J on Stokes

Director Standards Development and Education

ETHICAL DECISION-MAKING
Ethics Decision-Making Webinar
Ethical Landscape
Why ethical people engage in questionable conduct
Developing Ethical Decision-Making (EDM) Framework
Group case
Breakout discussions
Group analysis/voting


Webinar is NOT:
60 minutes of Lecture
Regulatory/Compliance Training
Creating a Moral Compass
Graded No Test!
Ethical Landscape
Market collapse was devastating to faith and
confidence in the investment industry
Functioning capital markets depend on trust
Trust is earned through ethical conduct
Ethics are fundamental to market integrity
Clients demand ethical conduct from
managers not just good performance


FINANCIAL SERVICES FARE WORST--AGAIN
5
How much do you trust the following industries to do what is right?
79%
66%
64%
62%
60%
59%
56%
53%
51%
47%
45%
Technology
Automotive
Food and Beverage
Consumer Packaged Goods
Telecommunications
Brewing and Spirits
Pharmaceuticals
Energy
Media
Banks
Financial Sevices
2012 Results
77%
69%
66%
65%
62%
62%
59%
58%
53%
50%
50%
Technology
Automotive
Food and Beverage
Consumer Packaged Goods
Telecommunications
Brewing and Spirits
Energy
Pharmaceuticals
Media
Banks
Financial Sevices
2013 Results
Source: 2013 Edelman Trust Barometer
ALIGNMENT OF EXPECTATIONS AND PERFORMANCE
Source: 2013 Edelman Trust Barometer
How important are each of the following actions to building trust?
63%
59%
58%
57%
54%
41%
38%
41%
23%
28%
24%
23%
26%
22%
OFFERS HIGH QUALITY PRODUCTS OR SERVICES
PLACES CUSTOMERS AHEAD OF PROFITS
HAS ETHICAL BUSINESS PRACTICES
HAS TRANSPARENT AND OPEN BUSINESS PRACTICES
COMMUNICATES FREQUENTLY AND HONESTLY ON THE
STATE OF ITS BUSINESSS
HAS HIGHLY-REGARDED AND WIDELY ADMIRED TOP
LEADERSHIP
DELIVERS CONSISTENT FINANCIAL RETURNS TO
INVESTORS
IMPORTANCE PERFORMANCE
Investor Perceptions
DILBERTReprinted by permission of United Feature Syndicate, Inc.
WHICH HAS MORE INFLUENCE ON WHETHER A
PERSON WILL ENGAGE IN UNETHICAL
CONDUCT?


A. Disposition: A persons moral character.
B. Situation: Outside circumstances.



Situational v. Dispositional
Some studies have shown that situational
influences have more to do with a persons ethical
behavior than a persons character.

Under the right conditions good people can be
induced, seduced and initiated to act unethically.

--- Phillip Zimbardo, Prof. Emer. Stanford University
WHICH OF THE FOLLOWING SITUATIONAL
CIRCUMSTANCES WILL INFLUENCE A PERSON
TO ENGAGE IN UNETHICAL CONDUCT?


A. Obedience to authority
B. Conformity with others
C. Incrementally engaging in unethical behavior
D. Following group decisions
E. Over confidence in ability to act appropriately
F. Responding to incentives




Obedience to Authority
We are less likely to take part in unethical actions
on our own than when requested by a supervisor.
We want to please authority: may lead us to carry out instructions
without thinking about the ethical implications
Supervisors rarely directly ask us to perform unethical activities, instead
they infer it based on incentives.
Rationalizations:
I want to be a team player, I want to be loyal.
I was just following orders.
Conformity
We often take our cues from our reference group about the proper way
to act
We become acculturated to behavior and we assume that this behavior
is normal and acceptable
We conform our judgments to the judgments of our reference group

Rationalizations:
Everybody else does it, so it must be okay
Its how you succeed around here
Incrementalism The Slippery Slope
Unethical behavior often occurs when we subconsciously lower our
standards over time through small changes in our behavior

Rationalizations:
J ust this one time
It doesnt really hurt anyone
Its not a big deal
Group Think v. Independent Thinking
Being in a group lessens our individual feelings
of accountability and responsibility
Our moral doubts are assuaged by the groups concurrence

Rationalizations:
We are a good and wise group
This is the way it has always been done
Overconfidence
We tend to believe that we are more honest and
fair-minded than our peers and competitors
This often leads us to make decisions that
have ethical implications without engaging in
serious reflection

Rationalization:
I am more ethical than they are, it wont happen to me
Framing
Objectives are often framed to focus on one factor (AUM, bonuses,
stock price)
We often overlook or justify behavior if it leads to
the achievement of that goal or objective
Rationalizations:
That is the way they do it at Firm X, so it
must be okay
If we do not do it, someone else will
Smart people created the incentive structure,
Im just responding to it
Effective Ethical Thinking Begins with:
Becoming more conscious about your thoughts and
behaviors, to increase the likelihood that you will notice and
act on ethical issues before they become destructive

Recognizing that ethical dilemmas are a normal and
predictable part of most jobs

Discussing approaches for dealing with ethical issues
Case Studies
Illustrate ethical principles and ethical analysis in real-
life scenarios

Prompt discussion and exploration of key concepts and
ideas from differing perspectives

Focus on issue-spotting and analysis rather than correct
or incorrect answers

Develop an ethical framework for decision making
Developing a Framework for
Ethical Decisions
18
I. Fundamental Ethical Principles
Client interests come first
Preservation of confidentiality
Avoid/manage conflicts of interest
Full and fair disclosure
Fair dealing
Reasonable care and prudent judgment
Maintain independence and objectivity
II. Ethical Analysis
What are the important facts?
To whom is a duty owed?
What are the issues?
What are the ethical principles involved?
Are there any conflicts of interest?
How are the conflicts managed?
Developing a Framework for Ethical
Decisions:

Cases
18
You are the assistant to a senior portfolio manager at the firm responsible for
submitting the managers expense reports. Because the manager often does
not have receipts for minor expenses such as meals and cab fare, you have
learned to override the accounting system when he submits the reports. The
manager recently returned from a trip without receipts for larger expenses.
When you inquire about the receipts, the manager tells you he lost the receipts
and to just override the system like you usually do. You should:

The Expense Report
16
A. Submit the report without the receipts.
B. Submit the report for only expenses that are backed up with receipts.
C. Create receipts to back up your bosss expenses this one time but inform the
manager that you will not do so again.
D. Ask the manager of accounting what to do.
Expense Report: Key Issues
Ethical Principle: Honesty
Loyalty to Employer v. Manager
Important Facts:
manager asks you to deviate from rules
overridden system before
Situational Influences
incrementalism
obedience to authority



CASES: BREAKOUT DISCUSSIONS
Each Breakout will discuss one case (5 - 6 min.)
Use the ethical decision-making framework to
analyze the case (to the right of the case)
Select a spokesperson
When the large group reconvenes, the Breakout
cases will be presented and the large group will
vote on each
After the voting, the spokesman for each Breakout
will present their analysis
Resolving Ethical Dilemmas
Ethical issues are normal and predictable.
Be more conscious about thoughts to notice and act
on ethical issues before they become problems.
Be aware of and address negative situational
influences.
Apply Ethical Decision-Making Framework.
Live and breath fundamental ethical principles.
Know your duties/gather relevant facts/manage
conflicts.
Discuss with colleagues.