STEWARDSHIP ETHICS IN DEBT MANAGEMENT

STEWARDSHIP ETHICS IN DEBT MANAGEMENT

Issues in Business Ethics VOLUME 12 Series Editors Henk van Luijk, Nijenrode, Netherlands of Business, Breukelen, The Netherlands Patricia Werhane, University of Virginia, U.S.A. Editorial Board Brenda Almond, University of Hull, Hull, U.K. Antonio Argandoiia, lese, Barcelona, Spain William C. Frederick, University of Pittsburgh, U.S.A. Georges Enderle, University of Notre Dame, U.S.A. Norman E. Bowie, University of Minnesota, U.S.A. Brian Harvey, Manchester Business School, U.K. Horst Steinmann, University of Erlangen-Numberg, Numberg, Germany

StevvardshipEthics in Debt Management by ROYMOHON University of Sunderland, Sunderland, U.K. SPRINGER SCIENCE+BUSINESS MEDIA, B.V.

A C.I.P. Catalogue record for this book is available from the Library of Congress. ISBN 978-94-010-5976-3 ISBN 978-94-011-4696-8 (ebook) DOI 10.1007/978-94-011-4696-8 Printed on acid-free paper AII Rights Reserved 1999 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 1999 Softcover reprint of the hardcover 1 st edition 1999 No part of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, electronic or mechanical, inc\uding photocopying, recording Of by any information storage and retrieval system, without written permission from the copyright owner.

CONTENTS Preface ix Introduction 1 Focusing on Stewardship to Consider Debt Management 1 Stewardship and accountancy 2 Stewardship and corporate governance 3 Stewardship and environmental strategy 3 Stewardship and Christian values 4 A strategy for testing in business ethics 4 Literature resources for ethical debt management 6 The Structure of this Book 7 Notes to Introduction 9 Chapter 1 The Context of Stewardship: The Debt Problem 12 1.1. Historical Context 12 1.1.1. Usury and scripture 12 1.1.2. The historical context 14 1.1.3. The present day 15 1.2. Moral Concerns and the Debt Problem 16 1.2.1. Economics 16 1.2.2. Business 24 1.2.3. Private individuals 27 1.3. Technical Aspects ofthe Morality of Debt 28 1.3.1. Economic issues 28 1.3.2. Borrowers 33 1.3.3. Lenders 37 1.3.4. Borrower-lender relationship 39 1.4. Conclusion 43 1.4.1 Factors not suitable for incorporation into an ethical model 43 1.4.2 The relevance of stewardship 44 Notes to chapter 1 47 v

vi CONTENTS Chapter 2 The Stewardship Concept 52 2.1 Definitions of Stewardship in Business 52 2.1.1. Stewardship accounting 52 2.1.2. Agency theory 55 2.2. A Critical Defense of Stewardship 57 2.2.1. Stewardship distinguished from other views 57 2.2.2. Stewardship defended from current criticisms 59 2.3. Development of the Concept of Stewardship 69 2.3.1. Product stewardship 70 2.3.2. Religious stewardship 70 2.3.3. Stewarding and the environment 72 2.3.4. The stewardship concept and its core values 74 2.3.5. Key elements of stewardship for debt management 78 2.4. The Dynamics of Stewardship Decision-making 80 2.4.1. The environmental context 80 2.4.2. The market context 82 2.4.3. The business context 83 Notes to Chapter 2 88 Chapter 3 Borrowers and Borrowing 91 3.1. Stewardship 91 3.1.1 Stewardship in existing financial management 91 3.1.2. Stewardship and ethical debt management 93 3.2. Entrustedness in Personal Debt Management 96 3.3 Matching 98 3.3.1. Defining the financial starting point 99 3.3.2. Measuring asset enhancement 100 3.3.3. Reliable information for strategic direction 100 3.3.4. Family stewardship 103 3.4. Effectiveness 106 3.5. Development 109 3.5.1. Resisting external pressures III 3.5.2. Defining realistic objectives 113 3.6. Accountability 114 3.6.1. Accountable control 114 3.6.2. Domestic budgeting lis

CONTENTS vii 3.6.3. Mastering budgeting problems 115 3.7. Fairness 117 3.8. Strategic Decisions for Contemporary Issues 117 3.8.1. Strategy selection 117 3.8.2. Stewardship of debt 120 Notes to Chapter 3 125 Chapter 4 Bankers, Business Finance and Consumer Lending 129 4.1. Business Finance 131 4.1.1. Principles: evaluation of the canons of lending 131 4.1.2. Practice: evaluation of lending procedures 133 4.2 Consumer Lending 141 4.2.1. Stewardship and individual appraisal 141 4.2.2. Stewardship and systems appraisal methods 145 4.2.3. Conclusions 149 Notes to Chapter 4 158 ChapterS Mortgage Finance and Money Advice 161 5.1. The Issue of Justice 161 5.2. Mortgage Finance 166 5.2.1. Mortgage finance and criteria of justice 166 5.2.2. Mortgage debt management 167 5.2.3. Debt dependency 173 5.3. Money Advice 175 5.3.1. Advice services and access 175 5.3.2. Stewardship values in money advice provision 176 5.3.3. Conclusion 184 Notes to Chapter 5 185 Chapter 6 The Stewardship Debt Management Model 188 6.1. The Concept of Stewardship 188 6.1.1. The four prerequisites 188 6.1.2. Stewardship concept values 190 6.2 The Stewardship Debt Management Model 191

viii CONTENTS 6.2.1. Entrustedness 193 6.2.2. Matching (a) bankers 194 6.2.3. Effectiveness 194 6.2.4. Matching (b) borrowers 196 6.2.5. Development 198 6.2.6. Accountability 200 6.2.7. Fairness 204 6.2.8. Limitations of the model 6.2.9. Conclusion Notes to Chapter 6 205 207 208 Bibliography Index 209 221

PREFACE As we move forward into the Third Millennium AD the perennial problem of unmanageable debt is still with us. As if to prove the point, in late November 1997, the Tokuyo City Bank in Japan closed down its business, reminding the world that default still stalks families, institutions and governments. It seems that little has been achieved in handling debt since 1216 when the Magna Carta limited the actions of bailiffs against debtors willing and able to make payment. Current literature about consumer credit, business finance and mortgages reveals the urgent need to tackle the ethics of borrowing and lending on some commonly understood and acceptable basis. In this book, the stewardship concept familiar in accounting, corporate governance, environmental strategy and Christian social ethics is analyzed to provide a framework. The book demonstrates that analysis of the concept of stewardship provides a set of resource-related social values which shed light upon ethical issues in debt management and enable the construction of a decision support model to secure improvements in debt management practice. The values are applied to operational debt management as experienced by personal borrowers, small businesses and home buyers. The roles of both lenders and money advisers are considered in relation to this experience. The familiarity of the stewardship concept to a various sections of society provides a starting point for a financial services industry wide ethic for debt management. The stewardship values have been embedded together with technical finance and within the practitioner's world so that borrowers, bankers and money advisers will feel at home as the argument of the book unfolds. The book could not have been written independently of the literary resources that have provided the raw materials for the ethical interaction contained in the following chapters and the author would like to acknowledge his debt to the various authors cited in this work and to the relevant copyright holders.