Ethics and Governance 2220,

Vol.:(0123456789)1 3

Journal of Business Ethics (2021) 172:803–819
https://doi.org/10.1007/s10551-020-04489-2

O R I G I N A L PA P E R

Moral Pragmatism as a Bridge Between Duty, Utility, and Virtue
in Managers’ Ethical Decision‑Making

Matej Drašček1 · Adriana Rejc Buhovac2 · Dana Mesner Andolšek1

Received: 23 December 2019 / Accepted: 18 March 2020 / Published online: 28 March 2020
© Springer Nature B.V. 2020

Abstract
The decline of empirical research on ethical decision-making based on ethical theories might imply a tacit consensus has
been reached. However, the exclusion of virtue ethics, one of the three main normative ethical theories, from this stream of
literature calls this potential consensus into question. This article investigates the role of all three normative ethical theo-
ries—deontology, utilitarianism and virtue ethics—in ethical decision-making of corporate executives. It uses virtue ethics
as a dependent variable thus studying the interconnectivity of all three normative ethical theories in specific circumstances.
We find that managers use different ethical theories in different circumstances (business vs. private life, formal vs informal
ethical leadership, etc.). A predictive model of ethical decision-making, however, cannot be established. We also find that
only a limited number of variables influence the choice of ethical theory, which leans business ethics towards postmodern
management paradigm. We suggest that moral pragmatism could provide the answer to ethical decision-making.

Keywords Ethical decision-making · Managers · Moral pragmatism · Virtue ethics · Postmodernism

Introduction

Ethics, as a philosophical discipline, serves as a theoretical
basis for the ethical decision-making of managers (Arjoon
2007; Hunt and Vitell 1986; Paul and Elder 2005; Treviño
et al. 2006). However, less than 10% of all empirical studies
on ethical decision-making use philosophical ethical theo-
ries to understand the decision-making phenomenon (Craft
2013). Additionally, only a few have been done in recent
years (see Amirshahi et al. 2016; Khalid et al. 2017; Paik
et al. 2019; Vance et al. 2016; Wisler 2018). Indeed, there
has been a major decrease in the overall number of published
studies, particularly compared to 1993–1994, when 11 stud-
ies on this topic were published (O’Fallon and Butterfield

2005). This decrease in research might indicate a tacit con-
sensus on the extant empirical findings related to ethical
decision-making.

However, there are a number of issues that make the
lack of research—and the potential consensus—concern-
ing. First, our literature review indicates that the majority
(21) of empirical studies of ethical decision-making based
on ethical theories investigated two main normative ethical
theories, namely utilitarianism and deontology, with other
studies including also other theories, e.g. Machiavellianism
(e.g. Cyriac and Dharmaraj 1994; Hegarty and Sims 1978);
theory of justice and rights (e.g. Kujala 2001; McDonald and
Pak 1996; Premeaux 2004). In total, 19 different combina-
tions of ethical theories have been researched, with some
studies testing only one theory (e.g. Corey et al. 2014) and
others testing up to nine different ethical theories simultane-
ously (Wisler 2018) (Table 1 shows all the variations of test-
ing theories). Second, the simultaneous testing of the basic
three normative ethical theories has been limited only to
testing of ethical reasoning with limited inclusion of factors
(e.g. Khalid et al. 2017). In addition, from the perspective of
research participants, only slightly more than a third of stud-
ies included managers (largely from lower decision-making
levels) to study ethical decision-making. Finally, the major-
ity of studies were done in the USA, with around 25% done

* Matej Drašček
[email protected]

Adriana Rejc Buhovac
[email protected]

Dana Mesner Andolšek
[email protected]

1 Faculty of Social Studies, University of Ljubljana,
Kardeljeva ploščad 5, 1000 Ljubljana, Slovenia

2 Faculty of Economics, University of Ljubljana, Kardeljeva
ploščad 17, 1000 Ljubljana, Slovenia

804 M. Drašček et al.

1 3

in Latin America, Asia and Australia and less than 10% done
in Western Europe, which suggests that the relative lack of
diversity in study sites is additional limitation of previous
research.

This article aims to determine whether the tacit consen-
sus on the dominance of utilitarianism and deontology in
managers’ ethical decision-making holds if virtue ethics is
considered. Virtue ethics has been recently reintroduced in
the field of business ethics (Fontrodona et al. 2013; Norman
2013; Whetstone 2001) and we lack the understanding of
its influence on ethical decision-making when tested along
with utilitarianism and deontology (e.g. Furler and Palmer
2010; Khalid et al. 2017; Yoon 2011). Our study investi-
gates the phenomenon on C-suite managers and executives,
which has received limited research coverage (Craft 2013),
with the inclusion of vast and various personal and organi-
sational factors influence (Campbell and Cowton 2015).
Finally, the article aims to investigate the possible existence
of ‘ethical ambidexterity’, which occurs when managers
do not use grand ethical theory consistently, but base their
ethical decisions on reasonable deliberation and choose the

one that resonates most in a given situation (Bazerman and
Tenbrunsel 2011a, b; Lemoine et al. 2019; Shafer-Landau
2015; Simons 2002).

Theoretical Background

The Big Three: Utilitarianism, Deontology and Virtue
Ethics

The arguments for the three main ethical theories—utilitari-
anism, deontology and virtue ethics—originate from philos-
ophers (e.g. Fieser and Lillegard 2002; Foot 1978; Louden
1984; Hursthouse 1999; MacIntyre 1981; Sher 2012) and
are supported by mainstream bodies of knowledge (e.g. the
Routledge Philosophy Dictionary and Stanford Encyclopae-
dia of Philosophy; The Blackwell Guide to Ethical Theory),
business ethicists (Arjoon 2007; Donaldson and Werhane
1993; Norman 2013; Whetstone 2001) and leadership theo-
ries (Lemoine et al. 2019).

Kymlicka (2002) summarised the historical evolution of
three main ethical theories. Virtue ethics was the first ethi-
cal theory established by Aristotle (2000) in ancient Greece.
Aquinas used it as the foundation for the ethics of the Cath-
olic Church, which prevailed until the eighteenth century.
Deontology, which was formally introduced by Kant (1788),
is grounded in the divine command theory, which was part
of the tradition of justifying ethics based on the existence
of God. Utilitarianism, which was formally introduced at
almost the same time as deontology by Bentham (1789),
opposes the established tradition of connecting ethics with
divinity and instead is based in empiricism.

The division of ethical theories into only utilitarianism
and deontology started with the Anglo-Saxon school of phi-
losophy, which classifies ethical theories based on two main
types of moral reasoning: teleological, which judges moral-
ity based on the consequences of the action, and deontologi-
cal, which does not consider the consequences of an action
(Schüller 1973). The basis of teleological ethics (utilitarian-
ism and virtue ethics) is the Platonic and Aristotelian idea of
good and happiness (Greek: eudaimonia), which is viewed
as the ultimate goal of life, while deontological ethics is
based on law, obligations and duties (Ricouer 1990). While
some research on ethical decision-making has used this divi-
sion (e.g. Galbraith and Stephenson 1993), virtue ethics has
been largely omitted. This is particularly strange since the
most prominent figure in teleological ethical theory, which
includes utilitarianism as well, is Aristotle, who developed
virtue ethics (Heidegger and Schüssler 1992).

One possible reason for this omission could be that
utilitarianism and deontology have long been seen as the
only legitimate ethical theories (Sher 2012). Virtue eth-
ics was reintroduced to mainstream philosophy as another

Table 1 The underlying ethical theories in the empirical studies of
ethical decision-making

Philosophical theory Number

Machiavellism 2
Deontology and utilitarianism 21
Rule and act utilitarianism; act and rule deontology; egoism 2
Personal values, professional values 1
Egoism, utilitarianism, Kant’s imperative, goaled rule 2
Relativism, justice, utilitarianism, deontology, hybrid

theory
1

Self-interest, theory of role conflict 1
Utilitarianism, Machiavellism 1
Self-interest, utilitarianism, categorical imperative, duties,

justice, neutralisation, religion and light of day
1

Contractualism, rules, conformism 1
Justice, deontology, relativism, utilitarianism, egoism 1
Rule and act utilitarianism, theory of justice, theory of

fairness
2

Utilitarianism, morality (duty), justice 1
Ethical sensitivity 1
Justice, utilitarianism, relativism and egoism 1
Deontology (formalism and idealism), social contract

theory
1

Linear and nonlinear thinking 1
Fatalism, virtue ethics, utilitarianism, deontology and

amorality
1

Economic egoism, reputation egoism, rule and act utilitari-
anism, self-virtue, other’s virtue, rule and act deontology

1

Utilitarianism 1
Total 44

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normative, philosophical, ethical theory by Anscombe
(1958) and reinforced its role as a basis for the other two
by MacIntyre (1984). What separates virtue ethics from the
other two theories, however, is the importance of virtues of
decision makers itself. While utilitarianism considers virtues
to be characteristics that result in good consequences and
deontology considers them to be characteristics of someone
who fulfils his duties, virtue ethics resists any definition of
ethics that does not rely on virtues (e.g. justice) (Kawall
2009).

The confusion between the main ethical theories is even
greater in other professional and management academic
sources. The Stanford Encyclopaedia of Philosophy, for
example, differentiates between 39 different types of ethics.
However, there is a clear distinction between the main ethi-
cal theories, on the one hand, and derived, professional, and
political ethical theories, on the other hand. Derived ethical
theories build upon main ethical theories but change their
propositions. For example, the theory of rights is derived
from Kant’s definition of duty as a categorical imperative
(Forst 2012). Professional ethical theories are based on
main ethical theories but are applied to a specific profession
(medicine, law, journalism or business; Singer 1979). Politi-
cal ethical theories are mostly the consequence of socio-
cultural influences; for example, the feminist ethics of the
1970s was an answer to the rising importance of women in
society (Dagger and Lefkowitz 2014).

In the context of ethical decision-making normative
models and processes, ethical theories are mostly divided
into deontology (or universalism) and utilitarianism (or
relativism) (Ferrell and Gresham 1985; Forsty 1980; Hunt
and Vitell 1986). This division has been adopted in most
empirical research on ethical decision-making based on ethi-
cal theories (Craft 2013); since the first study in this stream
of research (see Hegarty and Sims 1978), almost half of all
related studies have included this dual view. This dualism is
also present in quantitative (Craft 2013; Ford and Richard-
son 1994; Loe et al. 2000; O’Fallon and Butterfield 2005)
and qualitative (Lehnert et al. 2016) meta-reviews of ethi-
cal decision-making based on ethical theories. On the other
hand, virtue ethics has also been mostly studied in leadership
theory (e.g. Bauman 2018; Neubert et al. 2009; Cameron
2011; Whetstone 2001; Knight and O’Leary 2006), values
studies (Moore 2008; Murphy 1999; Chun 2005; Chan and
Ananthram 2019), personality traits studies (Riggio et al.
2010; Walsh et al. 2016) and applied to selected professions
(Oakley and Cocking 2001), such as medical profession (Jor-
dan and Meara 1990; Pellegrino 2002; Brody 1988; Barlow
et al. 2018). Also, virtue ethics has yet to be researched in
comparison with the other two main ethical theories in the
domain of managers’ ethical decision-making.

Anyhow, even without inclusion of major normative eth-
ical theory, these meta-reviews conclude that deontology

(universalism) positively and utilitarianism (relativism)
negatively effects ethical decisions (Craft 2013; O’Fallon
and Butterfield 2005). However, this is paradoxical for two
reasons. First, by definition, the use of utilitarianism, one of
the main ethical theories, cannot lead to unethical decisions
because that would mean that the ethical theory is unethical.
Second, unlike utilitarianism, deontology does not see con-
sequences or results of ethical decision as a part of ethics,
and so the conclusions of research cannot be based on the
same end results (i.e. ethical decisions).

Thus, the basic problem remains: if a tacit consensus has
been reached regarding empirical research on the outcomes
of ethical decision-making, but consensus regarding the
division of the main ethical theories has not, how could the
outcomes of prior research be valid? Indeed, there are, as
previous mentioned, 19 different divisions of ethical theories
in empirical research, so there could not be a tacit consensus.
Additionally, utilitarianism is viewed in ethical decision-
making research to lead to unethical decisions and deontol-
ogy is viewed to lead to ethical decisions, but virtue ethics
is not even included in the meta-reviews research.

Moral Pragmatism as the Bridge Between Theory
and Practice in Decision‑Making

Moral pluralism is independent from meta-ethical views
(Mason 2018). As a theory, it offers an explanation of the
existence of complex super-eminent structure of ethical
values. It means that each value has its own basis and that
values cannot be derived from only one super-value (for
example from justice or fairness) (Becker 1992). However,
the philosophical concept of moral pluralism should not be
confused with moral relativism, which claims that moral
actions are judged in relation to, for example, culture, values
and society (Hinman 2012).

On the other hand, moral pluralism goes hand-in-hand
with the postmodernist theory of organisational studies,
which emphasises a fragmented view of the people in an
organisation (Alvesson and Deetz 2006). This theory is
a step away from the modernist perspective of people as
wholes, which emphasises masculinity, reason, vision and
control. In contrast, postmodernism claims that each person
is complex and that people are inadvertently part of the web
of sex, age, sexuality, power and other factors, all of which
have moral weight (Cooper and Burrell 2015).

The concept of narrative fallacy provides the same expla-
nation about perceptive as people as whole as postmodern-
ism, but it focuses upon models based in social studies. It
claims that such models cannot be developed, but attempts
are still made because of humans’ tendency to look at a
sequence of events or facts and explain them through forced
logical connections (Taleb 2008). Explanations connect
facts, creating a story that makes it easier for humans to

806 M. Drašček et al.

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remember. However, a problem arises when this is miscon-
strued as an understanding of actual facts or modus operandi
of phenomena, similar to predictive models, which are both
not valid (Taleb 2007).

Rosenthal and Buchholz (2007) attempted to resolve this
postmodernist approach and the normative fallacy in busi-
ness ethics through pragmatism and moral pluralism. This
is in accordance with England (1967), who claimed that
the first approach to managerial decision-making must be
pragmatism, after which the ethical theories of deontology
and utilitarianism, for example, can be applied, but again
leaving out virtue ethics. However, moral pragmatism raises
two questions: can managers employ more than one ethical
theory simultaneously during decision-making, and does
business ethics as a discipline need grand ethical theories
and predictive models to further establish itself as a legiti-
mate scientific discipline?

Donaldson and Werhane (1993) state that determining the
dominance of an ethical theory is not necessary for further
development of business ethics. Other notable authors with
a similar outlook include Boatright (1993), who states that
differences in theories should not lead to an endless search
for the ‘best’ theory, and Beauchamp and Bowie (1993),
who believe that philosophy should help society find reason-
able and systematic approaches to moral problems, but not
mechanical solutions or steps for decision-making regarding
these problems.

The act of making decisions based on multiple moral
frameworks is called a ‘metaphysical music chair’ (Callicott
1990; Weston 1991). Many philosophers have started to state
that moral principles should be separated from philosophi-
cal foundations (Wenz 1993). As a result, they have tried to
develop one moral theory that could embrace a variety of
moral principles, but at the same time claiming that ethics
cannot be reduced to or derived from only one normative
ethical framework. (Rosenthal and Buchholz 2007). How-
ever, empirical research has yet to prove the validity of this
theory.

Hypothesis Development

The major gap stems from the omission of virtue ethics
as dependent variable in the empirical research of ethical
decision-making based on ethical theories (Arjoon 2000;
Crossan et al. 2013; Whetstone 2001; Yoon 2011). While
one could argue that virtue ethics has been included in
research, e.g. as part of deontology (Premeaux 2004) or the
personality traits (e.g. Allen and Davis 1993; Crossan et al.
2013), the use of virtue ethics as independent variable raises
theoretical and empirical considerations. From the theoreti-
cal perspective, the inclusion of virtue ethics as personality
traits misuses the proxy of personality traits or character as

virtue ethics (Walker 1989; Mitchell 2015). Thus, virtue eth-
ics should not be treated as personality traits, which happens
often in the implications of the virtue theory in the research
of ethical decision-making, where personality is involved
(Solomon 2003). From the empirical perspective, the use of
personality traits as independent variable, both in empirical
(e.g. Groves et al. 2007; Mencl and May 2009) and theoreti-
cal research (Hunt and Vitell 1986), stems for the above-
mentioned misunderstanding of personality traits as part of
virtue ethics, thus leading to wrong conclusions. Using vir-
tue ethics as independent variable implies that virtue ethics
is not a normative ethical theory, at pair with utilitarianism
and deontology and also leads to wrong conclusions about
which ethical theory is being used by decision makers.

Another major gap in ethical decision-making research
is related to the fact that most empirical studies studied a
limited number of independent variables (on average 4–6
variables), with the most studied variables being nine
(McDonald and Pak 1996) and some only with one (e.g. sex
(Galbraith and Stephenson 1993), profession (Cohen et al.
1993) and age (Brady and Wheeler 1996). The included
independent variables have also mostly been proxies them-
selves (Campbell and Cowton 2015), e.g. personality traits
(e.g. Hadjicharalambous and Shi 2015; Brady and Wheeler
1996), ethical culture (e.g. Verbeke et al. 1996), intentions
(Cohen et al. 1993) etc., they were not measurable per se,
but compounded from other variables to form a new one
(e.g. ethical culture).

Moreover, most studies have investigated the reasons for
unethical behaviour/decision-making (Campbell and Cowton
2015). Research has yet to show which variables are corre-
lated with ethical decisions based on ethical theories (McDe-
vitt et al. 2007). This is supported by “positive psychology”
approach in organisational studies research, which empha-
sizes the need for more research of “positive” phenomena
(Peterson and Seligman 2004). To determine which ethical
theory and variables lead to ethical decisions, it is neces-
sary to understand the causes of managers’ choice of ethi-
cal theory when engaging in ethical decision-making. This
stream of research would avoid the natural fallacy (Kohlberg
1971; Moore 1903)—also called is-ought problem, where an
ought is established from an is—from which some studies
have suffered. Even though there is a vast amount of research
on the variables in ethical decision-making, limited research
has been done on the multiple personal and organisational
variables that affect ethical decision-making (Lehnert et al.
2015). Based on this, our first hypothesis is as follows:

Hypothesis 1 A predictive model of managers’ choice of
ethical theory in ethical decision-making can be established.

Some believe that managers use one grand ethical theory
that aligns with the modern theory of organisations, while

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others believe in moral pragmatism or “ethical ambidexter-
ity”, claiming that there is no one grand theory and instead
highlighting the mutual interdependence between theories
based on various variables (Rosenthal and Buchholz 2007;
Treviño and Nelson 2007) that dictate the use of pragma-
tism in ethical decision-making. Theory of ethical decision-
making (Arnold et al. 2010; Rosenthal and Buchholz 2007)
has already elaborated upon whether managers consistently
use different ethical theories or tend towards pragmatism
(England 1967; Fraedrich and Ferrell 1992). According to
the leadership theory, pragmatic managers are best when it
comes to problem-solving (Bedell-Avers et al. 2008). Due
to the fundamental differences between normative ethical
theories, it can be expected that managers will use the same
ethical theories in all their decisions, which is in accordance
with Kohlberg’s theory of moral development (Kohlberg
1971). But even Kohlberg (1971) argues that adults live
most of their time on the third or the fourth level of moral
development and only occasionally reach the fifth or the
sixth level. This might indicate a low level of consistency in
moral reasoning of managers. Furthermore, one might con-
clude that moral agents are prone to using ethical theories
which suit them best momentarily. In this case, a pragmatic
view is the cause of ethical confusion of managers. If man-
agers do use different theories in different circumstances,
regardless of internal (i.e. personal, biological) or external
(i.e. societal, organisational) factors, they are ethically ambi-
dextrous. Extant leadership and management literature rarely
examine whether they consistently use one moral philosophy
(Lemoine et al. 2019). In normative moral reasoning theory,
however, two opposing views are held about consistent use
of ethical theories in different circumstances (Hooker and
Little 2000).

Moral particularists believe that one absolute principle
cannot be applied to every moral circumstance, meaning
the moral agent should choose reasonably the most suitable
ethical theory in different circumstances (Dancy 2004). On
the other hand, the moral generalists believe that absolute
moral principles are the backbone of ethical theory and the
consistent use of ethical theory, no matter the circumstances,
is the moral person’s imperative (Raz 2006). Based on this,
our second hypothesis is as follows:

Hypothesis 2 Managers consistently use one ethical theory
in all circumstances.

Research Design and Data

To test the hypotheses, managerial ethical decision-making
scenarios in six different circumstances were chosen (see
Appendix 1): private/family life, business environment, gen-
eral ethical dilemma, refusal to do unethical acts, ethical

leadership of colleagues, and informal ethical leadership in
ethical decision-making. The scenarios were developed and
pilot tested in in-depth interviews with nine C-suite manag-
ers (see Appendix 2 for sample characteristics) who were
carefully selected to ensure diversity in terms of tenure,
industry, age and sex.

The scenarios are short, concise and unambiguous (Bed-
nar and Westphal 2006). They allow for many options,
as the purpose of the research is to find out what ethical
theory managers use rather than developing a solution to
ethical dilemmas (Bazerman and Tenbrunsel 2011a, b). All
solutions are ethically correct and not ethically disputable,
unlike previous research, where the main focus has been to
study the variables that lead to unethical behaviour. Con-
sequently, the ‘socially desirable answers’ effect (Randall
and Fernandes 1991) was eliminated. Finally, each solution
represents only one normative ethical theory: deontology
(duty, obligations, universal laws, golden rule), utilitarian-
ism (results, consequences, added value, benefits, costs), and
virtue ethics (character, values, golden mean, practice).

The population of managers under investigation (Slove-
nian managers) was identified as 48,513 based on official
statistical data (Republic of Slovenia Statistical Office). The
target sample was 200 respondents with the aim to get the
approximate same ratio of micro, SME and large organisa-
tions’ respondents in the sample. Being aware of the fact
that response rate in business ethics’ research is low (Bab-
bie 1986), the survey was sent to around 2000 managers. In
the first round, we used help of two associations, the Man-
agers’ Association of Slovenia and the Institute of Internal
Auditors Slovenia. The first one was aiming at small and
medium-sized organisations, while the other targeted large
organisations (by Slovenian law, internal audit is obligatory
in large organisations). Because the response rate did not
yield desired results, the second round of personal contacts
via LinkedIn was used to get the target sample. In total, 166
managers completed the survey. The sample was compared
regarding the average characteristics of all Slovenian com-
panies, with the identification of the following deviations:
the overrepresentation of financial sector as well as manag-
ers of large organisations, which was intentional by design.
Regarding the size of the sample, it is in line with previous
research on business ethics, which included approximately
200 respondents, with a minimum standard of 100 (Bailey
1982). Table 2 shows the sample characteristics.

Results

Hypothesis 1

The frequency of each ethical theory chosen in each circum-
stance is shown in Table 3. Virtue ethics was mostly chosen

808 M. Drašček et al.

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in circumstances related to private and business life, leader-
ship and informal leadership, while deontology was chosen

in the general ethical dilemma and in the situation involving
refusal to do an unethical act.

As managers could only chose from previously defined
answers, and thus there was no logical sequence or order,
Pearson’s chi-squared test was used. Also, a logistic regres-
sion was established for each circumstance. The results are
shown in Table 4.

The analyses of each circumstance achieved the follow-
ing results:

Personal/Private Life

With regards to decision-making in the private lives of man-
agers, no variable was statistically relevant. When build-
ing the logistic model, the model was established with only
the variable of education. Even though the model had been
improved throughout the whole process of variable elimina-
tion, the final model, which included only one independent
variable, did not achieve statistical significance (p = 0.094).

Business environment

With regards to decision-making in business, managers’
age was established as a statistically significant variable
(p = 0.048). In the final logistic model, only one independent
variable—managers’ age—was identified as being statisti-
cally significant.

General Ethical Dilemma

With regards to decision-making in general ethical dilem-
mas, the variables of managers’ sex (p = 0.015), age
(p < 0.001), education (p = 0.047), industry (p = 0.039) and
ownership (p = 0,041) were established as statistically sig-
nificant. In the final logistic model, models were built with
three independent variables (age, sex and ownership), which
were also statistically significant (p < 0.001). F-tests showed
that each independent variable in the model was statistically
significant and influenced the managers’ choice of ethi-
cal theory. Once the model was established, second-order
interactions of other independent variables were introduced.
The results showed that model was statistically significant
(p = 0.015), but the interactions did not have a statistically
significant impact on the forecasting of managers’ preferred
ethical theory.

Refusal of Unethical Act

With regards to decision-making concerning refusal of an
unethical act, the variable organisation size was established
as statistically significant (p = 0.023). In the final logistic
model, only one independent variable was identified as
statistically significant: organisation size. The final model

Table 2 Descriptive statistics

Sex N %
 Male 77 46.4
 Female 89 53.6

Age N %
 Less than 30 years 2 1.2
 31–40 years 50 30.1
 41–55 years 95 57.2
 Over 56 years 19 11.5

Work experience N %
 Less than 10 years 15 9
 11–20 years 82 49.4
 21–30 years 44 26.5
 Over 31 years 25 15.1

Education N %
 Less than bachelor’s 28 16.9
 Bachelor’s or undergraduate degree 88 53.0
 Graduate (master’s or PhD) 50 30.1

Educational background N %
 Arts and humanities 8 4.8
 Natural sciences 34 20.5
 Social sciences 124 74.7

Industry N %
 Non-profit organisation 5 3.0
 State organisation (ministry, agencies) 10 6.0
 Manufacturing 17 10.2
 Financial services 54 32.5
 Retail 14 8.4
 Information technology 16 9.7
 Other services 50 30.1

Ownership N %
 State institution (ministries, agencies, etc.) 13 7.8
 State ownership 21 12.7
 Domestic (Slovenian) 83 50.0
 Foreign 49 29.5

Work position N %
 Managing director or board member or CEO

(more than 251 employees)
22 13.2

 Managing director or board member or CEO
(11–250 employees)

43 25.9

 Managing director (less than 10 employees) 25 15.1
 Executive, manager, head of department, etc 76 45.8

Organisation size N %
 Less than 10 employees 33 19.9

1 1–50 employees 31 18.7
 51–250 employees 43 25.9
 Over 251 employees 59 35.5

Total 166 100

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revealed that managers in influence of organisations with
more than 251 employees made managers use ethical theo-
ries of utilitarianism and deontology, while other values did
not have a significant impact.

Ethical Leadership of Colleagues

With regards to decision-making in ethical leadership, the
variable work experience was established as statistically
significant (p = 0.022). In the final logistic model, only one
independent variable was identified as being statistically
significant: work experience. The final logistic regression
model revealed that work experience of 21–30  years led
managers to choose deontology or utilitarianism, but not
virtue ethics.

Informal Ethical Leadership

With regards to decision-making concerning informal ethi-
cal leadership, the variables of managers’ work experience
(p = 0.034), educational background (p = 0.023) and industry
(p = 0.036) were established as statistically significant. In the
final logistic model, models were built with three independ-
ent variables (work experience, age and industry). F-tests
showed that each independent variable was statistically
significant and influenced the managers’ choice of ethical
theory. Analysis revealed that the choice of deontology or
utilitarianism was statistically valid in state institutions and
the retail industry (p < 0.05). Differentiation between virtue
ethics and deontology was statistically significant only if
the manager was employed in a state institution and had
21–30 years of work experience.

Based on the results of the Pearson chi-square test, a
structural model was developed. Table 5 shows the results
of an explanatory factor analysis of the Shapiro–Wilk test
results for each measured independent variable.

None of the variables’ values had a normal distribution
(p < 0.05). This included nominal variables in the factor
analysis, which could not be treated as normally distributed.
Thus, principal axis factoring was used to create factors.
Varimax rotation was used to create factors as the values
of each measurement in individual factors were connected
with the direction and power of relation. To build factors,
the stricter standard marginal value limit of 0,3 was used as

a factor weight, meaning that each measured variable had to
achieve a level of factor relation, as Table 6 shows.

Table 6 shows the results of the factor analysis, which
included principal axis factoring and varimax rotation. The
factor analysis included four factors. Two variables (educa-
tion background and education level) were not included due
to their unsatisfactory level of relation with any factor. The
four established factors were combined as follows:

• Factor 1: age and work experience (experience).
• Factor 2: size of organisation.
• Factor 3: ownership structure and industry (company).
• Factor 4: sex and work position.

The results of Bartlett’s test of sphericity, which shows
whether variables have relation, statistically showed vari-
ability of factors (χ2 = 246; df = 36; p < 0.001).

Table  7 shows the results of the Kaiser–Meyer–Olkin
(KMO) measure of sampling adequacy. The relation between
variables was weak (below 0.5) but is still within the limits
of acceptability (Cerny and Kaiser 1977). The model was
thus built with four factors. The alternative methods included
either incorporating more variables into model, which led
to lower KMO, or using all variables without intermediate
factors into structural equation modelling (SEM), which led
to weaker explainable variance, were thus not suitable.

Table 8 shows the percentage of explainable variance for
each individual factor, with factors ordered from the highest
explainable variance to the lowest. In total, the explainable
variance of all four factors was only 47.1%, with root of
mean square error (RMSE) of four established factors being
0,0969.

The four factors were used to build a path diagram of the
structural model to check the relation of managers’ choice of
ethical theory. Prior to inclusion in the model, all categori-
cal variables were transformed into dummy variables. Due
to the small sample and variability, some dummy variables
were eliminated (education background and education level).

Figure 1 shows the path diagram. The measured values
in the upper row are represented by squares and factors are
represented by circles. The variables related to the ethical
theory that the structural model is attempting to predict are
shown at the bottom. Ethical theories are coded as follows:
utilitarianism is 1, virtue ethics is 2 and deontology is 3.

Table 3 Frequency of chosen
ethical theory by circumstance

Private life (%) Business (%) Ethical
dilemma
(%)

Refusal of
unethical act
(%)

Ethical
leadership
(%)

Indirect
involvement
(%)

Virtue ethics 51.8 41.6 4.2 30.1 74.7 88.0
Utilitarianism 41.0 37.3 33.1 9.6 10.8 1.2
Deontology 7.2 21.1 62.7 60.3 14.5 10.8

810 M. Drašček et al.

1 3

Table 4 Pearson χ2 for different
circumstances

Circumstance Variable χ2 Coverage p

Personal/private life Sex 0.83 2 0.660
Age 8285 6 0.218
Work experience 5202 6 0.518
Education 8.78 4 0.067
Educational background 8346 4 0.080
Industry 18,873 12 0.092
Ownership 5519 6 0.479
Work position 7284 6 0.295
Size 8,617 6 0.196

Business Sex 0.237 2 0.888
Age 12,705 6 0.048
Work experience 12,393 6 0.054
Education 2275 4 0.685
Educational background 2028 4 0.731
Industry 13.35 12 0.344
Ownership 5318 6 0.504
Work position 0.842 6 0.991
Size 5663 6 0.462

Ethical dilemma Sex 8452 2 0.015
Age 52.1 6 < 0.001
Work experience 6065 6 0.416
Education 9644 4 0.047
Educational background 2751 4 0.600
Industry 21.89 12 0.039
Ownership 13,127 6 0.041
Work position 3211 6 0.782
Size 6.98 6 0.323

Refusal of unethical act Sex 0.746 2 0.689
Age 7893 6 0.246
Work experience 11,049 6 0.087
Education 6032 4 0.197
Educational background 2008 4 0.734
Industry 7.33 12 0.835
Ownership 8758 6 0.188
Work position 11,511 6 0.074
Size 14,66 6 0.023

Ethical leadership Sex 2097 2 0.350
Age 12,215 6 0.057
Work experience 14,738 6 0.022
Education 2123 4 0.713
Educational background 4724 4 0.317
Industry 15,655 12 0.208
Ownership 6278 6 0.393
Work position 5712 6 0.456
Size 7513 6 0.276

811Moral Pragmatism as a Bridge Between Duty, Utility, and Virtue in Managers’ Ethical…

1 3

The structural model was built with 1.229 interactions,
and in order to optimise the NLMINB method, 28 free
parameters were used. The statistical value of the built model
was 218.633, the degree of freedom was 82, and p < 0.001.

While analysing the influence of the measured variables
on the dummy variables, as shown in Table 9, no variable
had a statistically important impact on the creation of the
dummy variables or successfully predict managers’ choice
of ethical theory (p > 0.05).

The calculated dummy variables were unable to success-
fully predict managers’ choice of ethical theory, as shown
in Table 10, as no dummy variable statistically impacted the
choice of ethical theory (p > 0.05). This can also be seen in
the standard weights in Fig. 1. Thus, the model cannot be
statistically valid.

The results of Pearson chi-square tests show the limited
number of variables influencing the manager’s choice of
ethical theory. In only two circumstances (general ethical
dilemma and informal ethical leadership) more than one
variable is correlated with managers choice of ethical theory.

The correlation between multiple variables and general
ethical dilemma, with results of using deontology (golden
rule) as dominant ethical theory, can be interpreted as a con-
solidation of ethical decision-making in the business world.
There has been a discussion about having clear rules when
doing ethical business (Enderle 1999) and golden rule comes
as the best proxy for this (Donaldson 1994).

Regarding the informal ethical leadership, this topic is yet
to be research. Our research shows that virtue ethics is, as

Table 4 (continued) Circumstance Variable χ2 Coverage p

Indirect involvement Sex 0.04 2 0.980

Age 8054 6 0.234

Work experience 13,657 6 0.034

Education 4 4 0.406

Educational background 11,329 4 0.023

Industry 22,177 12 0.036

Ownership 4945 6 0.551

Work position 5791 6 0.447

Size 4548 6 0.603

Table 5 Explanatory factor analysis of the Shapiro–Wilk test

Variable Age Work experience Education Size

N 166 166 166 166
Shapiro–Wilk p < .001 < .001 < .001 < .001

Table 6 Factor analysis using a principal axis factoring method and
varimax rotation

Variable Factors Uniqueness

1 2 3 4

Age 0.882 0.212
Work experience 0.853 0.264
Size 0.904 0.150
Educational background 0.921
Ownership 0.769 0.365
Industry 0.538 0.668
Education 0.720 0.907
Sex 0.416 0.453
Work position 0.818

Table 7 Kaiser–Meyer–Olkin measure of sampling adequacy

Variable MSA

Total 0.486
Age 0.504
Work experience 0.499
Education 0.454
Size 0.450
Sex 0.567
Educational background 0.531
Industry 0.437
Ownership 0.462
Work position 0.443

Table 8 Percentage of explained variance for each individual factor

Factor SS loadings % of variance Cumulative %

1 1.547 17.19 17.2
2 1.000 11.11 28.3
3 0.953 10.59 38.9
4 0.743 8.26 47.1

812 M. Drašček et al.

1 3

with formal ethical leadership, the main ethical theory man-
agers use in this circumstance. The diminishing use of utili-
tarianism and growing importance of deontology, connected
with higher age and work experience, could be confirma-
tion of Kohlberg theory of moral development (Forte 2004).
This shows as well that the process of moral learning is a
constant in managers’ life (consciously or unconsciously).
These results are opposite to previous research that elderly
respondents are inclined toward utilitarianism and not deon-
tology (Marques and Azevedo-Pereira 2009). The results of
dominance of utilitarianism in public sector are surprising
as well. This phenomenon could be explained with elevated
pressure and spending cuts of public sector as well as the
raise of importance of efficiency in public spending among
managers in public sector (Jurkiewicz and Massey 2003).

The first tested hypothesis of this article was that it was
possible to develop a model of managers’ choice of ethi-
cal theories in different circumstances as well as the influ-
ence of variables on the choice of ethical theories. Based on

Fig. 1 Path diagram of manag-
ers’ choice of ethical theory.
Age age—WE work experience,
Sizesize—O_1 state-owned
institution, O_2—state-owned
corporation, O_3—privately
owned corporation, I_1—non-
profit industry, I_2—state insti-
tution industry, I_3—production
industry, I_4—financial services
industry, I_5—retail industry,
I_6—IT industry, WP_1—
board or director (more than
251 employees), WP_2—board
or director (11–250 employ-
ees), F1—factor 1, F2—factor
2, F3—factor 3, F4—factor 4,
ET—ethical theory

Table 9 Influence of the measured variables on the dummy variable

Factor Statistical test
value

Standard error Z p

F1
 Age 1.000
 Work experi-

ence
2.961 2.562 1.156 0.248

F2
 Size 1.000

F3
 Ownership_1 1.000
 Ownership_2 − 0.002 0.006 − 0.278 0.781
 Ownership_3 − 0.006 0.022 − 0.285 0.776
 Industry_1 0.016 0.053 0.290 0.772
 Industry_2 0.047 0.157 0.300 0.764
 Industry_3 − 0.001 0.002 − 0.236 0.814
 Industry_4 − 0.000 0.003 − 0.165 0.869
 Industry_5 − 0.000 0.001 − 0.113 0.910
 Industry_6 0.000 0.001 0.010 0.992

F4
 Workposi-

tion_1
1.000

 Workposi-
tion_2

− 0.003 0.349 − 0,009 0.993

Table 10 Results of regression analysis of dummy variables

Factor Coefficient Standard error Z p

Ethical theory F1 − 0.043 0.126 − 0.341 0.733
F2 0.060 0.062 0.961 0.336
F3 0.005 0.017 0.279 0.780
F4 − 0.002 0.248 − 0.009 0.993

813Moral Pragmatism as a Bridge Between Duty, Utility, and Virtue in Managers’ Ethical…

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the research, however, it can be concluded that a predictive
model could not be developed. This result is in accordance
with the postmodernist explanation of management, accord-
ing to which the development of predictive models is coun-
terproductive (Alvesson and Deetz 2006).

The second hypothesis was built on the premise that even
though models of each circumstance could not be developed
in a structural model, managers could still choose the same
ethical theory in different circumstances.

Hypothesis 2

Table 11 shows the frequency of selection of each theory
in different circumstances. A high number of grey cells
and very low number of white cells (ideally, 0) indicates
that managers used the same theory, regardless of the cir-
cumstances. However, the results show that the opposite
occurred.

Table 12 shows the results of McNemar’s test for com-
paring connected answers. McNemar’s test, besides the
Bonferroni correction, was used, because answers did not
have a designated order. Each comparison showed that
there are statistically relevant differences in the frequency
of selection of each ethical theory (p < 0.05). Based on these
results, hypothesis 2, which states that managers consistently

Table 11 Frequency of ethical
arguments based on three main
ethical theories in different
circumstances VV UU DD VV UU DD VV UU DD VV UU DD VV UU DD

VV 4141 2929 1616 44 2626 5656 2222 55 5959 6363 99 1414 7979 11 66

UU 2525 2626 1717 22 2626 4040 2727 99 3232 5252 66 1010 5656 11 1111

DD 33 77 22 11 33 88 11 22 99 99 33 00 1111 00 11

VV 22 1616 5151 2121 88 4040 4949 88 1212 6363 00 66

UU 55 2626 3131 1414 55 4343 5050 77 55 5353 11 88

DD 00 1313 2222 1515 33 1717 2525 33 77 3030 11 44

VV 00 11 66 44 11 22 66 11 00

UU 2222 33 3030 3636 88 1111 4949 11 55

DD 2828 1212 6464 8484 99 1111 9191 00 1313

VV 3737 11 1212 4545 11 44

UU 1212 22 22 1616 00 00

DD 7575 1515 1010 8585 11 1414

VV 108108 00 1616

UU 1717 00 11

DD 2121 22 11

Business
Ethical

dilemma

Refusal of

unethical act
Leadership

Indirect

involvement

P
ri

v
a
te

l
if

e
B

u
si

n
e
ss

E
th

ic
a
l

D
il

e
m

m
a

R
e
fu

sa
l

o
f

u
n
e
th

ic
a
l

a
c
t

L
e
a
d
e
rs

h
ip

V virtue ethics, U utilitarianism, D deontology

Table 12 McNemar’s test for comparing connected answers

C1—private life; C2—business; C3—ethical dilemma; C4—refusal
of unethical act; C5—ethical leadership; C6—indirect involvement

Circumstances χ2 Level of
coverage

p (with adjustment)

C1–C2 13,358 3 < 0.004
C1–C3 105,479 3 < 0.001
C1–C4 97,662 3 < 0.001
C1–C5 35,168 3 < 0.001
C1–C6 65,541 3 < 0.001
C2–C3 64,126 3 < 0.001
C2–C4 47,783 3 < 0.001
C2–C5 35,481 3 < 0.001
C2–C6 74,444 3 < 0.001
C3–C4 41,123 3 < 0.001
C3–C5 111,494 3 < 0.001
C3–C6 142,080 3 < 0.001
C4–C5 64,870 3 < 0.001
C4–C6 87,954 3 < 0.001
C5–C6 18,009 3 < 0.001

814 M. Drašček et al.

1 3

use one ethical theory regardless of the circumstances, is
rejected.

The results of the analysis show that when managers
are faced with a general ethical dilemma or must refuse
an unethical decision, managers primarily use deontology,
in accordance with previous reviews of ethical decision-
making (Craft 2013; Ford and Richardson 1994; Loe et al.
2000; O’Fallon and Butterfield 2005). On the other hand,
when managers are in a position of leadership or informal
leadership position, they predominately use virtue ethics, in
accordance with the importance of virtue ethics in leader-
ship theory (Norman 2013). Managers predominantly use
virtue ethics (frequency) and utilitarianism in business life
(Collier 2018; Paine 1994) and deontology (frequency) in
family life, in accordance with the research on medical eth-
ics (Foreman 1999), while research on this in business ethics
is yet to be established. Finally, integration of all theories
into one grand theory remains elusive (Lemoine et al. 2019),
as only some variables influence managers’ choice of ethical
theory in different circumstances. No clear multiple regres-
sion model could be established.

An analysis of the structural model confirmed that manag-
ers were characterised by ethical ambidexterity or pragmatic
approach, as the model could not be developed. The results
show that a statistically relevant model could not be estab-
lished based on the characteristics of the decision makers,
circumstances or ethical theories. Similarly, the postmodern
explanation of science claims that no absolute truth exists
and that all truths are local (Gergen & Thatchenkery, 1996).
While building the model, avoidance of the narrative fallacy
was crucial in order to ensure that a complex phenomenon
such as ethics was not forced into a model. However, even
the introduction of more variables than had been included in
previous research did not lead to a statistically valid model.
Thus, the results confirm the moral pragmatism, a concept
in which the ethical theory used by a decision maker varies
in different circumstances based on their moral reasoning.

Limitations and Future Research

The research has some limitations. First, managers have
busy schedules (Porter and Nohria 2018) as well as requests
from many different researchers to provide input for stud-
ies (Scandura and Williams 2000). As such, it is possible
that managers themselves did not complete the survey.
Also, the positive selection may have occurred (Randall and
Fernandes 1991) with only ‘ethical’ managers completing
the survey. Both risks were minimised by direct, personal
requests sent to managers. Second, answers given by man-
agers may vary from what they would do in real life, when
faced with time pressure and the demand to make important
decisions (Frederiksen et al. 1972; Nederhof 1985). Finally,

the research utilised a sample of Slovenian managers (direc-
tors and CEOs). Due to socio-cultural and historical specif-
ics, generalisations of study findings may be questionable
(Eweje and Brunton 2010; Ho 2010; Mintz 1996; Hsee and
Weber 1999).

The future research should tackle these limitations. One
direction is conducting multicultural research in different
parts of the world with emphasis on areas, such as the Mid-
dle East and Asia, where additional, non-Western ethical
theories could be used to explain managers’ choices of ethi-
cal theories in decision-making. The role of family life as
well as tensions in private/professional life in regard to ethi-
cal theory could be examined, as well. The investigation of
the role of family status, children, religion, marriage status,
sexual preference etc. could be considered to understand the
choices of ethical theories. The use of qualitative studies in
ethical decision-making based on ethical theories is yet to
be established, as well (Lehnert et al. 2016). The observa-
tion method could be used to reveal actual process of ethi-
cal decision-making in real life. Furthermore, the tipping
point, when, how, and why managers change their ethical
theories should be established, and definition of change in
managers’ chosen ethical theory should be used to examine
variables or circumstances. This could be done with field
experiments (Thaler and Ganser 2015) or neuroscientific
methods (Robertson et al. 2017). Finally, the role and the
practice of reflection as a tool to improve moral reasoning
should be observed more intensively in practice, particularly
when moral reasoning or imagination is not on the main
agenda in the boardrooms.

Conclusions

The field of business ethics has yet to establish how manag-
ers choose an ethical theory to use in ethical decision-mak-
ing. This paper could not establish this either. A person, as a
being characterised by reason as well as emotions, is a com-
plex system that, in contrast to natural sciences, cannot be
formalised or modelled. Indeed, Buckingham and Goodall
(2019) claimed that management cannot be researched with
models or formulas, as they cannot take into account the
complexity and variables associated with everything that
happens in humans when they make decisions. The com-
plexity of people is especially relevant in management,
where managers have important influences on not only other
people but also the environment (Drucker 1954). Thus, even
if research on management avoids a methodological point
of view, different studies can sometimes produce diametri-
cally different results on the same topic. However, this does
not mean that this phenomenon should not be researched or
understood.

815Moral Pragmatism as a Bridge Between Duty, Utility, and Virtue in Managers’ Ethical…

1 3

Business ethics also faces the same problem as leader-
ship literature: integration of different theories into a holistic
theory (Piccolo et al. 2012). Haidt (2012) thinks that man-
agers view morality from different perspectives, leading to
different answers about what is right and wrong. This notion
is rooted in ethical theories, which have only recently been
examined in empirical and theoretical research (Lemoine
et al. 2019). Future empirical and theoretical research should
first try to determine whether the three main ethical theories
complement one another or are fundamentally opposed.

From the theoretical perspective, the theory of business
ethics should focus more on moral pragmatism with the first
step being a clear definition of normative ethical theories.
Starting from the normative models of ethical decision-
making (e.g. Treviňo 1986; Jones 1991; Schwartz 2016),
it should be clear, that there are three (and not two) main
normative ethical theories with virtue ethics being an out-
put rather than the input to the model of ethical decision-
making as currently suggested (e.g. Hunt and Vitell 1986).
With virtue ethics included in the models, theorist should
use moral pragmatism to define ethical decisions. Currently,
models focus on why managers make unethical decision
(Soltes, 2016; Clayton, 2019), which is in accordance with
the modernistic approach, where the world is seen as black
and white. Moral pragmatism, which is supported by this
research, on the other hand is still not seen as part of norma-
tive models of ethical decision-making. Normative models
should thus change to better resonate with reality.

Furthermore, business ethics research should focus more
on “positive psychology” (Peterson and Seligman 2004),
where the emphasis is on positive (ethics) and not negative
(crime or unethical) phenomena. Our study has used this
approach. In the future, we need to better establish what
variables lead to ethical behaviour.

From the managerial perspective, no theory can provide
perfect grounds to all ethical circumstances. But the premise
that ethical decision-making is based on normative ethical
theories is valid. With no aim to establish a grand ethical
theory, future research should consider plurality (not exclu-
sivity) of theories and include moral creativity, education/
training, reflection and reading (Badaracco 2006). Moral
guidance should come from experience and provide different
views on decision-making. Ethical decision-making involves
not only use of theories but also actions, which become hab-
its. Moral pragmatism could be a solution to moral dilemmas
that managers face.

Moral pragmatism is primarily focused on moral under-
standing. Different values and their conflicting dimensions,
which lead to different solutions, demand moral sensitiv-
ity from managers. New decisions breed new dilemmas,
and thus basing decisions on just past experience is fruit-
less. Although this does not mean that managers should be
ignorant of the past, prior experiences should be interpreted

based on present circumstances, and moral creativity should
be used to develop possible solutions.

The role of moral reflection as well as moral learning is
thus a must for managers. The complexity of the modern
business world does not support one grand ethical theory.
Managers should be aware and proficient in all ethical theo-
ries and views. The competency of ethical reasoning should
be examined and actively supported in all organisations (Jain
et al. 2018) thus helping their managers to become ethically
proficient.

Moral pragmatism achieves this by helping managers
clarify what is important in an ethical dilemma and pro-
viding guidelines to make reasonable and enlightened deci-
sions. Sometimes, different, conflicting moral norms must be
integrated into decisions (Drucker 1967). To do so, manag-
ers should not only be intellectually capable but also able to
use moral creativity to solve ethical dilemmas. A pragmatic
approach, which emphasises practical knowledge, daily
problems and cost-effective solutions, is thus more effective
for managerial problems than other approaches (Mumford
and Van Doorn 2001). Similarly, pragmatic leaders are more
flexible and able to cooperate with others than charismatic or
ideological managers, even in the face of adversity (Beddell-
Avers et al. 2008). Another reason, why pragmatic managers
are more effective, is that they investigate the causes of prob-
lems and articulate solutions based on present circumstances
(Mumford et. al. 2008). Based on previous findings, thus,
solely following rules or specific ethical theories and not
adopting a pragmatic approach could lead to a lack of moral
sensitivity, which is the opposite goal of ethical decision-
making. Moral pragmatism thus can help to improve ethical
decision-making while not falling into the ethical relativism
trap.

Compliance with Ethical Standards

Conflict of interest The authors declare that they have no competing
interests.

Ethical Approval All procedures performed in studies involving human
participants were in accordance with the ethical standards of the insti-
tutional and/or national research committee and with the 1964 Dec-
laration of Helsinki and its later amendments or comparable ethical
standards.

Research Involving Human and Animal Rights The article does not
contain any studies with human and animals participants performed
by any of the authors.

Appendix 1

Scenarios with ethical theories in parentheses following the
answer (not shown in actual survey):

816 M. Drašček et al.

1 3

Private life

1. At work, you have organised a very important meet-
ing, which is important not only for the organisation but
also for your career. Unfortunately, you did not notice
that you also have family obligations, which you cannot
avoid. Assume that you chose your family obligations.
You would make this decision because:

• Family obligations always take priority over business
obligations. (deontology)

• The fulfilment of family obligations will bring the
greatest good/happiness to the most people affected
by the decision. (utilitarianism)

• Being a good parent/spouse is the most important
value in my life. (virtue ethics)

Business/professional life

2. Your organisation is in trouble and you have to lay off
many colleagues (assume that you have already done
everything that was formally or informally possible,
including talking with employees, cost optimisation and
lowering investments, so there are no other options). To
make a decision about who to lay off, you will use the
following as a guiding principle

• The added value that the employee brings to the
organisation. (utilitarianism)

• The legal criteria for layoffs. (deontology)
• The work attitude of the employee. (virtue ethics)
General ethical dilemma

3. When you find yourself in an ethical dilemma, your main
decision-making principle is:

• The golden mean (not too much, not too little). (vir-
tue ethics)

• The greatest good for the greatest number of people.
(utilitarianism)

• Do unto others as you would have them do unto you.
(deontology)

Refusing to do an unethical act

4. The reason why you would NOT do an unethical act is:

• It is simply wrong. (deontology)
• Only in actions is a person’s real ethical character

revealed. (virtue ethics)
• Because of my act, a lot of people would suffer.

(utilitarianism)
Ethical leadership—leading colleagues.

5. Your subordinate has lied to you. Nobody else has found
out about the lie except you, and it does not have any
consequences for the organisation or its work. Assume
that you will give a disciplinary notice to the employee.
You would do so because the employee:

• Did indirect damage to the organisation. (utilitarian-
ism)

• Did not meet his work obligations as defined by the
labour contract. (deontology)

• Showed his true character to be one you cannot trust
anymore. (virtue ethics)

Informal ethical leadership

6. Your friend or colleague made an ethical mistake. What
advice would you give him/her?

• We learn from mistakes, so you will do better next
time. (virtue ethics)

• As long as nobody got hurt, everything is OK. (utili-
tarianism)

• It is important is that you have good intentions, no
matter the consequences. (deontology)

Appendix 2

See Table 13

References

Allen, J., & Davis, D. (1993). Assessing some determinant effects of
ethical consulting behavior: The case of personal and profes-
sional values. Journal of Business Ethics, 12(6), 449–458.

Alvesson, M., & Deetz, S. (2006). Critical theory and postmodernism
approaches to organisation studies. In S. R. Clegg & C. Hardy
(Eds.), Studying organization: Theory & method (pp. 185–211).
Thousand Oaks, CA: Sage.

Table 13 Characteristics of
interviewed directors Age

 Below 40 years 1
 41–55 years 7
 Above 55 years 1

Sex
 Male 8
 Female 1

Tenure
 Below 5 years 3
 6–15 year 4
 More than 15 years 2

Organisation
 Profit 7
 Non-profit 2
 SMEs 1
 Large 8

Education background
 Natural science 5
 Social studies 4

817Moral Pragmatism as a Bridge Between Duty, Utility, and Virtue in Managers’ Ethical…

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ORIGINAL PAPER

When Kamay Met Hill: Organisational Ethics in Practice

Jonathan A. Batten1 • Igor Lončarski2 • Peter G. Szilagyi3,4

Received: 30 November 2015 / Accepted: 3 January 2017 / Published online: 27 January 2017

� Springer Science+Business Media Dordrecht 2017

Abstract The Kamay and Hill insider trading conviction

in Australia highlights many of the issues and problems

involved in the prevention, detection and prosecution of

insider trading. The case uniquely highlights how ethical

behaviour is instilled at home, in school and in society, and

the need for ethical responsibility at the personal and

organisational level to complement legal rules and

enforcement. We use the Kamay and Hill case to explore

the reasons behind the failure of the traditional top-down

approach to insider trading prevention, where institutional

ethical codes of conduct largely reflect and rely upon

national rules, norms, and regulation. We propose a bot-

tom-up approach to ensure that individual and organisa-

tional behaviour is ethical, where emphasis is not on

compliance but on a set of core ethical values that allow

individual and corporate expression. It is our strong belief

that compliance cannot replace ethics.

Keywords Abuse of public office � Australia � Ethical
norms and values � Ethical standards and codes � Industry
standards � Foreign exchange market � FX Global Code �
Insider trading � UN Global Compact

Introduction

In early 2015 Lukas Kamay, previously a currency trader at

National Australia Bank (NAB), and his accomplice

Christopher Hill, a former employee of the Australian

Bureau of Statistics
1
(ABS), were convicted of the largest

insider trading scandal in Australian history. Kamay and

Hill had gone to university together and had a simple but

meticulously planned trading scheme: Hill would obtain

pre-release ABS economic data, which Kamay would then

trade on using leveraged Australian dollar (AUD)–US

dollar (USD) foreign exchange contracts (termed margin

FX contracts). Kamay executed a total of 45 trades care-

fully timed to avoid detection and offsetting news flows

and made a profit in excess of A$8 million (US$6 million)

within one year. Unsurprisingly for opaque over-the-

counter (OTC) foreign exchange markets, the pair were

tipped off by the brokers responsible for executing their

trades, rather than by market surveillance and technology

efficiently used in stock markets to detect insider trading

through price irregularities (see Frino et al. 2013; Olmo

et al. 2011).

This paper uses the Kamay and Hill case to examine the

system of insider trading prevention and ethical standards

& Igor Lončarski
[email protected]

Jonathan A. Batten

[email protected]

Peter G. Szilagyi

[email protected]; [email protected]

1
Department of Banking and Finance, Monash University,

PO Box 197, Caulfield East, VIC 3145, Australia

2
Faculty of Economics, University of Ljubljana, Kardeljeva

pl. 17, 1000 Ljubljana, Slovenia

3
CEU Business School, Central European University, Frankel

Leó út 30-34, Budapest 1023, Hungary

4
Judge Business School, University of Cambridge,

Trumpington Street, Cambridge CB2 1AG, UK

1
The Australian Bureau of Statistics is an independent statutory

authority of the Australian government whose functions duties and

powers are set out in the Australian Bureau of Statistics Act 1975 and

the Census and Statistics Act 1905.

123

J Bus Ethics (2018) 147:779–792

https://doi.org/10.1007/s10551-017-3435-4

within the banking and finance industry. The Kamay and

Hill case provides unique insights into the role that ethical

codes and values now play in moderating, or otherwise

affecting, self-serving behaviour in financial markets. We

argue that unless the existing compliance-based system of

regulatory rules and industry standards comes to reflect

core ethical values, then insider trading and other illegal

and unfair market practices will remain commonplace.

Financial markets comprise financial market intermedi-

aries such as banks and non-bank financial institutions, as

well as other stakeholders including regulators, industry

organisations, non-financial corporations and households.

Judicial process and regulations are intended to support

participation in financial markets by economic agents with

heterogeneous skills and information. Insider trading laws

are argued to be especially relevant in ensuring the fairness

and integrity of financial markets worldwide (Bhattacharya

2014). While it is important to recognise the unique cul-

tures, religion and legal systems within each society that

form the context for individual values and norms,
2
there is

a minimum set of legal requirements needed to ensure

contractual fairness in financial market transactions and

improve investor perceptions of market integrity. The

enforcement of these legal requirements is also important,

as evidenced by the literature on insider trading law

enforcement in stock markets (Bhattacharya and Daouk

2002; Fernandes and Ferreira 2009).

The Kamay and Hill case uniquely highlights the need for

ethical responsibility at the personal and organisational level

to also complement legal rules and enforcement. Enforce-

ment activity suffers from major deficiencies in over-the-

counter markets where regulators’ radar for illegal actions is

attenuated (Silvers 2016). Indeed, Kamay’s trades were

never detected by foreign exchange market surveillance. The

global foreign exchange market has a daily turnover of

USD1.7 trillion, and the AUD–USD currency pair is the

fourth most-traded with a turnover of USD353 billion (BIS

2016a). Economic agents in this market attempt to make

profits from trading the various risks that arise from their

actual and speculative cash flows in local and foreign cur-

rency. However, since the exchange rate changes in response

to theoretically random new information, economic benefits

can only accrue to those on the right side of rate movements.

Koslowski (2011: 53) note that speculative profits are

financial intermediaries’ reward for the ‘‘value-adding

activity of the absorption of uncertainty’’. Kamay and Hill,

however, took no such risk, and in fact timed their trades to

maximise their informational advantage while minimising

the probability of contrary news flows.

Ethical responsibility in the Kamay and Hill case is

especially important in the context of financial markets’

money-making culture that encouraged and possibly cul-

tivated behaviour that at its extreme involves breaching

both legal rules and organisational and societal codes of

ethics. Should Kamay and Hill’s employers have taken

greater responsibility for the actions of their employees

beyond obvious monitoring and the establishment of

organisational and personal codes of conduct? How far

should institutional responsibility go in terms of preventing

individuals from acting against the law or firm policies?

To provide insight into these critical issues, we interpret

the Kamay and Hill case in the context of various stylised

models that describe the relationship between organisational

culture, individual action and corporate accountability. The

context of financial crime relates to organisational culture

and its connection to industry, and then national rules and

laws. Clearly, organisational process at ABS was poor in that

Hill was able to easily, and unhindered by organisational

protocol, obtain and share confidential information that was

obviously market sensitive. Despite clear guidelines at the

national, industry and firm level, Kamay also successfully

executed his trades and managed his personal trading

simultaneously with NAB client positions, and during some

of the most turbulent trading on record. In fact, the ‘‘gung-

ho’’ culture in the dealing room in which Kamay worked is

both well known and was used by the defence as an attempt to

mitigate his sentence.
3

We add to the existing literature in two key areas of

research on the scale and scope of ethical policy and its

implementation at the corporate and institutional level. The

first concerns the nature and practice of ethics by key

stakeholders in the banking and finance industry (such as

Koslowski 2011). The second concerns empirical investi-

gation of the scale and scope of ethical attitudes and beliefs

in financial and non-financial corporations (e.g. Emerson

and McKinney 2010).

The paper is structured as follows: First, a review of the

literature on insider trading is provided, which builds

where possible on earlier studies such as Bhattacharya and

Daouk (2002) and Bhattacharya (2014). Then, attention is

directed towards the circumstances surrounding the Hill

2
There is a rich literature on the source of individual ethics and

norms. For example, Emerson and McKinney (2010) highlight the

importance of religion in personal ethics. Werner (2008) also notes

how religious holiness manifests in virtues of integrity and moral

purity.

3
Note that in Kamay and Hill’s case the court imposed a criminal

punishment on individuals who abused insider trading laws. Mean-

while, institutions that manipulate financial markets and cause much

more information distortion and social harm receive fines and

sanctions. The scandal surrounding the manipulation of the London

Interbank Offered Rate (LIBOR) is one such example (Hou and Skeie

2014). Here the reputational cost was overwhelmed by the potential

profits, thus the constraining effects that reputation may play on

insider actions were insufficient (Cui et al. 2015).

780 J. A. Batten et al.

123

and Kamay conviction. Next, we introduce various stylised

models that provide a context for the possible relationships

and interconnections in insider trading codes, values and

norms that may exist at the international, national, corpo-

rate, institutional and individual levels.
4
It is in this context

that the institutional and legal environment in Australia is

discussed and considered. Discussion is then directed to the

appropriate method of engendering good ethical practice.

Should ethical policy be implemented from a societal level

(top-down approach), or be driven by personal ethical

codes (bottom-up approach)? In either case, what more can

and should be done to inculcate an ethical culture at both a

personal and institutional level? The final section allows

for concluding remarks that address two key themes. First,

the issue on what more could be done to improve existing

codes and rules at the firm level, and second, what action

should be taken by the firm to prevent individuals acting

against the law or official firm policies. The broader con-

text of this last point is how ethical behaviour should be

encouraged and pursued.

Insider Trading Defined

Insider trading involves trading in financial markets on

material non-public information with the intention of

achieving a significant financial gain. Whether or not a

financial gain is achieved is irrelevant, the key issue is the

trader’s intention to misuse material information. In most

jurisdictions, insider trading is prohibited or criminalised to

protect the investing public.

With the globalisation of financial markets, international

standards of insider trading regulation and enforcement

have converged significantly in recent years (e.g. Beny

2007; Bhattacharya 2014; Bhattacharya and Daouk 2002;

Franklin 2013). Anglo-American common law countries

have commonly lead civil law countries in adopting and

enforcing insider trading rules. Insider trading was made

illegal in 1934 by the USA, 1966 by Canada, 1970 by

Australia and 1980 by the UK; in contrast, it was not

outlawed until 1988 by Japan, Switzerland and Spain, 1993

by China, and 1994 by Germany (e.g. Beny 2007; Franklin

2013). Recent insider trading regulations have been shown

to have improved price informativeness, reduced market

distortions, and generally enhanced market efficiency in

developed markets in particular (Betzer and Theissen 2010;

Fernandes and Ferreira 2009).

The legal basis for the prosecution of insider trading and

how insider trading rules are implemented at a personal,

industry and societal levels is complex. Based on a review

of US court decisions, settled enforcement proceedings,

and Securities and Exchange Commission (SEC) rules,

Nagy (2009) shows that fiduciary principles are frequently

not essential for the offense of insider trading. Nonetheless,

prosecutions remain difficult despite spectacular examples

of market failures. In the USA, the SEC prosecutes around

50 cases each year, with most cases brought on exchange-

based stock trading and many being settled out of court

(Ventoruzzo 2014). In Australia, the sentencing range for

insider trading had not been established until the present

Kamay and Hill case.

Insidertradingmaybeconsideredwithinthebroadercontext

of financial regulation where the focus is on access to infor-

mation. For example, Goshen and Parchomovsky (2006) argue

that financial market regulationmaybe divided into three broad

categories: (1) disclosure duties, which reduce the costs of

gathering information; (2) restrictions on fraud and manipula-

tion, which lower the costs of verifying information; and (3)

restrictions on insider trading that would undermine the

investment made in gathering and verifying information. Insi-

der trading imposes a penalty on other financial market par-

ticipants even if they are not affected directly by the actual act.

Broadly speaking, white-collar crime such as tax

avoidance and insider trading are often considered vic-

timless in that ‘‘there is no visible victim at their root’’

(Green 2010). This argument could also be applied to the

Kamay and Hill case, where neither the prosecution nor the

recent study of Batten et al. (2015) found detectable price

impacts around the trades. However, the lack of a visible

victim was not considered a defence when considering

Kamay and Hill’s insider trading profits (CDPP v Hill and

Kamay, 2015: 47).
5
Though not a consideration in the

Kamay and Hill case, insider trading can indeed have non-

trivial consequences in foreign exchange markets even if

the act is victimless. Since the exchange rate is the price to

exchange the currency of two different capital markets, it is

possible for adverse price movements to transfer to eco-

nomic agents in another economy. For example, consider

the costs and benefits arising from the AUD depreciating

relative to the USD. This price movement benefits Aus-

tralian exporters, but it hinders importers and may translate

into higher product prices for domestic consumers.

Whether insider trading without a visible victim should be

prosecuted is a contentious issue. McGee (2008) argues that

not all insider trading is unethical, and transactions without

obvious fraudulent harm to individuals or groups should be

permitted. Kamay and Hill’s criminal prosecution creates an
4
For the sake of brevity, we do not discuss popular normative

theories and potential conflicts between individual moral beliefs.

These issues are discussed at length by Hasnas (2016) and Reiter

(2016).

5
http://www.smh.com.au/cqstatic/12z7v7/DPP%20v%20Hill%

20and%20Kamay%20-%20Sentence.pdf.

When Kamay Met Hill: Organisational Ethics in Practice 781

123

interesting precedence in this regard, while also testing the

effectiveness of the current top-down approach to market

discipline. Under the top-down approach, national regula-

tion tends to drive ethical codes and rules at the institutional

level, but the extent of these is generally limited to those

practices that can actually attract regulatory penalties.

Financial market theory that focuses on the market

microstructure of how market participants operate, set

prices and execute trades gives some theoretical merit to

McGee’s (2008) view. Grossman and Stiglitz (1980), for

example, argue that in the absence of any profits arising

from the use of any informational advantage, there would

be no incentive for individuals to seek, analyse and trade

on information, as the market equilibrium would be such

that it would reveal any informational advantage to other

market participants. In other words, if there is no nonzero

expected profit arising from costly information gathering,

markets would fail (in effect a catch 22).

A key question, however, is where the informational

advantage actually comes from. In financial economics, mar-

kets are assumed efficient with the price impact of information

only considered by market participants upon its public release.

Thus, an economic advantage is achieved only through the

speed of reaction to new information, with financial interme-

diaries making considerable investment in the infrastructure

necessary for quick trading execution. The cost of this infras-

tructure, and especially the recent use of advanced technology

by high-frequency traders, is itself an impediment to market

access and places other investors at a persistent informational

disadvantage. Under these circumstances, Yadav (2016) con-

cludes that algorithmic traders can undermine market integrity

in a way similar to fraudulent insider traders.

On the whole, one can interpret the informational

advantage argument by distinguishing between insiders and

‘‘misappropriators’’, as in Engelen and Van Liederkerke

(2007). While the behaviour of true insiders can easily be

explained in an economic context, the same does not hold

for misappropriators whose actions are difficult to justify

on either moral or economic grounds. In this paper, we are

not discussing whether insider trading is unethical or not,

as numerous other authors have done so in the past (En-

gelen and Van Liederkerke 2007; McGee 2008, 2009;

O’Hara 2001; Werhane 1989). We simply take it to be an

unethical and unlawful practice and are predominantly

interested in the extent to which organisations succeed in

promoting and ensuring individual ethical behaviour.

Kamay and Hill’s Insider Trading Scheme

Lukas Kamay and Christopher Hill graduated from Monash

University in Melbourne, Australia, but pursued indepen-

dent careers. Following graduation, Hill joined the time

series department of ABS. Kamay worked in financial

markets and eventually landed a job in the Melbourne

Treasury of NAB, one of the four major banks in Australia

and a leading bank worldwide. He was very successful and

promoted within two years to Associate Director. He had a

less privileged background than Hill, and his ambition to

succeed was well known among his colleagues. The two

met in May 2013 at a birthday party and hatched the

trading scheme that would become their undoing. A

timeline of their meeting and subsequent events is provided

in Table 1.

The pair’s insider trading scheme was simple but effec-

tive: Hill would surreptitiously obtain pre-release ABS data

on Labour Force, Retail Trade, Building Approvals and

Private Capital Expenditures, which he was technically not

permissioned to access but were known to affect the AUD–

USD exchange rate.
6
He would then pass the statistics on to

Kamay, typically via a phone text message.

Kamay initially setup one and then another account with

the broker Pepperstone in August and September 2013. He

then set up separate accounts with the broker Axicorp in

February and May 2014, but kept these accounts secret

from Hill. Table 2 provides a detailed account of Kamay’s

trades on the pre-release ABS statistics. Overall, he exe-

cuted 45 speculative trades on AUD–USD margin FX

contracts on 22 days spanning the period September 2013

to May 2014. Not all of his trades were profitable, with

some designed to lose money and therefore give the

appearance to the brokers that his trading behaviour was

normal and success based on luck. Hill was not aware of

most of the trading and thought that only small profits were

being obtained. He received only two modest payments

from Kamay: A$13,000 in December 2013 and A$6500 in

April 2014. He was therefore surprised to learn that

Kamay’s trades had in fact produced gross profits in excess

of A$8 million.
7

Kamay was careful to both mask his activities and avoid

trading when interfering news flows were expected to

emanate from other markets. For example, late morning

ABS data releases often overlap with releases of economic

data by China and Japan, Australia’s two main trading

6
See http://www.rba.gov.au/mkt-operations/ex-rate-rba-role-fx-mkt.

html for a discussion on economic factors that affect the AUD–USD

exchange rate.
7
Kamay was sentenced to seven years and three months, while Hill

to three years and three months. Hill received a lower sentence

because he had not been aware of the scope and profitability of

Kamay’s trading activity. The two had agreed in May 2013 that the

trading would occur over 12 months with the aim of making just

AUD200,000. This gross amount would have translated to an after-tax

profit of AUD50,000 for each, since Kamay had the accounts in his

name and had a marginal tax rate of 50%. Interestingly, had they

stuck to the original agreement the trading scheme would likely never

have been detected.

782 J. A. Batten et al.

123

partners. However, China and Japan publish key release

dates in advance, which Kamay made sure to avoid when

timing his trades. Kamay executed trades as close as pos-

sible to the times of the ABS data releases, and carefully

timed reversals of his positions to maximise profits.

The technical paper of Batten et al. (2015) shows that

Kamay was successful in making sure that his trades had

no detectable impact on the AUD–USD exchange rate. The

paper uses an asset-pricing framework (Solnik 1977; Stulz

1981; Bekaert and Harvey 1995) to compare the exchange

rate’s intraday volatility and excess returns on days when

Kamay traded versus other news days and days without

news. The results depict a strategic trading behaviour by

Kamay that is consistent with the insider trading behaviour

previously documented by Frino et al. (2013), Korczak

et al. (2010) and McInish et al. (2011). Kamay’s trading on

ABS release dates of high market volatility is also con-

sistent with traditional financial market theory, which

postulates that insiders mask their actions by only trading

during periods of market turbulence (Kyle 1985; Frino

et al. 2013).

A Perspective on Insider Trading Rules
and Regulations

International and National Rules

The broad regulatory context of the Kamay and Hill case is

the role of the financial system in the modern economy,

and the importance of monitoring the actions of individual

actors and participants associated with financial institu-

tions. While banks are just one of many institutions that

participate in the financial system, they are subjected to the

heaviest regulation and regulatory scrutiny due to their

Table 1 Timeline of events

Event Date Description Number of

trades

Paragraph

1 2007 K and H meet while studying economics and finance at Monash University, Melbourne

Australia

9

2 2011 K and H graduate from Monash University 10

3 2011 K employed by the National Australia Bank (NAB) in Melbourne on its wholesale front office

desk

11

4 2011 H employed by the Australian Bureau of Statistics (ABS) 12

5 2013 At a chance meeting in May K and H come up with plan to trade on pre-release ABS data. 13

6 2013 On August 8, K opens trading account 1 with Pepperstone, a foreign exchange contract

provider, to trade margin foreign exchange (FX) contracts

16

7 2013–2014 On September 12 to May 8, K trades 21 margin FX contracts through Pepperstone account 1.

Sixteen trades make profits of A$284,000, and five make deliberate losses of A$195,000

21 18

8 2013 On September 2, K opens trading account 2 at Pepperstone. K keeps the account secret from H 19

9 2013–2014 K trades 13 margin FX contracts through Pepperstone account 2. The trades make profits of

A$970,000 and deliberate losses of A$14,000

13 19

10 2014 K opens trading accounts 3 and 4 with another broker Axicorp 20

11 2014 On February 3 to 13, K trades three margin FX contracts through Axicorp accounts 3 and 4. The

trades make profits of A$601,000

3 21

12 2014 On February 27 to May 8, K trades eight margin FX contracts through Axicorp accounts 3 and

4. The trades make profits of A$5,372,000, with two trades making deliberate losses of

A$816,000

8 22

13 2014 Pepperstone and Axicorp file reports with the Australian Securities and Investments Corporation

(ASIC) under mandatory reporting requirements of suspected insider trading on February 19

and 20, respectively

30

14 2014 The Australian Federal Police and ASIC begin a joint investigation on February 21, but allow

trading to continue to gather sufficient evidence to mount a successful prosecution. On May 9,

search warrants are issued, and Kamay and Hill are arrested

31

15 2014 Joel Murphy, Head of Sales at Pepperstone who alerted ASIC to the trades, is sacked on May 9.

He is currently suing Pepperstone for unfair dismissal
a

Paragraph is the paragraph reference from CDPP v Hill and Kamay 2015 VSC 86. H is Christopher Russell Hill, K is Lukas James Kamay.

Kamay executed a total of 45 margin FX trades: 34 through Pepperstone Financial Pty Ltd and 11 through AxiCorp Financial Services Pty Ltd
a
http://www.heraldsun.com.au/news/law-order/employer-wont-back-down-over-insider-trading-sacking/story-fni0fee2-1227037855024

When Kamay Met Hill: Organisational Ethics in Practice 783

123

systemic role in providing leverage and trading risk

exposures. While international banks have organisational

units capable of monitoring in-house trading, the sheer size

of their positions warrants particular regulatory attention.

These points are discussed in detail by the International

Competition Network (ICN), which notes that regulatory

reform has become more focused on the importance of

maintaining competition (ICN 2005).

Insider trading and market manipulation are of particular

regulatory concern and attention. Regulatory principles are

embodied in the guidance on corruption by the United

Nations (UN) and other international organisations, which

loosely refer to ‘‘the abuse of entrusted power for private

gain—not only financial gain but also non-financial

advantages’’ (Transparency International; UN Global

Compact). Other institutions such as the World Bank also

attempt to operationalise regulatory oversight by scoring

countries in terms of regulatory quality and other gover-

nance indicators.
8
More specific to our paper is the current

initiative of the Bank for International Settlements to issue

a global code for foreign exchange market conduct. The

BIS’ Foreign Exchange Market Group completed the first

phase of establishing a global code in May 2016, with the

complete code and adherence mechanisms to be released in

May 2017. While rules directly related to insider trading

are not mentioned in the current draft, there are detailed

Table 2 Australian Bureau of Statistics (ABS) data release dates and Kamay’s pre-release trades

ABS data Labour force

(Cat. 6202)

Retail trade

(Cat. 8501)

Building

approvals

(Cat. 8731)

Private capital

expenditure

(Cat. 5625)

RBA Net news

days

(N = 67)

Trade days
c

(N = 22)

17/01/13 09/01/13 10/01/13 3 0

07/02/13 06/02/13 04/02/13 28/02/13 05/02/13 5 0

14/03/13 05/03/13 04/03/13 05/03/13 3 0

11/04/13 04/04/13 04/04/13 02/04/13 3 0

09/05/13 06/05/13 02/05/13 07/05/13 4 0

13/06/13 03/06/13 30/05/13 30/5/13 04/06/13 4 0

11/07/13 03/07/13 04/07/13 02/07/13 4 0

08/08/13
a

05/08/13
a

30/07/13 29/08/13 06/08/13 5 0
b

12/09/13
a

03/09/13
a

02/09/13 03/09/13 3 2

10/10/13
a

01/10/13
a

02/10/13
a

01/10/13 3 3

07/11/13
a

04/11/13
a

31/10/13
a

28/11/13 05/11/13 5 3

12/12/13
a

03/12/13 02/12/13
a

03/12/13 3 2

16/01/14 09/01/14 09/01/14 2 0

13/02/14
a

06/02/14
a

03/02/14
a

27/02/14
a

04/02/14 5 4

13/03/14
a

06/03/14
a

04/03/14 04/03/14 3 2

10/04/14
a

03/04/14
a

02/04/14
a

01/04/14 4 3

08/05/14
a

07/05/14
a

05/05/14
a

29/05/14 06/05/14 5 3

12/06/14 03/06/14 02/06/14 03/06/14 3 0

Hill data release to Kamay
a
(N = 24) 9 8 6 1

Relevant news events (N = 76) 18 18 18 6 16

ABS is Australian Bureau of Statistics. RBA is relevant Reserve Bank of Australia Statement on Monetary Policy, typically made after ABS data

release, termed ‘‘Statement by Glenn Stevens, Governor: Monetary Policy Decision’’

ABS data as specified in CDPP v Hill and Kamay (2015) VSC 86 paragraph 32

Net news days are the net days in each of the event rows. Trade days are the number of actual trade days in the event rows; trading only took

place when the relevant pre-release data were the only news event on that day

ABS release times are 11:30 a.m. Australian Eastern Time. There were 40 relevant ABS releases and 11 RBA meetings over the trading period,

for a total of 51 events. Some of these overlap
a
Trade dates are those dates that both match the evidence provided by CDPP v Hill and Kamay (2015) VSC 86 and those trades made to avoid

overlap with RBA monetary policy decisions, which occur early in the month
b
Hill released data to Kamay but the relevant accounts were not opened until August 9, 2013

c
A total of 45 trades were made over these days: 21 trades were made using the Pepperstone account 1 (12 September 2013 to 8 May 2014).

Thirteen trades were made using the Pepperstone account 2 (12 September 2013 to 27 February 2014). Three trades were made using the

AxiCorp account 1 (3 to 13 February 2014). Eight trades were made using the AxiCorp account 2 (27 February to 8 May 2014)

8
http://info.worldbank.org/governance/wgi/index.aspx#faq-2.

784 J. A. Batten et al.

123

comments on information sharing. For example, the third

guiding principle states that ‘‘Market participants are

expected to be clear and accurate in their communications

and to protect confidential information to promote effective

communication that supports a robust, fair, open, liquid and

appropriately transparent FX Market’’ (BIS 2016b: 3).

National legislation includes ‘‘umbrella’’ rules covering

insider trading and consumer protection laws. In Australia,

there are two main financial market regulators equivalent to

the central bank and securities markets regulator present in

most developed economies. The Reserve Bank of Australia

(RBA) conducts monetary policy with the objective of

ensuring AUD stability and monitors licenses trading banks

to maintain a strong financial system.
9
Securities markets

violations, which include insider trading and market

manipulation, are the domain of the Australian Securities

and Investments Corporation (ASIC). The prosecution of

Kamay and Hill only involved the ASIC, because their

trading scheme, while profitable, did not destabilise the

currency given the enormous sums traded in foreign

exchange markets.
10

The ASIC requires mandatory reporting by financial

market participants of suspected insider trading. The rele-

vant regulation RG 238.14 states, ‘‘We do not expect a

market participant to actively seek to detect reportable mat-

ters for the purposes of Rule 5.11.1. Rather, the rule requires

market participants to report activity they become aware of

in the ordinary course of their client and proprietary trading

activities’’.
11

As noted previously, in the Kamay and Hill case it was

Kamay’s brokers that reported what was thought to be

trading irregularities. Although this paper does not directly

address this issue, one particular concern with the existing

normative structure of rules and standards is the difficult

process of monitoring. A critical problem highlighted by

the Kamay and Hill case is how regulators should monitor

trading in opaque OTC markets, including cash-based

foreign exchange markets and dependent derivatives mar-

kets. In exchange-based stock markets, abnormal trading

typically associated with insider trading can be captured

using computer-based search algorithms (see Olmo et al.

2011). For OTC markets, however, no such application of

technology currently exists. It is also important to point out

that while there has been a convergence in insider trading

rules internationally, there remains significant variation in

both rules and their enforcement across countries, despite

the clear economic benefits accrued (Beny 2007; Steinberg

2003).

Institutional and Organisational Rules

and Regulations

The internal ethical codes and rules of financial institutions

within national systems are based on both national regu-

lations and rules issued by industry organisations such as

the national Australian Bankers Association (ABA) and the

international Chartered Financial Analyst (CFA) Institute.

These rules reflect key ethical concepts of justice, duty and

responsibility, and are expressed at both the corporate and

industry levels in terms of specific ethical policies and

principles.

The CFA Code of Ethics and Standards of Professional

Conduct has six core principles, including acting with

integrity, competence, diligence and respect with the

public, clients and prospective clients; acting in an ethical

manner that reflects credit on the investment professional

and the investment profession; and promoting the integrity

of and upholding the rules of capital markets.
12

The ABA

Code of Banking Practice has four key areas that does not

specifically refer to market integrity, but more broadly to

key commitments and general obligations associated with

banking services and practices, while acknowledging a

general duty of confidentiality.
13

In Kamay and Hill’s case, both their employers had

strict hiring procedures and set high ethical standards for

their employees. For example, ABS had a clear policy on

the use of private information (see ‘‘Appendix’’), while

NAB made clear statements on the importance of meeting

legal and regulatory obligations and acting with honesty

and integrity.
14

Importantly, however, neither employer

was successful deterring unethical behaviour. For example,

Kamay argued for diminished responsibility due to the

aggressive money-making culture in NAB’s Treasury. This

argument was not well-received by the Australian court,

which suggested that higher standards should always apply.

Statman (2009) nonetheless shows that culture not only

influences behaviour but also perceptions of fairness and

context. Thus, in some countries Kamay and Hill’s actions

may not be considered unfair and might even be considered

acceptable. Certainly, there are significant differences

internationally in the extent of ethical enforcement (Beny

2007).

9
http://www.rba.gov.au/about-rba/our-role.html.

10
The ASIC has investigated a number of suspected cases of insider

trading on key economic news, http://www.smh.com.au/national/rba-

interest-rate-decisions-and-australian-dollar-movements-20150411-

1mj6cj.html.
11

ASIC Regulatory Guide 238 (2013), http://download.asic.gov.au/

media/1247093/rg238.pdf.

12
https://www.cfainstitute.org/ethics/codes/Pages/index.aspx.

13
http://www.bankers.asn.au/industry-standards/ABAs-code-of-bank

ing-practice.
14

https://www.nab.com.au/content/dam/nabrwd/About-Us/national-

australia-bank-code-of-conduct.pdf.

When Kamay Met Hill: Organisational Ethics in Practice 785

123

In order to better understand the role of culture in

affecting individual ethical standards, it is important to

understand how individuals interact in hierarchies and the

agency issues that can arise as a result. In economics, the

agency problem may be interpreted as a lack of loyalty. In

social psychology, however, the agency problem is related

to excessive loyalty. This distinction is important because

it shows that compliance is rooted in the notion of

rationality and consequence-based decision making. As the

experimental evidence of Milgram (1974) shows, humans

‘‘suffer’’ from excessive loyalty to authority, or what he

refers to as ‘‘agentic shift’’. Of course, as long as we

recognise the rule of law and compliance as the basis for

authority, then compliance will be effective—and even too

effective in the sense that it will not even be questioned.

Importantly, there are circumstances in which the role of

authority can actually be taken over by culture at the cor-

porate, departmental, or even smaller group level. If this

culture is in stark contrast to societal norms, it can

encourage the unethical behaviour of individuals by means

of excessive loyalty. Milgram also explores how mitigating

such behaviour requires rivalling authority, absent author-

ity and dissenting peers. Morck (2008) discusses how to

introduce these concepts in corporations from the per-

spective of corporate governance. These approaches pro-

vide solutions for changing organisational culture to allow

greater individual expression.

There is also an important role to be played by educa-

tional organisations in introducing students to ethical

concepts, in the event that they have not been exposed to

them previously, and reinforcing existing personal or

individual ethical codes and norms. While there is a debate

on whether ethics can be taught, educational organisations

in recent years have modified curricula and introduced

ethics courses (Oates and Dias 2016). Monash University

in Melbourne, where the pair graduated, also has clear

guidelines on ethical practice
15

and consciously tries to

install the importance of ethics and ethical conduct in its

business and economics graduates through teaching and

learning.
16

These objectives are broadly in line with the

UN’s Principles for Responsible Management Education

(PRME) initiative, which was launched in 2007 as part of

the UN Global Compact initiative, and which Monash

Business School joined in 2009. Given that Kamay and Hill

graduated in 2011, they are certain to have been exposed to

the importance of ethics and ethical conduct both formally

and practically, interwoven in Monash University’s cur-

ricula, during their undergraduate education.

In summary, the Kamay and Hill case is important

because it represents an obvious breakdown in the educa-

tion and socialisation process of financial market profes-

sionals. The pair were presented with many examples of

ethics and ethical principles during their education and

subsequent professional careers at the organisational,

industry, national as well as international level. While they

both showed remorse for their actions during prosecution,

they had perceived their insider trading scheme as a game

without consequence. That it should be made clear to a

younger generation that crime does have consequence was

emphasised by the court and used as justification for the

severity of the pair’s sentencing, especially for Kamay.

These issues are discussed in the next section, where we

present three stylised models of stakeholder relationships

in terms of independent and interdependent linkages

between ethical norms, rules and regulation.

Stylised Models on Linkages Between Ethical
Norms, Rules and Regulation

Kamay and Hill’s insider trading actions closely resembled

those typically taken by corporate insiders, who normally

exploit positive rather than negative news and use their

informational advantage to both maximise profits and

minimise risk (Lee et al. 2014). As evidenced by the low

number of insider trading prosecutions even in exchange-

based stock markets, such deeds are hard to catch. If so, the

prevention of insider trading should transcend the imposi-

tion of penalties, with consideration also given to how

ethics is managed within the firm and how ethical beha-

viour is encouraged and implemented at home, in school

and in society more generally. We now attempt to articu-

late this critical issue in an ethical framework, which

emphasises the importance of ethical practice being rein-

forced both at the corporate and the societal level. Clearly,

one needs to do more than just rely on insider trading

regulation and its enforcement.

We show three stylised models depicting the interplay

between individual, firm, industry and national/societal

ethical principles, as well as related rules and regulations

on insider trading.

Figure 1 illustrates a concentric system of nested stan-

dards, which are centralised and where channels link

international and national rules, laws and religious stan-

dards. National standards and ethical principles then reflect

directly into industry and firm-level codes and standards.

This likely represents the current status quo of insider

trading laws and rules. In Australia, for example, insider

trading regulation has converged with international stan-

dards, which are in turn imposed on industry- and firm-

level codes and standards. Personal beliefs and morals sit

15
http://adm.monash.edu/workplace-policy/ethics/.

16
http://adm.monash.edu/human-resources/ethics/ethics-statement-web.

pdf.

786 J. A. Batten et al.

123

nested within this framework. Importantly, industry- and

firm-level codes and standards reflect national laws with no

obvious intent to transcend them.

It is important that this hierarchy of rules also dictates

personal beliefs, and while there may be some feedback

from personal beliefs into the hierarchy, it is unlikely that

the beliefs can be interpreted. Such a rigid system of

compliance requires constant monitoring and policing and

leads to failure when monitoring is not maintained. In fact,

the system is based on the predisposition that individuals

are unlikely to behave ethically (or comply), hence the

need for the overwhelming complexity in regulation and

rules. This by itself raises the issue that what we generally

describe and/or think of as ethics is in fact simply a

taxonomy of compliance—i.e. teaching, codifying and

telling individuals what they need to follow in order to

conform to a minimum set of standards. Under such as

setting, individual responsibility and ethical judgement are

abdicated in favour of rule adherence. The Kamay and Hill

case and other recent financial market scandals are exam-

ples of when monitoring (compliance) was either inade-

quate or simply not undertaken, as would occur when a

firm has failed to enact national regulation through insuf-

ficient internal controls.

Figure 2 highlights the evolution of the system towards

well-developed law and governance frameworks in the

spirit of La Porta et al. (1998). These systems are inde-

pendent of legal perspectives (e.g. common vs. civil law

origin), and compliance is ensured by a strong and inde-

pendent judicial system as interpreted by the law and

finance literature (see Beny 2007). Here, personal, firm and

industry codes are all nested independently and non-in-

clusively within a broader set of national and international

rules and standards.

The problem in Fig. 2 is obvious: transmission channels

are undirected, and there is little scope for development or

evolution based on interaction and learning. There is also

the potential for conflict between international and national

regulations and the rules imposed by industry organisa-

tions. For an example one needs to go no further than the

ethics rules of the British Bankers Association (BBA), and

the failure of these rules to curtail both the individual and

institutional sanctioned breaches of trust associated with

the recent London Interbank Offered Rate (LIBOR) scan-

dal. Note that as a result of this scandal, there has been a

progression to the supervision of LIBOR rates by national

regulators (see Hou and Skeie 2014).

It is of course not surprising that national regulators rely

on industry self-regulation, especially in opaque OTC

markets where regulatory monitoring is difficult. However,

the Kamay and Hill case also highlights both the strength

and the weakness of this approach. While Kamay and Hill

were ultimately convicted, had they executed their trans-

actions more carefully (for example, through offshore

rather than domestic brokers), they would likely never have

been detected. Therefore, where present, industry rules

need to complement those imposed at the national level,

and even transcend them under circumstances where

national regulation is inefficient or inadequate (Beny

2007).

We argue that the interdependent ethical, moral and

legal framework shown in Fig. 3 is the best suited for the

prevention of illegal insider trading. Here, a core set of

shared principles at the national, industry, firm and indi-

vidual levels provides a conceptual structure to a broader

set of rules, laws and principles. In this setting, responsivity

is not entirely abdicated, and individual judgement and

Fig. 1 Stylised centralised ethical, moral and legal structure. Exam-
ples of relevant ethical rules and guidelines related to insider trading:

(A) International ethical codes: FX Global Code (BIS 2016b); UN

Global Compact with reference to integrity and corruption; Trans-

parency International’s Code of Conduct for Corporations. https://

www.unglobalcompact.org/about/integrity-measures, http://www.

transparency.org/whatwedo/answer/code_of_ethics_for_companies_

good_practices_and_resources. (B) National regulation in Australia:

Corporations Amendment (Financial Market Supervision) Act 2010

provides market integrity rules; Privacy Act 1988 provides the gen-

eral duty of confidentiality. (C) Industry codes of conduct: FX Global

Code (BIS 2016b); CFA Code of Ethics and Standards of Professional

Conduct; ABA Code of Banking Practice. https://www.cfainstitute.

org/ethics/codes/Pages/index.aspx, http://www.bankers.asn.au/indus

try-standards/ABAs-code-of-banking-practice. (D) Firm-specific

codes: There may be firm-level strategic and policy statements on the

need for corporate social responsibility and the need for stakeholder

engagement. Corporate policy may include a number of relevant

dimensions including the need for transparency and disclosure; the

presence of internal and external audits; whistle-blowing rules and

specific internal controls (compliance) that address trading and risk

shifting (transfer pricing). In the case of the NAB Code of Conduct

(Section 8) there is specific reference to the need to ‘‘ensure that our

conduct in business ensures that we treat customers fairly and that we

help safeguard market integrity’’. https://www.nab.com.au/content/

dam/nabrwd/About-Us/national-australia-bank-code-of-conduct.pdf

When Kamay Met Hill: Organisational Ethics in Practice 787

123

duty is sharpened by the presence of rules that translate into

higher ethical principles and standards. The system is

inclusive and, since there are shared principles, tolerant in a

way that allows for sharing and individual expression. How

best to achieve such an interdependent structure remains a

challenge for financial markets and those institutions and

individuals that operate within them.

A key problem that remains is that the current focus on

institutions, laws and codes reflects the prevailing attitude

of modern (neoclassical) economic theory that markets are

well functioning and possess self-correcting mechanisms

that always get things right even if individuals get them

wrong. Nonetheless, given the heterogeneity of individual

beliefs, norms and biases in establishing ethical systems

and policy, there is a need to first recognise and articulate

commonalities as well as differences, while modifying and

reinterpreting policy in response to individual feedback. In

the absence of such a consideration, setting up rules and

compliance is the only viable course of action.

The agency problem, as described in economics and

finance, is based on Jensen and Meckling’s (1976) well-

known principal-agent theme where rules and compliance

are focused on the lack of loyalty. The Kamay and Hill

Fig. 2 Stylised independent ethical, moral and legal structure.
Examples of relevant ethical rules and guidelines related to insider

trading: (A) International ethical codes: FX Global Code (BIS 2016b);

UN Global Compact with reference to integrity and corruption;

Transparency International’s Code of Conduct for Corporations.

https://www.unglobalcompact.org/about/integrity-measures, http://

www.transparency.org/whatwedo/answer/code_of_ethics_for_compa

nies_good_practices_and_resources. (B) National regulation in Aus-

tralia: Corporations Amendment (Financial Market Supervision) Act

2010 provides market integrity rules; Privacy Act 1988 provides the

general duty of confidentiality. (C) Industry codes of conduct: FX

Global Code (BIS 2016b); CFA Code of Ethics and Standards of

Professional Conduct; ABA Code of Banking Practice. https://www.

cfainstitute.org/ethics/codes/Pages/index.aspx, http://www.bankers.

asn.au/industry-standards/ABAs-code-of-banking-practice. (D) Firm-

specific codes: There may be firm-level strategic and policy state-

ments on the need for corporate social responsibility and the need for

stakeholder engagement. Corporate policy may include a number of

relevant dimensions including the need for transparency and disclo-

sure; the presence of internal and external audits; whistle-blowing

rules and specific internal controls (compliance) that address trading

and risk shifting (transfer pricing). In the case of the NAB Code of

Conduct (Section 8) there is specific reference to the need to ‘‘ensure

that our conduct in business ensures that we treat customers fairly and

that we help safeguard market integrity’’. https://www.nab.com.au/

content/dam/nabrwd/About-Us/national-australia-bank-code-of-con

duct.pdf

Fig. 3 Interdependent ethical, moral and legal structure. The inter-
dependent structure is centred on core ethical values that support, or

underpin, an overlapping and interconnected structure of personal,

firm and industry-level beliefs. There is interaction and adjustment.

Examples of relevant ethical rules and guidelines related to insider

trading: (A) International ethical codes: FX Global Code (BIS 2016b);

UN Global Compact with reference to integrity and corruption;

Transparency International’s Code of Conduct for Corporations.

https://www.unglobalcompact.org/about/integrity-measures, http://

www.transparency.org/whatwedo/answer/code_of_ethics_for_compa

nies_good_practices_and_resources. (B) National regulation in Aus-

tralia: Corporations Amendment (Financial Market Supervision) Act

2010 provides market integrity rules; Privacy Act 1988 provides the

general duty of confidentiality. (C) Industry codes of conduct: FX

Global Code (BIS 2016b); CFA Code of Ethics and Standards of

Professional Conduct; ABA Code of Banking Practice. https://www.

cfainstitute.org/ethics/codes/Pages/index.aspx, http://www.bankers.

asn.au/industry-standards/ABAs-code-of-banking-practice. (D) Firm-

specific codes: There may be firm-level strategic and policy state-

ments on the need for corporate social responsibility and the need for

stakeholder engagement. Corporate policy may include a number of

relevant dimensions including the need for transparency and disclo-

sure; the presence of internal and external audits; whistle-blowing

rules and specific internal controls (compliance) that address trading

and risk shifting (transfer pricing). In the case of the NAB Code of

Conduct (Section 8) there is specific reference to the need to ‘‘ensure

that our conduct in business ensures that we treat customers fairly and

that we help safeguard market integrity’’. https://www.nab.com.au/

content/dam/nabrwd/About-Us/national-australia-bank-code-of-con

duct.pdf

788 J. A. Batten et al.

123

case and other recent financial scandals show that where

the attention is on the individual, it may well be the

organisational culture fostering excessively competitive

behaviour. We believe that these issues, as related to the

ethical behaviour of individuals, need to be addressed from

the bottom-up, starting with the individual to allow inter-

pretation further up the organisational hierarchy. The pre-

vailing top-down compliance-based approach is already

well-implemented, but often fails to ensure market integ-

rity. The issue remains as to how best to enable an effective

and balanced interaction between interpretations of ethics

and compliance of rules or norms.

The field of behavioural economics and finance can

provide clues as to how compliance can be structured,

promoted and executed when behavioural biases of indi-

viduals are considered. For example, individuals respond

differently to positive and negative framing of rules and

codes, and consider their responsibilities differently when

completely bounded by rules as opposed to given more

latitude and accountability. This perspective is proposed by

Langevoort (2016), who introduces the concept of beha-

vioural compliance and explains why and how a compli-

ance framework should ‘‘draw from a wider range of

behavioural predictions about individual and organisational

behaviour’’.

Conclusion

This paper has used the historic Kamay and Hill case of

foreign exchange insider trading in Australia to highlight

the many issues and problems involved in the prevention,

detection and prosecution of insider trading in financial

markets. What remains clear is that the current moral and

ethical system, responding in a top-down manner to insider

trading laws and their enforcement, needs to be improved.

A critical task is the propagation of ethical behaviour, not

only in terms of codes of conduct but also in terms of

embedding ethics in the culture of the firm. Ideally, the

legal, ethical and moral structures surrounding financial

markets should be interdependent and inclusive, while still

allowing for individual and corporate expression. This

approach in effect sees corporate policy as being at the

nexus of individual and national-international guidance. In

a centralised and hierarchical system where rules are nested

and layered, individuals likely become overwhelmed and

feel disconnected from the policy setting process.

Our review of the insider trading literature has empha-

sised the importance of both international and domestic

rules, and that of industry regulations and sanctions.

International differences in insider trading regulation and

enforcement impose a challenge to establishing universal

rules and principles that can be taught in schools. The need

for industry-based monitoring is obvious given the scale,

scope and economic importance of financial markets today.

In the context of education, the question is whether

ethics can really be instilled in individuals at the level of

tertiary education. Firstly, it seems that what is currently

taught is essentially compliance with laws, regulations and

corporate codes of conduct and ethical policy. The role of

individual judgement and responsibility remains ambigu-

ous, with little scope for individual interpretation of ethical

norms and principles. Secondly, raising these issues so late

in the life of an individual may be inappropriate. Previous

research shows, for example, that the ethicality of univer-

sity students is heavily affected by gender, age, religious

beliefs and interpersonal competitiveness (Terpstra et al.

1993). The Kamay and Hill case has nevertheless shown

two individuals with distinctly different social backgrounds

colluding in the same unethical undertaking. In other

words, the seeds of their opportunistic deeds were likely

planted earlier in life, and changing them through educa-

tion may be difficult, if not impossible.

The psychological traits of an individual seem to play an

important role in ethical behaviour and may bias the

individual’s choice of professional vocation. Brown et al.

(2010), for example, show that more empathetic and less

narcissistic individuals are more likely to make ethical

decisions. They further demonstrate that finance majors

tend to be less empathetic and more narcissistic, i.e. are

less likely to act ethically all else equal. Even if an indi-

vidual emerges from the educational process with a ten-

dency towards ethical behaviour, whether they make

ethical decisions in their later professional careers will

likely be affected by the prevailing corporate and industry

culture.

Oates and Dias (2016) analyse the extent to which ethics

is included in the banking and finance programmes of

Australian business schools. They find that 34 out of 54

programmes include ethics, but only around 10 per cent

include ethics in all courses. They also find that little focus

is given to actual assessment on ethics.

Hence, it is vital to discuss what more, and how much

more, can be done at financial institutions in terms of

implementing and enforcing ethical codes and rules. The

key question is what responsibility firms should take in

terms of truly embedding ethics in their cultures, and how

far they should go in monitoring unethical behaviour in its

many manifestations. The credibility and authenticity of

ethical principles in the financial sector is difficult to pro-

mote at the firm (and market) level, especially in the wake

of the many scandals and market manipulation practices

that have become evident in recent years (e.g. LIBOR

fixing, gold fixing, foreign exchange fixing, warehousing

scandal, etc.).

When Kamay Met Hill: Organisational Ethics in Practice 789

123

This leads to the final question of whether it is possible

to have better financial institutions, and whether these

institutions and their agents are able to be better corporate

citizens despite the competitive culture they actively

encourage. The reality is that the financial system and its

participants have a preeminent role in the modern econ-

omy. It seems that the process of embedding ethics must

start strategically from the top and addressed at all levels of

the institution, by promoting an ethical culture while at the

same time severely deterring and penalising social mis-

conduct at both the individual and firm levels.

Good examples of sound ethical codes include the UN’s

PRME initiative in education, and the CFA Institute’s Code

of Ethics and Standards of Professional Conduct among

professional societies. However, much more needs to be

done at the firm level, where critical issues remain invisible

to public and public scrutiny. Only then will financial

institutions receive greater public credibility and, by doing

so, remove the central argument typically used by indi-

viduals to rationalise their own unethical behaviour. As

firms and markets are essentially run by people, this should

foster better ethical culture in the financial sector. Institu-

tions should also provide good examples (or role models)

for the promotion and integration of social responsibility

and broader concepts of ethical behaviour. This clearly

should start early in life, with attention given to estab-

lishing a core foundation of ethical principles and values

that will transcend, and integrate with, corporate, industry

and national perspectives.

The Kamay and Hill case highlights further issues in

preventing, detecting and prosecuting insider trading that

have not been discussed in detail in this paper. The pair

faced a complex charge of insider trading and identity

theft, and there was considerable discussion on the severity

of their sentencing. Certainly, the sentencing judge sought

to make the sentences unpleasant to dissuade others from

repeating the crime, stating ‘‘it is self-evident that the

longer the sentence, the harder the bite’’ (CDPP v Hill and

Kamay, 2015: 937). The sentences’ effectiveness in

deterring further insider trading remains to be seen.

Finally, it is important to place the Kamay and Hill case

and other examples of market failures in the context of the

broader activities of banks, especially with respect to

lending, financing and more recently their strong focus on

fee-based activities. A recent discussion provided by the

Fidelis International Institute highlights a large number of

ethical issues that the financial sector generally faces,

including the support of totalitarian regimes and

unscrupulous firms, or that of firms that leave a large

ecological footprint.
17

This suggests that while individual

trading behaviour is certainly important, it really is just one

of many issues that need to be addressed.

Acknowledgements This paper was first discussed at Monash
University, Australia, in 2015. The authors wish to thank those who

shared their opinions and views on the actions of Christopher Hill and

Lukas Kamay, who are both Monash University alumni. We also like

to thank Aleksandr Gevorkyan, participants at the 22nd International

Vincentian Business Ethics Conference, Patrick Flanagan and three

anonymous referees for valuable comments and suggestions.

Appendix: Policy on Pre-embargo Access to ABS
Statistical Releases

To ensure impartiality and integrity of ABS statistics, it is

standard ABS policy and practice to make all our statistical

releases available on our website to all government, com-

mercial and public users of our statistics, simultaneously,

from 11.30 a.m. (Canberra time) on the day of their

release. Prior to 11.30 a.m., all ABS statistics are treated as

confidential and regarded as ‘‘under embargo’’.

However, given the high level of market and community

interest in some statistical series, it is important from a

‘‘public good’’ perspective that key ministers are able to

respond in an informed manner to requests from the media

for early comment on the released statistics, thereby

avoiding any inadvertent misinterpretation. The ABS also

provides access for a range of authorised Wires service

providers.

For selected government agencies, a secure ‘‘lockup’’

facility is provided for both market sensitive and a small

number of other complex key ABS statistical releases. This

enables authorised government officials and ministerial staff

time to analyse the release and develop a briefing to be

provided to relevant ministers after lifting of the embargo.

Authorised persons attending a lockup are required to

remain in a secure room managed by ABS staff and are

prohibited from communicating any information from the

statistical release to anyone outside the room, until the

embargo is lifted at 11.30 a.m. (Canberra time). Attendees

at the lockup are also required to sign security undertakings

which include provision for prosecution under the Crimes

Act 1914 for anyone who breaches the conditions for

attending the lockup.

The following products are approved for provision to

authorised persons via ABS-hosted lockups on the morning

of the day of their release:

Balance of Payments and International Investment

Position, Australia—quarterly (cat. no. 5302.0)

Labour Force, Australia—monthly (cat. no. 6202.0)

Consumer Price Index, Australia—quarterly (cat. no.

6401.0)

17
http://www.fidelisinstitute.org/article.php?se=13&ca=22.

790 J. A. Batten et al.

123

Australian National Accounts: National Income,

Expenditure and Product—quarterly (cat. no. 5206.0)

International Trade in Goods and Services, Australia—

monthly (cat. no. 5368.0)

Housing Finance, Australia—monthly (cat. no. 5609.0)

Private New Capital Expenditure and Expected Expen-

diture, Australia—quarterly (cat. no. 5625.0)

Business Indicators, Australia—quarterly (cat. no.

5676.0)

Labour Price Index, Australia—quarterly (cat. no.

6345.0)

Producer Price Indexes, Australia—quarterly (cat. no.

6427.0)

Retail Trade, Australia—monthly (cat. no. 8501.0)

Building Approvals, Australia—monthly (cat. no.

8731.0)

Australian National Accounts: State Accounts—annual

(cat. no. 5220.0)

Recorded Crime—Victims, Australia—annual (cat. no.

4510.0)

Recorded Crime—Offenders—annual (cat. no. 4519.0)

Criminal Courts, Australia—annual (cat. no. 4513.0)

Crime Victimisation, Australia—annual (cat. no.

4530.0)—also previously known as Crime and Safety,

Australia (cat. no. 4509.0).

Construction Work Done, Australia, Preliminary—

quarterly (cat. no. 8755.0)

In addition to the above arrangements, and having

regard to the complexity of analyses required, a number of

Commonwealth Treasury officials have access to Aus-

tralian National Accounts: National Income, Expenditure

and Product (cat. no. 5206.0) early afternoon on the day

before its release.

In exceptional circumstances, approval may be given for

additional ad hoc lockups for other key statistical releases.

If possible, a public notice of intention to hold this lockup

will be published on the ABS website at least six working

days in advance of the event. If this is not possible notifi-

cation of an ad hoc, lockup will be made on the ABS

website as soon as possible.

The ABS also provides authorised Wires service pro-

viders with a shorter secure ‘‘lockup’’ to enable them to

prepare, referred to as the ‘‘Wires Preparation Service’’.

The Wires Preparation Service allows access to a limited

range of embargoed key statistical products (Category 1

and all but two Category 2 Main Economic Indicators, and

one Other Leading Indicator), to authorised Wires service

representatives in a secure environment at the ABS NSW

office, 44 Market Street, Sydney, 10 min prior to their

public release at 11:30 a.m., Canberra time. Wires service

providers are not permitted to release any material until the

embargo has been lifted at 11.30 a.m. Canberra time.

Access to statistics via the Wires Preparation Service is to

ensure market-sensitive material is accurately represented

at the time of public release. It is not intended to facilitate

more comprehensive analyses of the statistics; such anal-

yses may be conducted after the embargo is lifted at

11:30 a.m., Canberra time.

The following Wires service providers attend the Wires

Preparation Service:

Need To Know

Selerity

Market News International

Thomson Reuters

Dow Jones Newswires

Bloomberg News

AAP.

David Kalisch

Australian Statistician

Notes: This page was first published on 21 December

2007, and last updated on 18 May 2015

http://www.abs.gov.au/websitedbs/D3310114.nsf/4a2563

53001af3ed4b2562bb00121564/e4c5f2f722533b9eca2573b

7001b56ce!OpenDocument.

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