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The Global Fraud Crisis: Its Implications for an Asian Business School

Gasinee Witoonchart: Dean, Thammasat Business School, Thammasat University &  Fredric William Swierczek: Director, DPB & IMBA, Thammasat Business School, Thammasat University


Image: Gasinee Witoonchart"There are some frauds so well conducted that it would be stupidity not to be deceived by them” – Charles Calab Colton, 1780 – 1832.

Business Schools worldwide are rushing to fix the damage created by the Global Financial crisis. Curriculum and courses are being written, post mortems conducted, and MBA oaths or pledges similar to the Hippocratic oath are being sworn by new MBA graduates. These oaths would be better called the Hypocritical oaths, and the financial crisis better called the Global Fraud crisis.

From the viewpoint of Asia, specifically Bangkok which was the ground zero for the Asian Financial crisis of 1997, the worldwide reaction to the Global financial crisis as if it were a unique or unexpected event demonstrates a naiveté or near sightedness which tends to be the perspective of the global finance professionals. Throughout recent history bubble crises have developed continuously and consistently on a cyclical basis. The causes tend to be clear with analysis in hindsight and the solutions predictable in the form of international financial institution or national government bailouts or both. A striking element of this worldwide financial contagion is fraud. Fraud is defined as tricky, deception or deceit. It is synonymous with duplicity, scams, and swindle. This fraud is not just the Madoff type of explicit fraud, but the implicit and delusional fraud represented by the false value of financial instruments, the false assumptions underlying the models used to predict financial value and, performance and false rating of the instruments which confirmed a value to the investor which in fact had no basis in reality and were negative rather than positive. Fraud is the determining character of the Global Financial crisis.

Failure to understand the extensive and intensive consequences of this multi-dimensional fraud is like trying to treat Swine Flu with aspirin – the consequences will be worst in the future because Business Schools, particularly in Asia, will not have learned the important lessons based on the root symptoms. A case study, no matter how insightful, or an oath, no matter how committed the MBA who takes it is, will not solve the problems.  Solutions without this understanding will be no more effective than the Post-Enron initiatives like Sarbanes Oxley or the risk management provisions of Basel II.

Business schools do not need to do a great deal more to help prevent future Enrons; they need to stop doing a lot of what they currently do. (Ghoshal: 2005:75).

Academic research related to conduct in business and management has had some very significant and negative influences on the practice of management. These influences have been less at the adoption level of a particular theory and more at the incorporation within the world-view of managers of a set of ideas and assumptions that have come to dominate much of management research. More specifically, by propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility (Ghoshal, 2005: 76).

The Mandala of the Global Fraud Crisis

The Mandala is presented in Figure 1. A Mandala is a Buddhist symbolic description of an integrated view of reality. It shows two types of tensions or contradictions. The first tension is contextual and related to government policy and regulation of the financial sector and the open market impetus or dynamism. The second tension is between the stakeholders including investors, employees, customers, retirees, the community and the environment in terms of global climate change and carbon emissions and the executives and financial professionals in corporations who are charged with maximizing shareholder value.

Figure 1: The Mandala of the Global "Fraud" Crisis

Figure 1: The Mandala of the Global “Fraud” Crisis

Beginning with the executive and financial professionals: how was it possible to destroy billions of dollars in value? It begins with the reliance on mortgage-based instruments in which financial feasibility was based on consumer debt at a period of time when consumer debt was at its highest in history.

These instruments were bundled, rated and used for capital requirements. They were included in sophisticated financial models to predict future value and minimize risk. Underlying all of this is the fraud that consumers could pay the obligation which they could not. Any basic analysis of their financial viability would have shown this.

The next level of fraud relates to the guarantee that regulatory requirements like Sarbanes Oxley would prevent the abuse of financial responsibility characteristic of the Enron Syndrome. If the regulatory approach was effective, the financial crisis should have been prevented or minimized. Oversight should have minimized risk. The fact that it didn’t shows that institutional approaches will always be subject to human initiative and ingenuity. Enforcement will always be limited.

Related to the fraud of asset backed securities, and an institutional and regulatory emphasis, is the fraud of the efficient market hypothesis. This fraud assumes that the market is self-regulating and will correct itself. The appropriate approach is to leave it alone.

The past ten years have dealt a series of blows to Efficient Market theory, the idea that asset prices accurately reflect all available information. In the late 1990s dotcom companies with no profits and barely any earnings were valued in billions of dollars. In 2006 investors massively underestimated the risks in bundling together portfolios of American subprime mortgages (The Economist, 2009). Belief in Efficient Market theory made the authorities reluctant to restrain either the dotcom or the housing and credit bubbles (The Economist, 2009). An open market stimulates financial innovation and increases the value of the market for all investors. If the efficient market hypothesis operated, bubble situations would not develop.  The market does correct itself but in dramatic financial collapses in a continuing cycle. Faith in the efficient market is indicative of the naive bias of financial management professionals. They should and do know better but they don't act because of the herd mentality.

Finally the basic fraud, the core of all other fraud, is agency theory, in which professionals will work in the best interests of shareholders and, by extension, other stakeholders. Casting shareholders in the role of "principals" who are equivalent to owners or proprietors, and managers as "agents" who are self-centred and are only interested in using company resources to their own advantage is justified simply because, with this assumption, the elegant mathematics of principle agent models can be applied to enormously complex economic, social and moral issues (Ghoshal, 2005: 80).

Agency theory contributes to fraud because financial decisions are based on rewards which in the best case reflect an understanding of the risk involved, and in the worst case reward financial professionals who destroy more value than the institution which they represent actually has. This does not include the overall impact on the real economy: employees who lose their jobs, retirees who lose savings, the disadvantaged who lose programs funded by foundations, or the poor who rely on corporate donations or charity.

Agency theory is based on the assumption of the value-maximizing individual. This individual is unreflective and unconcerned about the wider consequences of their decisions or actions. This assumption supports the fraud multiplier, and it has to be challenged and corrected.

The right way: buddhist principles in business

"Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it and live up to it."

Asian values were discredited after the financial crisis of 1997 as they were not real values based on a system of thought originating in Asia. They were values of convenience more consistent with crony capitalism than with doing right.

Potential correctives originating in the West like Corporate Governance, Social Responsibility, Behavioral Economics or MBA oaths tend to be superficial guides to behavior, but do not change the underlying values of the executive or professional. Following such prescriptions does not require self-reflection but only to follow rules or guidelines without thinking.

In Asia these prescriptions are borrowed and literally alien. Corporations follow SARBOX, Corporate Governance or Social Responsibility because it is a requirement from abroad. They look good on paper, but Asian executives don’t necessarily believe these precepts.
The alternative is to emphasize values that are consistent with Asian belief systems. In East Asia, Confucian Principles or Taoist Principles are ethical standards which could have significant meaning, but have been submerged by contemporary ideologies.

In Thailand, Buddhism is a contemporary belief system which tends to be ignored in business practice because executives, managers and financial and marketing professionals are typically educated according to Western, usually American, principles. These principles are based on a different context; a set of values which tend to be opposite from Asia (and Thailand specifically), and behaviors which tend to be uncritically accepted as best practice.

This imitation has its benefits but it has more limitations. An emphasis on Buddhist understanding would be an important change, and a more appropriate set of values to guide business practice in Thailand.

The first dimension of Buddhist principles is self reflection and critique. To be a better person, the business executive must understand what they do that is right and wrong. They must focus on doing more right.

In doing right, the second dimension is creating merit on a continuous basis. This means expanding what is right as a person, in business, in society, and in maintaining the natural environment.

The Middle Way is the third dimension of Buddhism which should be emphasized. It represents balance and sustainability rather than excess.

A final dimension is the understanding of cycles, and has a long-term emphasis. This avoids the short-term unreflective actions of short-term selfish executives and professionals.

Buddhist principles are compatible with Western concepts such as Corporate Governance and Social Responsibility and the Triple Bottom Line but the core values are different. The critical difference is self-reflection and critique in a particular socio-cultural context.

Conclusion

Implementing Buddhist principles in Business schools in Thailand requires more than just adding a course or an emphasis to a curriculum. These values need to be embedded in the content, delivery, practice and commitment of every course and for every faculty and student to understand and apply. This is relevant to the Principles of Responsible Management Education of which Thammasat Business School is a member. Another issue is whether Buddhist values are transferable to other contexts. They do not have to be. What is important is that the practices are suitable.

According to the Dali Lama, the main emphasis of Buddhism is to identify the Right View, the best understanding of how to behave, and to take the Right Actions consistent with that understanding (Dalai Lama & Vanden Muyzenbery, 2008: 18). This understanding relates to:

Self-reflection and critique, doing good / making merit, a balanced and sustainable approach, and a long term view are compatible with other business cultures. The starting point is the recognition and critique of values reflecting a specific business culture, and a practice consistently based on what is right not what is wrong.

References