Between Law and Markets: Is There a Role for Culture and Ethics in Financial Regulation?

44 Pages Posted: 6 Oct 2012 Last revised: 12 Sep 2013

See all articles by Dan Awrey

Dan Awrey

Cornell Law School; European Corporate Governance Institute

Sir William Blair

Queen Mary University of London; Queen Mary University of London - Centre for Commercial Law Studies

David Kershaw

London School of Economics - Law Department

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Date Written: October 5, 2012


The limits of markets as mechanisms for constraining socially suboptimal behavior are well documented. Simultaneously, conventional approaches toward the law and regulation are often crude and ineffective mechanisms for containing the social costs of market failure. So where do we turn when both law and markets fail to live up to their social promise? Two possible answers are culture and ethics. In theory, both can help constrain socially undesirable behavior in the vacuum between law and markets. In practice, however, both exhibit manifest shortcomings. To many, this analysis may portend the end of the story. From our perspective, however, it represents a useful point of departure. While neither law nor markets may be particularly well suited to serving as “the conscience of the Square Mile”, it may nevertheless be possible to harness the power of these institutions to carve out a space within which culture and ethics – or, combining the two, a more ethical culture – can play a meaningful role in constraining socially undesirable behavior within the financial services industry.

The objective of this article is to explore some of the ways which, in our view, this might be achieved. This exploration takes place across two dimensions. In the first dimension, we hold constant the core internal governance arrangements – corporate objectives, directors’ duties, board composition, committee structures and remuneration policies – within financial institutions. We then examine how the law and markets might be leveraged to engender a more ethical culture in two important areas: bilateral counterparty arrangements and socially excessive risktaking. More specifically, we examine how ‘process-oriented’ regulation – backed by a credible threat of both public enforcement and reputational sanctions – might be employed with a view to reframing personal ethical choices and fostering a more ethical organizational culture within financial services firms. Intuitively, we would expect the success of this strategy to be a function of the incentives generated by existing internal governance arrangements. Lamentably, however, many of these arrangements give primacy to the financial interests of shareholders and managers over those of other stakeholders including, perhaps most importantly, society. In the second dimension, therefore, we examine how we might cultivate a more ethical culture through reforms of the core governance arrangements of financial institutions.

Keywords: Culture, ethics, finance, financial regulation, process-oriented regulation, corporate governance

Suggested Citation

Awrey, Dan and Blair, Sir William and Kershaw, David, Between Law and Markets: Is There a Role for Culture and Ethics in Financial Regulation? (October 5, 2012). LSE Legal Studies Working Paper No. 14/2012, Available at SSRN: or

Dan Awrey (Contact Author)

Cornell Law School ( email )

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Cornell University
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United States

European Corporate Governance Institute ( email )

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Sir William Blair

Queen Mary University of London ( email )

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Queen Mary University of London - Centre for Commercial Law Studies ( email )

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David Kershaw

London School of Economics - Law Department ( email )

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London WC2A 2AE, WC2A 2AE
United Kingdom

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