Designing an Effective Compliance and Ethics Program
In two years, the climate for investment has turned from irrational exuberance—as Alan Greenspan called it—to excessive worry and downright pessimism. Can we correct the excesses and build on the achievements of the booming 90s? Or was it all a mirage—a passing fever that caused many to lose touch with reality?
We can’t take progress for granted. We must nurture the spread of market-based economies and work toward a more open, integrated, and flexible world economy. We need to extend an information-led upsurge in innovation.
The initiation of all wise or noble things comes and must come from individuals; generally at first from some one individual.
Partly because of the growth in corporate profits, economists at JP Morgan Chase anticipate GDP growth of about 3.5 percent this year. While consumer spending gains are likely to slow, that should be offset by higher business spending on capital goods and inventories. We have the lowest inflation (1.5 percent) and interest rates in 40 years—together with GDP growth of 3.5 percent and an unemployment rate of just 6 percent. And, the S&P 500 closed the books on 2002 with a sharp increase in reported earnings (up 27 percent) and a 21 percent increase in operating earnings. From this transfer of the world into the consciousness, this beholding of all things in the mind, follow easily his whole ethics.
Complete liberty of contradicting and disproving our opinion is the very condition which justifies us in assuming its truth for purposes of action; and on no other terms can a being with human faculties have any rational assurance of being right.
Looking ahead, we believe that the stage is set for sustained, long-term growth. Inflation is low, and we have rising productivity, or increasing output per hour worked—the best single measure of economic health. Over the past four quarters, productivity growth in U.S. reached about 5 percent, suggesting that the transformation of the workplace—fueled by innovation, technology, and globalization—has not slowed.
I do not assert that anything better is compatible, as a general rule, with the present low state of the human mind. All he can claim is, freedom to point out the way. In this age, the mere example of non-conformity, the mere refusal to bend the knee to custom, is itself a service.
Business Ethics and Compliance
By the end of this year, global growth should return to the 3 percent-plus annual pace that was the average during 1995 to 2000. China is booming, growing at 7 percent or more—a dramatic example of the power of market-driven economic advancement. Better results are possible longer-term, especially if Europe and Japan make their economies more flexible.
If the U.S. recovery is underway and the global outlook is reasonably good, why don’t people feel better? Why the sour mood about financial markets?
As I see it, we are still recovering from the excesses and outsized optimism of the late 90s. But not all of the optimism was unjustified. We saw a surge in innovation and entrepreneurship, an investment boom, economic prosperity, equity market expansion, wealth enhancement, job creation, low unemployment, a focus on future growth, and financial innovation.
But expectations become outsized. By early 2000, things changed. Suddenly, our system began to look dysfunctional. We witnessed the bursting of the stock market bubble, a decline of more than 25 percent in the market capitalization of stocks, shrinkage in the retirement and savings accounts of millions of people, accounting scandals, outrage over pay packages for top executives, and a loss of confidence in accounting, Wall Street, and corporate America.
I believe that other ethics than any which can be evolved from exclusively Christian sources, must exist side by side with Christian ethics to produce the moral regeneration of mankind; and that the Christian system is no exception to the rule, that in an imperfect state of the human mind the interests of truth require a diversity of opinions.
Ten Lessons for Ethics and Compliance in Business
- We have been going through unusual volatility in financial markets because we have been going through unusual change. Part of the shift has been increased reliance on the sale of marketable securities—stocks, bonds, and other instruments—rather than bank lending. Individuals and businesses alike became less risk averse.
- While our capitalist model is prone to excesses in a boom, our system is transparent, efficient, and self-correcting. Our system does not prop up losers or sweep problems under the rug. It exposes and punishes speculative excesses through bankruptcy and loss of capital. It puts the heat of publicity on executive crime, and it sends criminals to prison. Even in ugly circumstances, this system works.
- We need to dose the gap between pay and performance, especially at the top. Sure, we can debate the merits of large compensation packages to CEOs and other top officers. But the stock market remains today sharply higher than in the past, and the gains have been widely dispersed. Indeed, that is one big reason for our long-term optimism.
- We have a true shareholding democracy. In 1982, when the Dow was struggling to top 1,000, fewer than 20 percent of U.S. households owned stock. Today more than 50 percent own stocks. If the wealth created by a rising stock market is spread among many people, the pain of a falling market is more widely shared. Even though the Dow is down about 3,000 points from its high in early 2000, it is still up eight times from 1982.
- We have seen tremendous job creation over the past decade. You can add up all of the job creation in Europe and Japan over the past two decades—and multiply that by a double-digit number—and it still won’t equal the number of new jobs created here.
- We are still adjusting to the downside. Is the market overpriced or underpriced today? I don’t know, but I do know that it is closer to fair valuation than it was at its peak in early 2000. I count that as another plus.
- Individuals who engage in fraud—treating ordinary expenses as capital expenditures and inflating profits—should go to jail. The visible enforcement of laws designed to protect shareholders and other investors is essential in capital markets. Our free market system depends highly on trust. Fraud and corruption highlight the need for transparency and governance. Still, we shouldn’t indict the many because of the actions of a few.
- The regulatory and legislative process can help restore trust in our system. As the CEO of a publicly owned company, I am comfortable with the new requirement that the CFO and I personally certify the financial statements. I regard many of the new rules and regulations as healthy. Value-based leadership can’t be an oxymoron. But in the long run, the attempt to impose ethics or morality from the outside with new rules and regulations is less likely to succeed than what we do on the inside to promote high standards of integrity.
- Integrity is imperative, and must be combined with innovation and an enterprising spirit—the essence of real progress. In a market-based system, there is pain to be felt and a price to be paid for change and progress. Corporate America must continue to reinvent itself—finding new ways to motivate, reward, and inspire people.
- Our mistakes have been mistakes of judgment, not mistakes of principle or ethics. Yes, we have made mistakes as JPMorgan Chase. We concentrated too much in the telecom sector. We were misled by Enron. And we did not anticipate the sudden collapse of numerous investment-grade companies into bankruptcy. So, we have made mistakes—but they have been mistakes of judgment.
Compliance-based and Integrity-based Code of Ethics
We have been through a lot over the last two years. We have created a global financial firm through a series of mergers, culminating with the merger of J.P. Morgan and Chase. All mergers are difficult, but we are gaining market share in key areas and receiving positive feedback from our clients.
But if our leaders only had a rudimentary understanding of how management works, perhaps the most important question about any ethics policy up for consideration would not only have a better chance of being asked (before ever needing to entertain the questions of ethics, morals, politics, or constitutionality), but also of being answered correctly: will it work?
Our strategy is based on diversity and balance of wholesale and retail business. On the wholesale side, clients prefer a global, broad-based firm that can deliver integrated capabilities. In retail, we have great strengths. Our financial performance has been disappointing, but we are not making excuses—we are learning from our mistakes and making changes to gain strength from the challenges.
Markets allow us to learn from our mistakes as well as our successes—to change, adapt, innovate and grow.