Individuals who participate in the CFA Program are instilled with the importance of making strong ethical decisions in their professional activities. Those who earn the CFA Charter further this commitment by annually attesting to their adherence to the CFA Institute Code of Ethics and Standards of Professional Conduct. Yet, each issue of CFA Magazine includes a list of recent sanctions against charterholders and candidates handed down by the Professional Conduct Program. You would expect these individuals to understand the ethical implications of their decisions.
A recent publication by Muel Kaptein, partner at KPMG and professor in business ethics at Erasmus University’s Rotterdam School of Management, compiles insights from a wide range of research and experiments to explore why individuals are led astray from their ethical foundations. The concept behind Why Good People Sometimes Do Bad Things: 52 Reflections on Ethics at Work was based on three broad questions Kaptein found intriguing:
- Why do even the most honest and conscientious employees sometimes go off the rails?
- What pushes upstanding and intelligent managers over the edge?
- What causes benevolent organizations to lead their customers, employees, and shareholders up the garden path?
Most of the chapters are organized by the factors that Kaptein found commonly influence ethical behavior within organizations. After first establishing “the foundation which enables us to better examine the behavior of organizations and individuals,” seven factors are addressed to help the reader “gain a broad view of the significance of these factors for your own behavior, the behavior of others and the behavior of organizations.” These factors discuss activities around:
Each chapter discusses insights from different research projects and allows the reader to build upon their understanding of how ethical lapses may occur. In the section on clarity, “The name of the game: euphemisms and spoilsport” (chapter 11) shows how bribery may become an acceptable norm for a firm when it is regularly referred to as “oiling the wheels” or “service costs.” A new employee may easily be led to believe that such payments are an acceptable business practice. Firms must act quickly to prevent ethical lapses from becoming hidden behind such benign phrases.
Another chapter addresses how we might rationalize the relationship of ethical and unethical actions. In the section on commitment, “Wealth is damaging: red rags and red flags” (chapter 36), another researcher “showed that the mere image of money leads to more selfish behavior.” Here individuals are likely to rationalize their misbehavior should they feel the offended party would not be particularly damaged by their conduct. Firm executives need to understand how their actions may be perceived by all employees when it comes to “the risks of conspicuous spending.”
While these two studies are not directly related, one can see how they may influence well-meaning individuals into misconduct. If firm executives consistently flaunt their attendance at meetings held in resort locations, then a lower ranking employee may rationalize it is all right to marginally inflate their expense reimbursements as it was still much lower than the last executive trip. This would be especially true if such “padding the tab” practices were commonly used or discussed by coworkers.
Especially in today’s financial industry, maintaining one’s personal ethical foundations is an ongoing and challenging process. “The recent financial and economic crisis has exposed the human factor in the inner workings of organizations as never before.” Clearly, these events impacted a significant number of individuals beyond those making questionable decisions. One outcome is that “organizations also pay more attention to behavior by investing in cultural programs, professional development, codes of conduct, and soft controls.”
CFA Institute provides several publications that investment firms may use to support their internal ethical culture. Our standards regarding asset management, research objectivity, performance presentations, and pension and endowment oversight allow firms to demonstrate their commitment to acting ethically and in the best interest of their clients and stakeholders.