In this
article we will look at the Corporate Social Responsibility and Ethics of
Northern Rock. Northern Rock was a bank based in the United Kingdom that fell
into a major financial crisis in 2007. Customers were worried they would lose
their money so they queued outside the bank and tried to protect the capital
that they had invested in the firm.
This
article will discuss and analyse the different ethical and moral theories of
Corporate Social Responsibility. The article will also provide an insight on
the importance of applying ethical concepts and strategies to a business as
well as discuss the future for CSR and make some reasonable predictions.
First you might want to know abit more about CSR and what it is. Corporate
Social Responsibility aims to ensure that businesses do everything in an
ethical manner. This means they should consider their social, environmental and
economic impact as well as their influence on human rights.
It is a view of the corporation and its role in society that assumes a
responsibility among firms to pursue goals in addition to profit maximisation
and a responsibility among firm’s stakeholders to hold the firm accountable for
its actions
CSR ensures
that businesses focus on what is ethically and morally correct for the business
and its employees while also maintaining a high level of social responsibility.
Ethics looks to examine what should and can be done. There is no guarantee that
ethical behaviour will be used in a business that uses CSR.
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| Customers queuing up to take their money out |
Who to blame for the failure of the bank?
Over forty years’ ago an economist named Milton Friedman,
also winner of the Nobel Prize for his contribution to economics, argued that “there is one and only one social
responsibility of business – to use its resources and engage in activities
designed to increase its profits”. Many
individuals and companies share the ethos that Friedman had, as do Northern
Rock. The directors have been taking a large salary for themselves thus leaving
Northern Rock in a difficult situation. The large salaries of the directors are not
possible as the inflation rate at the time was 28%.
The huge salaries of the directors were one of the reasons
that the bank, Northern Rock had collapsed. This relates to egotism as the directors are
taking salaries for themselves and not thinking about the company. Egotism is
when an individual shows self-interest as a trait and does not think ethically
or about others. The major directors of Northern Rock thought that their
salaries were justifiable and they were using this salary and position of power
to fuel their ego. Many customers of Northern Rock had lost their money
invested in the bank and for many customers this was a substantial amount.
However the bank did not just collapse because of the salaries of the
directors, other factors which contributed towards the collapse were the
continuous rise of inflation, gross domestic product and the government
borrowing deficit reached 10% and the government had to go to the International
Monetary Fund for a loan to see it through the predicament.
Executive pay is the total amount of pay or financial
compensation an executive officer or director receives with a company.
Executive pay can include or be a mixtures salary, bonuses, shares of the
company stock, benefits, rewards and any other incentive paid out to the
executive officer.
During the mid-1990s to 2006, Northern Rock were providing
loans or mortgages to people who either because of their income, or lack of
assets could not obtain a loan or mortgage. This lead to a large amount of debt
being bought together for the individuals, another problem also occurred; they
could not pay back their loans. This is a classic example of deontology as the
banks did adhere to their obligations and duties when analysing a dilemma. This
means that someone will do what they have to because it is they are ethically
responsible to do so, in Northern Rock’s case they were giving out loans and
mortgages to everyone.
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| CSR diagram |
Utilitarianism is a factor to consider as to why shareholders
should take into account the actions of the directors. Utilitarianism is when a
firm will do anything to do good regardless of the outcome or how many people
it will have a negative effect on. For example; someone who sacrifices their
life to save a train full of people is fulfilling an obligation to society. In
Northern Rock’s case they were giving loans to everyone regardless of their
situation.
Although the collapse of Northern Rock was not entirely the
director’s fault and a number of factors did contribute towards it such as the
large loan pay-outs to customers who could not afford to pay back their loans. On
the other hand because of the director’s large salary and the egoism from the
directors, the bank collapsed.
A shareholder is someone who has invested resources into a
particular company to receive equity in that specific firm. It is then up to
the company to issue dividends to the shareholders. Dividends are a sum of
money which is usually distributed by a company among its shareholders
regularly. This is typically paid out quarterly during the financial year.
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| Time for Northern Rock ran out |
To stop the directors from receiving such a large salary,
shareholders could have intervened and either elected new directors or put a
limit to the directors salary. If they were to do this then Northern Rock,
would not be in as much financial trouble.
Maintaining Regulation for Northern Rock is very important
for the bank. Regulation is a law, order or rule which is prescribed by an
authority and especially to regulate conduct. It is important for banks to
follow regulations set by higher authority, banks have to comply with the laws
and regulations set.
Many firms have doubts about ethics and whether what they
are doing is correct. Business Ethics in terms of issues of right and wrong,
and quite naturally question whether there is any way difference from the law.
The words ethics and morality are often used interchangeably, although many
academic writers have proposed clear differences between the two terms (e.g.
Crane 2000). Ethics represents an attempt to systemize and rationalise
morality, typically into generalised rules that offer a solution to situations
of moral uncertainty.
Directors may have deserved to earn such a large salary
because they have worked themselves up over time. The Directors think they have
earned such a high salary because they do that a lot of work around Northern
Rock and this justifies it. They see the day to day running of the bank and
they represent the shareholders, who can just as easily elect new directors if
the currents ones are not performing to a good standard. On the other hand,
higher authorities should put a cap on their earning potential and limit how
much they can earn yearly. If the directors cannot justify such a high salary,
then it is pointless and a waste of money to allow them to earn that much.
Corporate Social Responsibility proposes to ensure companies
act on their business actions in a more ethical way. This means a company would
have to take account of social and economic impacts as well as consideration of
human rights.
There are many different opinions concerning the use of CSR.
Friedman claims it is the responsibility of the business to make as much money
as the business can without any regard for ethics. However Sternberg states that
business ethics is based on the result of the business selling their products
and services within the law and to behave ethically.
The shareholders for Northern Rock could take action against
the different directors because they are partially responsible for getting
Northern Rock into such financial trouble and their arrogance caused the bank
to go into a crisis. However the directors have also worked their way to their
position and deserve to earn however much they earn.
What about Northern Rock's customers?
Savers of Northern Rock should have their savings guaranteed
by the government because if they were not, savers would lose all their money.
This would be very unethical and unfair for the savers. There are various stakeholders involved with
Northern Rock and the bank. A
stakeholder is someone who is affected by the business in anyway. A major
stakeholder of Northern Rock were the shareholders as they would want the best
possible dividends paid out to them regularly so they would remain happy with
the company. The shareholders would want the share prices to increase, so they
can gain more capital. As the shareholders also invest money into the bank they
would want an increase in return capital.
Customers are one of the bank’s key stakeholders as they
have savings with Northern Rock and use their services such as taking a loan or
mortgage out. During the banking crisis savers were behaving very unethically
as they were just thinking of themselves, this is considered as egoism. In
2008, a major financial comparison site estimated 1 in 10 adults in the UK
spend more than they earn in a month. In a ten year gap between 1997 and 2007
the number of credit cards increased from 36 million to an astonishing 71
million. These statistics support the fact that customers just wanted money so
they could finance a certain lifestyle. In September 2007 many first time
buyers were borrowing more than 90% of the cost of the house they were
purchasing. Most of the customers could not afford to repay the loan payment
thus the reason for the bank’s collapse.
The Financial Services Authority would also play a
stakeholder for Northern Rock as they have to approve and authorise everything
that Northern Rock would have to do. Customers are also a key stakeholder in
the bank as they are the users. As the
bank was a pivotal part of the community, the customers would be affected as it
was a Northern bank and the community would be proud of Northern Rock. Shareholders could have capped the director’s
salary.
Employees are affected by the business and are one of the
main shareholders of Northern Rock. When the employee starts work with Northern
Rock they have a contract of Employment which states the employment conditions,
rights, responsibilities and duties. Employees follow the deontology theory
which states that people should follow and adhere to their obligations and
responsibilities. During the banking failure 1/3 of the banks employees lost
their jobs.
The local community is another stakeholder in Northern Rock
because they used to provide financial support and funding for the local
community. Without the support of the bank the local community would suffer in
terms of financial support.
The government is involved in the business and is a major
stakeholder. The government are affected by them as they fund the bank and
authorise some of the transactions that are made by the bank. Without the
authorisation of the government, Northern Rock would not be able to complete
their transactions with their customers and they would not be able to give out
loans and mortgages. Employees are affected by the bank because they work for
Northern Rock and without people working for them, Northern Rock would not be
able to run.
The Financial Services Authority is a stakeholder in
Northern Rock as they would want the fair treatment of customers. The Deposit
Guarantee Schemes Directive (DGSD), which was first adopted in 1994, governs
the operation of deposit guarantee schemes all over the European Economic Area.
This meant that if the bank was the
collapse customers would have their savings saved and they would not lose
everything.
The government displayed signs of justice when they
privatised Northern Rock to take them out of the banking crisis. They were
trying act ethically while maintaining fairness and interactional. They made
sure the investors in Northern Rock, including the customers, had compensation
for the banking failure.
Northern Rock were regulated and by the Financial Services
Authority (FSA). This means all of the loans and mortgages that Northern Rock
issue, had to go through the Financial Services Authority (FSA). The government protect up to £85,000 of the
customers money that is deposited within Northern Rock by customers. They are
being socially responsible and are applying CSR to their actions and they are
doing what is ethically correct. The government have implemented virtue ethics
and utilitarianism as they were trying to do the greater amount of good for the
greater amount of people. They protected some of the customer’s money and
behaved ethically and morally correct.
This video explains what CSR is
The bank collapsed in 2007 when Northern Rock ran into
trouble. There are many people that are responsible for the failure of the
bank. There are various stakeholders
involved in the bank. The Bank of England is one of the firm’s main
stakeholders. The Bank of England issues Northern Rock with all the monies
needed for financial transactions. The Bank of England could be responsible for
the failure of the bank as a problem could have occurred because the Bank of
England does not have enough money to support the transactions.
Moral Responsibility is when a person praises, punishes or
rewards for an act for which a person is morally responsible. In Northern
Rock’s case there are many people who are morally responsible for the failure
of the bank. One of the reasons for the failure of the bank is the government.
The government’s actions can be linked to Utilitarianism as they were issuing
out loans and mortgages to customers who could not afford to pay back their
loans.
Loans were provided to people, who, because of their job or
income and the lack of assets or the property that the customer wanted to
purchase, for this simple fact they could not obtain a loan or mortgage. Due to
the booming property market from the mid-1990s to 2006, banks including
Northern Rock, allowed much riskier lending to happen. This led to multiple
debt problems for the people that took these loans out and they were not able
to pay back their initial loan. It could also be seen as Deontology as they
followed the rules, irrespective of the outcome.
Shareholders are partially to blame for the banking crisis
as well. As shareholders could have capped the director’s salary or limited
their salary to make sure they were not earning above a certain amount. However
as they never did this, it lead to further predicaments and decline for
Northern Rock.
Customers are also morally responsible for the failure of
Northern Rock as they carried on taking out loans and mortgages regardless of
knowing they would not have enough money to pay them back. They were trying to
maintain and live a lifestyle that was out of their financial reach. This could
be seen as Egoism as the customer would be taking out loans for their own
personal self-interest regardless of the consequences.
Teleology is another ethical theory that can apply to both
Northern Rock and their customers, this is when someone suits themselves and
disregards any laws/behaviours and regulations which may prevent their
behaviour.
US Economist
Milton Friedman stated, "There is one and only one social responsibility
of business-to use its resources and engage in activities designed to increase
its profits so long as it stays within the rules of the game, which is to say,
engages in open and free competition without deception or fraud." Friedman
states how a business should use everything in its power including its
resources, to increase its profits as long as it is legal and not deception or
fraud. This is exactly what the shareholders job is to do within the company. This
could be seen as Egoism as the business would just want to maximize its profits
and have self-interest.
The directors of Northern Rock also contributed to the
banking failure. The directors were taking an astronomical salary for
themselves and not thinking about ethics or the bank itself, however the
directors were performing their job and trying their best to keep the bank
afloat. Egoism does contribute for the director’s high salary and teleology as
the directors did not think about any laws and regulations in place and just
did what they wanted. An ethical theory that applies to the directors in this
case is teleology as they suited themselves while disregarding any laws and
regulations in place which may prevent their behaviour.
Banks went ahead and allowed much riskier lending and did
not contemplate the economic down turn was distressing everyone; this could be
due to greed or not have proper control of finances.
They went ahead and started lending out loans which are they
could not afford to give out, this resulted in way more customers coming to
Northern Rock for a loan. Northern Rock were willing to lend customers up to
£180,000, for those whose income was only at £30,000 while most other banks
would not risk that much money.
Future of CSR and Northern Rock
Business Ethics is how companies manage the business
processes to produce an overall positive impact on society. The banking situation has not improved by
much over the years since Northern Rock’s collapse.
Corporate Social Responsibility has grown to the status of a
career and is being discussed on the world stage. Companies which plan to be,
or are, leaders in corporate social responsibility are faced by rising public
expectations, increasing innovation and increased social problems. They are
forced to chart their CSR course and document their actions.
Over the years the financial market has seen a massive
meltdown due to the simple fact of over lending, poor regulation and over
borrowing. Northern Rock is a prime example of how failing to act in accordance
with CSR can not only upset the business but it can also jeopardise the
relationship of the customers, shareholders and stakeholders. Due to their
irresponsible behaviour and their lack of concern of what may happen due to
their actions, Northern Rock faced their punishment in the mass financial
crisis in 2008.
There are many lessons to be learned from Northern Rock’s
mistake and their lack of acknowledgement for CSR. One of the main lessons to learn
from the failure of the firm is to not lend money to customers who cannot
afford to pay the payment back. Most Customers were just taking credit out to
finance their lifestyles rather than needs according to Standard Life bank.
This is also the case for the directors of Northern Rock as they were getting
paid huge amounts of money and not justifying the amount they were getting
paid. The massive salaries were another reason of the bank’s collapse;
directors were just trying to fund their lavishing lifestyle regardless of the
outcome.
Politically, there were always those people who wished the
bank was to fail. Massive salaries were being to business executives and this
lead to the view that things should be sorted out. Television pictures
portraying angry depositors and savers of Northern Rock instigated major
political problems for the government.
Firms have to think about their shareholders when they are
developing new strategies for their business. The stakeholder approach was
designed as a model for improving the efficiency of the firm.
Northern Rock were willing to provide customers with higher
loans while other mortgage lenders were not prepared to do this. The firm made
loans that were not valued much and an increase in repossessions followed
nationally.
In the future, CSR optimists predict that a number of
companies and firms will be convinced to implement a CSR strategy into their
operations. An increasing amount of businesses see CSR as increased
competitiveness and profitability. Corporate Social Responsibility is part of a
search for a new social contract between business and society. This new
contract will not necessarily make a new set of rules but a new set of norms
arrived through experimentation.
Conculsion
Many pessimists believe that CSR will not be clear
enough for firms to take it up, unless it is legislated or there are other
added incentives. They also believe that CSR will not be in the public eye and
there won’t be clarity to what CSR is and why it is so important for a business
to implement Corporate Social Responsibility and Ethics. It will become
labelled as surplus to requirements and increasing the costs of running the
business. Companies who once implemented and embraced CSR will lose interest
and pursue other interests and objectives.
Even though there is a major contrast in views of social
impact and whether corporate responsibility works, the majority of researchers
agree that in 5 – 10 years from now CSR will become much more main-stream with
businesses. CSR in the future will become part of a business’s basic model and
not an add-on. Most of the progress and commitment to CSR may be slow progress
but it would increase the over time within a 5 – 10 year time frame.
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