Ethics Reform: Washington Is Not the Answer
Joanne Lipman’s recent Newsweek column “Are Ethics for Suckers?” strongly implies that Wall Street can’t help but lie, cheat, and steal. The “culture of success” in an arena where “alpha men and women” are “playing for super high stakes” precludes investment professionals from acting ethically by, among other things, protecting the interest of their clients, obeying clearly established securities regulations such as the ban on insider trading, or otherwise acting with integrity. (But don’t worry investors: they “really feel awful about what they do.”)
According to Lipman’s column, the view of the industry is that morals and ethics must be imposed upon this hard-charging, cut-throat lot by Washington. But putting Congress in charge of ethics hardly sounds like a recipe for success. Worse, it undermines true reform by further propagating the flawed view that ethics can be imposed by law, and outside regulators are solely responsible for making investment professionals toe the line.
Ethics reform can only succeed if firm leaders recognize that the long-term success of the investment industry depends on trust. Unethical behavior of the type that has recently been exhibited all too frequently erodes investor confidence in financial markets. The most recent Edelman Trust Barometer ranks banks and financial services firms at the very bottom of the list of industries that the public trusts to do the right thing. This is an incredible statistic considering these are the very industries that we rely upon to safeguard our financial well-being and retirement security. Alarms should be sounding for the financial industry. A lack of trust and confidence will inevitably lead to a reluctance of investors to commit capital to markets perceived to be dishonest and fraudulent. Regardless of the moral calculus, from a purely commercial perspective, it is imperative that the industry get serious about ethics to sustain and grow its business.
To reverse these negative perceptions, rigorous internal codes of ethics, employee training, and incentive structures that reward ethical behavior and punish wrongdoing are needed. Just as important, investors must demand that the professionals with whom they invest adopt and engage in best ethical practices.
While regulatory reform is necessary to shape the structure of the financial markets, relying on federal regulation alone to instill a culture of ethics and integrity will only doom us to more of the same outrageous behavior.