Conflicts of interest are a common concern across the investment industry spectrum. CFA Institute has long promoted the principle of placing the interest of the client before the interest of the firm or industry practitioners.
Individuals who are working towards or already have earned the CFA designation must adhere to this core component of the Code of Ethics and Standards of Professional Conduct in their professional activities. The guiding principle also is applicable across globally interconnected capital markets, regardless of regulatory jurisdiction.
Unfortunately, not all investment professionals operate under this fundamental ethical philosophy. If they did, then we would not continue to see cases of insider trading, fraudulent investment schemes, or misuse of client funds regularly appearing in news headlines. Is personal greed the only influence clouding their ethical vision?
A recent article in Institutional Investor theorizes that cultural factors may also play a role in influencing the nature and level of conflicts of interest that exist between asset managers and owners. The article focuses on Japan by highlighting recent scandals and examining three aspects of the business culture that contributed to such events:
- Employees wanting to be seen as “cooperative members of the larger group.” This creates an atmosphere of employees not wanting to challenge the actions of the employer.
- The importance of status within the modern Japanese business culture. Pressure on the investment professional is great because of “the importance of respecting the honor and status of executives even if wrong doing is suspected, and putting the needs of the company ahead of those of lower status” is tangible in every decision they make.
- The impact of cross ownership of companies on transparency. “This system is the perfect structure by which affiliated keiretsu member can feed each other insider information and obscure regulatory transparency into transactions through a complex network of affiliated holding companies.”
When the business culture adds other ethical concerns to the already complex process of managing conflicts of interest, managers seeking to overcome those challenges and communicate to investors their commitment to serving the best interests of their clients can turn to the CFA Institute Asset Manager Code of Professional Conduct. The Code provides a robust framework for affirming investor interests by, among other provisions, mandating extensive disclosure on conflicts of interests and significant organizational changes, while also prohibiting the trading on inside information.
This principles-based Code outlines the ethical and professional responsibilities for asset managers while providing implementation flexibility to meet both regulatory and cultural expectations. Both asset owners and managers benefit when a universal code of conduct is adopted. For the asset owners, the Code provides a useful tool for identifying managers committed to investor interests during both the initial and ongoing due diligence reviews. For asset managers, Code adoption demonstrates a voluntary commitment to ethical excellence easily communicated to current and potential clients.
CFA Institute is promoting adoption of the Code as a way to rebuild industry trust in the wake of several high-profile scandals involving misconduct. Currently nearly 800 firms from more than 25 countries are claiming compliance. While no firms from Japan are currently on that list, inquiries from investors in the Japanese market are likely to change that scenario.