ETHICS IN PRACTICE WHAT S INSIDE. Volume 3 Issue 2 November 4, Are People Sold on Ethics? Everyday Ethics - The Disclosure Rule

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1 ETHICS IN PRACTICE WHAT S INSIDE Volume 3 Issue 2 November 4, Are People Sold on Ethics? Everyday Ethics - The Disclosure Rule A Moment with our Faculty Inbox (New!) 1

2 Julie Ragatz Director, Cary M. Maguire Center for Ethics in Financial Services 2 Vol. 3 Issue 2 Are People Sold on Ethics? By Julie Ragatz When I am asked how I became interested in studying business ethics, I often share one of my favorite quotations from Aristotle, an ancient Greek philosopher: Hence it is no easy task to be good but to do this (the moral action) to the right person, to the right extent, at the right time, with the right motive, and in the right way, that is not for everyone, nor is it easy; wherefore goodness is rare and laudable and noble. Aristotle, Nicomachean Ethics, Book II, Chapter 9 As most of us can attest, it is no easy task to be good, even when we want to be. Even though most of us have good intentions, that is, we have a certain amount of moral motivation; we sometimes fail to act as we ought. What interested me about ethics was the project of thinking about how institutions, particularly businesses, can make the project of being good a little easier. Many people, not only business leaders, operate from the belief that ethical people will do the right thing, whatever the cost, while unethical people won t act well unless threatened with meaningful punishment. As regular readers of this Newsletter will attest, I think that this is too simplistic. Research in the field of behavioral ethics confirms that their environment profoundly influences people s behavior. In other words, culture matters in helping people be good. But, of course, the often-unasked question is why people should care about being good in the first place. It seems to me that while everyone in the industry understands the value of compliance, people are not sold on the importance of ethics. If you put the fear of God into people about the consequences of bad behavior, assuring representatives and employees that they will be caught and punished for violating regulations, and then rely on their sense of self-interest (and self-preservation) to stay within the lines, isn t that enough? What is the value-add of ethics? There are a couple of responses to that question. Jim Mitchell, the Chairperson of the Advisory Board of Center for Ethics, has said, If leaders spent more time talking about ethics, they would have to spend less time talking and thinking about compliance. If ethical behavior is normalized, leaders can spend more time thinking about the things that leaders should be thinking about, like adding value to clients or expanding their market share. This is one prong of the argument that good ethics is good business. But some people are skeptical. John Maynard Keynes argued that the market can stay irrational for longer than you can stay solvent. The analogy is that ethical behavior may lead to better business outcomes in the long-term, but the long-term may seem like a very long time and it can be hard to wait, especially if you are seeing other people benefit from acting unethically. The challenge is how to quantify

3 those compliance problems that did not happen. To paraphrase Sherlock Holmes, how do you count the dogs that don t bark? This is something that I have been thinking a lot about. It would require identifying those organizations with ethical cultures and those without ethical cultures and then analyzing performance by a variety of metrics. It may be easier to quantify the successes of an ethical culture by looking at the failures of an unethical one, all things held as equal as possible. Going back to my philosophical roots, Saint Thomas Aquinas famously argued that what people will not accept by faith, they can be persuaded to accept by reason. We cannot simply expect people to take the proposition that good ethics is good business on faith, we need to do a better job of making the case to others that this model really works to achieve good results. But there is a second argument as to the value of ethics. Any person who directs a Center for Ethics will report that some of the most popular events are speeches by reformed criminals These are people, usually well known, who have been convicted of some form of white collar crime. Upon the completion of their sentence, they go around the country telling their story, which is usually one of innocence lost, greed and redemption. I can tell you from personal experience that people really love these talks. Frankly, they have always made me uncomfortable, they seemed voyeuristic and unseemly, but since I appear to be in 3 Vol. 3 Issue 2 the minority on this issue, I resolved to take a closer look. The stories have a similar theme. These individuals got caught up in a vortex, which left them confused about the real things to be valued in this life. They remorsefully confess that they were too interested in power, prestige or wealth and that they lost sight of other goods (like family, community or their faith), which they previously valued. When they lost their position, power and wealth, they rediscovered their original appreciation for those other goods. Many express gratitude We cannot simply expect people to take the proposition that good ethics is good business on faith, we need to do a better job of making the case to others that this model really works to achieve good results. for their detection and punishment since, they confess ruefully, they would not have been able to give up those goods on their own - they had to be taken away. Why do we like these stories? I suspect that part of it is a consequence of society s current titillation with docudramas about crime and punishment, but there is a larger message. Most of us, like Aristotle, believe that the most choiceworthy life is one that celebrates virtue and contains goods like family, community and faith. We believe that a life led exclusively in pursuit of wealth and power is not the best life for human persons. We believe that there has to be something more, something else that makes life truly worth living. We like these stories because they reinforce to us what we believe to be true. These are people who had tremendous wealth and power, and they come before us, sheepishly, to declare that they got it all wrong. We can feel comforted and perhaps a little sanctimonious that our own little indiscretions have not taken us so far off the path that we have lost sight of what is real and true. When put in this light, these events do not strike me as so bad. They provide the opportunity to reflect on why we choose to be good. They provide reinforcement for the belief that people do not always choose the good because they fear punishment, but rather because they believe that ethics provides us with the skills we need to obtain the goods necessary for a choiceworthy life. So, does ethics need to be sold? Yes and No. Yes, because we need to a better job of demonstrating that good ethics is truly good business. We also need to do a better job of letting people know that dancing on the edge of right and wrong can have devastating consequences. We can lose our perspective; we can lose our way, just like the criminals on stage in front of us. But the overall prognosis is good, most people are sold on ethics, they value the goods an ethical life provides, they want to believe that they can do well by doing good, it is the job of ethical leaders to continue to reinforce these beliefs.

4 ...a word from our Chairman Jim Mitchell, CLU,ChFC Chairman, Advisory Board, Cary M. Maguire Center for Ethics in Financial Services 4 Vol. 3 Issue 2 Everyday Ethics - The Disclosure Rule By Jim Mitchell, CLU, ChFC This is another in a series of columns about guides to what I ve been calling Everyday Ethics. So far we have discussed the Golden Rule and the What if Everybody Did? Rule. This column concerns the Disclosure Rule. The Disclosure Rule asks if you would be comfortable with all your family and friends knowing about the action you propose to take. Would you be comfortable reading about what you are about to do on the front page of The Wall Street Journal or the local paper, or seeing it on Facebook? Would you be proud to have your proposed actions revealed on 60 Minutes? Would you want your family to see that show? Consider the example of performance-enhancing drugs in baseball. Mark McGwire led all of baseball with a then-record 70 home runs during the 1998 season. After having to deal for a dozen years with a lot of rumor and innuendo, in 2010 McGwire admitted that he had used these drugs. It s very emotional. It s telling family members, friends and..former teammates.that I m coming clean and being honest, he said. It s the first time they ve ever heard me talk about this. I hid it from everybody. I believe that, had McGwire considered the Disclosure Rule, he would not have used performance-enhancing drugs and saved himself a lot of personal anguish and embarrassment. And he still would have had a very successful career one that he could have been proud of. Personally, I frequently used a variation of the Disclosure Rule. For many years I kept a picture on my desk of my son as a wide-eyed four-year-old. Every day I vowed never to do anything that would make him less than proud of me. That picture of him as a four-year-old stayed on my desk until he went off to college, and even for a while after that. The Disclosure Rule can work well with groups, too. Sometimes groups can get caught up in group-think and start charging toward an idea that seems expedient but might be questionable ethically. If you are concerned that the group you are with is about to make an ethically challenged decision, it can be very helpful to ask how we all would feel reading about our proposed actions on the front page of The Wall Street Journal. It takes just one brave person to ask this question. I have seen groups stop in their tracks and realize they were heading down a wrong path. The reason that Everyday Ethics rules such as the Disclosure Rule are so useful is that almost all of the decisions we face every day have an ethical dimension. Many of our decisions are resource allocation decisions, even if the only resource being allocated is our own time. Before you make such decisions, think about using the rules of Everyday Ethics. I truly believe you will find them quite helpful. _

5 Wade Pfau, Ph.D., CFA Professor of Retirement Income 5 Vol. 3 Issue 2 A Moment with our Faculty - Wade Pfau, Ph.D., CFA By Sheila Runkel, CLF Wade grew up in Iowa and Michigan, and his original plan in high school was to become a U.S. government economist. After earning both a BA and BS from the University of Iowa, he pursued a Ph.D. in economics at Princeton University. While writing his dissertation at Princeton, which focused on President Bush s proposal to create a Personal Retirement Account with a portion of Social Security contributions, Wade developed a passion for finance. Near the end of his doctoral program, he decided to postpone getting a job in the government; he wanted to try living abroad and moved to Japan. He got a job teaching economics at the National Graduate Institute for Policy Studies, a graduate school for government officials from developing and emerging market countries. A long way from his native Midwest, Wade gained a global financial perspective in Japan while researching public pension systems in different countries. Retirement income accumulation is just as important to longevity outside of the United States; Japan s current retirees generally save quite a bit. They are less likely to own stocks, and many households keep the bulk of their savings in postal savings accounts. With slight deflation in Japan, deposits have earned a small real return, so discussions about issues like safe retirement withdrawal rates are less common. There are other differences that Wade noticed, as well. Brokerage fees are still exceedingly high in Japan, and there wasn t much effort at the brokerages to check about the suitability of investments. Life insurance is also quite expensive. When Japan s interest rates were so much lower than the rest of the world, retail banks were aggressively promoting that household investors hold foreign currency deposits with exchange rate risk. Comprehensive financial planning in Japan, however, is still a rarity. After ten years in Japan during which he met his wife and had two children The American College welcomed Dr. Pfau to the faculty in April of 2013, as the first professor to teach exclusively in its new PhD program. He is responsible for three courses in the curriculum; courses centered on the accumulation and distribution of financial assets, on public policy related to financial and retirement planning, and on research methods. When dealing with sophisticated products and a population whose cognitive abilities continually decline as the aging process continues, Wade believe that ethics in retirement planning is paramount. This is a population that could easily be taken advantage of; as such, it is important for an advisor to always act in the best interest of their client. Dr. Pfau s rule of thumb is for the advisor to take care of the client first, then their employer, and themselves last. My background in ethics as a formal discipline has been from studying the very comprehensive ethics materials that are part of the CFA Institute curriculum. Wade says. I became a CFA charterholder in [ ] I try to maintain objectivity with my research, though I ve found that many financial planners become suspicious when I speak positively about income annuities, since they view The American College as being very closely tied to the insurance industry. Of course, they are correct about those financial ties, but I m thankful that no one at the college has tried to influence my research in any sort of unethical way. I m glad that ethics plays an important role in everything The American College does.

6 Inbox The Center for Ethics is excited to introduce Inbox as a new section to the newsletter. We want to know what you, the reader, think about ethical topics within the financial services industry. We will pose one or more questions in each issue, asking for your thoughts. The responses will be included in the following issue of the newsletter. We look forward to hearing from you. Note: All responses will be kept anonymous. Question Companies with strong ethical standards tend to do better and last longer, but establishing an ethical culture is not easy. What are the most significant obstacles to creating an ethical culture within an organization? Please share your thoughts here. 6 Vol. 3 Issue 2