Views on improving the integrity of global capital markets
22 April 2011

Ethics Reform: Washington Is Not the Answer

Posted In: Uncategorized

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.

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

3 thoughts on “Ethics Reform: Washington Is Not the Answer”

  1. Bill Dalasio says:

    I can’t help but wonder how much of the elevated distrust stems from legitimate grievances and how much stems from smear jobs from people with an agenda. In addition, how much of the distrust stems from the bailouts? Of course, that was Wall Street working specifically hand-in-hand with Washington. Would there be an attempt to address that?

  2. Jon Stokes says:

    Thank you for your comment Mr. Dalasio. The seemingly cozy relationship between Washington and Wall Street that led to lax regulation and oversight and now has seemingly stalled regulatory reform effort only adds to the perception that investment professionals manipulate the system to boost profits at the expense of investors. Until true regulatory reform is enacted and, more importantly, the investment firms embrace the fundamental ethical principles such as fiduciary responsibility and placing client interests first, the investing public will continue to cast a jaundiced eye at financial professionals to the detriment of the securities markets.

  3. Bill Dalasio says:

    Please don’t take this the wrong way, Mr. Stokes, but financial services is already among the most heavily regulated sectors in the economy. It doesn’t seem to have done a whole lot to burnish our reputation in the public eye. And for much of the public, it wasn’t that efforts at additional regulation have stalled that has them upset. It’s the bailouts themselves. Additional layer upon layer of regulation has also proved ineffective at preventing unethical behavior in itself. Bad actors are going to find a way to make it to people’s wallets no matter what the regulatory environment or (let’s not kid ourselves) make the regulations work in their favor. At the end of the day, I think the only real, long-term solution is for the investment profession to better police our own ranks and, much more importantly, better educate the public about what it is that we do and don’t do.

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