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G8 set to push return to “ethics”

June 29, 2009

by Guy Dinmore

Published on June 29 2009 on FT

Flawed markets and fundamental weaknesses in the world economic system
demand the adoption of a “global standard” of norms and principles and a
return to ethics in business, according to finance ministers from the
Group of Eight club of rich countries.

In a 66-page report expected to be endorsed by heads of government at
next week’s G8 summit in Italy, ministers agree that “a rethinking of
the framework of the global economic and financial system is critical”.

“A set of common principles and standards governing international
economic and financial activity is an essential foundation for stable
global growth,” the report says, laying out the proposed Lecce Framework
named after the baroque Italian city where the ministers met earlier
this month.

The report, seen by the Financial Times, recommends that the “global
standard” cover such areas as executive pay, corruption, banking,
corporate governance, taxation and markets.

With voters angry at bailing out companies seen as victims of their own
reckless greed, and some government officials under fire for their lack
of standards, the moralistic tone of the report captures the new found
interest in the importance of ethics.

Economic freedom had not been matched by respect of fundamental norms of
“integrity and propriety”, the report says, calling for a strengthening
of “business ethics and investor protection” as well as transparency.

“It is widely accepted that the pursuit of excessive risk aimed at
boosting short-term profits contributed to the financial market downturn
and subsequent global recession.
The disconnect between management compensation and company performance
has led to a public outcry as taxpayers have been asked to finance
private sector bailouts.”

Debate over the proposals has mirrored G8 divisions, with the UK and US
“Anglo-Saxon” economic model blamed by continental Europeans for
creating the global credit crisis through a lack of oversight and
regulation. However, initial efforts to impose legally binding codes,
backed by Giulio Tremonti, Italy’s finance minister and an architect of
the Lecce process, appear to have been blocked.

Italy, as holder of the G8 presidency, is working closely with Germany
and the Organisation for Economic Cooperation and Development to expand
the initiative beyond the G8. The process is being linked  with
Chancellor Angela Merkel’s proposed Global Charter for sustainable
economic activity, which is to be discussed by the broader G20.

The task of drawing up specific recommendations will be left mainly to
institutions such as the OECD, the International Monetary Fund and the
Financial Stability Board which have already pioneered such work.

The G20 summit in London in April broadened the mandate of the FSB, and
35 ministers attending an OECD council meeting last week endorsed the
organisation’s involvement in the Lecce Framework and Ms Merkel’s Global
Charter.

“Previous efforts to address issues of propriety, transparency and
integrity have suffered from poor implementation, despite multilateral
agreements on particular initiatives,” the report warns. On compliance,
it recommends an “internationally agreed comprehensive framework to
strengthen and monitor compliance and foster peer pressure”.

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