A culture is created in which "it's a rational cost/benefit decision for a manager to break the law".

Some believe the morality of corporations is related to factors such as size and local business culture.

Tom Davies, ethics expert at the Institute of Chartered Accountants said: "What happens in Auckland may well raise eyebrows in Wellington, a shake of the head in Christchurch and apoplexy in Dunedin."

And, he said, it was easier for the moral beliefs of managers to shine through in smaller companies where owners and managers had much more relative power.

Others believe society trains business people to behave the way they do.

Auckland University associate professor Ananish Chaudhuri said the power companies found by the Commerce Commission to be taking advantage of their market power were doing "exactly what we teach students in our economics principles courses; charge high prices when demand is high, a policy commensurate with profit maximising, which is at the core of market-based economies".

And some of the most powerful voices companies hear those of their legal advisers would appear to be influential.

Commercial lawyer John Horner, head of the Law Society's commercial and business law committee said lawyers briefed clients on the law, not morality, and that sometimes included advice on "strategically" defending morally and legally untenable cases.

"There might be a $10m claim. If you drag it out and spend $1m in fighting it, maybe it deters people. There is no question there is some gaming of the system."

In his experience, some businessmen insisted on operating morally, while others used whatever device they could to push it to the line for financial gain.

Chaudhuri said he increasingly felt that what were perceived as fair and unfair behaviours by companies were driven by the numbers rather than a moral relation to society.

Davies doesn't agree. "I haven't seen anything to suggest this generation or time is any better or worse than others. Memories tend to fade the harsher reality."

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