Local Ethics in a Global World

Ethics, fairness, trust, and freedom from corruption are parts of social capital, and social capital matters in financial markets. Investors consider not only the information they receive but also their trust in the accuracy of the information and the fairness of the markets in which to trade. Deficiencies in ethics and fairness mark all countries. But surveys of the perception among students and finance professionals of the fairness of insider trading in eight countries indicate that deficiencies are more pronounced in some countries than in others. Five factors are discussed that affect social capital: culture, globalization, income, education, and law enforcement.Ethics, fairness, trust, and freedom from corruption are all parts of social capital, and social capital matters in financial markets because in considering the trade-off between risk and return, investors base decisions not only on available information but also on how much they trust the accuracy of the information and on the fairness of markets.Deficiencies in ethics and fairness mark all countries, but such deficiencies are more pronounced in some countries than in others. Previous research has found, for example, that levels of corruption vary by country. The scores of India, Turkey, Tunisia, and Italy on the Corruption Perception Index are lower than those of Australia, the Netherlands, the United States, and Israel. This article presents the findings of a survey of perceptions of the fairness of insider trading on the part of finance professionals and college students in eight countries. The rankings generally followed the corruption rankings. Finance professionals and college students in India, Turkey, Tunisia, and Italy perceive insider trading to be fairer than do finance professionals and students in Australia, the Netherlands, the United States, and Israel.Why are levels of corruption higher in some countries than in others? Why is insider trading considered fairer in some countries than in others? These are the questions I try to answer in this article. I discuss five factors that affect social capital: culture, globalization, income, education, and law enforcement.Social capital, including a sense of fairness, is generally higher in economically developed countries, where incomes are high and markets play a prominent role, than in less economically developed countries. A potent tool to increase both income and fairness is globalization. When an Italian family business puts most of its production in Vietnam and China, it increases income in Vietnam and China. And it increases trust and fairness because extending business beyond one’s family requires extension of trust and fairness beyond one’s family.Education, including education about the law, is useful in tilting the behavior of people toward fairness. The surveys reported in the article show that finance professionals in all countries perceive insider trading as less fair than do college students. This difference is probably a result of continuing moral and legal education. Nevertheless, perceptions of the fairness of insider trading vary greatly from country to country, even among finance professionals. The global reach of companies and institutions can be a force for changing perceptions, especially in countries where insider trading and other trading violations are generally perceived as fair.Education is useful but not powerful enough to reinforce social capital. People know that the law mandates paying taxes and agree that they should pay their taxes honestly. But when asked what deters them from cheating, most people point to enforcement—the fear of an IRS audit. Even the best moral and legal education will not persuade some people to refrain from insider trading when tempted by gaining seemingly easy thousands or millions of dollars. Law enforcement, aided by technology (such as computer logs of trading and video cameras on floors of exchanges), must supplement education. Companies and institutions can do their share by advocating vigorous enforcement of the law and rigorously enforcing their own codes of ethics.