Practical analysis for investment professionals
07 May 2013

Are Young Investment Professionals Especially Vulnerable to Ethical Lapses?

While reading a Wall Street Journal article about yet another young trader at the center of a scandal — 33-year-old Tom Hayes, the only trader to be cited by name in the Libor-rigging investigation — I was reminded of an interview that I conducted with John R. Boatright, a professor at the Quinlan School of Business at Loyola University Chicago. During our conversation, I asked Boatright about what ethical issues new entrants into the investment profession should think about.

Boatright tells his students that “ethics can be dangerous to your career, because you may be called upon to do things that turn out to be unethical or illegal.” A study of 30 recent graduates from the Harvard MBA program supports his point: The study found that many newly minted MBAs “received explicit instructions from their middle-manager bosses or felt strong organization pressures to do things that they believed were sleazy, unethical, or sometimes illegal.” The graduates attributed these requests to the “intense pressure to get a job done and to gain approval.”

Hayes’ story about how he became embroiled in the Libor scandal is, unfortunately, eerily reminiscent of what happened to Kweku Adoboli, the 32-year-old UBS trader who lost more than $2 billion of the bank’s money in a massive trading scandal in 2011. Both stories illustrate the ethical perils faced by young professionals who seem especially vulnerable to career-ending lapses just as their talents and high potential are beginning to get recognized.

Consider these similarities between Adoboli and Hayes:

Both were recruited by banks after graduating from college: Hayes in 2001, and Adoboli in 2003.

Both worked very hard, gained favorable reputations, and were highly compensated. Hayes began as a junior derivatives trader and gained a reputation as a top trader. In 2009, when Citigroup tried to lure Hayes away by offering him more than twice his $2 million salary, his boss at UBS fought to retain him, citing Hayes’s “strong connections with Libor setters in London,” in an email to UBS executives.

Adoboli was viewed as hardworking and smart, “a man on the make whose career prospects and future earnings were taking off,” according to detective chief inspector Perry Stokes of the City of London police. Adoboli was part of a close-knit group of traders and was described by colleagues as the “good cop” of the team. He went from earning £30,000 as a trainee in 2003 to earning £360,000 by 2011.

Both became involved in their respective scandals in their 20s, when they were viewed as “golden boys” (and became infamous as rogues in their early 30s).

Why are smart, hardworking, well-respected young professionals at high risk of ethical missteps? Loyola University’s Boatright believes that young people are often naïve and may get involved in unethical or illegal behavior without realizing what they are doing. In addition, there’s downward pressure in most organizations, and young people are more hesitant to stand up to higher-ranking, experienced managers.

That seemed to be the case for both Hayes and Adoboli. According to regulators, UBS traders were already engaged in inappropriate practices when Hayes joined the Tokyo office in 2006. He reportedly told a close friend that trying to rig Libor seemed like “common industry practice,” and one he wasn’t inclined to quibble with: “Who was I to question what they were doing? I thought it was weird, but that’s how they did it.”

In addition, according to the Wall Street Journal, Hayes’s superiors at UBS encouraged him to pursue “an envelope-pushing trading strategy.” And although Hayes was generating tens of millions of dollars per year for his employer, he was still worried that it wasn’t enough to satisfy his bosses.

A similar storyline runs through Adoboli’s narrative. At his trial, the young trader told the jury that staff were encouraged to take risks and were told that they “wouldn’t know where the limit of the boundary was until you got a slap on the back of the wrist.” He testified that he knew that he was circumventing the bank’s rules but — like Hayes — insisted his transgressions were common practice at the firm. Adoboli claimed that three of his colleagues who worked on the same trading desk were aware of his illegal activity before it surfaced. Ultimately his undoing was driven by pressure from senior managers: Adoboli changed from a conservative, bearish position to an aggressive, bullish one, which caused him to lose control during the financial crisis. “UBS was my family. Everything I did was for the benefit of the bank,” Adoboli told jurors.

So what are the lessons that can be learned from Hayes and Adoboli?

All financial professionals — especially those just beginning their careers — would be wise to listen for the following red flags from their superiors:

  • “No one will ever know.”
  • “This conversation never happened.”
  • “It doesn’t matter how it gets done, as long as it gets done.”

Professionals should also be cautious if they find themselves using one of the following phrases to justify their own actions:

  • “Everybody else is doing it.”
  • “That is the way they do it at Firm X, so it must be okay.”
  • “If we do not do it, someone else will.”
  • “This is the way it has always been done.”
  • “It doesn’t really hurt anyone.”
  • “I want to be a team player, I want to be loyal.”

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.


About the Author(s)
Michael McMillan, CFA

Michael McMillan, CFA, was director of ethics education at CFA Institute. Previously, he was a professor of accounting and finance at Johns Hopkins University’s Carey School of Business and George Washington University’s School of Business. Prior to his career in academia, McMillan was a securities analyst and portfolio manager at Bailard, Biehl, and Kaiser and at Merus Capital Management. He is a certified public accountant (CPA) and a chartered investment counselor (CIC). McMillan holds a BA from the University of Pennsylvania, an MBA from Stanford University, and a PhD in accounting and finance from George Washington University.

3 thoughts on “Are Young Investment Professionals Especially Vulnerable to Ethical Lapses?”

  1. Bharath M says:

    Very interesting read! The last part of the blog detailing the lessons learnt from the ‘Hayes and Adoboli’ case will serve as a good benchmark for evaluating ourselves I guess.

    I have a query: Is failure to communicate through written media such as letters or emails creating an opportunity to vioate ethical standards? As in, if all communication betwen a supervisor and a subordinate is on paper and not verbal, will it help in minimising the violations?

  2. Hi Bhrath, thanks for your question. Although it would be great if all communications between suborodinates and a supervisor were documented, that is would be unrealistic in many circumstances and professional situations. In addition, since there is an “never ending” trail to emails, most supervisors would never ask their subordinate to do anything unethical in “writing.” As we have read in many of the recent scandals and trials, emails can be key in trials. Therefore, people have become loathe, or at least stop and think twice for “memoralizing” any of their comments/requests in either emails or texts.

  3. Pablo Matsumoto, CFA says:

    Young, bright and ambitious people in conjunction with huge financial incentives and desire to succeed professionally is a very dangerous cocktail from ethical perspective. Even for those very aware of ethical issues it is very difficult to reject doing something they’ve been told to do when the outcome will be losing a lot of money, losing their job (with very low prospects of finding another one) or being looked down by you peers.

    A real change will happen when regulators, the industry and the society start to focus on how to change the culture of the financial institutions from top to bottom. In critical environments, you can’t rely only on people doing the right thing at the right moment. You need to have a system with the adequate incentives to do so. If you are going to pay millions in bonuses for a 100bp more of yield in a short term no matter if your strategy is a way to a global disaster that will cost billions, problems will arise. If your front desk employees will earn millions per year but your risk management team is look as a sink cost, problems will arise. If someone raise an unethical or illegal issue and he/she is fired and his/her peers are promoted, the outcome will be what we have now.

    The industry and regulators are in a “blame the pilot” mode. The easiest is to blame individuals as “bad apples” who made the wrong thing as solitaire wolfs. We cannot think in prosecution and enforcement as “the” answer. They are necessary but they will not be a long term and real solution if the financial industry does not provide the right incentives for people to make the right thing.

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