EFTA00286419.pdf

CFA INSTITUTE NEWS IN FOCUS The Value of Sharing Ethical Wisdom By James G. Jones. CFA The conviction of Rajat Gupta in June 2012 for securities individual. If he estimates the costs and benefits based fraud and conspiracy resulting from charges of insider trad- only on the costs of this single action, he is most likely sig- ing marked the end of a tragic fall from grace. The former nificantly underestimating the total costs. Rather, a more CEO of consulting firm McKinsey and Company as well as enlightened individual, who is aware of the natural progres- a former board member of Goldman Sachs, American Air- sion of unethical behavior, will compare the estimated ben- lines, and Procter & Gamble and a noted philanthropist, efits to a much larger cost based on a hypothetical future Gupta later stated during sentencing, "I regret terribly the unethical act that would have a much more severe penalty. impact of this matter on my family, my friends and the insti- A significant improvement in ethical decision making tutions that are dear to me. I have lost my reputation I built could be achieved-1f individuals understood the principle of for a lifetime. The verdict was devastating." progression in unethical actions and began upwardly adjust- Gupta had committed the error most common to decisions ing th_e_estimated cost of unethical behavior. that end in great regret and pain. At the time of deciding, Laws, regulations, and codes of ethics by their very nature he did not understand the ultimate cost of his poor decision. define only the direct negative consequences of unethical It goes without saying that if we could somehow foresee behaviors. The benefits of ethical conduct, often undefined ultimate outcomes, we would make better decisions and and implied, are typically framed in terms of benefits to have fewer regrets. As a society, we recognize this truth society or the avoidance of punishment. and have sought to communicate with clarity the costs of Although most of the benefits of unethical behavior are certain poor decisions whose consequences extend beyond immediate, ethical behavior bestows its benefits over a the individual to other members of society. The establish- longer time horizon. ment of criminal laws and sentencing guidelines serves to The first benefit of ethical behavior is a clear conscience. define and communicate both the unacceptable behavior Because unethical behavior is behavior that injures another and the personal costs of a conviction. Civil law and gov- individual or society for personal gain, a rare individual would ernment regulations serve similar purposes. In our pro- not recognize or have some empathy for those injured. The fession, the CFA Institute Code of Ethics and Standards of lingering guilt can slowly rot the soul. Even for those indi- Professional Conduct define proper and improper behav- viduals who can dismiss or push feelings of guilt or empa- ior for CFA Institute members and impose penalties for thy away, the lack of a clear conscience requires hard work. misconduct, ranging from private censure to revocation Unethical actions must be kept hidden, far from the light of of the CFA charter. day. False histories must be constructed, lies must be told, Most people would agree that laws, regulations, and and the truth must never be discussed. One must always be codes of ethics are important pillars in society that inform on guard. Careless talk cannot be tolerated. us what ethical behavior looks like and which behaviors, The ethical individual can live the carefree life. having by the nature of the severity of their associated penalty, are no fearS).ofH History is an open book velyus d* - most egregious. Yet, even with these constructs, unethical ErisTe vkho0t worry. T ere is no ear of being "found out" behavior persists. However, I submit that these institutional For there is nothing to find. Note that having a clear con- systems have two major shortcomings. First, they do not science does not imply that regrettable mistakes were not shed light on the natural progression of unethical behav- made, but even though honest mistakes may have conse- ior, and second, they cannot effectively communicate the quences, such mistakes are not moral failures. benefits of ethical conduct to the individual. Both of these A different benefit of ethical behavior is the acquisition shortcomi o sigm cant errors in estima of a reputation for integrity and honesty. Although a good the cted costs and benefits of ethical behavior. utation takes a long time to develop, the benefits are The worst ethical lapses that make the headlines are su antial. The trust of clients and the respect of peers rarely the initial ethical lapse of the individual. Such eth- enh ce your personal brand, which creates new opportu- ical journeys typically begin years prior with a seemingly nitie and increases personal satisfaction and joy. Clients minor ethical misstep. By failing to address the strong ten- are ore likely to refer colleagues and friends to a profes- dency of ethical misconduct to progress over time in its depth sion. I with a sterling reputation. People are more willing and severity, the current system of laws, regulations, and to rtner and engage with such a person, and the individ- codes of ethics—with their focus on the costs of individual u: has a greater sense of worth and purpose. actions—do not properly inform people of the likely long- Since the benefits of a clear conscience and a sterling term effects of a seemingly small ethical lapse. reputation do not reveal themselves in the short term and Suppose a minor ethical dilemma comes bef are hard to quantify, it is highly likely that individuals will 6 CFA Institute Magazine Marsh/April 2014 EFTA00286419 substantially underestimate their benefits, resulting in more been in the investment profession for an extended period unethical behavior. of time have stories to share. Some stories are born of our Who has witnessed the principle of progression within own experiences. Others are gathered from the observa- unethical behavior? Who has experienced the benefits of a tion of other people's experiences. It falls to us to bring our clear conscience and a sterling reputation? Not unexpect- Code of Ethics to life by sharing these stories with others edly, research shows that ethical decision making improves in our industry, especially those new to the profession who with age and experience. Therefore, seasoned and experi- are most likely to misestimate future costs and benefits. enced investment professionals have a special role to play. We must tell stories of those whose unethical actions may It is their responsibility to inform those new to the profes- have succeeded for a season but, like the actions of Rajat sion of the true costs of unethical behavior and the bene- Gupta, eventually led to great pain and hurt. We must help fits of ethical behavior. them understand the great satisfaction and joy that even- How can we communicate these truths effectively? I tually come from a great reputation built over many years believe the answer may come from our childhood. As chil- of honorable and ethical work. We must help them become dren, our parents and caretakers wanted to teach us virtues. better decision makers by giving them better information. They knew the development of a virtuous life would ben- So, for those ofus who have been in the investment profes- efit us as well as society, but their methods were curious. sion for a long time, I have this admonition: Tell your story. If they wanted to teach us the importance of honesty, they Educate. We must not overlook this important responsibil- didn't just say, "Tell the truth, or you will get punished." ity of an investment professional. We must help the inexpe- Instead, they told us the story "The Boy Who Cried Wolf." rienced better estimate future costs and benefits. To those They used "The Tortoise and the Hare" to teach the impor- who are inexperienced, I ask you to listen and consider our tance of perseverance, and "Beauty and the Beast" high- stories. Trust our call to pursue a higher ethical calling— lighted the virtues of compassion and loving the unlovable. for the ultimate benefit of society and you. They knew something about the human condition. Sto- lames 0. Jones, CFA. Is the founder and managing member of Sterling ries stick with us. Propositional statements and rules are investment Advisors in Bolivar. Missouri. and a member of the CFA instli tute Board of Governors. often forgotten or dismissed over time. A story resonates and settles deeper within us. Can the power of stories be harnessed to help people become more ethical? I believe it can. 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