Moving from grey to black and white

Category: Asia, Global
By Irene Cheung*

Ethical behaviour is not only best practice for our profession, but essential to good business

Life is full of rules. As toddlers, our parents teach us rules that keep us safe. As teenagers, we push boundaries and might explore things outside of accepted social rules, testing the water as we transition to adulthood.

When joining the workforce, we enter a world where our moral compass – what we’ve been taught, how we think, and what we know – can be challenged. The situations we face may be complex and there may not be straightforward rules to follow.

In life and in work, right and wrong bring moral and ethical dilemmas, and, given the global nature of business, what may seem like a perfectly simple answer in one country could be completely inappropriate in another.

“Moral clarity often blurs without a backdrop of shared attitudes, and without familiar laws and judicial procedures that define standards of ethical conduct, certainty is elusive,” Thomas Donaldson wrote in an article entitled Values in Tension: Ethics Away from Home, in the Harvard Business Review. He wrote this 20 years ago and it still holds true today. So how can we move from grey to black and white when it comes to ethical conduct?

Best practices

Our column this month challenges readers to review your company’s professional code of conduct and ethics training, and test the practicality of your firm’s guidance. Is it a useful playbook?

As a guide, the CFA Institute Code of Ethics and Standards of Professional Conduct may be helpful, which covers three key areas:

1) That financial professionals put the integrity of the profession and interests of clients above their own interests;
2) That they act with integrity, competence, and respect; and
3) That they maintain and develop professional competence.

Readers might also find useful our ethical decision-making framework – part of our continuing professional development – which can help investment professionals analyse and evaluate ethical scenarios where there is no clear right or wrong answer.

The framework follows an ‘identify-consider-act-reflect’ process. It’s not a linear checklist, but a summary of the key factors that may impact ethical decisions.

Identify: Reflect on the fundamental investment professional principles at issue, such as fair dealing, full disclosure, duty to your employer, and duty to your clients. Consider if you have all the necessary information – what else do you need to know?

Consider: Look at outside pressures, such as conforming to industry or cultural practices. Consider the different scenarios and solutions that may apply, and if you need to seek independent guidance.

Act: While a decision needs to be made, it might require multiple actions or none at all. You may need to raise the issue to a higher authority.

Reflect: This is possibly the most important element. What did you learn from the situation? Did you make the right choice? Does your company have a process in place to make this type of decision easier in the future?

Academic expertise

While knowing and understanding the framework is essential to our industry, we want it to become part of the DNA of financial professionals. To support this, CFA Institute recently partnered with the University of Virginia Darden School of Business to integrate content from Giving Voice to Values (GVV) into our ethics training modules, among other initiatives.

Developed by Professor Mary Gentile, an award-winning and widely published author, GVV helps leaders rehearse real life scenarios and “starts from the premise that most of us already want to act on our values. We also want to feel we have a reasonable chance of doing so effectively and successfully”. In other words, prescripting, rehearsal, and practice can help you voice and act on your values more effectively.

Practice, practice, practice

To help practitioners, CFA Institute recently launched Ethics in Practice, a weekly online ethical exercise found in the Standards, Ethics and Regulations section of our Market Integrity blog. Read through the exercise below, authored by my colleague Jon Stokes, and test your ethical decision-making capability.

David, an analyst for an asset management firm, attends a presentation for securities analysts at the headquarters of a manufacturing company. The analysts are impressed with the presentation and ask the chief executive officer many questions. After the meeting, the head of investor relations invites all analysts to a private club for dinner and karaoke. Most of the analysts accept the invitation. Of the choices below, what do you believe David should do?

A) Accept the invitation
B) Accept the dinner but not karaoke
C) Accept the invitation but disclose the invitation to his supervisor
D) Reject the invitation

Analysing the answers

The ethical principle at issue in this case is independence and objectivity, with the question turning on whether David is compromised by accepting an invitation to dinner and karaoke from representatives of the company he is researching.

Here is where looking at your own company’s guidelines should steer your decision, with the appropriate course of action turning on how extravagant the benefit might be.

Choice A assumes that the dinner and karaoke are not extravagant and would have no impact on David’s opinion of the company. But how can David know this based on the information given? Cultural context also plays a role: is David a local or just visiting? Does he need to know more about the venue and the local culture? Dinner and karaoke may be tame in some cultures but more extravagant in others. Awareness of cultural sensitivities and expectations are very important, especially for those who may be working outside of their home region.

Choice B steers a middle ground by having David only accept part of the entertainment, which may lessen the threat of a compromised analysis. In practice, this may be rather awkward to do and the dinner itself could still be expensive.

Choice C also attempts to compromise by suggesting David could accept the dinner and karaoke if he discloses this to his employer. But this disclosure would be incomplete – he should also tell his clients. They need to know that David was given a nice dinner and potentially fun-filled night on the town by the company he is analysing.

Choice D is best practice, albeit not the easiest choice. It avoids any impact on the perception of David’s honesty and integrity.       

* Irene Cheung, CFA, CAIA, FRM, is director, professional standards at CFA Institute, Asia Pacific