Ethics in Finance - Social Contracts and Beyond

26 Pages Posted: 22 Oct 2014 Last revised: 29 Mar 2015

See all articles by P. M. Vasudev

P. M. Vasudev

University of Ottawa - Common Law Section

Date Written: October 18, 2014


Reports about misconduct in the financial sector are seemingly endless. Misconduct is wide-ranging and varied – from abusive practices in mortgage securities and commodities markets to manipulation of foreign exchange and interest rates. Truly, the reports suggest an ethical crisis in finance. A major complaint is about the lack of serious efforts to hold to account executives that engaged in misconduct or were in leadership positions at the banks. The events call into question the adequacy of the current arrangements for ensuring integrity in the financial sector, at the institutional and individual levels.

This paper examines developments in the financial sector and their ethical implications from Donaldsonian perspectives. Specifically, it applies the constructs of “efficiency hypernorm” (Donaldson and Dunfee, 1999) and the Integrative Social Contracts Theory (ISCT) (Donaldson and Dunfee, 2002) to interpret the trends and explore potential correctives. Arguably, there has been a general moral decline in the financial sector. This warrants revisit of the efficiency hypernorm and its notion that enlightened self-interest can, by itself, promote ethical conduct among market actors.

The article explores how corporate codes of ethics can be instruments to promote ethical behavior in the financial sector. The codes are internally generated and corporations can tailor them to suit their specific needs. Ethics codes can be amplified to include norms on issues such as degree of care, personal integrity and accountability, and this can be effective in checking misconduct.

Keywords: financial misconduct, corporate codes of ethics, regulatory ethics, mortgage securities, derivatives, commodities speculation, LIBOR manipulation, exchange rate manipulation, Foreign Corrupt Practices Act, corporate governance, board responsibilities, business ethics

JEL Classification: A13, A14, D21, D22, F31, G18, G21, G28

Suggested Citation

Vasudev, P. M., Ethics in Finance - Social Contracts and Beyond (October 18, 2014). Ottawa Faculty of Law Working Paper No. 2015-6, Available at SSRN:

P. M. Vasudev (Contact Author)

University of Ottawa - Common Law Section ( email )

57 Louis Pasteur Street
Ottawa, K1N 6N5
613-562-5800 (Phone)
613-562-5124 (Fax)


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