the future of finance: investor rights and ethical decision-making a. mark harbour, cfa, cima ®,...
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THE FUTURE OF FINANCE: INVESTOR RIGHTS AND ETHICAL DECISION-MAKING
A. Mark Harbour, CFA, CIMA®, CPA
Past President, CFA Society of Los Angeles
(310) 210-1133
www.cfala.org
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AGENDA – SESSION OUTLINE
Why cover ethics? Do we have an issue?
More importantly, what can you do about it?
• Introducing CFA• Do we have an issue?• Cheating, Integrity and Trust• Morals, Values, and Ethics• Practical Solutions - Ethical Behavior• Practical Suggestions - Hiring an Advisor• Questions?
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CFA Institute is the global, not-for-profit association of investment professionals that has set the standard for professional excellence since 1947. The CFA Institute family includes over 100,000 members and 140 member societies around the world.
CFA Los Angeles is one of the large societies of the CFA organization with approximately 2,000 members in the Los Angeles region. We are active in supporting education programs for our members and collaborating with other organizations to provide value for our members and our community by serving the mutual interests of our members and the public good.
ABOUT CHARTERED FINANCIAL ANALYSTS (CFA)
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To lead the investment profession globally by promoting the highest standards of ethics,
education, and professional excellence for the ultimate benefit of society.
CFA INSTITUTE MISSION
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FIVE ORGANIZATIONAL PILLARS
•Championing ethical behavior in investment markets.
Ethical Champion
•Creating a strong community of investment professionals.
Global Community
•Being a respected source of knowledge in investment markets.
Industry Knowledge
•Raising standards of professional excellence in the industry.
Professional Excellence
•Build an investment industry that serves the interests of investors and society.
The Greater Good
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DO WE HAVE AN ISSUE?
YOU CAN TRUST ME…
Roundtable Discussion With Bernie Madoff
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DO WE HAVE AN ISSUE? 1
1 From The Edelman Trust Barometer - 2014
Banks and Financial
Services are consistently
at the bottom.
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An earlier Edelman survey also highlighted 7 key attributes to building trust that reflected gaps between importance of and the actual performance received for each as shown in the following chart –
1 From The Edelman Trust Barometer - 2013
DO WE HAVE AN ISSUE? 1
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DO WE HAVE AN ISSUE? 1
How much would you estimate we spend to handle fraud?1
1 – Moral Intelligence 2.0, Doug Lennick and Fred Kiel, April 2011
Description Amount
Company Revenue $100,000,000
6% is the cost of fraud detection (and lack of ethical behavior
$6,000,000
Leaving the amount to cover expenses and fund profits $94,000,000
For example, assuming a company with $100 MM revenue
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56% of MBA Students and 43% of law students admit they cheat. 93% say cheating is justified and 90% have no moral dilemma about doing so.3
1 - Fred Schab, University of Georgia survey2 - “How could a Sweet Third-Grader Just Cheat on That School Exam” WSJ Article 5/13/133 - Johnson Institute recent study
In 1969, more than 80% of high school children agreed that “honesty is the best policy”. By 1989, the figure was 60%1
Recent estimates are that 1 in 3 students cheat at some point in elementary school. By high school, 51% admit to cheating on a test in the past year and 74% copied homework.2
Key Planning Implications –
Take active steps to strengthen ethical values and behavior for junior staff (and future generations).
Incorporate a statement of values to enhance ethical awareness in business and family succession plans.
WHAT ABOUT THE FUTURE?
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CHEATING, INTEGRITY & TRUST1
Our sense of our own morality is connected to the amount of cheating we feel comfortable with.
1 – Taken from The Honest Truth about Dishonesty, by Dan Ariely
…as long as we cheat by only a little bit, we can benefit from it and still view ourselves as marvelous human beings.
…we should focus on early signs of dishonest behaviors and do our best to cut them down in their budding stages
before they reach full bloom.
Question - Who Cheats???
Answer - We All Do….
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CONTRIBUTING FACTORS1
1 – Taken from The Honest Truth about
Dishonesty, by Dan Ariely
Increase Dishonesty No Effect Decrease Dishonesty
Pledge
Ability to Rationalize
Conflicts of Interest
Creativity
One Immoral Act
Being Depleted
Others Benefitting From Our Dishonesty
Culture That Gives Examples of Dishonesty
Watching Others Behave Dishonestly
Signatures
Moral Reminders
SupervisionProbability of Being Caught
Amount of Money
to be Gained
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INTEGRITY1
For an object or system to have integrity, it must be in a state or condition of being whole, complete, unbroken, unimpaired, sound, perfect condition.
Workability: the state or condition that determines the available opportunity for performance (i.e., the “opportunity set”)
Bicycle Wheel Example: As we remove spokes from the wheel, integrity is more and more diminished, and as integrity is more and more diminished, the wheel becomes less and less workable.
When we remove enough spokes the wheel has no integrity and collapses into complete failure and will not work at all.
To the degree that integrity is diminished, the opportunity for performance (the opportunity set) is diminished.1 – Taken from Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and
Legality by Werner H. Erhard, Michael C. Jenson, and Steve Zaffron
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You are whole and complete when your word is whole and complete, and
Your word is whole and complete when you honor your word in one of two ways:
1. By keeping your word, on time as promised; or
2. As soon as you know you won’t keep your word, you inform all parties involved and clean up any mess caused in their lives.
When you and your people do this, you are honoring your word even despite having not kept it, and you maintain integrity
What happens when you take specific action to improve TEAM INTEGRITY?
Results (per Michael Jensen for his organization – SSRN1):
1. 300% increase in output;
2. No required increase in input
3. Happier people in the organization
{Jensen’s co-authors/consultants note large gains in their client’s productivity, and reductions in injury and death rates in the mining industry by implementing actions to improve integrity}
IMPACT OF INTEGRITY
1 – SSRN - Social Science Research Network
Setting Expectations is Key….
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Trust is a social practice, not a set of beliefs…an aspect of culture and the product of cultivation
1 Building Trust: In Business, Politics, Relationships, and Life, by Robert C. Solomon and Fernando Flores
Trust is an option, a choice
Trust is dynamic. It involves personal responsibility, commitment, and change
“Trust is something that you ____________.”
Breaches of trust do not mark the end of trust but are part of the process of trusting
The core strategy for building trust is the practice of making and receiving assessments and learning how to negotiate them
WHAT IS TRUST?1
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THE ECONOMICS OF TRUST?1
Trust = Speed Cost
Trust = Speed Cost
“Transcendent values like trust and integrity literally translate into revenue, profits and prosperity.”
Quote from Patricia Aburdene, Author of Megatrends 2010
1 – Taken from The Speed of Trust, Stephen R. Covey
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Values – our fundamental beliefs
Morals – values we attribute to a system of beliefs
(usually outside ourselves)
Ethics – Decisions and actions
Being open about our values…
Provides a sense of your character
Expresses openness which invites trust
Encourages others to follow your lead
VALUES, MORALS & ETHICS
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PROFESSIONAL CODES
Codes of Conduct are
Rules Based
(think externally enforced)
Values Based
(think self-imposed)
Codes of Ethics are
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WHY ETHICAL CODES?
On the whole, human beings want to be good, but not too good, and not quite all the time
George Orwell
Ethics is: Our capacity for obedience to the unenforceable
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TOUGH CHOICES (FOR ACTION)
Are not right versus wrong but are right versus right –
Truth versus loyaltyDo I tell the truth or protect my team?
Individual versus communityShould my needs or my community come first?
Short-term versus long-termDoes a sacrifice today bring a longer term benefit?
Justice versus mercyShould I teach a hard lesson or give another chance?
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WHAT ELSE IS REQUIRED?
Is having a personal moral code sufficient? – Significant statistical reduction of cheating when
specific reminders recall codes of conduct 1
– What gives people meaning?2
“the ability to realize my full potential as a person”
“being associated with a good (ethical) organization”
“translating values into operational behavior”
Some professional organizations articulate shared values in their codes (NASW)
1 The Honest Truth About Dishonesty: How We Lie to Everyone---Especially Ourselves by Dan Ariely.2 Survey responses & quotes from A Spiritual Audit of Corporate America, Ian Mitroff and Elizabeth Denton
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PRACTICAL SOLUTIONS
Begin by self examination (you & your team):
– Review/take a personal survey1
– Consider ethical awareness and improvement as a routine element of your practice process evaluation - upgrade based on survey results
– Solicit client feedback designed to improve your ethical awareness
1 - Moral Intelligence and Moral Intelligence 2.0, Doug Lennick and Fried Kiel. A personal survey PDF is available at Worksheet for Defining your Code of Ethics
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FOR INDIVIDUAL DECISIONS AND ACTIONS
Be aware that your intuitive “system 1” decision process (i.e., the “want” self) is more likely to be immoral than the deliberative “system 2”. Thus, for decisions with moral implications, attempt to engage system 2.
Utilize pre-commitment devices to “lock in” a desired course of action. (or perhaps publicly commit to a decision in advance).
Consider adding more options to the decision (rather than yes or no, should I choose A, B, or C). Multiple choices seem to elicit more deliberative thought methods.
“Debrief” your decisions periodically with a trusted friend or advisor – particularly one who can play the role of “devil’s advocate” to your decisions. This will help ensure you are accurate in your recollections and more concise in projecting for the future.
1 – Taken from Blind Spots, Max Bazerman & Ann Tenbrunsel
PRACTICAL SOLUTIONS1
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PRACTICAL SOLUTIONS1
FOR GROUP DECISIONS AND ACTIONS
Look for the informal values of the organization. Who “really” runs the company – assess motivations from the answers to that question. Notice what is talked about as an indicator of values of those in positions of power.
Call unethical behavior by its name. (are you “lying” or just “misrepresenting the facts”….are you “stealing”, or inappropriately allocating resources”)
Look for danger zones or “sink holes” in an organization where unethical behavior is more likely. Specifically, those areas characterized by uncertainty, time pressure, short-term horizons, and isolation are good breeding grounds for unethical actions and decisions). Once identified, take proactive steps to reduce the likelihood of unethical actions and decisions.
1 – Taken from Blind Spots, Max Bazerman & Ann Tenbrunsel
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PRACTICAL SOLUTIONS1
FOR GROUP DECISIONS AND ACTIONS (CONT’D)
Change the defaults on decisions (i.e., opt out required rather than opting in for savings plans, and automatic allocations of pay raises to retirement plans – save more later).
Communicate more clearly the issues and relative magnitude of decisions.
Attempt to override the undue influence of short term costs regarding longer term benefits. (i.e. gas price increases to reduce consumption - but propose tax increase that doesn’t take effect until some time in the future). This method is sometimes referred to as “future lock in”.
Web based reference links can be found at - http://www.blindspots-ethics.com/
1 – Taken from Blind Spots, Max Bazerman & Ann Tenbrunsel
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Mere obedience to law does not measure the greatness of a nation...
The true test is the extent to which individuals can be trusted to obey self imposed law.
John Fletcher Moulton
HOW DO WE MEASURE SUCCESS?
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DO IT YOURSELF OR HIRE AN ADVISOR1?
1 – Taken from Wealth Management Unwrapped by Charlotte Beyer
ASSESS YOURSELF FOR KNOWLEDGE/SOPHISTICATION AND THE NEED FOR CONTROL
Add up your scores for all questions in both categories – and plot them on the chart on the following page
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DO IT YOURSELF OR HIRE AN ADVISOR1?
1 – Taken from Wealth Management Unwrapped by Charlotte Beyer
ASSESS YOURSELF FOR KNOWLEDGE/SOPHISTICATION AND THE NEED FOR CONTROL
High Level of Sophistication
- - - - -K N O W L E D G E - - - -
- -
- -
-C
O N
T R
O L
- -
- -
Low Level of Sophistication2
4
6
8
10
High Need for Control
Low Need for Control
People like us – caution!
Capable Overconfident
Do-it-yourselfer
NaïveHopeful
Delusional
VulnerableIrresponsible
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WHO SHOULD YOU HIRE FOR ADVICE?1
KEY QUESTION – WHAT SERVICES DO YOU VALUE?
1 – 2010 Survey of Advisors – published by IMCA first quarter 2011
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WHO SHOULD YOU HIRE FOR ADVICE?1
1 – 2010 Survey of Advisors – published by IMCA first quarter 2011
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IDENTIFY YOUR SCREENING PRIORITIES1
1 – Taken from Wealth Management Unwrapped by Charlotte Beyer
WHAT IS MOST IMPORTANT?
Assign a percentage to each according to your perception of what is most important to you - the total must equal 100%
___% ___%___% ___%___%
People Philosophy Process Performance “Phees”
Whotheyare
Whatthey
believe
HowDecisionsare made
Howhave they
done
Whatthey
charge
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SUGGESTED ADVISOR QUESTIONS…1. What are your qualifications and certifications? Can you name one or two real life
experiences that were most helpful to enhancing your professional skills?
2. What regulatory body oversees you? SEC? OCC? Other?
3. Do you operate under the fiduciary standard in client relationships?
4. What are the top three activities in your service routine that you believe add the most value to your clients?
5. Do you utilize written investment policy statements with your clients? How do you determine the target return (after inflation) for my overall portfolio?
6. How do you define risk? How would you manage it in my situation?
7. How do you access the best funds or smartest money managers? What criteria do you use (and frequency) in deciding/monitoring which ones to use?
8. What are your long term career objectives and do you have a succession plan?
9. Are your investment strategies based on a global perspective? How do you view active vs passive investment strategies?
10. How do you ensure your technology is state of the art?
11. What are your fees? Are there additional indirect fees we pay for specific investments? How frequently do you review fees with your clients?
1 – Some questions taken from Wealth Management Unwrapped by Charlotte Beyer
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QUESTIONS…
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The Psychology of Ethics in the Finance and Investment Industry by Thomas Oberlechner (a CFA Institute Publication)
How Good People Make Tough Choices by Rushworth Kidder Trust and Honesty in the Real World by Mark Fagan and Tamar Frankel A Spiritual Audit of Corporate America: A Hard Look at Spirituality, Religion, and Values in the Workplace (J-B Warre
n Bennis Series) by Ian Mitroff and Elizabeth A. Denton
Moral Intelligence: Enhancing Business Performance and Leadership Success (Paperback) by Doug Lennick and Fred Kiel
The SPEED of Trust: The One Thing That Changes Everything by Stephen M.R. Covey, Stephen R. Covey, and Rebecca R. Merrill
Trust in the Balance: Building Successful Organizations on Results, Integrity, and Concern (Jossey-Bass Business & Management Series) by Robert Bruce Shaw
A Whole New Mind: Why Right Brainers Will Rule the Future by Daniel H. Pink Crucial Conversations: Tools for Talking When Stakes are High by Kerry Patterson, Joseph Grenny, Ron McMillan,
and Al Switzler Emotional Intelligence: 10th Anniversary Edition; Why It Can Matter More Than IQ by Daniel Goleman Collaboration: How Leaders Avoid the Traps, Create Unity, and Reap Big Results by Morten T. Hansen Freedom Collaboration: How Leaders Avoid the Traps, Create Unity, and Reap Big Results by Morten T. Hansen Website – Institute for Wealth Management Standards (Don Trone and Charles Lowenhaupt) -
http://www.wealthstandards.org/standards.html?cr_i=502 Website – Edelman Trust Survey 2013 - http://www.edelman.com/insights/intellectual-property/trust-2013/ Website – CFA Institute Global Market Sentiment Survey 2013
http://www.cfainstitute.org/about/research/surveys/Pages/global_market_sentiment_survey_2013.aspx Open Leadership: How Social Technology Can Transform the Way You Lead by Charlene Li Blind Spots by Max Bazerman and Ann Tensbrunsel
READING RESOURCES 1 OF 2
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READING RESOURCES 2 OF 2 The Honest Truth about Dishonesty: How We Lie to Everyone---Especially Ourselves by Dan Ariely Switch: How to Change Things When Change Is Hard by Chip Heath and Dan Heath The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead by David Callahan Thinking Fast and Slow by Daniel Kahneman Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality by Werner H.
Erhard, Michael C. Jenson, and Steve Zaffron Strings Attached: Untangling the Ethics of Incentives by Ruth W. Grant The Righteous Mind: Why Good People Are Divided by Religion and Politics by Jonathan Haidt The Decision to Trust: How Leaders Create High-Trust Organizations by Robert R. Hurley Building Trust – an article by Jamie Ziegler with 5 key ideas to build trust The right and wrong ways to apologize – Link to Bruce Weinstein, Ph.D’s website – look at the blog on ways to
apologize The Death of Corporate Reputation – Jonathan Macey Sidetracked: Why Our Decisions Get Derailed, and How We Can Stick to the Plan – Francesca Gino Trapped: When Acting Ethically is Against the Law – by John Hasnas IMCA Code of Professional Responsibility (July 1, 2009) IMCA Standards of Practice (currently under revision) Building Trust: In Business, Politics, Relationships, and Life – Robert C. Solomon and Fernando Flores Daring Greatly: How the Courage to Be Vulnerable Transforms the Way We Live, Love, Parent, and Lead – Brene
Brown Trust Inc. – Nan S. Russell Practical Wisdom – Barry Schwartz and Kenneth Sharpe An Ethical Decision-Making Model – website using the Josephson Institute of Ethics material Resources PDF from the CFA Society of Los Angeles (some duplication of material with this list)
http://www.cfala.org/files/public/AdvocacyandEthicsReadingandResourceList.pdf